OFG BANCORP - Quarter Report: 2018 March (Form 10-Q)

UNITED STATES

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number 001-12647

OFG Bancorp

Incorporated in the Commonwealth of Puerto Rico, IRS Employer Identification No. 66-0538893

Principal Executive Offices:

254 Muñoz Rivera Avenue

San Juan, Puerto Rico 00918

Telephone Number: (787) 771-6800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☐ Accelerated Filer ý Non-Accelerated Filer ☐ Smaller Reporting Company ☐ (Do not check if a smaller reporting company)

Emerging Growth Company ☐

If an Emerging Growth Company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

Number of shares outstanding of the registrant’s common stock, as of the latest practicable date:

43,968,342 common shares ($1.00 par value per share) outstanding as of April 30, 2018

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION			Page
Item 1.	Financial Statements
	Unaudited Consolidated Statements of Financial Condition		1
	Unaudited Consolidated Statements of Operations		3
	Unaudited Consolidated Statements of Comprehensive Income		5
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity		6
	Unaudited Consolidated Statements of Cash Flows		7
	Notes to Unaudited Consolidated Financial Statements
		Note 1 – Organization, Consolidation and Basis of Presentation	9
		Note 2 – Significant Events	10
		Note 3 – Restricted Cash	11
		Note 4 – Investment Securities	12
		Note 5 – Loans	17
		Note 6 – Allowance for Loan and Lease Losses	41
		Note 7 – FDIC Indemnification Asset and True-Up Payment Obligation	49
		Note 8 – Foreclosed Real Estate	48
		Note 9 – Derivatives	50
		Note 10 – Accrued Interest Receivable and Other Assets	51
		Note 11 – Deposits and Related Interest	52
		Note 12 – Borrowings and Related Interest	54
		Note 13 – Offsetting of Financial Assets and Liabilities	56
		Note 14 – Income Taxes	58
		Note 15 – Regulatory Capital Requirements	59
		Note 16 – Stockholders’ Equity	60
		Note 17 – Accumulated Other Comprehensive Income	61
		Note 18 – Earnings per Common Share	63
		Note 19 – Guarantees	64
		Note 20 – Commitments and Contingencies	65
		Note 21 – Banking and Financial Service Revenues	68
		Note 22 – Fair Value of Financial Instruments	69
		Note 23 – Business Segments	75

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		77
		Critical Accounting Policies and Estimates	77
		Overview of Financial Performance:	77
		Selected Financial Data	78
		Financial Highlights of the First Quarter of 2018	80
		Analysis of Results of Operations	81
		Analysis of Financial Condition	90
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		117
Item 4.	Controls and Procedures		121
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings		122
Item 1A.	Risk Factors		122
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		122
Item 3.	Default upon Senior Securities		122
Item 4.	Mine Safety Disclosures		122
Item 5.	Other Information		122
Item 6.	Exhibits		123
Signatures			124

FORWARD-LOOKING STATEMENTS

The information included in this quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to the financial condition, results of operations, plans, objectives, future performance and business of OFG Bancorp (“we,” “our,” “us” or “Oriental”), including, but not limited to, statements with respect to the adequacy of the allowance for loan losses, delinquency trends, market risk and the impact of interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal proceedings and new accounting standards on the Oriental’s financial condition and results of operations. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions are generally intended to identify forward-looking statements.

These statements are not guarantees of future performance and involve certain risks, uncertainties, estimates and assumptions by management that are difficult to predict. Various factors, some of which by their nature are beyond Oriental’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause such a difference include, but are not limited to:

· the rate of growth in the economy and employment levels, as well as general business and economic conditions;

· changes in interest rates, as well as the magnitude of such changes;

· the credit default by the government of Puerto Rico or its municipalities;

· amendments to the fiscal plan approved by the Financial Oversight and Management Board of Puerto Rico;

· determinations in the court-supervised debt-restructuring process under Title III of PROMESA for the Puerto Rico government and all of its agencies, including some of its public corporations;

· the impact of property, credit and other losses in Puerto Rico as a result of hurricanes Irma and Maria;

· the amount of government, private and philanthropic financial assistance for the reconstruction of Puerto Rico’s critical infrastructure, which suffered catastrophic damages caused by hurricane Maria;

· the pace and magnitude of Puerto Rico’s economic recovery;

· the potential impact of damages from future hurricanes and natural disasters in Puerto Rico;

· the fiscal and monetary policies of the federal government and its agencies;

· changes in federal bank regulatory and supervisory policies, including required levels of capital;

· the relative strength or weakness of the commercial and consumer credit sectors and the real estate market in Puerto Rico;

· the performance of the stock and bond markets;

· competition in the financial services industry; and

· possible legislative, tax or regulatory changes.

Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-looking statements include the following: negative economic conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense; changes in interest rates and market liquidity which may reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets; adverse movements and volatility in debt and equity capital markets; changes in market rates and prices which may adversely impact the value of financial assets and liabilities; liabilities resulting from litigation and regulatory investigations; changes in accounting standards, rules and interpretations; increased competition; Oriental’s ability to grow its core businesses; decisions to downsize, sell or close units or otherwise change Oriental’s business mix; and management’s ability to identify and manage these and other risks.

All forward-looking statements included in this quarterly report on Form 10-Q are based upon information available to Oriental as of the date of this report, and other than as required by law, including the requirements of applicable securities laws, Oriental assumes no obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF MARCH 31, 2018 AND DECEMBER 31, 2017

	March 31,		December 31,
	2018		2017
	(In thousands)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	354,930	$	478,182
Money market investments		7,428		7,021
Total cash and cash equivalents		362,358		485,203
Restricted cash		3,030		3,030
Investments:
Trading securities, at fair value, with amortized cost of $647 (December 31, 2017 - $647)		293		191
Investment securities available-for-sale, at fair value, with amortized cost of $815,970 (December 31, 2017 - $648,800)		801,641		645,797
Investment securities held-to-maturity, at amortized cost, with fair value of $467,980 (December 31, 2017 - $497,681)		485,143		506,064
Federal Home Loan Bank (FHLB) stock, at cost		11,499		13,995
Other investments		3		3
Total investments		1,298,579		1,166,050
Loans:
Loans held-for-sale, at lower of cost or fair value		10,505		12,272
Loans held for investment, net of allowance for loan and lease losses of $168,592 (December 31, 2017 - $167,509)		4,122,924		4,044,057
Total loans		4,133,429		4,056,329
Other assets:
Foreclosed real estate		40,314		44,174
Accrued interest receivable		35,141		49,969
Deferred tax asset, net		128,270		127,421
Premises and equipment, net		67,163		67,860
Customers' liability on acceptances		25,869		27,663
Servicing assets		10,533		9,821
Derivative assets		898		771
Goodwill		86,069		86,069
Other assets		55,468		64,693
Total assets	$	6,247,121	$	6,189,053

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF MARCH 31, 2018 AND DECEMBER 31, 2017 (CONTINUED)

	March 31,		December 31,
	2018		2017
	(In thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits	$	2,117,857	$	2,039,126
Savings accounts		1,274,414		1,251,398
Time deposits		1,441,157		1,508,958
Total deposits		4,833,428		4,799,482
Borrowings:
Securities sold under agreements to repurchase		273,926		192,869
Advances from FHLB		43,934		99,643
Subordinated capital notes		36,083		36,083
Other borrowings		394		153
Total borrowings		354,337		328,748
Other liabilities:
Derivative liabilities		752		1,281
Acceptances executed and outstanding		25,869		27,644
Accrued expenses and other liabilities		85,886		86,791
Total liabilities		5,300,272		5,243,946
Commitments and contingencies (See Note 20)
Stockholders’ equity:
Preferred stock; 10,000,000 shares authorized;
1,340,000 shares of Series A, 1,380,000 shares of Series B, and 960,000 shares of Series D issued and outstanding
(December 31, 2017 - 1,340,000 shares; 1,380,000 shares; and 960,000 shares) $25 liquidation value		92,000		92,000
84,000 shares of Series C issued and outstanding (December 31, 2017 - 84,000 shares); $1,000 liquidation value		84,000		84,000
Common stock, $1 par value; 100,000,000 shares authorized; 52,625,869 shares issued: 43,968,342 shares outstanding (December 31, 2017 - 52,625,869;
43,947,442)		52,626		52,626
Additional paid-in capital		541,404		541,600
Legal surplus		83,138		81,454
Retained earnings		210,008		200,878
Treasury stock, at cost, 8,657,527 shares (December 31, 2017 - 8,678,427 shares)		(104,142)		(104,502)
Accumulated other comprehensive (loss), net of tax of $1,999 (December 31, 2017 $564)		(12,185)		(2,949)
Total stockholders’ equity		946,849		945,107
Total liabilities and stockholders’ equity	$	6,247,121	$	6,189,053

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS ENDED MARCH 31, 2018 AND 2017

	Quarter Ended March 31,
	2018		2017
	(In thousands, except per share data)
Interest income:
Loans	$	74,612	$	77,650
Mortgage-backed securities		7,051		7,206
Investment securities and other		1,507		1,322
Total interest income		83,170		86,178
Interest expense:
Deposits		7,298		7,353
Securities sold under agreements to repurchase		1,076		3,245
Advances from FHLB and other borrowings		374		596
Subordinated capital notes		428		366
Total interest expense		9,176		11,560
Net interest income		73,994		74,618
Provision for loan and lease losses, net		15,460		17,654
Net interest income after provision for loan and lease losses		58,534		56,964
Non-interest income:
Banking service revenue		10,463		10,626
Wealth management revenue		6,019		6,215
Mortgage banking activities		1,757		587
Total banking and financial service revenues		18,239		17,428

FDIC shared-loss benefit, net		-		1,403
Net gain on:
Derivatives		-		81
Other non-interest income		275		162
Total non-interest income, net		18,514		19,074

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS ENDED MARCH 31, 2018 AND 2017 (CONTINUED)

	Quarter Ended March 31,
	2018		2017
	(In thousands, except per share data)
Non-interest expense:
Compensation and employee benefits		20,608		20,347
Professional and service fees		2,694		3,237
Occupancy and equipment		7,768		7,199
Insurance		1,478		1,600
Electronic banking charges		4,966		4,902
Information technology expenses		2,009		1,998
Advertising, business promotion, and strategic initiatives		1,347		1,395
Loss on sale of foreclosed real estate and other repossessed assets		1,226		1,326
Loan servicing and clearing expenses		1,161		1,189
Taxes, other than payroll and income taxes		2,260		2,372
Communication		885		914
Printing, postage, stationary and supplies		644		637
Director and investor relations		240		280
Credit related expenses		2,419		2,626
Other		2,416		1,662
Total non-interest expense		52,121		51,684
Income before income taxes		24,927		24,354
Income tax expense		8,010		9,204
Net income		16,917		15,150
Less: dividends on preferred stock		(3,465)		(3,465)
Income available to common shareholders	$	13,452	$	11,685
Earnings per common share:
Basic	$	0.31	$	0.27
Diluted	$	0.30	$	0.26
Average common shares outstanding and equivalents		51,121		51,131
Cash dividends per share of common stock	$	0.06	$	0.06


See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE QUARTERS ENDED MARCH 31, 2018 AND 2017


	Quarter Ended March 31,
	2018		2017
	(In thousands)

Net income	$	16,917	$	15,150
Other comprehensive income before tax:
Unrealized (loss) gain on securities available-for-sale		(11,326)		1,866
Unrealized gain on cash flow hedges		656		182
Other comprehensive (loss) income before taxes		(10,670)		2,048
Income tax effect		1,434		(296)
Other comprehensive (loss) income after taxes		(9,236)		1,752
Comprehensive income	$	7,681	$	16,902

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY

FOR THE QUARTERS ENDED MARCH 31, 2018 AND 2017


	Quarter Ended March 31,
	2018		2017
	(In thousands)
Preferred stock:
Balance at beginning of period	$	176,000	$	176,000
Balance at end of period		176,000		176,000
Common stock:
Balance at beginning of period		52,626		52,626
Balance at end of period		52,626		52,626
Additional paid-in capital:
Balance at beginning of period		541,600		540,948
Stock-based compensation expense		291		218
Stock-based compensation excess tax benefit recognized in income		(127)		-
Lapsed restricted stock units		(360)		(358)
Balance at end of period		541,404		540,808
Legal surplus:
Balance at beginning of period		81,454		76,293
Transfer from retained earnings		1,684		1,479
Balance at end of period		83,138		77,772
Retained earnings:
Balance at beginning of period		200,878		177,808
Net income		16,917		15,150
Cash dividends declared on common stock		(2,638)		(2,637)
Cash dividends declared on preferred stock		(3,465)		(3,465)
Transfer to legal surplus		(1,684)		(1,479)
Balance at end of period		210,008		185,377
Treasury stock:
Balance at beginning of period		(104,502)		(104,860)
Lapsed restricted stock units		360		358
Balance at end of period		(104,142)		(104,502)
Accumulated other comprehensive (loss) income, net of tax:
Balance at beginning of period		(2,949)		1,596
Other comprehensive (loss) income, net of tax		(9,236)		1,752
Balance at end of period		(12,185)		3,348
Total stockholders’ equity	$	946,849	$	931,429

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE QUARTERS ENDED MARCH 31, 2018 AND 2017


	Quarter Ended March 31,
	2018		2017
	(In thousands)
Cash flows from operating activities:
Net income	$	16,917	$	15,150
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred loan origination fees and fair value premiums on acquired loans		1,118		618
Amortization of investment securities premiums, net of accretion of discounts		1,614		2,336
Amortization of core deposit and customer relationship intangibles		330		369
FDIC shared-loss benefit		-		(1,403)
Depreciation and amortization of premises and equipment		2,277		2,110
Deferred income tax expense, net		586		2,443
Provision for loan and lease losses, net		15,460		17,654
Stock-based compensation		291		218
Stock-based compensation excess tax benefit recognized in income		(127)		-
(Gain) loss on:
Sale of mortgage loans held-for-sale		(87)		(207)
Derivatives		-		(81)
Foreclosed real estate		1,284		1,570
Sale of other repossessed assets		217		(160)
Originations of loans held-for-sale		(23,292)		(38,945)
Proceeds from sale of mortgage loans held-for-sale		5,945		10,893
Net (increase) decrease in:
Trading securities		(102)		33
Accrued interest receivable		14,828		1,672
Servicing assets		(712)		170
Other assets		10,448		11,615
Net (decrease) in:
Accrued interest on deposits and borrowings		(359)		(1,031)
Accrued expenses and other liabilities		(11,235)		(25)
Net cash provided by operating activities		35,401		24,999

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE QUARTERS ENDED MARCH 31, 2018 AND 2017 (CONTINUED)

	Quarter Ended March 31,
	2018		2017
	(In thousands)
Cash flows from investing activities:
Purchases of:
Investment securities available-for-sale		(173,162)		(51,430)
FHLB stock		(35,775)		(7,065)
Maturities and redemptions of:
Investment securities available-for-sale		23,408		28,659
Investment securities held-to-maturity		19,844		20,551
FHLB stock		38,271		697
Proceeds from sales of:
Foreclosed real estate and other repossessed assets, including write-offs		(619)		(127)
Origination and purchase of loans, excluding loans held-for-sale		(286,129)		(171,153)
Principal repayment of loans, including covered loans		197,622		213,135
(Repayments to) reimbursements from the FDIC on shared-loss agreements, net		-		(10,125)
Additions to premises and equipment		(1,580)		(1,489)
Net cash (used in) provided by investing activities		(218,120)		21,653

Cash flows from financing activities:
Net increase (decrease) in:
Deposits		40,198		51,853
Securities sold under agreements to repurchase		81,000		(121,792)
FHLB advances, federal funds purchased, and other borrowings		(55,221)		(378)
Exercise of stock options and restricted units lapsed, net		-		(1)
Dividends paid on preferred stock		(3,465)		(3,465)
Dividends paid on common stock		(2,638)		(3,037)
Net cash used in financing activities	$	59,874	$	(76,820)
Net change in cash, cash equivalents and restricted cash		(122,845)		(30,168)
Cash, cash equivalents and restricted cash at beginning of period		488,233		513,469
Cash, cash equivalents and restricted at end of period	$	365,388	$	483,301
Supplemental Cash Flow Disclosure and Schedule of Non-cash Activities:
Interest paid	$	9,103	$	12,131
Mortgage loans securitized into mortgage-backed securities	$	17,954	$	24,921
Transfer from loans to foreclosed real estate and other repossessed assets	$	11,179	$	1,601
Reclassification of loans held-for-sale portfolio to held-for-investment portfolio	$	1,247	$	-
Financed sales of foreclosed real estate	$	369	$	242
Loans booked under the GNMA buy-back option	$	12,515	$	9,973
See notes to unaudited consolidated financial statements

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION, CONSOLIDATION AND BASIS OF PRESENTATION

Nature of Operations

OFG Bancorp (“Oriental”) is a publicly-owned financial holding company incorporated under the laws of the Commonwealth of Puerto Rico. Oriental operates through various subsidiaries including, a commercial bank, Oriental Bank (the “Bank”), a securities broker-dealer, Oriental Financial Services Corp. (“Oriental Financial Services”), an insurance agency, Oriental Insurance, LLC. (“Oriental Insurance”), a retirement plan administrator, Oriental Pension Consultants, Inc. (“OPC”), and two operating subsidiaries of the Bank, OFG USA, LLC ("OFG USA") and Oriental International Bank, Inc. Through these subsidiaries and their respective divisions, Oriental provides a wide range of banking and financial services such as commercial, consumer and mortgage lending, auto loans, financial planning, insurance sales, money management and investment banking and brokerage services, as well as corporate and individual trust services.

On April 30, 2010, the Bank acquired certain assets and assumed certain deposits and other liabilities of Eurobank, a Puerto Rico commercial bank, in an FDIC-assisted acquisition. On February 6, 2017, the Bank and the FDIC agreed to terminate the shared-loss agreements related to the Eurobank Acquisition. On December 18, 2012, Oriental acquired a group of Puerto Rico-based entities that included Banco Bilbao Vizcaya Argentaria Puerto Rico (“BBVAPR”), a Puerto Rico commercial bank, as well as a securities broker-dealer and an insurance agency, which is referred to herein as the “BBVAPR Acquisition.” These acquired businesses have been integrated with Oriental’s existing business.

New Accounting Updates Not Yet Adopted

Premium Amortization on Purchased Callable Debt Securities Receivables. In March 2017, the FASB issued ASU No. 2017-08, which requires the amortization of the premium on callable debt securities to the earliest call date. The amortization period for callable debt securities purchased at a discount would not be impacted by the ASU. This ASU will be applied prospectively for annual and interim periods in fiscal years beginning after December 15, 2018. The ASU is not expected to have a material impact on Oriental's consolidated financial position or results of operations. At March 31, 2018, Oriental does not have callable debt securities.

Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting (a consensus of the Emerging Issues Task Force). In February 2017, the FASB issued ASU No. 2017-06, which intended to reduce diversity and improve the usefulness of information provided by employee benefit plans that hold interests in master trusts. This ASU will be applied prospectively for annual and interim periods in fiscal years beginning after December 15, 2018. The ASU is not expected to have a material impact on Oriental's consolidated financial position or results of operations.

Simplifying the Test for Goodwill Impairment. In January 2017, the FASB issued ASU No. 2017-04, which simplifies the measurement of goodwill impairment. An entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. This ASU will be applied prospectively for annual and interim periods in fiscal years beginning after December 15, 2019. We will assess the impact that the adoption of ASU 2017-04 will have on our consolidated financial statements and related disclosures during this year.

Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued ASU No. 2016-13, which includes an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. ASU No. 2016-13 is effective for fiscal years, and interim periods, beginning after December 15, 2019. Oriental will implement ASU No. 2016-13 on January 1, 2020. While we continue to assess the impact of ASU No. 2016-13, we have developed a roadmap with time schedules in place from 2016 to implementation date. Oriental's cross-functional implementation team has developed a project plan to ensure we comply with all updates from this ASU at the time of adoption. We recently have selected the software and are in the process of assessing the methodology to be used in order to develop an acceptable model to estimate the expected credit losses. After the model has been developed, reviewed and validated in accordance with our governance policies, Oriental will provide further disclosure regarding the estimated impact on our allowance for loan and lease losses. Also, we are assessing the additional disclosure requirements from this update. Although Oriental expects the allowance for credit losses to increase upon adoption with a corresponding adjustment to retained earnings, the ultimate amount of the increase will depend on the portfolio composition, credit quality, economic conditions and reasonable and supportable forecasts at that time.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Leases. In February 2016, the FASB issued ASU No. 2016-02, the FASB issued ASU No. 2016-02, which requires lessees to recognize a right-of-use asset and related lease liability for leases classified as operating leases at the commencement date that have lease terms of more than 12 months. This ASU retains the classification distinction between finance leases and operating leases. ASU No. 2016-02 is effective for fiscal years, and interim periods, beginning after December 15, 2018. Oriental plans to adopt this guidance effective January 1, 2019 using the required modified retrospective approach, which includes presenting the cumulative effect of initial application along with supplementary disclosures. As a lessor and lessee, we do not anticipate the classification of our leases to change, but we expect to recognize right-of-use assets and lease liabilities for substantially all of our operating lease commitments for which we are the lessee as a lease liability and corresponding right-of-use asset on our consolidated financial statements. Oriental has made substantial progress in reviewing contractual arrangements for embedded leases in an effort to identify Oriental’s full lease population and is presently evaluating all of its leases, as well as contracts that may contain embedded leases, for compliance with the new lease accounting rules. Oriental’s leases primarily consist of leased office space, and information technology equipment. At March 31, 2018, Oriental had $33.7 million of minimum lease commitments from these operating leases (refer to Note 20). Although Oriental is still evaluating the impact that the adoption of this accounting pronouncement will have on its consolidated financial statements, preliminarily it expects that the amounts to be recognized as right-of-use assets and lease liabilities will be less than 1% of its total assets and is not expected to have a material impact on its regulatory capital.

New Accounting Updates Adopted During the Current Quarter

Restricted Cash. In November 2016, the FASB issued ASU No. 2016-18, which amends Topic 230 (Statement of Cash Flows) and requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU No. 2016-18 is intended to reduce diversity in practice in how restricted cash or restricted cash equivalents are presented and classified in the statement of cash flows. ASU No. 2016-18 is effective for fiscal years, and interim periods, beginning after December 15, 2017. The standard requires application using a retrospective transition method. The adoption of ASU No. 2016-18 on January 1, 2018, changed the presentation and classification of restricted cash and restricted cash equivalents in our consolidated statements of cash flows.

Revenue from Contracts with Customers. In May 2014, the FASB issued ASU No. 2014-09, which supersedes the revenue recognition requirements Topic 605 (Revenue Recognition), and most industry-specific guidance. ASU No. 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09 permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). In August 2015, the FASB issued ASU No. 2015-14 to defer the effective date of ASU No. 2014-09 by one year to fiscal years beginning after December 15, 2017. Oriental has adopted this ASU on January 1, 2018 using the modified retrospective method. Oriental’s implementation efforts included the identification of revenue streams that are within the scope of the new guidance and the review of related contracts with customers to determine their effect on certain non-interest income items presented in our consolidated statements of operations and the additional presentation disclosures required (refer to note 21). We concluded that substantially all of Oriental’s revenues are generated from activities that are outside the scope of this ASU, and the adoption did not have a material impact on our consolidated financial statements. Therefore, there was no cumulative effect adjustment recorded.

NOTE 2 – SIGNIFICANT EVENTS

Hurricanes Irma and Maria

During 2017, Oriental was impacted by hurricanes Irma and Maria, which struck the Island on September 7, 2017 and September 20, 2017, respectively. Hurricane Maria caused catastrophic damages throughout Puerto Rico, including homes, businesses, roads, bridges, power lines, commercial establishments, and public facilities. It caused an unprecedented crisis when it ravaged the Island’s electric power grid less than two weeks after hurricane Irma left over a million Puerto Rico residents without power. For several months after the hurricanes, a large part of Puerto Rico was and some areas still remain without electricity, many businesses were unable to operate, and government authorities struggled to deliver emergency supplies and clean drinking water to many communities outside the San Juan metropolitan area. Further, payment and delivery systems, including the U.S. Post Office, were unable to operate for weeks after hurricane Maria.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Almost all of Oriental’s operations and clients are located in Puerto Rico. Although Oriental’s business operations were disrupted by major damages to Puerto Rico’s critical infrastructure, including its electric power grid and telecommunications network, Oriental’s digital channels, core banking and electronic funds transfer systems continued to function uninterrupted during and after the hurricanes. Within days after hurricane Maria, and upon securing a continuing supply of diesel fuel for its electric power generators, Oriental was able to open its main offices and many of its branches and ATMs in addition to its digital and phone trade channels.

As a result of this event, and based on current assessments of information available for the impact of the hurricanes on our credit portfolio, 2017 third and fourth quarter results included an additional loan loss provision of $27.0 million and $5.4 million, respectively. During the quarter ended March 31, 2018, Oriental recorded a $8.6 million provision for loan losses to replenish the allowance for loan charge-offs of $8.2 million related to the hurricanes.

Oriental implemented its disaster response plan as these storms approached its service areas. To operate in disaster response mode, Oriental incurred expenses for, among other things, buying diesel and generators for electric power, debris removal, security matters, property damages, and emergency communication with customers regarding the status of Bank operations. The estimated total losses as of December 31, 2017 amounted to $6.6 million. No additional losses have been incurred at March 31, 2018.

Oriental maintains insurance for casualty losses as well as for disaster response costs and certain revenue lost through business interruption. Management believes that recovery of $2.2 million incurred costs as of December 31, 2017 is probable. Oriental received a $1.0 million partial payment from the insurance company during the quarter ended December 2017 and a $0.7 million payment during the quarter ended March 31, 2018. Accordingly, a receivable of $0.5 million and $1.2 million was included in other assets at March 31, 2018 and December 31, 2017, respectively, for the expected recovery.

NOTE 3 – RESTRICTED CASH

The following table includes the composition of Oriental’s restricted cash:

	March 31,		December 31,
	2018		2017
	(In thousands)
Cash pledged as collateral to other financial institutions to secure:
Derivatives	$	1,980	$	1,980
Obligations under agreement of loans sold with recourse		1,050		1,050
	$	3,030	$	3,030

At both March 31, 2018 and December 31, 2017, the Bank’s international banking entities, Oriental International Bank Inc. (“OIB”) and Oriental Overseas, a division of the Bank, held an unencumbered certificate of deposit and other short-term highly liquid securities in the amount of $300 thousand and $325 thousand, respectively, as the legal reserve required for international banking entities under Puerto Rico law. These instruments cannot be withdrawn or transferred by OIB or Oriental Overseas without prior written approval of the Office of the Commissioner of Financial Institutions of Puerto Rico (the "OCFI").

As part of its derivative activities, Oriental has entered into collateral agreements with certain financial counterparties. At both March 31, 2018 and December 31, 2017, Oriental had delivered approximately $2.0 million of cash as collateral for such derivatives activities.

Oriental has a contract with FNMA which requires collateral to guarantee the repurchase, if necessary, of loans sold with recourse. At both March 31, 2018 and December 31, 2017, Oriental delivered as collateral cash amounting to approximately $1.1 million.

The Bank is required by Puerto Rico law to maintain average weekly reserve balances to cover demand deposits. The amount of those minimum average reserve balances for the week that covered March 31, 2018 was $208.5 million (December 31, 2017 - $189.2 million). At March 31, 2018 and December 31, 2017, the Bank complied with the requirement. Cash and due from bank as well as other short-term, highly liquid securities are used to cover the required average reserve balances.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 4 – INVESTMENT SECURITIES

Money Market Investments

Oriental considers as cash equivalents all money market instruments that are not pledged and that have maturities of three months or less at the date of acquisition. At March 31, 2018 and December 31, 2017, money market instruments included as part of cash and cash equivalents amounted to $7.4 million and $7.0 million, respectively.

Investment Securities

The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the securities owned by Oriental at March 31, 2018 and December 31, 2017 were as follows:

	March 31, 2018
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
	(In thousands)
Available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates	$	538,900	$	328	$	9,133	$	530,095	2.51%
GNMA certificates		182,055		317		2,870		179,502	2.97%
CMOs issued by US government-sponsored agencies		78,104		-		2,729		75,375	1.90%
Total mortgage-backed securities		799,059		645		14,732		784,972	2.56%
Investment securities
US Treasury securities		10,280		-		156		10,124	1.28%
Obligations of US government-sponsored agencies		2,773		-		72		2,701	1.38%
Obligations of Puerto Rico government and public instrumentalities		2,455		-		43		2,412	5.55%
Other debt securities		1,403		29		-		1,432	2.98%
Total investment securities		16,911		29		271		16,669	2.06%
Total securities available for sale	$	815,970	$	674	$	15,003	$	801,641	2.55%

Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates	$	485,143	$	-	$	17,163	$	467,980	2.07%

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2017
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
	(In thousands)
Available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates	$	383,194	$	1,402	$	2,881	$	381,715	2.39%
GNMA certificates		166,436		1,486		584		167,338	2.94%
CMOs issued by US government-sponsored agencies		82,026		-		1,955		80,071	1.90%
Total mortgage-backed securities		631,656		2,888		5,420		629,124	2.47%
Investment securities
US Treasury securities		10,276		-		113		10,163	1.25%
Obligations of US government-sponsored agencies		2,927		-		48		2,879	1.38%
Obligations of Puerto Rico government and public instrumentalities		2,455		-		362		2,093	5.55%
Other debt securities		1,486		52		-		1,538	2.97%
Total investment securities		17,144		52		523		16,673	2.04%
Total securities available-for-sale	$	648,800	$	2,940	$	5,943	$	645,797	2.46%

Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates	$	506,064	$	-	$	8,383	$	497,681	2.07%

The amortized cost and fair value of Oriental’s investment securities at March 31, 2018, by contractual maturity, are shown in the next table. Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the period of final contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	March 31, 2018
	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Mortgage-backed securities
Due from 1 to 5 years
FNMA and FHLMC certificates	$	5,651	$	5,598	$	-	$	-
Total due from 1 to 5 years		5,651		5,598		-		-
Due after 5 to 10 years
CMOs issued by US government-sponsored agencies	$	69,086	$	66,513	$	-	$	-
FNMA and FHLMC certificates		216,028		212,418		-		-
Total due after 5 to 10 years		285,114		278,931		-		-
Due after 10 years
FNMA and FHLMC certificates	$	317,221	$	312,079	$	485,143	$	467,980
GNMA certificates		182,055		179,502		-		-
CMOs issued by US government-sponsored agencies		9,018		8,862		-		-
Total due after 10 years		508,294		500,443		485,143		467,980
Total mortgage-backed securities		799,059		784,972		485,143		467,980
Investment securities
Due less than one year
US Treasury securities	$	322	$	322	$	-	$	-
Obligations of Puerto Rico government and public instrumentalities		2,455		2,412		-		-
Total due in less than one year		2,777		2,734		-		-
Due from 1 to 5 years
US Treasury securities	$	9,958	$	9,802	$	-	$	-
Obligations of US government and sponsored agencies		2,773		2,701		-		-
Total due from 1 to 5 years		12,731		12,503		-		-
Due from 5 to 10 years
Other debt securities		1,403		1,432		-		-
Total due after 5 to 10 years		1,403		1,432		-		-
Total investment securities		16,911		16,669		-		-
Total	$	815,970	$	801,641	$	485,143	$	467,980

During the quarter ended March 31, 2018, Oriental retained securitized GNMA pools totaling $18.0 million amortized cost, at a yield of 3.26% from its own originations while, during the quarter ended March 31, 2017, that amount totaled $25.0 million, amortized cost, at a yield of 3.14%.

During the quarters ended March 31, 2018 and 2017, Oriental did not sell any mortgage-backed securities or investment securities.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables show Oriental’s gross unrealized losses and fair value of investment securities available-for-sale and held-to-maturity, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position at March 31, 2018 and December 31, 2017:

	March 31, 2018
	12 months or more
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies	$	69,921	$	2,594	$	67,327
FNMA and FHLMC certificates		106,196		3,804		102,392
Obligations of US Government and sponsored agencies		2,773		72		2,701
Obligations of Puerto Rico government and public instrumentalities		2,455		43		2,412
GNMA certificates		20,678		906		19,772
US Treasury Securities		9,958		156		9,802
	$	211,981	$	7,575	$	204,406
Securities held to maturity
FNMA and FHLMC certificates	$	338,260	$	13,311	$	324,949

	Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US government-sponsored agencies	$	8,183	$	135	$	8,048
FNMA and FHLMC certificates		367,587		5,329		362,258
GNMA certificates		131,685		1,964		129,721
US Treausury Securities		322		-		322
	$	507,777	$	7,428	$	500,349
Securities held-to-maturity
FNMA and FHLMC Certificates	$	146,883	$	3,852	$	143,031

	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US government-sponsored agencies	$	78,104	$	2,729	$	75,375
FNMA and FHLMC certificates		473,783		9,133		464,650
Obligations of Puerto Rico government and public instrumentalities		2,455		43		2,412
Obligations of US government and sponsored agencies		2,773		72		2,701
GNMA certificates		152,363		2,870		149,493
US Treausury Securities		10,280		156		10,124
	$	719,758	$	15,003	$	704,755
Securities held-to-maturity
FNMA and FHLMC certificates	$	485,143	$	17,163	$	467,980

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2017
	12 months or more
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies	$	72,562	$	1,857	$	70,705
FNMA and FHLMC certificates		111,635		2,122		109,513
Obligations of US Government and sponsored agencies		2,927		48		2,879
Obligations of Puerto Rico government and public instrumentalities		2,455		362		2,093
GNMA certificates		20,803		499		20,304
US Treasury Securities		9,952		113		9,839
	$	220,334	$	5,001	$	215,333

Securities available-for-sale
FNMA and FHLMC certificates	$	352,399		7,264		345,135

	Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies		9,464		98		9,366
FNMA and FHLMC certificates		125,107		759		124,348
GNMA certificates		14,001		85		13,916
US Treausury Securities		324		-		324
	$	148,896	$	942	$	147,954
Securities held to maturity
FNMA and FHLMC certificates	$	153,665	$	1,119	$	152,546

	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies		82,026		1,955		80,071
FNMA and FHLMC certificates		236,742		2,881		233,861
Obligations of Puerto Rico government and public instrumentalities		2,455		362		2,093
Obligations of US government and sponsored agencies		2,927		48		2,879
GNMA certificates		34,804		584		34,220
US Treausury Securities		10,276		113		10,163
	$	369,230	$	5,943	$	363,287
Securities held to maturity
FNMA and FHLMC certificates	$	506,064	$	8,383	$	497,681

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Oriental performs valuations of the investment securities on a monthly basis. Moreover, Oriental conducts quarterly reviews to identify and evaluate each investment in an unrealized loss position for other-than-temporary impairment. Any portion of a decline in value associated with credit loss is recognized in the statements of operations with the remaining noncredit-related component recognized in other comprehensive income (loss). A credit loss is determined by assessing whether the amortized cost basis of the security will be recovered by comparing the present value of cash flows expected to be collected from the security, discounted at the rate equal to the yield used to accrete current and prospective beneficial interest for the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered to be the “credit loss.” Other-than-temporary impairment analysis is based on estimates that depend on market conditions and are subject to further change over time. In addition, while Oriental believes that the methodology used to value these exposures is reasonable, the methodology is subject to continuing improvement, including those made as a result of market developments. Consequently, it is reasonably possible that changes in estimates or conditions could result in the need to recognize additional other-than-temporary impairment charges in the future.

Most of the investments ($1.2 billion, amortized cost, or 99.8%) with an unrealized loss position at March 31, 2018 consist of securities issued or guaranteed by the U.S. Treasury or U.S. government-sponsored agencies, all of which are highly liquid securities that have a large and efficient secondary market. Their aggregate losses and their variability from period to period are the result of changes in market conditions, and not due to the repayment capacity or creditworthiness of the issuers or guarantors of such securities.

The sole exposure to a Puerto Rico government bond ($2.5 million, amortized cost, or 0.2%) with an unrealized loss position at March 31, 2018 consists of an obligation issued by the Puerto Rico Highways and Transportation Authority ("PRHTA") secured by a pledge of toll revenues from the Teodoro Moscoso Bridge operated through a public-private partnership. The decline in the market value of this security is mainly attributed to the significant economic and fiscal challenges that Puerto Rico is facing, which is expected to result in a significant restructuring of the government under the supervision of the federally-created Fiscal Oversight and Management Board of Puerto Rico. The PRHTA bond had an aggregate fair value of $2.4 million at March 31, 2018 (98% of the bond's amortized cost) and matures on July 1, 2018. The discounted cash flow analysis for the investment showed a cumulative default probability at maturity of 2.3 %, thus reflecting that it is more likely than not that the bond will not default during its remaining term. Based on this analysis, Oriental determined that it is more likely than not that it will recover all interest and principal invested in this Puerto Rico government bond and is, therefore, not required to recognize a credit loss as of March 31, 2018. Also, Oriental’s conclusion is based on the assessment of the specific source of repayment of the outstanding bond, which continues to perform. PRHTA started principal repayments on July 1, 2014. All scheduled principal and interest payments to date have been collected. As a result of the aforementioned analysis, no other-than-temporary losses were recorded during the quarter ended March 31, 2018.

As of March 31, 2018, Oriental performed a cash flow analysis of its Puerto Rico government bond to calculate the cash flows expected to be collected and determine if any portion of the decline in market value of this investment was considered an other-than-temporary impairment. The analysis derives an estimate of value based on the present value of risk-adjusted future cash flows of the underlying investment, and included the following components:

· The contractual future cash flows of the bond are projected based on the key terms as set forth in the PRHTA official statement for the investment. Such key terms include among others the interest rate, amortization schedule, if any, and the maturity date.

· The risk-adjusted cash flows are calculated based on a monthly default probability and recovery rate assumptions based on the credit rating of the investment. Constant monthly default rates are assumed throughout the life of the bond which is based on the respective security’s credit rating as of the date of the analysis.

· The adjusted future cash flows are then discounted at the original effective yield of the investment based on the purchase price and expected risk-adjusted future cash flows as of the purchase date of the investment.

NOTE 5 - LOANS

Oriental’s loan portfolio is composed of two segments, loans initially accounted for under the amortized cost method (referred to as "originated and other" loans) and loans acquired (referred to as "acquired" loans). Acquired loans are further segregated between acquired BBVAPR loans and acquired Eurobank loans.

The composition of Oriental’s loan portfolio at March 31, 2018 and December 31, 2017 was as follows:

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	March 31,		December 31,
	2018		2017
	(In thousands)
Originated and other loans and leases held for investment:
Mortgage	$	682,564	$	683,607
Commercial		1,346,404		1,307,261
Consumer		334,865		330,039
Auto and leasing		957,197		883,985
		3,321,030		3,204,892
Allowance for loan and lease losses on originated and other loans and leases		(96,832)		(92,718)
		3,224,198		3,112,174
Deferred loan costs, net		7,125		6,695
Total originated and other loans loans held for investment, net		3,231,323		3,118,869
Acquired loans:
Acquired BBVAPR loans:
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Commercial		4,222		4,380
Consumer		27,235		28,915
Auto		16,171		21,969
		47,628		55,264
Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-20		(3,184)		(3,862)
		44,444		51,402
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage		526,089		532,053
Commercial		230,988		243,092
Consumer		932		1,431
Auto		35,006		43,696
		793,015		820,272
Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-30		(43,166)		(45,755)
		749,849		774,517
Total acquired BBVAPR loans, net		794,293		825,919
Acquired Eurobank loans:
Loans secured by 1-4 family residential properties		69,328		69,538
Commercial		52,418		53,793
Consumer		972		1,112
Total acquired Eurobank loans		122,718		124,443
Allowance for loan and lease losses on Eurobank loans		(25,410)		(25,174)
Total acquired Eurobank loans, net		97,308		99,269
Total acquired loans, net		891,601		925,188
Total held for investment, net		4,122,924		4,044,057
Mortgage loans held-for-sale		10,505		12,272
Total loans, net	$	4,133,429	$	4,056,329

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As a result of the devastation caused by hurricanes Irma and Maria, Oriental offered an automatic three-month moratorium for the payment due on certain loans. At December 31, 2017, Oriental had $2.6 billion loans under the moratorium program. The level of delinquencies for mortgage and auto loans as of December 31, 2017 was impacted by the loan moratorium. Aging of current and early delinquent loans in moratorium were frozen at September 30, 2017, throughout the moratorium period. In addition, although the repayment schedule was modified as part of the moratorium, certain borrowers continued to make payments shortly after the moratorium, having an impact on the respective delinquency status at December 31, 2017. At March 31, 2018, most of the loan moratoriums have expired, and delinquency levels are returning to pre-hurricane levels.

Originated and Other Loans and Leases Held for Investment

Oriental’s originated and other loans held for investment are encompassed within four portfolio segments: mortgage, commercial, consumer, and auto and leasing.

The following tables present the aging of the recorded investment in gross originated and other loans held for investment at March 31, 2018 and December 31, 2017, by class of loans. Mortgage loans past due include delinquent loans in the GNMA buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	March 31, 2018
													Loans 90+
													Days Past
													Due and
	30-59 Days		60-89 Days		90+ Days		Total Past						Still
	Past Due		Past Due		Past Due		Due		Current		Total Loans		Accruing
	(In thousands)
Mortgage
Traditional (by origination year):
Up to the year 2002	$	168	$	1,697	$	3,696	$	5,561	$	39,752	$	45,313	$	197
Years 2003 and 2004		235		1,612		6,989		8,836		73,203		82,039		-
Year 2005		-		1,235		3,303		4,538		38,610		43,148		68
Year 2006		78		2,486		5,069		7,633		53,279		60,912		-
Years 2007, 2008 and 2009		-		2,075		7,683		9,758		57,173		66,931		336
Years 2010, 2011, 2012, 2013		205		1,422		8,346		9,973		112,977		122,950		459
Years 2014, 2015, 2016, 2017 and 2018		-		318		1,499		1,817		125,289		127,106		-
		686		10,845		36,585		48,116		500,283		548,399		1,060
Non-traditional		-		43		3,415		3,458		13,498		16,956		-
Loss mitigation program		12,921		4,695		20,062		37,678		66,767		104,445		4,439
		13,607		15,583		60,062		89,252		580,548		669,800		5,499
Home equity secured personal loans		-		-		-		-		249		249		-
GNMA's buy-back option program		-		-		12,515		12,515		-		12,515		-
		13,607		15,583		72,577		101,767		580,797		682,564		5,499
Commercial
Commercial secured by real estate:
Corporate		-		-		-		-		237,751		237,751		-
Institutional		-		-		-		-		46,955		46,955		-
Middle market		4,839		560		2,454		7,853		208,697		216,550		-
Retail		939		640		9,113		10,692		231,981		242,673		-
Floor plan		-		-		-		-		4,078		4,078		-
Real estate		-		-		-		-		17,666		17,666		-
		5,778		1,200		11,567		18,545		747,128		765,673		-
Other commercial and industrial:
Corporate		-		-		-		-		168,490		168,490		-
Institutional		-		-		-		-		115,034		115,034		-
Middle market		249		-		881		1,130		91,148		92,278		-
Retail		759		140		919		1,818		176,225		178,043		-
Floor plan		-		-		51		51		26,835		26,886		-
		1,008		140		1,851		2,999		577,732		580,731		-
		6,786		1,340		13,418		21,544		1,324,860		1,346,404		-

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	March 31, 2018
													Loans 90+
													Days Past
													Due and
	30-59 Days		60-89 Days		90+ Days		Total Past						Still
	Past Due		Past Due		Past Due		Due		Current		Total Loans		Accruing
	(In thousands)
Consumer
Credit cards	$	1,144	$	61	$	260	$	1,465	$	26,049	$	27,514	$	-
Overdrafts		22		14		42		78		168		246		-
Personal lines of credit		125		67		50		242		1,791		2,033		-
Personal loans		3,310		2,410		1,278		6,998		283,137		290,135		-
Cash collateral personal loans		238		87		21		346		14,591		14,937		-
		4,839		2,639		1,651		9,129		325,736		334,865		-
Auto and leasing		45,003		16,555		13,594		75,152		882,045		957,197		-
Total	$	70,235	$	36,117	$	101,240	$	207,592	$	3,113,438	$	3,321,030	$	5,499

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2017
													Loans 90+
													Days Past
													Due and
	30-59 Days		60-89 Days		90+ Days		Total Past						Still
	Past Due		Past Due		Past Due		Due		Current		Total Loans		Accruing
	(In thousands)
Mortgage
Traditional (by origination year):
Up to the year 2002	$	86	$	938	$	3,537	$	4,561	$	41,579	$	46,140	$	467
Years 2003 and 2004		92		1,077		6,304		7,473		75,758		83,231		-
Year 2005		101		383		3,348		3,832		40,669		44,501		68
Year 2006		242		604		5,971		6,817		55,966		62,783		66
Years 2007, 2008 and 2009		358		1,258		8,561		10,177		58,505		68,682		577
Years 2010, 2011, 2012, 2013		233		978		7,393		8,604		116,674		125,278		1,202
Years 2014, 2015, 2016 and 2017		-		75		1,649		1,724		121,194		122,918		-
		1,112		5,313		36,763		43,188		510,345		553,533		2,380
Non-traditional		-		326		3,543		3,869		14,401		18,270		-
Loss mitigation program		7,233		3,331		18,923		29,487		73,793		103,280		4,981
		8,345		8,970		59,229		76,544		598,539		675,083		7,361
Home equity secured personal loans		-		-		-		-		256		256		-
GNMA's buy-back option program		-		-		8,268		8,268		-		8,268		-
		8,345		8,970		67,497		84,812		598,795		683,607		7,361
Commercial
Commercial secured by real estate:
Corporate		-		-		-		-		235,426		235,426		-
Institutional		-		-		118		118		44,648		44,766		-
Middle market		765		-		3,527		4,292		225,649		229,941		-
Retail		352		936		9,695		10,983		235,084		246,067		-
Floor plan		-		-		-		-		3,998		3,998		-
Real estate		-		-		-		-		17,556		17,556		-
		1,117		936		13,340		15,393		762,361		777,754		-
Other commercial and industrial:
Corporate		-		-		-		-		170,015		170,015		-
Institutional		-		-		-		-		125,591		125,591		-
Middle market		-		-		881		881		84,482		85,363		-
Retail		455		103		1,616		2,174		111,078		113,252		-
Floor plan		9		-		51		60		35,226		35,286		-
		464		103		2,548		3,115		526,392		529,507		-
		1,581		1,039		15,888		18,508		1,288,753		1,307,261		-

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2017
													Loans 90+
													Days Past
													Due and
	30-59 Days		60-89 Days		90+ Days		Total Past						Still
	Past Due		Past Due		Past Due		Due		Current		Total Loans		Accruing
	(In thousands)
Consumer
Credit cards	$	246	$	130	$	1,227	$	1,603	$	26,827	$	28,430	$	-
Overdrafts		20		6		31		57		157		214		-
Personal lines of credit		259		54		87		400		1,820		2,220		-
Personal loans		3,778		1,494		223		5,495		278,982		284,477		-
Cash collateral personal loans		103		59		312		474		14,224		14,698		-
		4,406		1,743		1,880		8,029		322,010		330,039		-
Auto and leasing		21,760		10,399		4,232		36,391		847,594		883,985		-
Total	$	36,092	$	22,151	$	89,497	$	147,740	$	3,057,152	$	3,204,892	$	7,361

At both March 31, 2018 and December 31, 2017, Oriental had a carrying balance of $94.9 million in originated and other loans held for investment granted to the Puerto Rico government, including its instrumentalities, public corporations and municipalities as part of the institutional commercial loan segment. All originated and other loans granted to the Puerto Rico government are general obligations of municipalities secured by ad valorem taxation, without limitation as to rate or amount, on all taxable property within the issuing municipalities. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations.

Acquired Loans

Acquired loans were initially measured at fair value and subsequently accounted for under either ASC 310-30 or ASC 310-20 (Non-refundable fees and Other Costs). We have acquired loans in the acquisitions of BBVAPR and Eurobank.

Acquired BBVAPR Loans

Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)

Credit cards, retail and commercial revolving lines of credits, floor plans and performing auto loans with FICO scores over 660 acquired at a premium are accounted for under the guidance of ASC 310-20, which requires that any contractually required loan payment receivable in excess of Oriental’s initial investment in the loans be accreted into interest income on a level-yield basis over the life of the loan. Loans accounted for under ASC 310-20 are placed on non-accrual status when past due in accordance with Oriental’s non-accrual policy, and any accretion of discount or amortization of premium is discontinued. Acquired BBVAPR loans that were accounted for under the provisions of ASC 310-20 are removed from the acquired loan category at the end of the reporting period upon refinancing, renewal or normal re-underwriting.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables present the aging of the recorded investment in gross acquired BBVAPR loans accounted for under ASC 310-20 as of March 31, 2018 and December 31, 2017, by class of loans:

	March 31, 2018
													Loans 90+
													Days Past
													Due and
	30-59 Days		60-89 Days		90+ Days		Total Past						Still
	Past Due		Past Due		Past Due		Due		Current		Total Loans		Accruing
	(In thousands)
Commercial
Commercial secured by real estate
Retail	$	-	$	-	$	119	$	119	$	-	$	119	$	-
Floor plan		-		-		921		921		363		1,284		-
		-		-		1,040		1,040		363		1,403		-
Other commercial and industrial
Retail		161		16		46		223		2,594		2,817		-
Floor plan		-		-		2		2		-		2		-
		161		16		48		225		2,594		2,819		-
		161		16		1,088		1,265		2,957		4,222		-
Consumer
Credit cards		767		105		270		1,142		23,719		24,861		-
Personal loans		84		7		61		152		2,222		2,374		-
		851		112		331		1,294		25,941		27,235		-
Auto		798		402		154		1,354		14,817		16,171		-
Total	$	1,810	$	530	$	1,573	$	3,913	$	43,715	$	47,628	$	-

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2017
													Loans 90+
													Days Past
													Due and
	30-59 Days		60-89 Days		90+ Days		Total Past						Still
	Past Due		Past Due		Past Due		Due		Current		Total Loans		Accruing
	(In thousands)
Commercial
Commercial secured by real estate
Retail	$	-	$	-	$	119	$	119	$	-	$	119	$	-
Floor plan		-		-		928		928		393		1,321		-
		-		-		1,047		1,047		393		1,440		-
Other commercial and industrial
Retail		36		-		221		257		2,681		2,938		-
Floor plan		-		-		2		2		-		2		-
		36		-		223		259		2,681		2,940		-
		36		-		1,270		1,306		3,074		4,380		-
Consumer
Credit cards		208		127		1,310		1,645		24,822		26,467		-
Personal loans		139		61		45		245		2,203		2,448		-
		347		188		1,355		1,890		27,025		28,915		-
Auto		602		248		179		1,029		20,940		21,969		-
Total	$	985	$	436	$	2,804	$	4,225	$	51,039	$	55,264	$	-

Acquired BBVAPR Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)

Acquired BBVAPR loans, except for credit cards, retail and commercial revolving lines of credits, floor plans and performing auto loans with FICO scores over 660 acquired at a premium, are accounted for by Oriental in accordance with ASC 310-30.

The carrying amount corresponding to acquired BBVAPR loans with deteriorated credit quality, including those accounted under ASC 310-30 by analogy, in the statements of financial condition at March 31, 2018 and December 31, 2017 is as follows:

	March 31,		December 31,
		2018		2017
		(In thousands)
Contractual required payments receivable:	$	1,444,070	$	1,481,616
Less: Non-accretable discount		354,590		352,431
Cash expected to be collected		1,089,480		1,129,185
Less: Accretable yield		296,465		308,913
Carrying amount, gross		793,015		820,272
Less: allowance for loan and lease losses		43,166		45,755
Carrying amount, net	$	749,849	$	774,517

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At March 31, 2018 and December 31, 2017, Oriental had $50.2 million and $50.3 million, respectively, in loans granted to Puerto Rico municipalities as part of its acquired BBVAPR loans accounted for under ASC 310-30. These loans are primarily secured municipal general obligations.

The following tables describe the accretable yield and non-accretable discount activity of acquired BBVAPR loans accounted for under ASC 310-30 for the quarters ended March 31, 2018 and 2017 :

	Quarter Ended March 31, 2018
	Mortgage		Commercial		Auto		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	258,498	$	46,764	$	2,766	$	885	$	308,913
Accretion		(7,073)		(3,685)		(869)		(256)		(11,883)
Change in expected cash flows		-		3,156		426		58		3,640
Transfer (to) non-accretable discount		(3,046)		(524)		(597)		(38)		(4,205)
Balance at end of period	$	248,379	$	45,711	$	1,726	$	649	$	296,465

Non-Accretable Discount Activity:
Balance at beginning of period	$	299,501	$	10,596	$	23,050	$	19,284	$	352,431
Change in actual and expected losses		(1,440)		(389)		(204)		(13)		(2,046)
Transfer from accretable yield		3,046		524		597		38		4,205
Balance at end of period	$	301,107	$	10,731	$	23,443	$	19,309	$	354,590

	Quarter Ended March 31, 2017
	Mortgage		Commercial		Auto		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	292,115	$	50,366	$	8,538	$	3,682	$	354,701
Accretion		(7,890)		(4,981)		(2,147)		(602)		(15,620)
Change in actual and expected losses		1		198		52		36		287
Transfer (to) from non-accretable discount		(7,409)		1,319		140		(58)		(6,008)
Balance at end of period	$	276,817	$	46,902	$	6,583	$	3,058	$	333,360

Non-Accretable Discount Activity:
Balance at beginning of period	$	305,615	$	16,965	$	22,407	$	18,120	$	363,107
Change in actual and expected losses		(3,031)		(843)		297		(19)		(3,596)
Transfer from (to) accretable yield		7,409		(1,319)		(140)		58		6,008
Balance at end of period	$	309,993	$	14,803	$	22,564	$	18,159	$	365,519

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Acquired Eurobank Loans

The carrying amount of acquired Eurobank loans at March 31, 2018 and December 31, 2017 is as follows:

	March 31		December 31
	2018		2017
	(In thousands)
Contractual required payments receivable:	$	174,859	$	179,960
Less: Non-accretable discount		5,547		5,845
Cash expected to be collected		169,312		174,115
Less: Accretable yield		46,594		49,672
Carrying amount, gross		122,718		124,443
Less: Allowance for loan and lease losses		25,410		25,174
Carrying amount, net	$	97,308	$	99,269

The following tables describe the accretable yield and non-accretable discount activity of acquired Eurobank loans for the quarters ended March 31, 2018 and 2017:

	Quarter Ended March 31, 2018
	Loans Secured by 1-4 Family Residential Properties		Commercial		Construction & Development Secured by 1-4 Family Residential Properties		Leasing		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	41,474	$	6,751	$	1,447	$	-	$	-	$	49,672
Accretion		(1,605)		(1,606)		-		(34)		(96)		(3,341)
Change in expected cash flows		(144)		898		-		(63)		178		869
Transfer (to) from non-accretable discount		(103)		(427)		(91)		97		(82)		(606)
Balance at end of period	$	39,622	$	5,616	$	1,356	$	-	$	-	$	46,594

Non-Accretable Discount Activity:
Balance at beginning of period	$	4,576	$	276	$	758	$	-	$	235	$	5,845
Change in actual and expected losses		(200)		(703)		-		97		(98)		(904)
Transfer from (to) accretable yield		103		427		91		(97)		82		606
Balance at end of period	$	4,479	$	-	$	849	$	-	$	219	$	5,547

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Quarter Ended March 31, 2017
	Loans Secured by 1-4 Family Residential Properties		Commercial		Construction & Development Secured by 1-4 Family Residential Properties		Leasing		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	45,839	$	16,475	$	2,194		-	$	-	$	64,508
Accretion		(1,904)		(4,510)		(38)		-		(158)		(6,610)
Change in actual and expected losses		81		778		37		(143)		310		1,063
Transfer from (to) non-accretable discount		681		-		(322)		143		(152)		350
Balance at end of period	$	44,697	$	12,743	$	1,871	$	-	$	-	$	59,311

Non-Accretable Discount Activity:
Balance at beginning of period	$	8,441	$	3,880	$	11	$	-	$	8	$	12,340
Change in actual and expected losses		(334)		(1,409)		-		143		(154)		(1,754)
Transfer (to) from accretable yield		(681)		-		322		(143)		152		(350)
Balance at end of period	$	7,426	$	2,471	$	333	$	-	$	6	$	10,236

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Non-accrual Loans

The following table presents the recorded investment in loans in non-accrual status by class of loans as of March 31, 2018 and December 31, 2017:

	March 31,		December 31,
	2018		2017
	(In thousands)
Originated and other loans and leases held for investment
Mortgage
Traditional (by origination year):
Up to the year 2002	$	3,394	$	3,070
Years 2003 and 2004		6,852		6,380
Year 2005		3,235		3,280
Year 2006		5,069		5,905
Years 2007, 2008 and 2009		7,347		7,984
Years 2010, 2011, 2012, 2013		7,652		6,259
Years 2014, 2015, 2016 and 2017		1,383		1,649
		34,932		34,527
Non-traditional		3,415		3,543
Loss mitigation program		17,456		16,783
		55,803		54,853
Commercial
Commercial secured by real estate
Institutional		10,548		118
Middle market		10,128		11,394
Retail		16,638		14,438
		37,314		25,950
Other commercial and industrial
Middle market		6,829		6,323
Retail		2,850		2,929
Floor plan		51		51
		9,730		9,303
		47,044		35,253
Consumer
Credit cards		260		1,227
Overdrafts		42		31
Personal lines of credit		63		102
Personal loans		1,877		900
Cash collateral personal loans		21		312
		2,263		2,572
Auto and leasing		13,594		4,232
Total non-accrual originated loans	$	118,704	$	96,910

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	March 31,		December 31,
	2018		2017
	(In thousands)
Acquired BBVAPR loans accounted for under ASC 310-20
Commercial
Commercial secured by real estate
Retail	$	119	$	119
Floor plan		921		928
		1,040		1,047
Other commercial and industrial
Retail		46		221
Floor plan		2		2
		48		223
		1,088		1,270
Consumer
Credit cards		270		1,310
Personal loans		61		45
		331		1,355
Auto		154		179
Total non-accrual acquired BBVAPR loans accounted for under ASC 310-20		1,573		2,804
Total non-accrual loans	$	120,277	$	99,714

Loans accounted for under ASC 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses or are accounted under the cost recovery method.

Delinquent residential mortgage loans insured or guaranteed under applicable FHA and VA programs are classified as non-performing loans when they become 90 days or more past due, but are not placed in non-accrual status until they become 12 months or more past due, since they are insured loans. Therefore, these loans are included as non-performing loans but excluded from non-accrual loans. In addition, these loans are excluded from the impairment analysis.

At March 31, 2018 and December 31, 2017, loans whose terms have been extended and which are classified as troubled-debt restructurings that are not included in non-accrual loans amounted to $98.2 million and $109.2 million, respectively, as they are performing under their new terms.

At March 31, 2018 and December 31, 2017, loans that are current in their monthly payments, but placed in non-accrual due to credit deterioration amounted to $28.0 million and $20.1 million, respectively.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Impaired Loans

Oriental evaluates all loans, some individually and others as homogeneous groups, for purposes of determining impairment. The total investment in impaired commercial loans that were individually evaluated for impairment was $68.6 million and $72.3 million at March 31, 2018 and December 31, 2017, respectively. The impairments on these commercial loans were measured based on the fair value of collateral or the present value of cash flows, including those identified as troubled-debt restructurings. The allowance for loan and lease losses for these impaired commercial loans amounted to $13.3 million and $10.6 million at March 31, 2018 and December 31, 2017, respectively. The total investment in impaired mortgage loans that were individually evaluated for impairment was $84.3 million and $85.4 million at March 31, 2018 and December 31, 2017, respectively. Impairment on mortgage loans assessed as troubled-debt restructurings was measured using the present value of cash flows. The allowance for loan losses for these impaired mortgage loans amounted to $9.0 million and $9.1 million at March 31, 2018 and December 31, 2017, respectively.

Originated and Other Loans and Leases Held for Investment

Oriental’s recorded investment in commercial and mortgage loans categorized as originated and other loans and leases held for investment that were individually evaluated for impairment and the related allowance for loan and lease losses at March 31, 2018 and 2017 are as follows:

	March 31, 2018
	Unpaid		Recorded		Related
	Principal		Investment		Allowance		Coverage
	(In thousands)
Impaired loans with specific allowance:
Commercial	$	57,169	$	52,049	$	13,274	26%
Residential impaired and troubled-debt restructuring		94,405		84,283		9,022	11%
Impaired loans with no specific allowance:
Commercial		19,020		15,784		N/A	0%
Total investment in impaired loans	$	170,594	$	152,116	$	22,296	15%

	December 31, 2017
	Unpaid		Recorded		Related
	Principal		Investment		Allowance		Coverage
	(In thousands)
Impaired loans with specific allowance:
Commercial	$	57,922	$	52,585	$	10,573	20%
Residential impaired and troubled-debt restructuring		94,971		85,403		9,121	11%
Impaired loans with no specific allowance
Commercial		22,022		18,953		N/A	0%
Total investment in impaired loans	$	174,915	$	156,941	$	19,694	13%

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Acquired BBVAPR Loans Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)

Oriental’s recorded investment in acquired BBVAPR commercial loans accounted for under ASC 310-20 that were individually evaluated for impairment and the related allowance for loan and lease losses at March 31, 2018 and December 31, 2017 are as follows:


	March 31, 2018
	Unpaid		Recorded		Related
	Principal		Investment		Allowance		Coverage
	(In thousands)
Impaired loans with specific allowance
Commercial	$	926	$	747	$	21	3%
Impaired loans with no specific allowance
Commercial	$	-	$	-		N/A	0%
Total investment in impaired loans	$	926	$	747	$	21	3%


	December 31, 2017
	Unpaid		Recorded		Specific
	Principal		Investment		Allowance		Coverage
	(In thousands)
Impaired loans with specific allowance
Commercial	$	926	$	747	$	20	3%
Impaired loans with no specific allowance
Commercial	$	-	$	-		N/A	0%
Total investment in impaired loans	$	926	$	747	$	20	3%

Acquired BBVAPR Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)

Oriental’s recorded investment in acquired BBVAPR loan pools accounted for under ASC 310-30 that have recorded impairments and their related allowance for loan and lease losses at March 31, 2018 and December 31, 2017 are as follows:

	March 31, 2018
							Coverage
	Unpaid		Recorded				to Recorded
	Principal		Investment		Allowance		Investment
	(In thousands)
Impaired loan pools with specific allowance:
Mortgage	$	536,514	$	526,089	$	14,331	3%
Commercial		239,976		229,216		22,045	10%
Consumer		1,892		932		21	2%
Auto		35,560		35,006		6,769	19%
Total investment in impaired loan pools	$	813,942	$	791,243	$	43,166	5%

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31 , 2017
							Coverage
	Unpaid		Recorded				to Recorded
	Principal		Investment		Allowance		Investment
	(In thousands)
Impaired loan pools with specific allowance:
Mortgage	$	547,064	$	532,052	$	14,085	3%
Commercial		250,451		241,124		23,691	10%
Consumer		2,468		1,431		18	1%
Auto		43,440		43,696		7,961	18%
Total investment in impaired loan pools	$	843,423	$	818,303	$	45,755	6%

The tables above only present information with respect to acquired BBVAPR loan pools accounted for under ASC 310-30 if there is a recorded impairment to such loan pools and a specific allowance for loan losses.

Acquired Eurobank Loans

Oriental’s recorded investment in acquired Eurobank loan pools that have recorded impairments and their related allowance for loan and lease losses as of March 31, 2018 and December 31, 2017 are as follows:

	March 31, 2018
							Coverage
	Unpaid		Recorded				to Recorded
	Principal		Investment		Allowance		Investment
	(In thousands)
Impaired loan pools with specific allowance:
Loans secured by 1-4 family residential properties	$	79,633	$	69,328	$	15,414	22%
Commercial		56,087		52,418		9,992	19%
Consumer		14		4		4	100%
Total investment in impaired loan pools	$	135,734	$	121,750	$	25,410	21%

	December 31, 2017
							Coverage
	Unpaid		Recorded		Specific		to Recorded
	Principal		Investment		Allowance		Investment
	(In thousands)
Impaired loan pools with specific allowance
Loans secured by 1-4 family residential properties	$	81,132	$	69,538	$	15,187	22%
Commercial		58,099		53,793		9,982	19%
Consumer		15		4		5	125%
Total investment in impaired loan pools	$	139,246	$	123,335	$	25,174	20%

The tables above only present information with respect to acquired Eurobank loan pools accounted for under ASC 310-30 if there is a recorded impairment to such loan pools and a specific allowance for loan losses.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents the interest recognized in commercial and mortgage loans that were individually evaluated for impairment, which excludes loans accounted for under ASC 310-30, for the quarters ended March 31, 2018 and 2017:

	Quarter Ended March 31,
	2018				2017
	Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment
	(In thousands)
Originated and other loans held for investment:
Impaired loans with specific allowance
Commercial	$	263	$	51,331	$	125	$	12,809
Residential troubled-debt restructuring		720		84,754		766		89,543
Impaired loans with no specific allowance
Commercial		176		17,764		532		43,895
		1,159		153,849		1,423		146,247
Acquired loans accounted for under ASC 310-20:
Impaired loans with specific allowance
Commercial		-		747		-		917
Total interest income from impaired loans	$	1,159	$	154,596	$	1,423	$	147,164

Modifications

The following tables present the troubled-debt restructurings in all loan portfolios during the quarters ended March 31, 2018 and 2017.

	Quarter Ended March 31, 2018
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate	Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate	Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Mortgage	38	$	5,747	5.69%	397	$	5,339	5.08%	363
Commercial	3		1,559	4.75%	72		1,555	4.75%	72
Consumer	28		354	15.75%	47		355	11.60%	69

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Quarter Ended March 31, 2017
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate	Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate	Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Mortgage	32	$	4,004	6.53%	391	$	4,015	4.86%	387
Commercial	9		1,218	7.29%	55		1,219	5.93%	64
Consumer	25		392	10.94%	64		430	10.33%	74
Auto	3		45	8.90%	75		47	11.88%	39

The following table presents troubled-debt restructurings for which there was a payment default during the twelve month periods ended March 31, 2018 and 2017:

	Twelve Month Period Ended March 31,
	2018			2017
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in thousands)
Mortgage	36	$	3,310	14	$	2,051
Commercial	4	$	398	1	$	50
Consumer	23	$	243	15	$	188

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Credit Quality Indicators

Oriental categorizes originated and other loans and acquired loans accounted for under ASC 310-20 into risk categories based on relevant information about the ability of borrowers to service their debt, such as economic conditions, portfolio risk characteristics, prior loss experience, and the results of periodic credit reviews of individual loans.

Oriental uses the following definitions for risk ratings:

Pass: Loans classified as “pass” have a well-defined primary source of repayment very likely to be sufficient, with no apparent risk, strong financial position, minimal operating risk, profitability, liquidity and capitalization better than industry standards.

Special Mention: Loans classified as “special mention” have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard: Loans classified as “substandard” are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as “doubtful” have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, questionable and improbable.

Loss: Loans classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be effected in the future.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of March 31, 2018 and December 31, 2017, and based on the most recent analysis performed, the risk category of gross originated and other loans and BBVAPR acquired loans accounted for under ASC 310-20 subject to risk rating by class of loans is as follows:

	March 31, 2018
	Risk Ratings

	Balance				Special
	Outstanding		Pass		Mention		Substandard		Doubtful		Loss
	(In thousands)
Commercial - originated and other loans held for investment
Commercial secured by real estate:
Corporate	$	237,751	$	203,090	$	32,790	$	1,871	$	-	$	-
Institutional		46,955		36,206		-		10,749		-		-
Middle market		216,550		180,511		13,389		22,650		-		-
Retail		242,673		213,262		4,178		25,233		-		-
Floor plan		4,078		2,771		-		1,307		-		-
Real estate		17,666		17,666		-		-		-		-
		765,673		653,506		50,357		61,810		-		-
Other commercial and industrial:
Corporate		168,490		156,581		11,909		-		-		-
Institutional		115,034		115,034		-		-		-		-
Middle market		92,278		78,493		5,425		8,360		-		-
Retail		178,043		174,727		333		2,983		-		-
Floor plan		26,886		24,439		2,396		51		-		-
		580,731		549,274		20,063		11,394		-		-
Total		1,346,404		1,202,780		70,420		73,204		-		-

Commercial - acquired loans (under ASC 310-20)
Commercial secured by real estate:
Retail		119		-		-		119		-		-
Floor plan		1,284		363		-		921		-		-
		1,403		363		-		1,040		-		-
Other commercial and industrial:
Retail		2,817		2,812		-		5		-		-
Floor plan		2		-		-		2		-		-
		2,819		2,812		-		7		-		-
Total		4,222		3,175		-		1,047		-		-

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	March 31, 2018
	Risk Ratings

	Balance				Special
	Outstanding		Pass		Mention		Substandard		Doubtful		Loss
	(In thousands)
Retail - originated and other loans held for investment
Mortgage:
Traditional		548,399		511,814		-		36,585		-		-
Non-traditional		16,956		13,541		-		3,415		-		-
Loss mitigation program		104,445		84,383		-		20,062		-		-
Home equity secured personal loans		249		249		-		-		-		-
GNMA's buy-back option program		12,515		-		-		12,515		-		-
		682,564		609,987		-		72,577		-		-

Consumer:
Credit cards		27,514		27,254		-		260		-		-
Overdrafts		246		168		-		78		-		-
Unsecured personal lines of credit		2,033		1,983		-		50		-		-
Unsecured personal loans		290,135		288,857		-		1,278		-		-
Cash collateral personal loans		14,937		14,916		-		21		-		-
		334,865		333,178		-		1,687		-		-
Auto and Leasing		957,197		943,603		-		13,594		-		-
Total		1,974,626		1,886,768		-		87,858		-		-

Retail - acquired loans (accounted for under ASC 310-20)
Consumer:
Credit cards		24,861		24,591		-		270		-		-
Personal loans		2,374		2,313		-		61		-		-
		27,235		26,904		-		331		-		-
Auto		16,171		16,017		-		154		-		-
		43,406		42,921		-		485		-		-
	$	3,368,658	$	3,135,644	$	70,420	$	162,594	$	-	$	-

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2017
	Risk Ratings

	Balance				Special
	Outstanding		Pass		Mention		Substandard		Doubtful		Loss
	(In thousands)
Commercial - originated and other loans held for investment
Commercial secured by real estate:
Corporate	$	235,426	$	200,395	$	33,094	$	1,937	$	-	$	-
Institutional		44,766		33,856		-		10,910		-		-
Middle market		229,941		196,058		4,749		29,134		-		-
Retail		246,067		215,121		8,058		22,888		-		-
Floor plan		3,998		2,678		1,320		-		-		-
Real estate		17,556		17,556		-		-		-		-
		777,754		665,664		47,221		64,869		-		-
Other commercial and industrial:
Corporate		170,015		157,683		12,332		-		-		-
Institutional		125,591		125,591		-		-		-		-
Middle market		85,363		71,222		6,386		7,755		-		-
Retail		113,252		109,477		562		3,213		-		-
Floor plan		35,286		32,165		3,070		51		-		-
		529,507		496,138		22,350		11,019		-		-
Total		1,307,261		1,161,802		69,571		75,888		-		-

Commercial - acquired loans (under ASC 310-20)
Commercial secured by real estate:
Retail		119		-		-		119		-		-
Floor plan		1,321		393		-		928		-		-
		1,440		393		-		1,047		-		-
Other commercial and industrial:
Retail		2,938		2,933		-		5		-		-
Floor plan		2		-		-		2		-		-
		2,940		2,933		-		7		-		-
Total		4,380		3,326		-		1,054		-		-

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2017
	Risk Ratings

	Balance				Special
	Outstanding		Pass		Mention		Substandard		Doubtful		Loss
	(In thousands)
Retail - originated and other loans held for investment
Mortgage:
Traditional		553,533		516,770		-		36,763		-		-
Non-traditional		18,270		14,727		-		3,543		-		-
Loss mitigation program		103,280		84,357		-		18,923		-		-
Home equity secured personal loans		256		256		-		-		-		-
GNMA's buy-back option program		8,268		-		-		8,268		-		-
		683,607		616,110		-		67,497		-		-

Consumer:
Credit cards		28,430		27,203		-		1,227		-		-
Overdrafts		214		158		-		56		-		-
Unsecured personal lines of credit		2,220		2,133		-		87		-		-
Unsecured personal loans		284,477		284,255		-		222		-		-
Cash collateral personal loans		14,698		14,386		-		312		-		-
		330,039		328,135		-		1,904		-		-
Auto and Leasing		883,985		879,753		-		4,232		-		-
Total		1,897,631		1,823,998		-		73,633		-		-

Retail - acquired loans (under ASC 310-20)
Consumer:
Credit cards		26,467		25,156		-		1,311		-		-
Personal loans		2,448		2,402		-		46		-		-
		28,915		27,558		-		1,357		-		-
Auto		21,969		21,790		-		179		-		-
Total		50,884		49,348		-		1,536		-		-
	$	3,260,156	$	3,038,474	$	69,571	$	152,111	$	-	$	-

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 6 – ALLOWANCE FOR LOAN AND LEASE LOSSES

The composition of Oriental’s allowance for loan and lease losses at March 31, 2018 and December 31, 2017 was as follows:

	March 31,		December 31,
	2018		2017
	(In thousands)
Allowance for loans and lease losses:
Originated and other loans and leases held for investment:
Mortgage	$	18,983	$	20,439
Commercial		33,174		30,258
Consumer		18,023		16,454
Auto and leasing		26,652		25,567
Total allowance for originated and other loans and lease losses		96,832		92,718

Acquired BBVAPR loans:
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Commercial		37		42
Consumer		2,659		3,225
Auto		488		595
		3,184		3,862
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage		14,331		14,085
Commercial		22,047		23,691
Consumer		18		18
Auto		6,770		7,961
		43,166		45,755
Total allowance for acquired BBVAPR loans and lease losses		46,350		49,617
Acquired Eurobank loans:
Loans secured by 1-4 family residential properties		15,414		15,187
Commercial		9,992		9,982
Consumer		4		5
Total allowance for acquired Eurobank loan and lease losses		25,410		25,174
Total allowance for loan and lease losses	$	168,592	$	167,509

Oriental maintains an allowance for loan and lease losses at a level that management considers adequate to provide for probable losses based upon an evaluation of known and inherent risks. Oriental’s allowance for loan and lease losses policy provides for a detailed quarterly analysis of probable losses. The analysis includes a review of historical loan loss experience, value of underlying collateral, current economic conditions, financial condition of borrowers and other pertinent factors. While management uses available information in estimating probable loan losses, future additions to the allowance may be required based on factors beyond Oriental’s control. We also maintain an allowance for loan losses on acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As discussed in Note 2, during 2017, hurricanes Irma and Maria caused catastrophic damages throughout Puerto Rico. Management performed an evaluation of the loan portfolios in order to assess the impact on repayment sources and underlying collateral that could result in additional losses.

For the commercial portfolio, the framework for the analysis was based on our current ALLL methodology with additional considerations according to the estimated impact categorized as low, medium or high. From this impact assessment, additional reserve levels were estimated by increasing default probabilities (“PD”) and loss given default expectations (“LGD”) of each allowance segment.

As part of the process, Oriental contacted its clients to evaluate the impact of the hurricanes on their business operations and collateral. The impact was then categorized as follows: (i) low risk, for clients that had no business impact or relatively insignificant impact; (ii) medium risk, for clients that had a business impact on their primary or secondary sources of repayment, but had adequate cash flow to cover operations and to satisfy their obligations; or (iii) high risk, for clients that had potentially significant problems that affected primary, secondary and tertiary (collateral) sources of repayment. This criterion was used to model adjusted PDs and LGDs considering internal and external sources of information available to support our estimation process and output.

During the fourth quarter, Oriental performed an update of the initial estimate, taking into consideration the most recent available information gathered through additional visits and interviews with clients and the economic environment in Puerto Rico.

For the retail portfolios, mortgage, consumer and auto, the assumptions established in the initial estimate were based on the historical losses of each ALLL segment and then further adjusted based on parameters used as key risk indicators, such as the industry of employment for all portfolios and the location of the collateral for mortgage loans. During the fourth quarter of 2017, Oriental performed additional procedures to evaluate the reasonability of the initial estimate based on the payment experience percentage of borrowers for which the deferral period expired. The analysis took into consideration historical payment behavior and loss experience of borrowers (PDs and LGDs) of each portfolio segment to develop a range of estimated potential losses. Management understands that this approach is reasonable given the lack of historical information related to the behavior of local borrowers in such an unprecedented event. The amount used in the analysis represents the average of potential outcomes of expected losses.

During the first quarter of 2018, Oriental updated the previous performed analysis to estimate probable losses related to the hurricanes. Analyses were based on the payment experience percentage of borrowers for which the deferral period expired in retail portfolios. For commercial portfolio, no changes in the level of impact assessed were identified based on communications with credit officers.

The documentation for the assessments considers all information available at the moment; gathered through visits or interviews with our clients, inspections of collaterals, identification of most affected areas and industries.

At March 31, 2018 and December 31, 2017, Oriental's allowance for loan and lease losses incorporated all risks associated to our loan portfolio, including the impact of hurricanes Irma and Maria.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Allowance for Originated and Other Loan and Lease Losses Held for Investment

The following tables present the activity in our allowance for loan and lease losses and the related recorded investment of the originated and other loans held for investment portfolio by segment for the periods indicated:

	Quarter Ended March 31, 2018
	Mortgage		Commercial		Consumer		Auto and Leasing		Total
	(In thousands)
Allowance for loan and lease losses for originated and other loans:
Balance at beginning of period	$	20,439	$	30,258	$	16,454	$	25,567	$	92,718
Charge-offs		(968)		(1,149)		(4,258)		(8,982)		(15,357)
Recoveries		314		182		240		3,777		4,513
(Recapture) provision for loan and lease losses		(802)		3,883		5,587		6,290		14,958
Balance at end of period	$	18,983	$	33,174	$	18,023	$	26,652	$	96,832

	March 31, 2018
	Mortgage		Commercial		Consumer		Auto and Leasing		Total
	(In thousands)
Allowance for loan and lease losses on originated and other loans:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	9,022	$	13,274	$	-	$	-	$	22,296
Collectively evaluated for impairment		9,961		19,900		18,023		26,652		74,536
Total ending allowance balance	$	18,983	$	33,174	$	18,023	$	26,652	$	96,832
Loans:
Individually evaluated for impairment	$	84,283	$	67,833	$	-	$	-	$	152,116
Collectively evaluated for impairment		598,281		1,278,571		334,865		957,197		3,168,914
Total ending loan balance	$	682,564	$	1,346,404	$	334,865	$	957,197	$	3,321,030

	Quarter Ended March 31, 2017
	Mortgage		Commercial		Consumer		Auto and Leasing		Unallocated		Total
	(In thousands)
Allowance for loan and lease losses for originated and other loans:
Balance at beginning of period	$	17,344	$	8,995	$	13,067	$	19,463	$	431	$	59,300
Charge-offs		(2,379)		(856)		(3,358)		(7,563)		-		(14,156)
Recoveries		56		89		165		3,294		-		3,604
Provision (recapture) for originated and other loan and lease losses		3,557		1,660		3,520		3,427		(429)		11,735
Balance at end of period	$	18,578	$	9,888	$	13,394	$	18,621	$	2	$	60,483

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2017
	Mortgage		Commercial		Consumer		Auto and Leasing		Unallocated		Total
	(In thousands)
Allowance for loan and lease losses on originated and other loans:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	9,121	$	10,573	$	-	$	-	$	-	$	19,694
Collectively evaluated for impairment		11,318		19,685		16,454		25,567		-		73,024
Total ending allowance balance	$	20,439	$	30,258	$	16,454	$	25,567	$	-	$	92,718
Loans:
Individually evaluated for impairment	$	85,403	$	71,538	$	-	$	-	$	-	$	156,941
Collectively evaluated for impairment		598,204		1,235,723		330,039		883,985		-		3,047,951
Total ending loan balance	$	683,607	$	1,307,261	$	330,039	$	883,985	$	-	$	3,204,892

Allowance for BBVAPR Acquired Loan Losses

Loans accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)

The following tables present the activity in our allowance for loan losses and related recorded investment of the associated loans in our BBVAPR acquired loan portfolio accounted for under ASC 310-20, for the periods indicated:

	Quarter Ended March 31, 2018
	Commercial		Consumer		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Balance at beginning of period	$	42	$	3,225	$	595	$	3,862
Charge-offs		-		(1,022)		(125)		(1,147)
Recoveries		3		54		228		285
(Recapture) provision for acquired BBVAPR loan and lease losses accounted for under ASC 310-20		(8)		402		(210)		184
Balance at end of period	$	37	$	2,659	$	488	$	3,184

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	March 31, 2018
	Commercial		Consumer		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	21	$	-	$	-	$	21
Collectively evaluated for impairment		16		2,659		488		3,163
Total ending allowance balance	$	37	$	2,659	$	488	$	3,184
Loans:
Individually evaluated for impairment	$	747	$	-	$	-	$	747
Collectively evaluated for impairment		3,475		27,235		16,171		46,881
Total ending loan balance	$	4,222	$	27,235	$	16,171	$	47,628

	Quarter Ended March 31, 2017
	Commercial		Consumer		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Balance at beginning of period	$	169	$	3,028	$	1,103	$	4,300
Charge-offs		(6)		(885)		(278)		(1,169)
Recoveries		1		64		452		517
Provision (recapture) for acquired loan and lease losses accounted for under ASC 310-20		19		384		(436)		(33)
Balance at end of period	$	183	$	2,591	$	841	$	3,615

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2017
	Commercial		Consumer		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	20	$	-	$	-	$	20
Collectively evaluated for impairment		22		3,225		595		3,842
Total ending allowance balance	$	42	$	3,225	$	595	$	3,862
Loans:
Individually evaluated for impairment	$	747	$	-	$	-	$	747
Collectively evaluated for impairment		3,633		28,915		21,969		54,517
Total ending loan balance	$	4,380	$	28,915	$	21,969	$	55,264

Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)

For loans accounted for under ASC 310- 30, as part of the evaluation of actual versus expected cash flows, Oriental assesses on a quarterly basis the credit quality of these loans based on delinquency, severity factors and risk ratings, among other assumptions. Migration and credit quality trends are assessed at the pool level, by comparing information from the latest evaluation period through the end of the reporting period.

The following tables present the activity in our allowance for loan losses and related recorded investment of the acquired BBVAPR loan portfolio accounted for under ASC 310-30 for the periods indicated:

	Quarter Ended March 31, 2018
	Mortgage		Commercial		Consumer			Auto	Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-30:
Balance at beginning of period	$	14,085	$	23,691	$	18	$	7,961	45,755
Provision (recapture) for acquired BBVAPR loans and lease losses accounted for under ASC 310-30		314		752		-		(887)	179
Allowance de-recognition		(68)		(2,396)		-		(304)	(2,768)
Balance at end of period	$	14,331	$	22,047	$	18	$	6,770	43,166

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Quarter Ended March 31, 2017
	Mortgage		Commercial		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-30:
Balance at beginning of period	$	2,682	$	23,452	$	4,922	$	31,056
Provision (recapture) for acquired BBVAPR loans and lease losses accounted for under ASC 310-30		923		223		3,186		4,332
Allowance de-recognition		(32)		(147)		(279)		(458)
Balance at end of period	$	3,573	$	23,528	$	7,829	$	34,930

Allowance for Acquired Eurobank Loan Losses

The changes in the allowance for loan and lease losses on acquired Eurobank loans for the quarters ended March 31, 2018 and 2017 were as follows:

	Quarter Ended March 31, 2018
	Loans Secured by 1-4 Family Residential Properties		Commercial		Consumer		Total
	(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of period	$	15,187	$	9,982	$	5	$	25,174
Provision (recapture) for loan and lease losses, net		179		(40)		-		139
Allowance de-recognition		48		49		-		97
Balance at end of period	$	15,414	$	9,991	$	5	$	25,410


	Quarter Ended March 31, 2017
	Loans Secured by 1-4 Family Residential Properties		Commercial		Consumer		Total
	(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of period	$	11,947	$	9,328	$	6	$	21,281
Provision (recapture) for loan and lease losses, net		2,398		(778)		-		1,620
Allowance de-recognition		(177)		(717)		(1)		(895)
Balance at end of period	$	14,168	$	7,833	$	5	$	22,006

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 7- FDIC INDEMNIFICATION ASSET AND TRUE-UP PAYMENT OBLIGATION

On February 6, 2017, the Bank and the FDIC agreed to terminate the single family and commercial shared-loss agreements related to the FDIC assisted acquisition of Eurobank on April 30, 2010. As part of the loss share termination transaction, the Bank made a payment of $10.1 million to the FDIC and recorded a net benefit of $1.4 million. Such termination payment took into account the anticipated reimbursements over the life of the shared-loss agreements and the true-up payment liability of the Bank anticipated at the end of the ten-year term of the single family shared-loss agreement. All rights and obligations of the parties under the shared-loss agreements terminated as of the closing date of the agreement.

Pursuant to the terms of the shared-loss agreements, the FDIC would reimburse the Bank for 80% of all qualifying losses with respect to assets covered by such agreements, and the Bank would reimburse the FDIC for 80% of qualifying recoveries with respect to losses for which the FDIC reimbursed the Bank. The single family shared-loss agreement provided for FDIC loss sharing and the Bank’s reimbursement to the FDIC to last for ten years, and the commercial shared-loss agreement provided for FDIC loss sharing and the Bank’s reimbursement to the FDIC to last for five years, with additional recovery sharing for three years thereafter.

The following table presents the activity in the FDIC indemnification asset and true-up payment obligation for the quarters ended March 31, 2018 and 2017:

	Quarter Ended March 31,
	2018		2017
	(In thousands)
FDIC indemnification asset:
Balance at beginning of period	$	-	$	14,411
FDIC indemnification asset benefit		-		1,403
Shared-loss termination settlement		-		(15,814)
Balance at end of period	$	-	$	-

True-up payment obligation:
Balance at beginning of period	$	-	$	26,786
Shared-loss termination settlement		-		(26,786)
Balance at end of period	$	-	$	-

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 8 — FORECLOSED REAL ESTATE

The following tables present the activity related to foreclosed real estate for the quarters ended March 31, 2018 and 2017:

	Quarter Ended March 31, 2018
	Originated and other loans and leases held for investment		Acquired BBVAPR loans		Acquired Eurobank loans		Total
		(In thousands)

Balance at beginning of period	$	14,283	$	18,347	$	11,544	$	44,174
Decline in value		(488)		(1,036)		(462)		(1,986)
Additions		1,487		1,649		113		3,249
Sales		(1,917)		(2,465)		(741)		(5,123)
Balance at end of period	$	13,365	$	16,495	$	10,454	$	40,314


	Quarter Ended March 31, 2017
	Originated and other loans and leases held for investment		Acquired BBVAPR loans		Acquired Eurobank loans		Total
		(In thousands)

Balance at beginning of period	$	12,390	$	21,379	$	13,751	$	47,520
Decline in value		(237)		(693)		(748)		(1,678)
Additions		3,412		3,534		440		7,386
Sales		(2,011)		(2,687)		(894)		(5,592)
Other adjustments		(85)		-		-		(85)
Balance at end of period	$	13,469	$	21,533	$	12,549	$	47,551

After hurricanes Irma and Maria in September 2017, management evaluated the potential impact these events brought to Oriental’s foreclosed real estate, considering the related underlying insurance coverage. Oriental has performed property inspections and taking into consideration all available information, the fair value of these properties was not materially impacted.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 9 — DERIVATIVES

The following table presents Oriental’s derivative assets and liabilities at March 31, 2018 and December 31, 2017:

	March 31,		December 31,
	2018		2017
	(In thousands)
Derivative assets:
Interest rate swaps designated as cash flow hedges		146		-
Interest rate swaps not designated as hedges	$	459	$	618
Interest rate caps		293		153
	$	898	$	771
Derivative liabilities:
Interest rate swaps designated as cash flow hedges		-		510
Interest rate swaps not designated as hedges		459		618
Interest rate caps		293		153
	$	752	$	1,281

Interest Rate Swaps

Oriental enters into interest rate swap contracts to hedge the variability of future interest cash flows of forecasted wholesale borrowings attributable to changes in a predetermined variable index rate. The interest rate swaps effectively fix Oriental’s interest payments on an amount of forecasted interest expense attributable to the variable index rate corresponding to the swap notional stated rate. These swaps are designated as cash flow hedges for the forecasted wholesale borrowing transactions, are properly documented as such, and therefore, qualify for cash flow hedge accounting. Any gain or loss associated with the effective portion of the cash flow hedges is recognized in other comprehensive income (loss) and is subsequently reclassified into operations in the period during which the hedged forecasted transactions affect earnings. Changes in the fair value of these derivatives are recorded in accumulated other comprehensive income to the extent there is no significant ineffectiveness in the cash flow hedging relationships. Currently, Oriental does not expect to reclassify any amount included in other comprehensive income (loss) related to these interest rate swaps to operations in the next twelve months.

The following table shows a summary of these swaps and their terms at March 31, 2018:

Notional

Fixed

Variable

Trade

Settlement

Maturity

Type

Amount

Rate

Rate Index

Date

(In thousands)

Interest Rate Swaps

34,735

2.4210%

1-Month LIBOR

07/03/13

08/01/23

34,735

An accumulated unrealized gain of $146 thousand and a loss of $510 thousand were recognized in accumulated other comprehensive income related to the valuation of these swaps at March 31, 2018 and December 31, 2017, respectively, and the related asset or liability is being reflected in the consolidated statements of financial condition.

At March 31, 2018 and December 31, 2017, interest rate swaps not designated as hedging instruments that were offered to clients represented an asset of $459 thousand and $618 thousand, respectively, and were included as part of derivative assets in the consolidated statements of financial position. The credit risk to these clients stemming from these derivatives, if any, is not material. At March 31, 2018 and December 31, 2017, interest rate swaps not designated as hedging instruments that are the mirror-images of the derivatives offered to clients represented a liability of $459 thousand and $618 thousand, respectively, and were included as part of derivative liabilities in the consolidated statements of financial condition.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table shows a summary of these interest rate swaps not designated as hedging instruments and their terms at March 31, 2018:

	Notional		Fixed	Variable	Settlement	Maturity
Type	Amount		Rate	Rate Index	Date	Date
	(In thousands)
Interest Rate Swaps - Derivatives Offered to Clients	$	12,500	5.5050%	1-Month LIBOR	04/11/09	04/11/19
	$	12,500

Interest Rate Swaps - Mirror Image Derivatives	$	12,500	5.5050%	1-Month LIBOR	04/11/09	04/11/19
	$	12,500

Interest Rate Caps

Oriental has entered into interest rate cap transactions with various clients with floating-rate debt who wish to protect their financial results against increases in interest rates. In these cases, Oriental simultaneously enters into mirror-image interest rate cap transactions with financial counterparties. None of these cap transactions qualify for hedge accounting, and therefore, they are marked to market through earnings. As of March 31, 2018 and December 31, 2017, the outstanding total notional amount of interest rate caps was $152.2 million and $152.6 million, respectively. At March 31, 2018 and December 31, 2017, the interest rate caps sold to clients represented a liability of $293 thousand and $153 thousand, respectively, and were included as part of derivative liabilities in the consolidated statements of financial condition. At March 31, 2018 and December 31, 2017, the interest rate caps purchased as mirror-images represented an asset of $293 thousand and $153 thousand, respectively, and were included as part of derivative assets in the consolidated statements of financial condition.

NOTE 10 — ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS

Accrued interest receivable at March 31, 2018 and December 31, 2017 consists of the following:

	March 31,		December 31,
	2018		2017
	(In thousands)
Loans, excluding acquired loans	$	31,756	$	46,936
Investments		3,385		3,033
	$	35,141	$	49,969

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Accrued interest receivable at December 31, 2017, included $39.7 million, resulting from the loan payment moratorium. Accrued interest receivable resulting from the loan payment moratorium has been decreasing, as most moratoriums have expired. Some of these accrued interests are payable at the end of the loan term.

Other assets at March 31, 2018 and December 31, 2017 consist of the following:

	March 31,		December 31,
	2018		2017
	(In thousands)
Prepaid expenses	$	7,154	$	9,200
Other repossessed assets		5,082		3,548
Core deposit and customer relationship intangibles		4,357		4,687
Mortgage tax credits		2,277		4,277
Investment in Statutory Trust		1,083		1,083
Accounts receivable and other assets		35,515		41,898
	$	55,468	$	64,693

Prepaid expenses amounting to $7.2 million and $9.2 million at March 31, 2018 and December 31, 2017, respectively, include prepaid municipal, property and income taxes aggregating to $4.2 million and $5.7 million, respectively.

In connection with the FDIC-assisted acquisition and the BBVAPR Acquisition, Oriental recorded a core deposit intangible representing the value of checking and savings deposits acquired. At March 31, 2018 and December 31, 2017 this core deposit intangible amounted to $3.1 million and $3.3 million, respectively. In addition, Oriental recorded a customer relationship intangible representing the value of customer relationships acquired with the acquisition of the securities broker-dealer and insurance agency in the BBVAPR Acquisition. At March 31, 2018 and December 31, 2017, this customer relationship intangible amounted to $1.2 million and $1.4 million, respectively.

Other repossessed assets totaled $5.1 million and $3.5 million at March 31, 2018 and December 31, 2017, respectively, that consist mainly of repossessed automobiles, which are recorded at their net realizable value.

At March 31, 2018 and December 31, 2017, tax credits for Oriental totaled $2.3 million and $4.3 million, respectively. These tax credits do not have an expiration date.

NOTE 11— DEPOSITS AND RELATED INTEREST

Total deposits, including related accrued interest payable, as of March 31, 2018 and December 31, 2017 consist of the following:

	March 31,		December 31,
	2018		2017
	(In thousands)
Non-interest bearing demand deposits	$	1,071,648	$	969,525
Interest-bearing savings and demand deposits		2,274,855		2,274,116
Individual retirement accounts		219,427		231,376
Retail certificates of deposit		592,307		595,983
Institutional certificates of deposit		200,595		209,951
Total core deposits		4,358,832		4,280,951
Brokered deposits		474,596		518,531
Total deposits	$	4,833,428	$	4,799,482

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Brokered deposits include $428.8 million in certificates of deposits and $45.8 million in money market accounts at March 31, 2018, and $471.6 million in certificates of deposits and $46.9 million in money market accounts at December 31, 2017.

The weighted average interest rate of Oriental’s deposits was 0.62% and 0.65% at March 31, 2018 and December 31, 2017, respectively. Interest expense for the quarters ended March 31, 2018 and 2017 was as follows:

	Quarter Ended March 31,
	2018		2017
	(In thousands)
Demand and savings deposits	$	2,812	$	2,909
Certificates of deposit		4,486		4,444
	$	7,298	$	7,353

At March 31, 2018 and December 31, 2017, time deposits in denominations of $250 thousand or higher, excluding accrued interest and unamortized discounts, amounted to $352.5 million and $359.6 million, respectively. Such amounts include public funds time deposits from various Puerto Rico government municipalities, agencies, and corporations of $2.3 million and $3.5 million at a weighted average rate of 0.30 % and 0.28 % at March 31, 2018 and December 31, 2017, respectively.

At March 31, 2018 and December 31, 2017, total public fund deposits from various Puerto Rico government municipalities, agencies, and corporations amounted to $127.3 million and $153.1 million, respectively. These public funds were collateralized with commercial loans amounting to $172.0 million and $173.0 million at March 31, 2018 and December 31, 2017, respectively.

Excluding accrued interest of approximately $1.7 million, the scheduled maturities of certificates of deposit at March 31, 2018 and 2017 are as follows:

	March 31,		December 31,
		2018		2017
	(In thousands)
Within one year:
Three (3) months or less	$	318,599	$	316,382
Over 3 months through 1 year		462,655		508,285
		781,254		824,667
Over 1 through 2 years		462,528		470,670
Over 2 through 3 years		121,506		137,016
Over 3 through 4 years		36,936		36,125
Over 4 through 5 years		37,247		38,623
	$	1,439,471	$	1,507,101

The table of scheduled maturities of certificates of deposits above includes brokered-deposits and individual retirement accounts.

The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans amounted to $1.1 million and $2.2 million as of March 31, 2018 and December 31, 2017, respectively.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 12 — BORROWINGS AND RELATED INTEREST

Securities Sold under Agreements to Repurchase

At March 31, 2018, securities underlying agreements to repurchase were delivered to, and are being held by, the counterparties with whom the repurchase agreements were transacted. The counterparties have agreed to resell to Oriental the same or similar securities at the maturity of these agreements. The purpose of these transactions is to provide financing for Oriental’s securities portfolio.

At March 31, 2018 and December 31, 2017, securities sold under agreements to repurchase (classified by counterparty), excluding accrued interest in the amount of $426 thousand and $369 thousand, respectively, were as follows:

	March 31,				December 31,
	2018				2017
			Fair Value of				Fair Value of
	Borrowing		Underlying		Borrowing		Underlying
	Balance		Collateral		Balance		Collateral
	(In thousands)
JP Morgan Chase Bank NA		152,500		164,749		82,500		88,974
KGS Alpha		11,000		11,730		-		-
Federal Home Loan Bank		110,000		116,589		110,000		116,509
Total	$	273,500	$	293,068	$	192,500	$	205,483

The following table shows a summary of Oriental’s repurchase agreements and their terms, excluding accrued interest in the amount of $426 thousand, at March 31, 2018:

			Weighted-
	Borrowing		Average		Maturity
Year of Maturity	Balance		Coupon	Settlement Date	Date
	(In thousands)
2018		72,500	1.52%	12/30/2015	4/29/2018
		11,000	2.15%	3/28/2018	4/4/2018

2019		50,000	1.72%	3/2/2017	9/3/2019

2020		60,000	1.85%	3/2/2017	3/2/2020
		50,000	2.61%	3/15/2018	3/15/2020
		30,000	2.70%	3/23/2018	3/23/2020
	$	273,500	1.96%

All of the repurchase agreements referred to above with maturity dates up to the date of this report were renewed as short-term repurchase agreements.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents the repurchase liability associated with the repurchase agreement transactions (excluding accrued interest) by maturity. Also, it includes the carrying value and approximate market value of collateral (excluding accrued interest) at March 31, 2018 and December 31, 2017. There was no cash collateral at March 31, 2018 and December 31, 2017.

					Market Value of Underlying Collateral						Market Value of Underlying Collateral
			Weighted		FNMA and				Weighted		FNMA and
	Repurchase		Average		FHLMC		Repurchase		Average		FHLMC
	Liability		Rate		Certificates		Liability		Rate		Certificates
	March 31, 2018						December 31, 2017
	(Dollars in thousands)
Less than 90 days	$	83,500		1.52%	$	90,170	$	-		-	$	-
Over 90 days		190,000		2.15%		202,898		192,500		1.63%		205,483
Total	$	273,500		1.96%	$	293,068	$	192,500		1.63%	$	205,483

Advances from the Federal Home Loan Bank of New York

Advances are received from the FHLB-NY under an agreement whereby Oriental is required to maintain a minimum amount of qualifying collateral with a fair value of at least 110% of the outstanding advances. At March 31, 2018 and December 31, 2017, these advances were secured by mortgage and commercial loans amounting to $972.8 million and $1.3 billion, respectively. Also, at March 31, 2018 and December 31, 2017, Oriental had an additional borrowing capacity with the FHLB-NY of $925.2 million and $920.0 million, respectively. At March 31, 2018 and December 31, 2017, the weighted average remaining maturity of FHLB’s advances was 5.8 months and 3.2 months, respectively. The original terms of these advances range between one month and seven years, and the FHLB-NY does not have the right to exercise put options at par on any advances outstanding as of March 31, 2018.

The following table shows a summary of these advances and their terms, excluding accrued interest in the amount of $75 thousand, at March 31, 2018:

			Weighted-
		Borrowing	Average		Maturity
Year of Maturity		Balance	Coupon	Settlement Date	Date
		(In thousands)
2018		34,735	1.86%	3/1/2018	4/2/2018

2020		9,124	2.59%	7/19/2013	7/20/2020
	$	43,859	2.01%

All of the advances referred to above with maturity dates up to the date of this report were renewed as one-month short-term advances.

Subordinated Capital Notes

Subordinated capital notes amounted to $36.1 million at March 31, 2018 and December 31, 2017, for both periods.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 13 – OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES

Oriental’s derivatives are subject to agreements which allow a right of set-off with each respective counterparty. In addition, Oriental’s securities purchased under agreements to resell and securities sold under agreements to repurchase have a right of set-off with the respective counterparty under the supplemental terms of the master repurchase agreements. In an event of default, each party has a right of set-off against the other party for amounts owed in the related agreements and any other amount or obligation owed in respect of any other agreement or transaction between them. Security collateral posted to open and maintain a master netting agreement with a counterparty, in the form of cash and securities, may from time to time be segregated in an account at a third-party custodian pursuant to an account control agreement.

The following table presents the potential effect of rights of set-off associated with Oriental’s recognized financial assets and liabilities at March 31, 2018 and December 31, 2017:

March 31, 2018

Gross Amounts Not Offset in the Statement of Financial Condition

Gross Amounts

Net Amount of

Offset in the

Assets Presented

Gross Amount

Statement of

in Statement

Cash

of Recognized

Financial

of Financial

Financial

Collateral

Net

Assets

Condition

Instruments

Received

Amount

(In thousands)

Derivatives

898

2,003

(1,105)

December 31, 2017

Gross Amounts Not Offset in the Statement of Financial Condition

Gross Amounts

Net amount of

Offset in the

Assets Presented

Gross Amount

Statement of

in Statement

Cash

of Recognized

Financial

of Financial

Financial

Collateral

Net

Assets

Condition

Instruments

Received

Amount

(In thousands)

Derivatives

771

2,010

(1,239)

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

March 31, 2018
							Gross Amounts Not Offset in the Statement of Financial Condition
					Net Amount of
			Gross Amounts		Liabilities
			Offset in the		Presented
	Gross Amount		Statement of		in Statement				Cash
	of Recognized		Financial		of Financial		Financial		Collateral		Net
	Liabilities		Condition		Condition		Instruments		Provided		Amount
	(In thousands)
Derivatives	$	752	$	-	$	752	$	-	$	1,980	$	(1,228)
Securities sold under agreements to repurchase		273,500		-		273,500		293,068		-		(19,568)
Total	$	274,252	$	-	$	274,252	$	293,068	$	1,980	$	(20,796)


December 31, 2017
							Gross Amounts Not Offset in the Statement of Financial Condition
					Net Amount of
			Gross Amounts		Liabilities
			Offset in the		Presented
	Gross Amount		Statement of		in Statement				Cash
	of Recognized		Financial		of Financial		Financial		Collateral		Net
	Liabilities		Condition		Condition		Instruments		Provided		Amount
	(In thousands)
Derivatives	$	1,281	$	-	$	1,281	$	-	$	1,980	$	(699)
Securities sold under agreements to repurchase		192,500		-		192,500		205,483		-		(12,983)
Total	$	193,781	$	-	$	193,781	$	205,483	$	1,980	$	(13,682)

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 14 — INCOME TAXES

At March 31, 2018 and December 31, 2017, Oriental’s net deferred tax asset amounted to $128.3 million and $127.4 million, respectively. In assessing the realizability of the deferred tax asset, management considers whether it is more likely than not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax asset are deductible, management believes it is more likely than not that Oriental will realize the deferred tax asset, net of the existing valuation allowances recorded at March 31, 2018 and December 31, 2017. The amount of the deferred tax asset that is considered realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.

Oriental classifies unrecognized tax benefits in other liabilities. These gross unrecognized tax benefits would affect the effective tax rate if realized. At March 31, 2018 the amount of unrecognized tax benefits remained at $1.3 million when compared to December 31, 2017. Oriental had accrued $24 thousand at March 31, 2018 (December 31, 2017 - $97 thousand) for the payment of interest and penalties relating to unrecognized tax benefits.

Oriental is subject to the dispositions of the 2011 Puerto Rico Internal Revenue Code, as amended (the "Code"). The Code imposes a maximum corporate tax rate of 39%. Oriental maintained a lower effective tax rate for the quarters ended March 31, 2018 and 2017 of 32.0% and 37.8%, respectively.

Oriental has operations in U.S. through its wholly owned subsidiary OPC, a retirement plan administration based in Florida. Also, in October 2017, Oriental expanded its operations in U.S. through the Bank's wholly owned subsidiary OFG USA. Both subsidiaries are subject to state and federal taxes. OPC is subject to Florida state taxes and OFG USA is subject to North Carolina state taxes. OFG USA elected to be classified as a corporation.

Income tax expense for the quarters ended March 31, 2018 and 2017 was $8.0 million and $9.2 million, respectively.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 15 — REGULATORY CAPITAL REQUIREMENTS

Regulatory Capital Requirements

OFG Bancorp (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and Puerto Rico banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Oriental’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Oriental and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Pursuant to the Dodd-Frank Act, federal banking regulators adopted capital rules that became effective January 1, 2015 for Oriental and the Bank (subject to certain phase-in periods through January 1, 2019) and that replaced their general risk-based capital rules, advanced approaches rule, market risk rule, and leverage rules. Among other matters, the new capital rules: (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to prior regulations. The current capital rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the previous four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, and resulting in higher risk weights for a variety of asset classes.

Pursuant to the current capital rules, the minimum capital ratios requirements are as follows:

4.5% CET1 to risk-weighted assets;

6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;

8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and

4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known

as the “leverage ratio”).

As of March 31, 2018 and December 31, 2017, OFG Bancorp and the Bank met all capital adequacy requirements to which they are subject. As of March 31, 2018 and December 31, 2017, the Bank is “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” an institution must maintain minimum CET1 risk-based, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios as set forth in the tables presented below.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

OFG Bancorp’s and the Bank’s actual capital amounts and ratios as of March 31, 2018 and December 31, 2017 are as follows:

				Minimum Capital			Minimum to be Well
	Actual			Requirement			Capitalized
	Amount		Ratio	Amount		Ratio		Amount	Ratio
	(Dollars in thousands)
OFG Bancorp Ratios
As of March 31, 2018
Total capital to risk-weighted assets	$	910,828	20.29%	$	359,130	8.00%	$	448,913	10.00%
Tier 1 capital to risk-weighted assets	$	852,882	19.00%	$	269,348	6.00%	$	359,130	8.00%
Common equity tier 1 capital to risk-weighted assets	$	652,012	14.52%	$	202,011	4.50%	$	291,793	6.50%
Tier 1 capital to average total assets	$	852,882	14.07%	$	242,395	4.00%	$	302,994	5.00%
As of December 31, 2017
Total capital to risk-weighted assets	$	899,258	20.34%	$	353,653	8.00%	$	442,067	10.00%
Tier 1 capital to risk-weighted assets	$	842,133	19.05%	$	265,240	6.00%	$	353,653	8.00%
Common equity tier 1 capital to risk-weighted assets	$	644,804	14.59%	$	198,930	4.50%	$	287,343	6.50%
Tier 1 capital to average total assets	$	842,133	13.92%	$	242,057	4.00%	$	302,571	5.00%



				Minimum Capital			Minimum to be Well
	Actual			Requirement			Capitalized
	Amount		Ratio	Amount		Ratio	Amount		Ratio
	(Dollars in thousands)
Bank Ratios
As of March 31, 2018
Total capital to risk-weighted assets	$	888,557	19.81%	$	358,832	8.00%	$	448,541	10.00%
Tier 1 capital to risk-weighted assets	$	830,845	18.52%	$	269,124	6.00%	$	358,832	8.00%
Common equity tier 1 capital to risk-weighted assets	$	830,845	18.52%	$	201,843	4.50%	$	291,551	6.50%
Tier 1 capital to average total assets	$	830,845	13.76%	$	241,559	4.00%	$	301,948	5.00%
As of December 31, 2017
Total capital to risk-weighted assets	$	879,648	19.92%	$	353,265	8.00%	$	441,581	10.00%
Tier 1 capital to risk-weighted assets	$	822,776	18.63%	$	264,949	6.00%	$	353,265	8.00%
Common equity tier 1 capital to risk-weighted assets	$	822,776	18.63%	$	198,712	4.50%	$	287,028	6.50%
Tier 1 capital to average total assets	$	822,776	13.63%	$	241,417	4.00%	$	301,771	5.00%

NOTE 16 – STOCKHOLDERS’ EQUITY

Additional Paid-in Capital

Additional paid-in capital represents contributed capital in excess of par value of common and preferred stock net of the costs of issuance. As of both March 31, 2018 and December 31, 2017, accumulated issuance costs charged against additional paid-in capital amounted to $13.6 million and $10.1 million for preferred and common stock, respectively.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Legal Surplus

The Puerto Rico Banking Act requires that a minimum of 10% of the Bank’s net income or loss for the year be transferred to a reserve fund until such fund (legal surplus) equals the total paid in capital on common and preferred stock. At March 31, 2018 and December 31, 2017, the Bank’s legal surplus amounted to $83.1 million and $81.5 million, respectively. The amount transferred to the legal surplus account is not available for the payment of dividends to shareholders.

Treasury Stock

Under Oriental’s current stock repurchase program it is authorized to purchase in the open market up to $7.7 million of its outstanding shares of common stock. The shares of common stock repurchased are to be held by Oriental as treasury shares. During the quarters ended March 31, 2018 and 2017, Oriental did not purchase any shares under the program.

At March 31, 2018 the number of shares that may yet be purchased under the $70 million program is estimated at 739,795 and was calculated by dividing the remaining balance of $7.7 million by $10.45 (closing price of Oriental's common stock at March 31, 2018).

The activity in connection with common shares held in treasury by Oriental for the quarters ended March 31, 2018 and 2017 is set forth below:

	Quarter Ended March 31,
	2018			2017
		Dollar			Dollar
	Shares	Amount		Shares	Amount
	(In thousands, except shares data)
Beginning of period	8,678,427	$	104,502	8,711,025	$	104,860
Common shares used upon lapse of restricted stock units	(20,900)		(360)	(32,598)		(358)
End of period	8,657,527	$	104,142	8,678,427	$	104,502

NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income, net of income taxes, as of March 31, 2018 and December 31, 2017 consisted of:

	March 31,		December 31,
	2018		2017
	(In thousands)
Unrealized loss on securities available-for-sale which are not other-than-temporarily impaired	$	(14,329)	$	(3,003)
Income tax effect of unrealized loss on securities available-for-sale		2,055		365
Net unrealized gain on securities available-for-sale which are not other-than-temporarily impaired		(12,274)		(2,638)
Unrealized gain (loss) on cash flow hedges		146		(510)
Income tax effect of unrealized (gain) loss on cash flow hedges		(57)		199
Net unrealized gain (loss) on cash flow hedges		89		(311)
Accumulated other comprehensive (loss), net of income taxes	$	(12,185)	$	(2,949)

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents changes in accumulated other comprehensive income by component, net of taxes, for the quarters ended March 31, 2018 and 2017:

	Quarter Ended March 31, 2018
	Net unrealized		Net unrealized		Accumulated
	gains on		loss on		other
	securities		cash flow		comprehensive
	available-for-sale		hedges		(loss) income
	(In thousands)
Beginning balance	$	(2,638)	$	(311)	$	(2,949)
Other comprehensive loss before reclassifications		(9,576)		26		(9,550)
Amounts reclassified out of accumulated other comprehensive income (loss)		(60)		374		314
Other comprehensive income (loss)		(9,636)		400		(9,236)
Ending balance	$	(12,274)	$	89	$	(12,185)

	Quarter Ended March 31, 2017
	Net unrealized		Net unrealized		Accumulated
	gains on		loss on		other
	securities		cash flow		comprehensive
	available-for-sale		hedges		(loss) income
	(In thousands)
Beginning balance	$	2,209		(613)		1,596
Other comprehensive loss before reclassifications		1,707		(38)		1,669
Amounts reclassified out of accumulated other comprehensive income (loss)		(66)		149		83
Other comprehensive income (loss)		1,641		111		1,752
Ending balance	$	3,850	$	(502)	$	3,348

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents reclassifications out of accumulated other comprehensive income for the quarters ended March 31, 2018 and 2017:

	Amount reclassified out of accumulated other comprehensive income				Affected Line Item in Consolidated Statement of Operations

	Quarter Ended March 31,
		2018		2017
	(In thousands)
Cash flow hedges:
Interest-rate contracts	$	374	$	149	Net interest expense
Available-for-sale securities:
Residual tax effect from OIB's change in applicable tax rate		5		8	Income tax expense
Tax effect from changes in tax rates		(65)		(74)	Income tax expense
	$	314	$	83

NOTE 18 – EARNINGS PER COMMON SHARE

The calculation of earnings per common share for the quarters ended March 31, 2018 and 2017 is as follows:

	Quarter Ended March 31,
	2018		2017
	(In thousands, except per share data)
Net income	$	16,917	$	15,150
Less: Dividends on preferred stock
Non-convertible preferred stock (Series A, B, and D)		(1,627)		(1,627)
Convertible preferred stock (Series C)		(1,838)		(1,838)
Income available to common shareholders	$	13,452	$	11,685
Effect of assumed conversion of the convertible preferred stock		1,838		1,838
Income available to common shareholders assuming conversion	$	15,290	$	13,523

Weighted average common shares and share equivalents:
Average common shares outstanding		43,955		43,916
Effect of dilutive securities:
Average potential common shares-options		28		77
Average potential common shares-assuming conversion of convertible preferred stock		7,138		7,138
Total weighted average common shares outstanding and equivalents		51,121		51,131
Earnings per common share - basic	$	0.31	$	0.27
Earnings per common share - diluted	$	0.30	$	0.26

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In computing diluted earnings per common share, the 84,000 shares of convertible preferred stock, which remain outstanding at March 31, 2018, with a conversion rate, subject to certain conditions, of 86.4225 shares of common stock per share, were included as average potential common shares from the date they were issued and outstanding. Moreover, in computing diluted earnings per common share, the dividends declared during the quarters ended March 31, 2018 and 2017 on the convertible preferred stock were added back as income available to common shareholders.

For the quarters ended March 31, 2018 and 2017, weighted-average stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to 859,322 and 507,786, respectively.

NOTE 19 – GUARANTEES

At March 31, 2018 and December 31, 2017 , the unamortized balance of the obligations undertaken in issuing the guarantees under standby letters of credit represented a liability of $18.6 million and $21.1 million, respectively.

Oriental has a liability for residential mortgage loans sold subject to credit recourse, pursuant to FNMA’s residential mortgage loan sales and securitization programs. At March 31, 2018 and December 31, 2017, the unpaid principal balance of residential mortgage loans sold subject to credit recourse was $6.3 million and $6.4 million, respectively.

The following table shows the changes in Oriental’s liability for estimated losses from these credit recourse agreements, included in the consolidated statements of financial condition during the quarters ended March 31, 2018 and 2017.

	Quarter Ended March 31,
	2018		2017
	(In thousands)
Balance at beginning of period	$	358	$	710
Net (charge-offs/terminations) recoveries		(94)		(140)
Balance at end of period	$	264	$	570

The estimated losses to be absorbed under the credit recourse arrangements were recorded as a liability when the credit recourse was assumed, and are updated on a quarterly basis. The expected loss, which represents the amount expected to be lost on a given loan, considers the probability of default and loss severity. The probability of default represents the probability that a loan in good standing would become 120 days delinquent, in which case Oriental is obligated to repurchase the loan.

If a borrower defaults, pursuant to the credit recourse provided, Oriental is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount of future payments that Oriental would be required to make under the recourse arrangements is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During the quarter ended March 31, 2018, Oriental did not repurchase any mortgage loans subject to credit recourse provisions. During the quarter ended March 31, 2017, Oriental repurchased approximately $41 thousand of unpaid principal balance in mortgage loans subject to the credit recourse provisions. If a borrower defaults, Oriental has rights to the underlying collateral securing the mortgage loan. Oriental suffers losses on these mortgage loans when the proceeds from a foreclosure sale of the collateral property are less than the outstanding principal balance of the loan, any uncollected interest advanced, and the costs of holding and disposing the related property. At March 31, 2018, Oriental’s liability for estimated credit losses related to loans sold with credit recourse amounted to $264 thousand (December 31, 2017– $358 thousand).

When Oriental sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. Oriental's mortgage operations division groups conforming mortgage loans into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or are sold directly to FNMA or other private investors for cash. As required under such mortgage backed securities programs, quality review procedures are performed by Oriental to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, Oriental may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the loans. During the quarter ended March 31, 2018, Oriental repurchased $2.3 million (March 31, 2017 – $978 thousand) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to credit recourse provision referred above.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

During the quarters ended March 31, 2018 and 2017, Oriental recognized $100 thousand in losses from the repurchase of residential mortgage loans sold subject to credit recourse, at both periods. During the quarters ended March 31, 2018 and 2017, Oriental recognized $1 thousand and $308 thousand, respectively, in losses from the repurchase of residential mortgage loans as a result of breaches of the customary representations and warranties.

Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including the FHLMC, require Oriental to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. At March 31, 2018, Oriental serviced $872.2 million (December 31, 2017 - 864.9 million) in mortgage loans for third-parties. Oriental generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, in the meantime, Oriental must absorb the cost of the funds it advances during the time the advance is outstanding. Oriental must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and Oriental would not receive any future servicing income with respect to that loan. At March 31, 2018, the outstanding balance of funds advanced by Oriental under such mortgage loan servicing agreements was approximately $605 thousand (December 31, 2017 - $440 thousand). To the extent the mortgage loans underlying Oriental's servicing portfolio experience increased delinquencies, Oriental would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

NOTE 20— COMMITMENTS AND CONTINGENCIES

Loan Commitments

In the normal course of business, Oriental becomes a party to credit-related financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby and commercial letters of credit, and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated statements of financial condition. The contract or notional amount of those instruments reflects the extent of Oriental’s involvement in particular types of financial instruments.

Oriental’s exposure to credit losses in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit, including commitments under credit card arrangements, and commercial letters of credit is represented by the contractual notional amounts of those instruments, which do not necessarily represent the amounts potentially subject to risk. In addition, the measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are identified. Oriental uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Credit-related financial instruments at March 31, 2018 and December 31, 2017 were as follows:

	March 31,		December 31,
	2018		2017
	(In thousands)
Commitments to extend credit	$	508,955	$	485,019
Commercial letters of credit		1,402		494

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Commitments to extend credit represent agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Oriental evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by Oriental upon the extension of credit, is based on management’s credit evaluation of the counterparty.

At March 31, 2018 and December 31, 2017, commitments to extend credit consisted mainly of undisbursed available amounts on commercial lines of credit, construction loans, and revolving credit card arrangements. Since many of the unused commitments are expected to expire unused or be only partially used, the total amount of these unused commitments does not necessarily represent future cash requirements. These lines of credit had a reserve of $567 thousand at both March 31, 2018 and December 31, 2017.

Commercial letters of credit are issued or confirmed to guarantee payment of customers’ payables or receivables in short-term international trade transactions. Generally, drafts will be drawn when the underlying transaction is consummated as intended. However, the short-term nature of this instrument serves to mitigate the risk associated with these contracts.

The summary of instruments that are considered financial guarantees in accordance with the authoritative guidance related to guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others, at March 31, 2018 and December 31, 2017, is as follows:

	March 31,		December 31,
	2018		2017
	(In thousands)
Standby letters of credit and financial guarantees	$	18,648	$	21,107
Loans sold with recourse		6,332		6,420

Standby letters of credit and financial guarantees are written conditional commitments issued by Oriental to guarantee the payment and/or performance of a customer to a third party (“beneficiary”). If the customer fails to comply with the agreement, the beneficiary may draw on the standby letter of credit or financial guarantee as a remedy. The amount of credit risk involved in issuing letters of credit in the event of nonperformance is the face amount of the letter of credit or financial guarantee. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The amount of collateral obtained, if it is deemed necessary by Oriental upon extension of credit, is based on management’s credit evaluation of the customer.

Lease Commitments

Oriental has entered into various operating lease agreements for branch facilities and administrative offices. Rent expense for the quarters ended March 31, 2018 and 2017, amounted to $2.2 million and $2.0 million, respectively, and is included in the "occupancy and equipment" caption in the unaudited consolidated statements of operations. Future rental commitments under leases in effect at March 31, 2018, exclusive of taxes, insurance, and maintenance expenses payable by Oriental, are summarized as follows:

	Minimum Rent
Year Ending December 31,	(In thousands)
2018	$	6,593
2019		6,345
2020		5,679
2021		4,796
2022		3,379
Thereafter		6,869
	$	33,661

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Contingencies

Oriental and its subsidiaries are defendants in a number of legal proceedings incidental to their business. In the ordinary course of business, Oriental and its subsidiaries are also subject to governmental and regulatory examinations. Certain subsidiaries of Oriental, including the Bank (and its subsidiary OIB), Oriental Financial Services, and Oriental Insurance, are subject to regulation by various U.S., Puerto Rico and other regulators.

Oriental seeks to resolve all litigation and regulatory matters in the manner management believes is in the best interests of Oriental and its shareholders, and contests allegations of liability or wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter.

Subject to the accounting and disclosure framework under the provisions of ASC 450, it is the opinion of Oriental’s management, based on current knowledge and after taking into account its current legal accruals, that the eventual outcome of all matters would not be likely to have a material adverse effect on the consolidated statements of financial condition of Oriental. Nonetheless, given the substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse outcome in certain of these matters could, from time to time, have a material adverse effect on Oriental’s consolidated results of operations or cash flows in particular quarterly or annual periods. Oriental has evaluated all litigation and regulatory matters where the likelihood of a potential loss is deemed reasonably possible. Oriental has determined that the estimate of the reasonably possible loss is not significant.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 21 – BANKING AND FINANCIAL SERVICE REVENUES

The following table presents the major categories of banking and financial service revenues for the quarters ended March 31, 2018 and 2017:

	Quarter Ended March 31,
	2018		2017
	(In thousands)
Banking service revenues:
Checking accounts fees	$	1,519	$	1,852
Savings accounts fees		154		155
Electronic banking fees		7,571		7,683
Credit life commissions		119		149
Branch service commissions		327		147
Servicing and other loan fees		601		484
International fees		169		146
Miscellaneous income		3		10
Total banking service revenues		10,463		10,626

Wealth management revenue:
Insurance income		1,238		1,551
Broker fees		1,789		1,876
Trust fees		2,696		2,548
Retirement plan and administration fees		287		240
Investment banking fees		9		-
Total wealth management revenue		6,019		6,215

Mortgage banking activities:
Net servicing fees		1,754		820
Net gains (losses) on sale of mortgage loans and valuation		3		174
Other		-		(407)
Total mortgage banking activities		1,757		587
Total banking and financial service revenues	$	18,239	$	17,428

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS

Oriental follows the fair value measurement framework under U.S. Generally Accepted Accounting Principles (“GAAP”).

Fair Value Measurement

The fair value measurement framework defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This framework also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Money market investments

The fair value of money market investments is based on the carrying amounts reflected in the consolidated statements of financial condition as these are reasonable estimates of fair value given the short-term nature of the instruments.

Investment securities

The fair value of investment securities is based on quoted market prices, when available, or market prices provided by Interactive Data Corporation ("IDC"), an independent, well-recognized pricing company. Such securities are classified as Level 1 or Level 2 depending on the basis for determining fair value. If listed prices or quotes are not available, fair value is based upon externally developed models that use both observable and unobservable inputs depending on the market activity of the instrument, and such securities are classified as Level 3. At March 31, 2018 and December 31, 2017, Oriental did not have investment securities classified as Level 3.

Securities purchased under agreements to resell

The fair value of securities purchased under agreements to resell is based on the carrying amounts reflected in the consolidated statements of financial condition as these are reasonable estimates of fair value given the short-term nature of instruments.

Derivative instruments

The fair value of the interest rate swaps is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, for the most part, on the shape of the yield curve, the level of interest rates, as well as the expectations for rates in the future. The fair value of most of these derivative instruments is based on observable market parameters, which include discounting the instruments’ cash flows using the U.S. dollar LIBOR-based discount rates, and also applying yield curves that account for the industry sector and the credit rating of the counterparty and/or Oriental. Certain other derivative instruments with limited market activity are valued using externally developed models that consider unobservable market parameters. Based on their valuation methodology, derivative instruments are classified as Level 2 or Level 3.

Servicing assets

Servicing assets do not trade in an active market with readily observable prices. Servicing assets are priced using a discounted cash flow model. The valuation model considers servicing fees, portfolio characteristics, prepayment assumptions, delinquency rates, late charges, other ancillary revenues, cost to service and other economic factors. Due to the unobservable nature of certain valuation inputs, the servicing rights are classified as Level 3.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Impaired Loans

Impaired loans are carried at the present value of expected future cash flows using the loan’s existing rate in a discounted cash flow calculation, or the fair value of the collateral if the loan is collateral-dependent. Expected cash flows are based on internal inputs reflecting expected default rates on contractual cash flows. This method of estimating fair value does not incorporate the exit-price concept of fair value described in ASC 820-10 and would generally result in a higher value than the exit-price approach. For loans measured using the estimated fair value of collateral less costs to sell, fair value is generally determined based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC 310-10-35 less disposition costs. Currently, the associated loans considered impaired are classified as Level 3.

Foreclosed real estate

Foreclosed real estate includes real estate properties securing residential mortgage and commercial loans. The fair value of foreclosed real estate may be determined using an external appraisal, broker price option or an internal valuation. These foreclosed assets are classified as Level 3 given certain internal adjustments that may be made to external appraisals.

Other repossessed assets

Other repossessed assets include repossessed automobiles. The fair value of the repossessed automobiles may be determined using internal valuation and an external appraisal. These repossessed assets are classified as Level 3 given certain internal adjustments that may be made to external appraisals.

Assets and liabilities measured at fair value on a recurring and non-recurring basis are summarized below:

	March 31, 2018
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
	(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale	$	-	$	801,641	$	-	$	801,641
Trading securities		-		293		-		293
Money market investments		7,428		-		-		7,428
Derivative assets		-		898		-		898
Servicing assets		-		-		10,533		10,533
Derivative liabilities		-		(752)		-		(752)
	$	7,428	$	802,080	$	10,533	$	820,041
Non-recurring fair value measurements:
Impaired commercial loans	$	-	$	-	$	68,580	$	68,580
Foreclosed real estate		-		-		40,314		40,314
Other repossessed assets		-		-		5,082		5,082
	$	-	$	-	$	113,976	$	113,976

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2017
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
	(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale	$	-	$	645,797	$	-	$	645,797
Trading securities		-		191		-		191
Money market investments		7,021		-		-		7,021
Derivative assets		-		771		-		771
Servicing assets		-		-		9,821		9,821
Derivative liabilities		-		(1,281)		-		(1,281)
	$	7,021	$	645,478	$	9,821	$	662,320
Non-recurring fair value measurements:
Impaired commercial loans	$	-	$	-	$	72,285	$	72,285
Foreclosed real estate		-		-		44,174		44,174
Other repossessed assets		-		-		3,548		3,548
	$	-	$	-	$	120,007	$	120,007

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarters ended March 31, 2018 and 2017:

	Servicing assets
	Quarter Ended March 31,
Level 3 Instruments Only	2018		2017
	(In thousands)
Balance at beginning of period	$	9,821	$	9,858
New instruments acquired		352		534
Principal repayments		(199)		(162)
Changes in fair value of servicing assets		559		(542)
Balance at end of period	$	10,533	$	9,688

During the quarters ended March 31, 2018 and 2017, there were purchases and sales of assets and liabilities measured at fair value on a recurring basis. There were no transfers into and out of Level 1 and Level 2 fair value measurements during such periods.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The table below presents quantitative information for all assets and liabilities measured at fair value on a recurring and non-recurring basis using significant unobservable inputs (Level 3) at March 31, 2018:

	March 31, 2018
	Fair Value		Valuation Technique	Unobservable Input	Range
	(In thousands)

Servicing assets	$	10,533	Cash flow valuation	Constant prepayment rate	4.08% -8.50%
				Discount rate	10.00% - 12.00%
Collateral dependent impaired loans	$	35,239	Fair value of property or collateral	Appraised value less disposition costs	19.20% - 35.20%


Other non-collateral dependent impaired loans	$	33,341	Cash flow valuation	Discount rate	4.15% - 10.50%

Foreclosed real estate	$	40,314	Fair value of property or collateral	Appraised value less disposition costs	19.20% - 35.20%

Other repossessed assets	$	5,082	Fair value of property or collateral	Estimated net realizable value less disposition costs	29.00% - 71.00%

Information about Sensitivity to Changes in Significant Unobservable Inputs

Servicing assets – The significant unobservable inputs used in the fair value measurement of Oriental’s servicing assets are constant prepayment rates and discount rates. Changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or offset the sensitivities. Mortgage banking activities, a component of total banking and financial service revenue in the consolidated statements of operations, include the changes from period to period in the fair value of the mortgage loan servicing rights, which may result from changes in the valuation model inputs or assumptions (principally reflecting changes in discount rates and prepayment speed assumptions) and other changes, including changes due to collection/realization of expected cash flows.

Fair Value of Financial Instruments

The information about the estimated fair value of financial instruments required by GAAP is presented hereunder. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of Oriental.

The estimated fair value is subjective in nature, involves uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could affect these fair value estimates. The fair value estimates do not take into consideration the value of future business and the value of assets and liabilities that are not financial instruments. Other significant tangible and intangible assets that are not considered financial instruments are the value of long-term customer relationships of retail deposits, and premises and equipment.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The estimated fair value and carrying value of Oriental’s financial instruments at March 31, 2018 and December 31, 2017 is as follows:

	March 31,				December 31,
	2018				2017
	Fair		Carrying		Fair		Carrying
	Value		Value		Value		Value
	(In thousands)
Level 1
Financial Assets:
Cash and cash equivalents	$	362,358	$	362,358	$	485,203	$	485,203
Restricted cash	$	3,030	$	3,030	$	3,030	$	3,030
Level 2
Financial Assets:
Trading securities	$	293	$	293	$	191	$	191
Investment securities available-for-sale	$	801,641	$	801,641	$	645,797	$	645,797
Investment securities held-to-maturity	$	467,980	$	485,143	$	497,681	$	506,064
Federal Home Loan Bank (FHLB) stock	$	11,499	$	11,499	$	13,995	$	13,995
Other investments	$	3	$	3	$	3	$	3
Derivative assets	$	898	$	898	$	771	$	771
Financial Liabilities:
Derivative liabilities	$	752	$	752	$	1,281	$	1,281
Level 3
Financial Assets:
Total loans (including loans held-for-sale)	$	3,735,449	$	4,133,429	$	3,842,907	$	4,056,329
Accrued interest receivable	$	35,141	$	35,141	$	49,969	$	49,969
Servicing assets	$	10,533	$	10,533	$	9,821	$	9,821
Accounts receivable and other assets	$	35,515	$	35,515	$	41,898	$	41,898
Financial Liabilities:
Deposits	$	4,767,479	$	4,833,428	$	4,782,197	$	4,799,482
Securities sold under agreements to repurchase	$	271,811	$	273,926	$	191,104	$	192,869
Advances from FHLB	$	43,880	$	43,934	$	99,509	$	99,643
Other borrowings	$	394	$	394	$	153	$	153
Subordinated capital notes	$	34,158	$	36,083	$	33,080	$	36,083
Accrued expenses and other liabilities	$	85,886	$	85,886	$	86,791	$	86,791

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following methods and assumptions were used to estimate the fair values of significant financial instruments at March 31, 2018 and 2017:

• Cash and cash equivalents (including money market investments and time deposits with other banks), restricted cash, accrued interest receivable, accounts receivable and other assets and accrued expenses and other liabilities have been valued at the carrying amounts reflected in the consolidated statements of financial condition as these are reasonable estimates of fair value given the short-term nature of the instruments.

• Investments in FHLB-NY stock are valued at their redemption value.

• The fair value of investment securities, including trading securities and other investments, is based on quoted market prices, when available or prices provided from contracted pricing providers, or market prices provided by recognized broker-dealers. If listed prices or quotes are not available, fair value is based upon externally developed models that use both observable and unobservable inputs depending on the market activity of the instrument.

• The fair value of the FDIC indemnification asset represented the present value of the net estimated cash payments expected to be received from the FDIC for future losses on covered assets based on the credit assumptions on estimated cash flows for each covered asset and the loss sharing percentages. The FDIC shared-loss agreements were terminated on February 6, 2017. Such termination takes into account the anticipated reimbursements over the life of the shared-loss agreements and the true-up payment liability of the Bank anticipated at the end of the ten year term of the single family shared-loss agreement. Therefore, at December 31, 2017, Oriental had no FDIC indemnification asset.

• The fair value of servicing asset is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions.

• The fair values of the derivative instruments are provided by valuation experts and counterparties. Certain derivatives with limited market activity are valued using externally developed models that consider unobservable market parameters.

• Fair value of derivative liabilities, which include interest rate swaps and forward-settlement swaps, are based on the net discounted value of the contractual projected cash flows of both the pay-fixed receive-variable legs of the contracts. The projected cash flows are based on the forward yield curve, and discounted using current estimated market rates.

• The fair value of the loan portfolio (including loans held-for-sale and non-performing loans) is based on the exit market price, which is estimated by segregating by type, such as mortgage, commercial, consumer, auto and leasing. Each loan segment is further segmented into fixed and adjustable interest rates. The fair value is calculated by discounting contractual cash flows, adjusted for prepayment estimates (voluntary and involuntary), if any, using estimated current market discount rates that reflect the credit and interest rate risk inherent in the loan.

• The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is based on the discounted value of the contractual cash flows, using estimated current market discount rates for deposits of similar remaining maturities.

• The fair value of long-term borrowings, which include securities sold under agreements to repurchase, advances from FHLB, and subordinated capital notes is based on the discounted value of the contractual cash flows using current estimated market discount rates for borrowings with similar terms, remaining maturities and put dates.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 23 – BUSINESS SEGMENTS

Oriental segregates its businesses into the following major reportable segments of business: Banking, Wealth Management, and Treasury. Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as Oriental’s organization, nature of its products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. Oriental measures the performance of these reportable segments based on pre-established goals of different financial parameters such as net income, net interest income, loan production, and fees generated. Oriental’s methodology for allocating non-interest expenses among segments is based on several factors such as revenue, employee headcount, occupied space, dedicated services or time, among others. These factors are reviewed on a periodical basis and may change if the conditions warrant.

Banking includes the Bank’s branches and traditional banking products such as deposits and commercial, consumer and mortgage loans. Mortgage banking activities are carried out by the Bank’s mortgage banking division, whose principal activity is to originate mortgage loans for Oriental’s own portfolio. As part of its mortgage banking activities, Oriental may sell loans directly into the secondary market or securitize conforming loans into mortgage-backed securities.

Wealth Management is comprised of the Bank’s trust division, Oriental Financial Services, Oriental Insurance, and OPC. The core operations of this segment are financial planning, money management and investment banking, brokerage services, insurance sales activity, corporate and individual trust and retirement services, as well as retirement plan administration services.

The Treasury segment encompasses all of Oriental’s asset/liability management activities, such as purchases and sales of investment securities, interest rate risk management, derivatives, and borrowings. Intersegment sales and transfers, if any, are accounted for as if the sales or transfers were to third parties, that is, at current market prices.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Following are the results of operations and the selected financial information by operating segment for the quarters ended March 31, 2018 and 2017:

	Quarter Ended March 31, 2018
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	74,374	$	12	$	8,784	$	83,170	$	-	$	83,170
Interest expense		(6,290)		-		(2,886)		(9,176)		-		(9,176)
Net interest income		68,084		12		5,898		73,994		-		73,994
Provision for loan and lease losses, net		(15,455)		-		(5)		(15,460)		-		(15,460)
Non-interest income, net		12,193		6,308		13		18,514		-		18,514
Non-interest expenses		(48,081)		(3,286)		(754)		(52,121)		-		(52,121)
Intersegment revenue		361		-		-		361		(361)		-
Intersegment expenses		-		(179)		(182)		(361)		361		-
Income before income taxes	$	17,102	$	2,855	$	4,970	$	24,927	$	-	$	24,927
Income tax expense (benefit)		6,670		1,113		227		8,010		-		8,010
Net income	$	10,432	$	1,742	$	4,743	$	16,917	$	-	$	16,917
Total assets	$	5,661,759	$	28,377	$	1,529,912	$	7,220,048	$	(972,927)	$	6,247,121

	Quarter Ended March 31, 2017
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	77,573	$	12	$	8,593	$	86,178	$	-	$	86,178
Interest expense		(6,814)		-		(4,746)		(11,560)		-		(11,560)
Net interest income		70,759		12		3,847		74,618		-		74,618
Provision for loan and lease losses, net		(17,642)		-		(12)		(17,654)		-		(17,654)
Non-interest income, net		13,227		5,928		(81)		19,074		-		19,074
Non-interest expenses		(46,054)		(4,220)		(1,410)		(51,684)		-		(51,684)
Intersegment revenue		464		-		71		535		(535)		-
Intersegment expenses		(71)		(311)		(153)		(535)		535		-
Income before income taxes	$	20,683	$	1,409	$	2,262	$	24,354	$	-	$	24,354
Income tax expenses (benefit)		8,066		550		588		9,204		-		9,204
Net income	$	12,617	$	859	$	1,674	$	15,150	$	-	$	15,150
Total assets	$	5,485,678	$	24,866	$	1,861,616	$	7,372,160	$	(957,553)	$	6,414,607

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The following discussion of Oriental’s financial condition and results of operations should be read in conjunction with the “Selected Financial Data” and Oriental’s consolidated financial statements and related notes. This discussion and analysis contains forward-looking statements. Please see “Forward-Looking Statements” and the risk factors set forth in our Form 10-K for the year ended December 31, 2017 (the “2017 Form 10-K”), for discussion of the uncertainties, risks and assumptions associated with these statements.

Oriental is a publicly-owned financial holding company that provides a full range of banking and financial services through its subsidiaries, including commercial, consumer, auto and mortgage lending; checking and savings accounts; financial planning, insurance and securities brokerage services; and corporate and individual trust and retirement services. Oriental operates through three major business segments: Banking, Wealth Management, and Treasury, and distinguishes itself based on quality service. Oriental has 39 branches in Puerto Rico and a subsidiary in Boca Raton, Florida, and a non-bank operating subsidiary in Cornelius, North Carolina. Oriental’s long-term goal is to strengthen its banking and financial services franchise by expanding its lending businesses, increasing the level of integration in the marketing and delivery of banking and financial services, maintaining effective asset-liability management, growing non-interest revenue from banking and financial services, and improving operating efficiencies.

Oriental’s diversified mix of businesses and products generates both the interest income traditionally associated with a banking institution and non-interest income traditionally associated with a financial services institution (generated by such businesses as securities brokerage, fiduciary services, investment banking, insurance agency, and retirement plan administration). Although all of these businesses, to varying degrees, are affected by interest rate and financial market fluctuations and other external factors, Oriental’s commitment is to continue producing a balanced and growing revenue stream.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a summary of our significant accounting policies in “Note 1—Summary of Significant Accounting Policies” of our 2017 Form 10-K.

In the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” section of our 2017 Form 10-K, we identified the following accounting policies as critical because they require significant judgments and assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition:

· Fair value measurements of financial instruments

· Interest on loans and allowance for loan losses

· Acquisition accounting for loans

· Income taxes

· Goodwill

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary based on changing conditions. Management has reviewed and approved these critical accounting policies and has discussed its judgments and assumptions with the Audit Committee of our Board of Directors. There have been no material changes in the methods used to formulate these critical accounting estimates from those discussed in our 2017 Form 10-K.

OVERVIEW OF FINANCIAL PERFORMANCE

SELECTED FINANCIAL DATA

	Quarter Ended March 31,
					Variance
	2018		2017		%
EARNINGS DATA:	(In thousands, except per share data)
Interest income	$	83,170	$	86,178	-3.5%
Interest expense		9,176		11,560	-20.6%
Net interest income		73,994		74,618	-0.8%
Provision for loan and lease losses, net		15,460		17,654	-12.4%
Net interest income after provision for loan and lease losses		58,534		56,964	2.8%
Non-interest income		18,514		19,074	-2.9%
Non-interest expenses		52,121		51,684	0.8%
Income before taxes		24,927		24,354	2.4%
Income tax expense		8,010		9,204	-13.0%
Net income		16,917		15,150	11.7%
Less: dividends on preferred stock		(3,465)		(3,465)	0.0%
Income available to common shareholders	$	13,452	$	11,685	15.1%
PER SHARE DATA:
Basic	$	0.31	$	0.27	14.8%
Diluted	$	0.30	$	0.26	15.4%
Average common shares outstanding		43,955		43,915	0.1%
Average common shares outstanding and equivalents		51,121		51,131	0.0%
Cash dividends declared per common share	$	0.06	$	0.06	0.0%
Cash dividends declared on common shares	$	2,638	$	2,637	0.0%
PERFORMANCE RATIOS:
Return on average assets (ROA)		1.09%		0.95%	14.7%
Return on average tangible common equity		7.73%		7.00%	10.4%
Return on average common equity (ROE)		6.84%		6.15%	11.2%
Equity-to-assets ratio		15.16%		14.52%	4.4%
Efficiency ratio		56.51%		56.15%	0.6%
Interest rate spread		5.13%		5.02%	2.2%
Interest rate margin		5.22%		5.10%	2.4%

SELECTED FINANCIAL DATA - (Continued)

	March 31,		December 31,		Variance
	2018		2017		%
PERIOD END BALANCES AND CAPITAL RATIOS:	(In thousands, except per share data)
Investments and loans
Investment securities	$	1,298,579	$	1,166,050	11.4%
Loans and leases, net		4,133,429		4,056,329	1.9%
Total investments and loans	$	5,432,008	$	5,222,379	4.0%
Deposits and borrowings
Deposits	$	4,833,428	$	4,799,482	0.7%
Securities sold under agreements to repurchase		273,926		192,869	42.0%
Other borrowings		80,411		135,879	-40.8%
Total deposits and borrowings	$	5,187,765	$	5,128,230	1.2%
Stockholders’ equity
Preferred stock	$	176,000	$	176,000	0.0%
Common stock		52,626		52,626	0.0%
Additional paid-in capital		541,404		541,600	0.0%
Legal surplus		83,138		81,454	2.1%
Retained earnings		210,008		200,878	4.5%
Treasury stock, at cost		(104,142)		(104,502)	0.3%
Accumulated other comprehensive (loss)		(12,185)		(2,949)	-313.2%
Total stockholders' equity	$	946,849	$	945,107	0.2%
Per share data
Book value per common share	$	17.76	$	17.73	0.2%
Tangible book value per common share	$	15.71	$	15.67	0.3%
Market price at end of period	$	10.45	$	9.40	11.2%
Capital ratios
Leverage capital		14.07%		13.92%	1.1%
Common equity Tier 1 capital ratio		14.52%		14.59%	-0.5%
Tier 1 risk-based capital		19.00%		19.05%	-0.3%
Total risk-based capital		20.29%		20.34%	-0.2%
Financial assets managed
Trust assets managed	$	2,939,723	$	3,039,998	-3.3%
Broker-dealer assets gathered	$	2,200,176	$	2,250,460	-2.2%

OVERVIEW OF FINANCIAL PERFORMANCE

Our first quarter results reflect the success of our strategies and Puerto Rico’s recovery. Oriental earned $0.30 per share fully diluted, 15% higher than a year ago. Our strong capital position continued to build.

The island benefited from loan payment moratoriums by Oriental and other banks, an increased availability of electric power, improvement in communications, and the return of day to day stability, as well as rebuild spending by FEMA, the start of payments of insurance claims, and the prospect of growing assignments of federal funds.

Nearly every metric in the quarter ended March 31, 2018 confirmed this progress. For the second quarter in a row, our originated loan growth outpaced the pay down of acquired loans, resulting in a net increase of $77.1 million from December 31, 2017.

Auto, consumer and mortgage lending production at $192.3 million increased 52% from the preceding quarter and more than 11% from the year ago quarter. In particular, auto lending was at a record level, up more than 46% from the preceding and year ago quarters. Commercial loan production in Puerto Rico, while lower than the prior quarter, rose more than 13% year over year. Meanwhile, our US commercial and industrial loan program added close to $74 million in participations.

With nearly all of our loan moratoriums expiring during this quarter, credit quality remained solid. Most metrics were better than, or returned to, pre-hurricanes levels.

Fee revenues rebounded with a 24% sequential increase in Banking Services and a 43% increase in mortgage banking. Core wealth management held steady at pre-hurricanes levels.

Customer deposits (excluding brokered-deposits) increased 2% from December 31, 2017 and 5% from a year ago. Our net interest margin expanded to 5.22%, and net new customer accounts grew at an annualized rate of 8%, significantly exceeding 2017’s hurricanes affected 2% rise.

Our effort to differentiate Oriental through superior service and digital banking technology is proving effective. Our team of dedicated bankers continually reaching out to our customers and clients is clearly working. During the quarter ended March 31, 2018, we introduced another new technology-based service—My Payments (Mis Pagos), which enables loan customers to pay online instead of standing in line.

While we remain cautious due to the uncertain economic environment on the island, we are confident positive momentum will prevail for both Oriental and Puerto Rico. We will continue to sharpen our focus on our retail and commercial clients, improve our service levels, and provide faster and more agile ways to do banking.

Summary of first quarter of 2018

· Net income available to shareholders was $13.5 million, or $0.30 per fully diluted share. This was in line with the $13.6 million, or $0.30 per share from the preceding quarter, and exceeded the year ago quarter’s $11.7 million, or $0.26 per share.

· Return on average assets and average tangible common equity was 1.09% and 7.73%, respectively.

· Tangible book value per common share was $15.71, and the tangible common equity ratio was 11.22%.

· Loan production of $309.4 million increased 22.0% from the preceding and 41.4% from the year ago quarter.

· Total provision for loan and lease losses, net, declined $2.2 million from the year ago quarter.

· Core non-interest income of $18.2 million increased 9.0% from the preceding quarter and 4.7% from the year ago quarter as banking service fees and mortgage banking revenues rebounded.

ANALYSIS OF RESULTS OF OPERATIONS

The following tables show major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for the quarters ended March 31, 2018 and 2017:

TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED MARCH 31, 2018 AND 2017

	Interest				Average rate		Average balance
	March		March		March	March	March		March
	2018		2017		2018	2017	2018		2017
	(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets	$	83,170	$	86,178	5.86%	5.89%	$	5,751,783	$	5,932,923
Tax equivalent adjustment		1,162		1,225	0.08%	0.08%		-		-
Interest-earning assets - tax equivalent		84,332		87,403	5.94%	5.97%		5,751,783		5,932,923
Interest-bearing liabilities		9,174		11,560	0.72%	0.87%		5,127,188		5,399,122
Tax equivalent net interest income / spread		75,158		75,843	5.22%	5.10%		624,595		533,801
Tax equivalent interest rate margin					5.29%	5.18%
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities		7,351		7,682	2.40%	2.29%		1,239,794		1,360,186
Interest bearing cash and money market investments		1,207		846	1.49%	0.80%		328,214		431,110
Total investments		8,558		8,528	2.21%	1.93%		1,568,008		1,791,296
Non-acquired loans
Mortgage		9,006		9,531	5.34%	5.43%		683,398		711,553
Commercial		18,274		15,997	5.66%	5.21%		1,310,444		1,245,530
Consumer		8,433		7,648	10.78%	11.09%		317,295		279,558
Auto and leasing		21,068		18,780	9.15%	9.78%		933,456		778,815
Total non-acquired loans		56,781		51,956	7.10%	6.99%		3,244,593		3,015,456
Acquired loans:
Acquired BBVAPR
Mortgage		7,073		7,890	5.54%	5.73%		517,839		558,864
Commercial		3,690		4,985	7.08%	7.81%		211,319		258,755
Consumer		2,388		2,932	16.82%	19.15%		57,568		62,097
Auto		1,339		3,278	9.89%	11.27%		54,912		117,933
Total acquired BBVAPR loans		14,490		19,085	6.98%	7.76%		841,638		997,649
Acquired Eurobank		3,341		6,610	13.89%	20.86%		97,544		128,522
Total loans		74,612		77,651	7.23%	7.60%		4,183,775		4,141,627
Total interest-earning assets		83,170		86,179	5.86%	5.89%		5,751,783		5,932,923

	Interest					Average rate		Average balance
	March		March			March	March	March		March
	2018		2017			2018	2017	2018		2017
	(Dollars in thousands)
Interest-bearing liabilities:
Deposits:
NOW Accounts		898		1,041		0.34%	0.39%		1,059,129		1,092,389
Savings and money market		1,497		1,481		0.50%	0.52%		1,206,100		1,164,040
Individual retirement accounts		336		426		0.61%	0.68%		224,299		253,626
Retail certificates of deposits		2,460		1,650		1.67%	1.24%		596,479		541,706
Total core deposits		5,191		4,598		0.68%	0.61%		3,086,007		3,051,761
Institutional deposits		6		641		0.01%	1.16%		203,962		224,196
Brokered deposits		1,886		1,885		1.64%	1.33%		466,638		574,549
Total wholesale deposits		1,892		2,526		1.14%	1.28%		670,600		798,745
		7,083		7,124		0.76%	0.75%		3,756,607		3,850,506
Non-interest bearing deposits		-		-		0.00%	0.00%		1,018,789		832,665
Core deposit intangible amortization		215		229		0.00%	0.00%		-		-
Total deposits		7,298		7,353		0.62%	0.64%		4,775,396		4,683,171
Borrowings:
Securities sold under agreements to repurchase		1,076		3,245		1.73%	2.29%		251,582		574,771
Advances from FHLB and other borrowings		374		596		2.37%	2.30%		64,127		105,097
Subordinated capital notes		428		366		4.79%	4.12%		36,083		36,083
Total borrowings		1,878		4,207		2.16%	2.38%		351,792		715,951
Total interest bearing liabilities		9,176		11,560		0.73%	0.87%		5,127,188		5,399,122
Net interest income / spread	$	73,994	$	74,618		5.13%	5.02%
Interest rate margin						5.22%	5.10%
Excess of average interest-earning assets over average interest-bearing liabilities								$	624,595	$	533,801
Average interest-earning assets to average interest-bearing liabilities ratio									112.18%		109.89%

C - CHANGES IN NET INTEREST INCOME DUE TO:
	Volume		Rate		Total
	(In thousands)
Interest Income:
Investments	$	(1,063)	$	1,092	$	29
Loans		(630)		(2,408)		(3,038)
Total interest income		(1,693)		(1,316)		(3,009)
Interest Expense:
Deposits		145		(200)		(55)
Repurchase agreements		(1,825)		(344)		(2,169)
Other borrowings		(279)		117		(162)
Total interest expense		(1,959)		(427)		(2,386)
Net Interest Income	$	266	$	(889)	$	(623)

Net Interest Income

Net interest income is a function of the difference between rates earned on Oriental’s interest-earning assets and rates paid on its interest-bearing liabilities (interest rate spread) and the relative amounts of its interest earning assets and interest-bearing liabilities (interest rate margin). Oriental constantly monitors the composition and re-pricing of its assets and liabilities to maintain its net interest income at adequate levels.

Comparison for the quarters ended March 31, 2018 and 2017

Net interest income of $74.0 million decreased $623 thousand from $74.6 million. Interest rate spread increased 11 basis points to 5.13% from 5.02% and net interest margin increased 12 basis points to 5.22% from 5.10%. These increases are mainly due to the net effect of a decrease of 3 basis points in the average yield of total interest earning assets and a decrease of 14 basis points in the total average of interest bearing liabilities.

Net interest income was positively impacted by:

· Higher interest income from originated loans of $4.8 million reflecting higher balances in the commercial and retail loan portfolios; and

· Lower interest expenses on securities sold under agreements to repurchase due to decreases in volume and interest rate of $1.8 million and $344 thousand, respectively, mainly as a result of (i) the repayment at maturity of a $232.0 million repurchase agreement at 4.78% in March 2017, and (ii) the unwinding of $100.0 million repurchase agreements in June 2017.

Net interest income was adversely impacted by:

· A decrease of $7.9 million in the interest income from the acquired BBVAPR and Eurobank loan portfolios as such loans continue to be repaid.

Comparison of quarters ended March 31, 2017 and 2016

Net interest income of $74.6 million slightly decreased 0.5% compared with $75.0 million, reflecting a decrease in interest income of 5.6%, partially offset by a decrease in interest expenses of 29.2%. Interest rate spread increase 43 basis points from 4.59% to 5.02%. This increase is mainly due to the net effect of 20 basis points increase in the average yield of interest-earning assets from 5.69% to 5.89% and to 23 basis points decrease in average costs of interest-bearing liabilities from 1.10% to 0.87%

Net interest income was positively impacted by:

· Higher interest income from originated loans of $4.0 million reflecting higher yields on commercial and retail loan portfolios; and

· Lower interest expenses on repurchase agreements and other borrowings of $5.0 million as a result of the repayment of high cost repurchase agreements and FHLB advances.

Net interest income was adversely impacted by:

· A decrease of $7.5 million in the interest income from acquired loans as such loans continue to be repaid; and

· A decrease in interest income from investments by $1.6 million due to lower volume and yield.

TABLE 2 - NON-INTEREST INCOME SUMMARY

	Quarter Ended March 31,
	2018		2017		Variance
	(Dollars in thousands)
Banking service revenue	$	10,463	$	10,626	-1.5%
Wealth management revenue		6,019		6,215	-3.2%
Mortgage banking activities		1,757		587	199.3%
Total banking and financial service revenue		18,239		17,428	4.7%
FDIC shared-loss benefit		-		1,403	-100.0%
Net gain on:
Derivatives		-		81	-100.0%
Other non-interest income		275		162	69.7%
		275		1,646	-83.3%
Total non-interest income, net	$	18,514	$	19,074	-2.9%

Non-Interest Income

Non-interest income is affected by the level of trust assets under management, transactions generated by clients’ financial assets serviced by the securities broker-dealer and insurance agency subsidiaries, the level of mortgage banking activities, and the fees generated from loans and deposit accounts.

Comparison of quarters ended March 31, 2018 and 2017

Oriental recorded non-interest income, net, in the amount of $18.5 million, compared to $19.1 million, a decrease of 2.9%, or $560 thousand. The decrease in non-interest income was mainly due to:

· The termination of the FDIC shared-loss agreement during the first quarter of 2017 resulting in the recognition of a $1.4 million gain during such period.

The decrease in non-interest income was partially offset by:

· An increase in mortgage banking activities of $1.2 million, reflecting $881 thousand from mortgage servicing and $407 thousand from decrease in repurchased loans.

Comparison of quarters ended March 31, 2017 and 2016

Oriental recorded non-interest income, net, in the amount of $19.1 million, compared to $13.5 million, an increase of 41.3%, or $5.6 million. The increase in non-interest income was mainly due to the termination of the FDIC shared-loss agreement during the first quarter of 2017 resulting in the recognition of a $1.4 million gain during such period, compared to $4.0 million expenses related to the aforementioned agreement in the year ago period.

TABLE 3 - NON-INTEREST EXPENSES SUMMARY

	Quarter Ended March 31,
	2018		2017		Variance %
	(Dollars in thousands)
Compensation and employee benefits	$	20,608	$	20,347	1.3%
Professional and service fees		2,694		3,237	-16.8%
Occupancy and equipment		7,768		7,199	7.9%
Insurance		1,478		1,600	-7.6%
Electronic banking charges		4,966		4,902	1.3%
Information technology expenses		2,009		1,998	0.6%
Advertising, business promotion, and strategic initiatives		1,347		1,395	-3.4%
Loss on sale of foreclosed real estate and other repossessed assets		1,226		1,326	-7.5%
Loan servicing and clearing expenses		1,161		1,189	-2.4%
Taxes, other than payroll and income taxes		2,260		2,372	-4.7%
Communication		885		914	-3.2%
Printing, postage, stationery and supplies		644		637	1.1%
Director and investor relations		240		280	-14.3%
Credit related expenses		2,419		2,626	-7.9%
Other		2,416		1,661	45.5%
Total non-interest expenses	$	52,121	$	51,683	0.8%
Relevant ratios and data:
Efficiency ratio		56.51%		56.15%
Compensation and benefits to non-interest expense		39.5%		39.4%
Compensation to average total assets owned		1.32%		1.27%
Average number of employees		1,367		1,429
Average compensation per employee	$	15.1	$	14.2
Average loans per average employee	$	3,061	$	2,898

Non-Interest Expenses

Comparison of quarters ended March 31, 2018 and 2017

Non-interest expense was $52.1 million, representing a slight increase of 0.8% compared to $51.7 million.

The increase in non-interest expenses was driven by:

· Higher other operating expense by $754 thousand, particularly attributed to an increase in claims and settlements accruals and to minor repairs to physical assets related to the impact of the hurricanes.

· Higher occupancy and equipment expenses by $568 thousand, primarily due to an increase in rent expenses driven by less rent income and to an increase in internet services.

The increases in the foregoing non-interest expenses were partially offset by:

· Lower professional and service fees by $543 thousand as a result lower consulting and advisory expenses; and

· Lower credit related expenses by $207 thousand, mainly due to a decrease in legal expenses from foreclosures of $249 thousand.

The efficiency ratio increased to 56.51% from 56.15%. The efficiency ratio measures how much of Oriental’s revenues is used to pay operating expenses. Oriental computes its efficiency ratio by dividing non-interest expenses by the sum of its net interest income and non-interest income, but excluding gains on the sale of investment securities, derivatives gains or losses, FDIC shared-loss benefit/expense, losses on the early extinguishment of debt, other gains and losses, and other income that may be considered volatile in nature. Management believes that the exclusion of those items permits consistent comparability. Amounts presented as part of non-interest income that are excluded from efficiency ratio computation for the quarters ended March 31, 2018 and 2017 amounted to $275 thousand and $1.6 million, respectively.

Oriental implemented its disaster response plan as hurricanes Irma and Maria approached its service areas. To operate in disaster response mode, Oriental incurred expenses for, among other things, buying diesel and generators for electric power, debris removal, security services, property damages, and emergency communication with customers regarding the status of Bank operations. Estimated losses at December 31, 2017 amounted to $6.6 million. No additional losses have been incurred at March 31, 2018.

Oriental maintains insurance for casualty losses as well as for disaster response costs and certain revenue lost through business interruption. Management believes that recovery of $2.2 million incurred costs as of December 31, 2017 is probable. Oriental received a $1.0 million partial payment from the insurance company in December 2017 and a $0.7 million payment during the first quarter of 2018. Accordingly, a receivable of $0.5 million and $1.2 million was included in other assets at March 31, 2018 and December 31, 2017, respectively, for the expected recovery.

Comparison of quarters ended March 31, 2017 and 2016

Non-interest expense for 2017 was $51.7 million, representing a decrease of 5.8% compared to $54.9 million in the previous year. The decrease in non-interest expenses was driven by:

· Lower insurance expense by $1.6 million, primarily as a result of a change in the calculation method of the FDIC Savings Association Insurance Fund (SAIF) insurance. The change was effective beginning with June 30, 2016 invoice, which was received during the third quarter of 2016.

· Lower loan servicing and clearing expense by $941 thousand, mainly due to mortgage servicing migration expenses amounting to $900 thousand during the first quarter of 2016.

· Lower electronic banking charges by $687 thousand, primarily as a result of a decrease of $885 thousand in credit cards merchant fees, partially offset by an increase in debit card billing fees of $135 thousand.

The efficiency ratio improved to 56.15% from 59.56% for the same period in 2016. Amounts presented as part of non-interest income that are excluded from efficiency ratio computation for the quarters ended March 31, 2017 and 2016 amounted to $1.6 million and $3.6 million, respectively.

Provision for Loan and Lease Losses

Comparison of quarters ended March 31, 2018 and 2017

Based on an analysis of the credit quality and the composition of Oriental’s loan portfolio, management determined that the provision for the quarter was adequate to maintain the allowance for loan and lease losses at an appropriate level to provide for probable losses based upon an evaluation of known and inherent risks.

Provision for loan and lease losses decreased 12.4%, or $2.2 million, to $15.5 million. The decrease in the provision was mostly due to:

· A decrease in the provision for acquired BBVAPR loan and lease losses of $3.9 million, mainly due to an additional provision recognized during the year ago quarter from the periodic assessment of loans remaining in these portfolios.

The decrease in the provision for loan and lease losses was partially offset by:

· An increase of $8.6 million to replenish the allowance for loan charge-offs of $8.2 million related to the hurricanes. It also included an increase in the allowance related to auto loan portfolio growth and one commercial loan placed in non-accrual.

Please refer to the "Allowance for Loan and Lease Losses" in the "Credit Risk Management" section of this MD&A for a more detailed analysis of the allowance for loan and lease losses.

Comparison of quarters ended March 31, 2017 and 2016

Provision for loan and lease losses increased 28.0%, or $3.9 million, to $17.7 million. The increase in the provision was mostly due to:

· An increase in the provision for acquired BBVAPR and Eurobank loan and lease losses of $3.2 million from the periodic assessment of loans remaining in these portfolios during the quarter ended March 31, 2017; and

· An increase in the provision for originated and other loan losses of $1.1 million due to continued growth of the portfolio.

Income Taxes

Comparison of quarters ended March 31, 2018 and 2017

Income tax expense was $8.0 million, compared to $9.2 million, reflecting the effective income tax rate of 32.0% and the net income before income taxes of $24.9 million for 2018, due to a higher proportion of exempt income and income subject to preferential rates.

Comparison of quarters ended March 31, 2017 and 2016

Income tax expense was $9.2 million, compared to $5.7 million. The effective tax rate for 2017 was 37.8% compared to 28.5% for 2016.

Business Segments

Oriental segregates its businesses into the following major reportable segments: Banking, Wealth Management, and Treasury. Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as Oriental’s organization, nature of its products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. Oriental measures the performance of these reportable segments based on pre-established goals of different financial parameters such as net income, net interest income, loan production, and fees generated. Oriental’s methodology for allocating non-interest expenses among segments is based on several factors such as revenue, employee headcount, occupied space, dedicated services or time, among others. Following are the results of operations and the selected financial information by operating segment for the quarters ended March 31, 2018 and 2017.

	Quarter Ended March 31, 2018
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	74,374	$	12	$	8,784	$	83,170	$	-	$	83,170
Interest expense		(6,290)		-		(2,886)		(9,176)		-		(9,176)
Net interest income		68,084		12		5,898		73,994		-		73,994
Provision for loan and lease losses		(15,455)		-		(5)		(15,460)		-		(15,460)
Non-interest income		12,193		6,308		13		18,514		-		18,514
Non-interest expenses		(48,081)		(3,286)		(754)		(52,121)		-		(52,121)
Intersegment revenue		361		-		-		361		(361)		-
Intersegment expenses		-		(179)		(182)		(361)		361		-
Income before income taxes	$	17,102	$	2,855	$	4,970	$	24,927	$	-	$	24,927
Income tax expense		6,670		1,113		227		8,010		-		8,010
Net income	$	10,432	$	1,742	$	4,743	$	16,917	$	-	$	16,917
Total assets	$	5,661,759	$	28,377	$	1,529,912	$	7,220,048	$	(972,927)	$	6,247,121

	Quarter Ended March 31, 2017
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	77,573	$	12	$	8,593	$	86,178	$	-	$	86,178
Interest expense		(6,814)		-		(4,746)		(11,560)		-		(11,560)
Net interest income		70,759		12		3,847		74,618		-		74,618
Provision for loan and lease losses		(17,642)		-		(12)		(17,654)		-		(17,654)
Non-interest income (loss)		13,227		5,928		(81)		19,074		-		19,074
Non-interest expenses		(46,054)		(4,220)		(1,410)		(51,684)		-		(51,684)
Intersegment revenue		464		-		71		535		(535)		-
Intersegment expenses		(71)		(311)		(153)		(535)		535		-
Income before income taxes	$	20,683	$	1,409	$	2,262	$	24,354	$	-	$	24,354
Income tax expense		8,066		550		588		9,204		-		9,204
Net income	$	12,617	$	859	$	1,674	$	15,150	$	-	$	15,150
Total assets	$	5,485,678	$	24,866	$	1,861,616	$	7,372,160	$	(957,553)	$	6,414,607

Comparison of quarters ended March 31, 2018 and 2017

Banking

Oriental's banking segment net income before taxes decreased $3.6 million to $17.1 million, reflecting:

· A decrease in net interest income by $2.7 million, mainly from the acquired BBVAPR and Eurobank loan portfolios as such loans continue to be repaid;

· Lower provision for loan and lease losses by $2.2 million, mainly from acquired loans due to an additional provision recognized during the year ago quarter from the periodic assessment of loans remaining in these portfolios.

· Lower non-interest income by $1.0 million, reflecting the termination of the FDIC shared-loss agreement in the first quarter of 2017.

· Higher non-interest expenses by $2.0 million mainly as a result of higher occupancy and equipment expenses, primarily due to an increase in rent expenses driven by less rent income and to an increase in internet services and other expenses; and

Wealth Management

Wealth management segment revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and insurance activities, increased $1.4 million to $2.9 million mainly due to higher income by $380 thousand, mainly from changes in volume and market rates, and lower expenses by $934 thousand from lower broker related expenses.

Treasury

Treasury segment net income before taxes, which consists of Oriental's asset/liability management activities, such as purchase and sale of investment securities, interest rate risk management, derivatives, and borrowings, increased to $5.0 million, compared to $2.3 million, reflecting:

Comparison of quarters ended March 31, 2017 and 2016

Banking

Oriental's banking segment net income before taxes increased $283 thousand in 2017, reflecting:

· A decrease in net interest income by $3.6 million, mainly from the acquired loan portfolios as such loans continue to be repaid;

· An increase in provision for loan and lease losses of $3.9 million. Provision for acquired loan and lease losses increased $2.8 million due to the periodic assessment of loans remaining in these portfolios;

· Higher non-interest income from the FDIC shared-loss benefit of $1.4 million related to the termination of the FDIC shared-loss agreements during the first quarter of 2017 compared to a $4.0 million expense in the year ago quarter.

· Lower non-interest expense by $2.2 million, primarily reflecting a decrease in loan servicing and clearing expenses of $941 thousand, mainly due to mortgage servicing migration expenses during the first quarter of 2016, and a decrease in electronic banking charges of $687 thousand, as a result of a decrease of $885 thousand in credit cards merchant fees, partially offset by an increase in debit card billing fees of $135 thousand.

Wealth Management

Wealth management revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and insurance activities, slightly increased $146 thousand to $1.4 million, mainly from changes in volume and market rates.

Treasury

Treasury segment net income before taxes increased to $2.3 million, compared to a loss of $1.8 million, reflecting:

· Lower interest expenses on repurchases agreements and other borrowings by $5.0 million, mainly from the partial unwinding of a repurchase agreement amounting to $268.0 million, which carried a cost of 4.78%, and the repayment of $227.0 million in short term FHLB advances at maturity.

ANALYSIS OF FINANCIAL CONDITION

Assets Owned

At March 31, 2018, Oriental’s total assets amounted to $6.247 billion representing an increase of 0.9% when compared to $6.189 billion at December 31, 2017. This increase is attributable to an increase in the investment and loan portfolios of $132.5 million and $77.1 million, respectively, partially offset by a decrease in cash and cash equivalents of $122.8 million.

Oriental's investment portfolio increased 11.4% to $1.299 billion at March 31, 2018, mainly attributed to the purchase of $155.8 million mortgage-backed securities available-for-sale, partially offset by paydowns in the investment securities held-to-maturity portfolio of $20.9 million during the first quarter of 2018.

Oriental’s loan portfolio is comprised of residential mortgage loans, commercial loans collateralized by mortgages on real estate, other commercial and industrial loans, consumer loans, and auto loans. At March 31, 2018, Oriental’s loan portfolio increased 1.9%. Loan production during the first quarter of 2018 reached $309.4 million compared to $218.9 million in the year ago quarter, a 41.3% increase. The non-acquired loan portfolio increased $116.1 million from December 31, 2017 to $3.321 billion at March 31, 2018. The BBVAPR acquired loan portfolio decreased $31.6 million from December 31, 2017 to $794.3 million at March 31, 2018. The Eurobank acquired loan portfolio decreased $2.0 million from December 31, 2017 to $97.3 million at March 31, 2018.

Cash and cash equivalents decreased 25.3% to $362.4 million, mainly attributed to the funding of new loan growth.

Accrued interest receivable resulting from the loan payment moratorium has been decreasing from December 31, 2017, as most moratoriums have expired. Some of these accrued interests are payable at the end of the loan term.

Financial Assets Managed

Oriental’s financial assets include those managed by Oriental’s trust division, retirement plan administration subsidiary, and assets gathered by its broker-dealer and insurance subsidiaries. Oriental’s trust division offers various types of individual retirement accounts ("IRAs") and manages 401(k) and Keogh retirement plans and custodian and corporate trust accounts, while the retirement plan administration subsidiary, OPC, manages private retirement plans. At March 31, 2018, total assets managed by Oriental’s trust division and OPC amounted to $2.940 billion, compared to $3.040 billion at December 31, 2017. Oriental Financial Services offers a wide array of investment alternatives to its client base, such as tax-advantaged fixed income securities, mutual funds, stocks, bonds and money management wrap-fee programs. At March 31, 2018, total assets gathered by Oriental Financial Services and Oriental Insurance from its customer investment accounts amounted to $2.200 billion, compared to $2.250 billion at December 31, 2017. Changes in trust and broker-dealer related assets primarily reflect changes in portfolio balances and differences in market values.

Goodwill

Goodwill recorded in connection with the BBVAPR Acquisition and the FDIC-assisted Eurobank acquisition is not amortized to expense, but is tested at least annually for impairment. A quantitative annual impairment test is not required if, based on a qualitative analysis, Oriental determines that the existence of events and circumstances indicate that it is more likely than not that goodwill is not impaired. Oriental completes its annual goodwill impairment test as of October 31 of each year. Oriental tests for impairment by first allocating its goodwill and other assets and liabilities, as necessary, to defined reporting units. A fair value is then determined for each reporting unit. If the fair values of the reporting units exceed their book values, no write-down of the recorded goodwill is necessary. If the fair values are less than the book values, an additional valuation procedure is necessary to assess the proper carrying value of the goodwill.

Reporting unit valuation is inherently subjective, with a number of factors based on assumptions and management judgments or estimates. Actual values may differ significantly from such estimates. Among these are future growth rates for the reporting units, selection of comparable market transactions, discount rates and earnings capitalization rates. Changes in assumptions and results due to economic conditions, industry factors, and reporting unit performance and cash flow projections could result in different assessments of the fair values of reporting units and could result in impairment charges. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, an interim impairment test is required.

Relevant events and circumstances for evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount may include macroeconomic conditions (such as a further deterioration of the Puerto Rico economy or the liquidity for Puerto Rico securities or loans secured by assets in Puerto Rico), adverse changes in legal factors or in the business climate, adverse actions by a regulator, unanticipated competition, the loss of key employees, or similar events. Oriental’s loan portfolio, which is the largest component of its interest-earning assets, is concentrated in Puerto Rico and is directly affected by adverse local economic and fiscal conditions. Such conditions have generally affected the market demand for non-conforming loans secured by assets in Puerto Rico and, therefore, affect the valuation of Oriental’s assets.

As of March 31, 2018, Oriental had $86.1 million of goodwill allocated as follows: $84.1 million to the Banking unit and $2.0 million to the Wealth Management unit. During the last quarter of 2017, based on its annual goodwill impairment test, Oriental determined that the Banking unit failed step one of the two-step impairment test and that the Wealth Management unit passed such step. As a result of step one, the Banking unit’s adjusted net book value exceeded its fair value by approximately $236.4 million, or 26%. Accordingly, Oriental proceeded to perform step two of the analysis. Based on the results of step two, Oriental determined that the carrying value of the goodwill allocated to the Banking unit was not impaired as of the valuation date. During the quarter ended March 31, 2018, Oriental performed an assessment of events or circumstances that could trigger reductions in the book value of the goodwill. Based on this assessment, no events were identified that triggered changes in the book value of goodwill at March 31, 2018.

TABLE 4 - ASSETS SUMMARY AND COMPOSITION

	March 31		December 31		Variance
	2018		2017		%
	(Dollars in thousands)
Investments:
FNMA and FHLMC certificates	$	1,015,238	$	887,779	14.4%
Obligations of US government-sponsored agencies		2,701		2,879	-6.2%
US Treasury securities		10,124		10,163	-0.4%
CMOs issued by US government-sponsored agencies		75,375		80,071	-5.9%
GNMA certificates		179,502		167,338	7.3%
Puerto Rico government and public instrumentalities		2,412		2,093	15.2%
FHLB stock		11,499		13,995	-17.8%
Other debt securities		1,432		1,538	-6.9%
Other investments		296		194	52.6%
Total investments		1,298,579		1,166,050	11.4%
Loans		4,133,429		4,056,329	1.9%
Total investments and loans		5,432,008		5,222,379	4.0%
Other assets:
Cash and due from banks (including restricted cash)		357,960		481,212	-25.6%
Money market investments		7,428		7,021	5.8%
Foreclosed real estate		40,314		44,174	-8.7%
Accrued interest receivable		35,141		49,969	-29.7%
Deferred tax asset, net		128,270		127,421	0.7%
Premises and equipment, net		67,163		67,860	-1.0%
Servicing assets		10,533		9,821	7.2%
Derivative assets		898		771	16.5%
Goodwill		86,069		86,069	0.0%
Other assets and customers' liability on acceptances		81,337		92,356	-11.9%
Total other assets		815,113		966,674	-15.7%
Total assets	$	6,247,121	$	6,189,053	0.9%
Investment portfolio composition:
FNMA and FHLMC certificates		78.2%		76.1%
Obligations of US government-sponsored agencies		0.2%		0.2%
US Treasury securities		0.8%		0.9%
CMOs issued by US government-sponsored agencies		5.8%		6.9%
GNMA certificates		13.8%		14.4%
Puerto Rico government and public instrumentalities		0.2%		0.2%
FHLB stock		0.9%		1.2%
Other debt securities and other investments		0.1%		0.1%
		100.0%		100.0%

TABLE 5 — LOANS RECEIVABLE COMPOSITION
	March 31		December 31		Variance
	2018		2017		%
	(In thousands)
Originated and other loans and leases held for investment:
Mortgage	$	682,564	$	683,607	-0.2%
Commercial		1,346,404		1,307,261	3.0%
Consumer		334,865		330,039	1.5%
Auto and leasing		957,197		883,985	8.3%
		3,321,030		3,204,892	3.6%
Allowance for loan and lease losses on originated and other loans and leases		(96,832)		(92,718)	4.4%
		3,224,198		3,112,174	3.6%
Deferred loan costs, net		7,125		6,695	6.4%
Total originated and other loans loans held for investment, net		3,231,323		3,118,869	3.6%
Acquired loans:
Acquired BBVAPR loans:
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Commercial		4,222		4,380	-3.6%
Consumer		27,235		28,915	-5.8%
Auto		16,171		21,969	-26.4%
		47,628		55,264	-13.8%
Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-20		(3,184)		(3,862)	-17.6%
		44,444		51,402	-13.5%
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage		526,089		532,053	-1.1%
Commercial		230,988		243,092	-5.0%
Consumer		932		1,431	-34.9%
Auto		35,006		43,696	-19.9%
		793,015		820,272	-3.3%
Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-30		(43,166)		(45,755)	-5.7%
		749,849		774,517	-3.2%
Total acquired BBVAPR loans, net		794,293		825,919	-3.8%
Acquired Eurobank loans:
Loans secured by 1-4 family residential properties		69,328		69,538	-0.3%
Commercial		52,418		53,793	-2.6%
Consumer		972		1,112	-12.6%
		122,718		124,443	-1.4%
Allowance for loan and lease losses on Eurobank loans		(25,410)		(25,174)	0.9%
Total acquired Eurobank loans, net		97,308		99,269	-2.0%
Total acquired loans, net		891,601		925,188	-3.6%
Total held for investment, net		4,122,924		4,044,057	2.0%
Mortgage loans held for sale		10,505		12,272	-14.4%
Total loans, net	$	4,133,429	$	4,056,329	1.9%

As shown in Table 5 above, total loans, net, amounted to $4.133 billion at March 31, 2018 and $4.056 billion at December 31, 2017. Oriental’s originated and other loans held-for-investment portfolio composition and trends were as follows:

· Mortgage loan portfolio amounted to $682.6 million (20.6% of the gross originated loan portfolio) compared to $683.6 million (21.3% of the gross originated loan portfolio) at December 31, 2017. Mortgage loan production totaled $26.6 million for the quarter ended March 31, 2018, which represents a decrease of 38.7% from $43.5 million for the same period in 2017. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to $12.5 million and $8.3 million at March 31, 2018 and December 31, 2017, respectively. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option.

· Commercial loan portfolio amounted to $1.346 billion (40.5% of the gross originated loan portfolio) compared to $1.307 billion (40.8% of the gross originated loan portfolio) at December 31, 2017. Commercial loan production, including the U.S. loan program production of $74.4 million, increased 152.2% to $117.1 million for the quarter ended March 31, 2018, from $46.5 million for the same period in 2017.

· Consumer loan portfolio amounted to $334.9 million (10.1% of the gross originated loan portfolio) compared to $330.0 million (10.3% of the gross originated loan portfolio) at December 31, 2017. Consumer loan production decreased 11.0% to $37.5 million for the quarter ended March 31, 2018 from $42.1 million for the same period in 2017.

· Auto and leasing portfolio amounted to $957.2 million (28.8% of the gross originated loan portfolio) compared to $884.0 million (27.6% of the gross originated loan portfolio) at December 31, 2017. Auto production increased by 47.6% to $128.1 million for the quarter ended March 31, 2018 compared to $86.8 million for the same period in 2017.

TABLE 6 — HIGHER RISK RESIDENTIAL MORTGAGE LOANS

	March 31, 2018
	Higher-Risk Residential Mortgage Loans*
											High Loan-to-Value Ratio Mortgages
	Junior Lien Mortgages					Interest Only Loans					LTV 90% and over
	Carrying					Carrying					Carrying
	Value		Allowance		Coverage	Value		Allowance		Coverage	Value		Allowance		Coverage
	(In thousands)
Delinquency:
0 - 89 days	$	9,448	$	276	2.92%	$	9,143	$	416	4.55%	$	66,873	$	1,487	2.22%
90 - 119 days		172		17	9.88%		128		5	3.91%		1,831		43	2.35%
120 - 179 days		13		1	7.69%		219		29	13.24%		1,689		63	3.73%
180 - 364 days		98		12	12.24%		121		17	14.05%		1,510		51	3.38%
365+ days		222		32	14.41%		1,725		269	15.59%		8,087		651	8.05%
Total	$	9,953	$	338	3.40%	$	11,336	$	736	6.49%	$	79,990	$	2,295	2.87%
Percentage of total loans excluding acquired loans accounted for under ASC 310-30		0.30%					0.34%					2.37%
Refinanced or Modified Loans:
Amount	$	1,941	$	213	10.97%	$	529	$	58	10.96%	$	16,321	$	1,249	7.65%
Percentage of Higher-Risk Loan Category		19.50%					4.67%					20.40%
Loan-to-Value Ratio:
Under 70%	$	6,652	$	233	3.50%	$	1,163	$	48	4.13%	$	-	$	-	-
70% - 79%		1,396		70	5.01%		2,518		104	4.13%		-		-	-
80% - 89%		860		19	2.21%		3,022		201	6.65%		-		-	-
90% and over		1,045		16	1.53%		4,633		383	8.27%		79,990		2,295	2.87%
	$	9,953	$	338	3.40%	$	11,336	$	736	6.49%	$	79,990	$	2,295	2.87%

* Loans may be included in more than one higher-risk loan category and excludes acquired residential mortgage loans.

Deposits from the Puerto Rico government totaled $127.3 million at March 31, 2018. The following table includes Oriental's lending and investment exposure to the Puerto Rico government, including its agencies, instrumentalities, municipalities and public corporations:

TABLE 7 - PUERTO RICO GOVERNMENT RELATED LOANS AND SECURITIES

March 31, 2018
						Maturity
Loans and Securities:		Carrying Value		Less than 1 Year		1 to 3 Years		More than 3 Years	Comments
	(In thousands)
Municipalities	$	145,028	$	5,264	$	95,626	$	44,138		Secured by ad valorem taxation, without limitation as to rate or amount, on all taxable property within the issuing municipalities. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations.
Investment securities		2,412		2,412		-		-		A PRHTA security maturing July 1, 2018 issued for P3 Project Teodoro Moscoso Bridge operated by private companies that have the payment obligation.
Total	$	147,440	$	7,676	$	95,626	$	44,138

Credit Risk Management

Allowance for Loan and Lease Losses

At March 31, 2018 and December 31, 2017, Oriental's allowance for loan and lease losses incorporated all risks associated to our loan portfolio, including the impact of hurricanes Irma and Maria.

Tables 8 through 10 set forth an analysis of activity in the ALLL and present selected loan loss statistics. In addition, Table 5 sets forth the composition of the loan portfolio.

Please refer to the “Provision for Loan and Lease Losses” section in this MD&A for a more detailed analysis of provisions for loan and lease losses.

Non-performing Assets

Oriental’s non-performing assets include non-performing loans and foreclosed real estate (see Tables 11 and 12). At March 31, 2018 and December 31, 2017, Oriental had $120.3 million and $99.7 million, respectively, of non-accrual loans, including acquired BBVAPR loans accounted for under ASC 310-20 (loans with revolving feature and/or acquired at a premium).

At March 31, 2018 and December 31, 2017, loans whose terms have been extended and which are classified as troubled-debt restructuring that are not included in non-performing assets amounted to $98.2 million and $109.2 million, respectively.

At March 31, 2018 and December 31, 2017, loans that are current in their monthly payments, but placed in non-accrual amounted to $28.0 million and $20.1 million, respectively. During the quarter ended March 31, 2018, a $10.5 million loan that is current in its monthly payments was placed in non-accrual due to credit deterioration after the hurricanes.

Acquired loans with credit deterioration are considered to be performing due to the application of the accretion method under ASC 310-30, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses. Credit related decreases in expected cash flows, compared to those previously forecasted are recognized by recording a provision for credit losses on these loans when it is probable that all cash flows expected at acquisition will not be collected.

Following hurricanes Irma and Maria, Oriental offered automatic payment deferrals and 90-day extensions for most loan categories. Most of these payment moratoriums ended during the quarter ended March 31, 2018 with most credit metrics better than, or returned to, pre-hurricanes levels.

At March 31, 2018, Oriental’s non-performing assets increased by 10.9% to $173.7 million (2.87% of total assets, excluding acquired loans with deteriorated credit quality) from $156.7 million (2.95% of total assets, excluding acquired loans with deteriorated credit quality) at December 31, 2017. Oriental does not expect non-performing loans to result in significantly higher losses. At March 31, 2018, the allowance for originated loan and lease losses to non-performing loans coverage ratio was 76.39% (87.35% at December 31, 2017).

Oriental follows a conservative residential mortgage lending policy, with more than 90% of its residential mortgage portfolio consisting of fixed-rate, fully amortizing, fully documented loans that do not have the level of risk associated with subprime loans offered by certain major U.S. mortgage loan originators. Furthermore, Oriental has never been active in negative amortization loans or adjustable rate mortgage loans, including those with teaser rates.

The following items comprise non-performing assets:

· Originated and other loans held for investment:

Residential mortgage loans — are placed on non-accrual status when they become 90 days or more past due and are written-down, if necessary, based on the specific evaluation of the collateral underlying the loan, except for FHA and VA insured mortgage loans which are placed in non-accrual when they become 12 months or more past due. At March 31, 2018, Oriental’s originated non-performing mortgage loans totaled $63.9 million (49.8% of Oriental’s non-performing loans), a 0.3% decrease from $64.1 million (58.9% of Oriental’s non-performing loans) at December 31, 2017.

Commercial loans — are placed on non-accrual status when they become 90 days or more past due and are written-down, if necessary, based on the specific evaluation of the underlying collateral, if any. At March 31, 2018, Oriental’s originated non-performing commercial loans amounted to $47.0 million (36.7% of Oriental’s non-performing loans), a 33.4% increase from $35.3 million at December 31, 2017 (32.4% of Oriental’s non-performing loans). This increase is mainly from a $10.5 million loan that is current in its monthly payments but was placed in non-accrual during the quarter ended March 31, 2018 due to credit deterioration after the hurricanes.

Consumer loans — are placed on non-accrual status when they become 90 days past due and written-off when payments are delinquent 120 days in personal loans and 180 days in credit cards and personal lines of credit. At March 31, 2018, Oriental’s originated non-performing consumer loans amounted to $2.3 million (1.8% of Oriental’s non-performing loans), a 12.0% decrease from $2.6 million at December 31, 2017 (2.4% of Oriental’s non-performing loans).

Auto loans and leases — are placed on non-accrual status when they become 90 days past due, partially written-off to collateral value when payments are delinquent 120 days, and fully written-off when payments are delinquent 180 days. At March 31, 2018, Oriental’s originated non-performing auto loans and leases amounted to $13.6 million (10.6% of Oriental’s total non-performing loans), an increase of 221.2% from $4.2 million at December 31, 2017 (3.9% of Oriental’s total non-performing loans).

Oriental has two mortgage loan modification programs. These are the Loss Mitigation Program and the Non-traditional Mortgage Loan Program. Both programs are intended to help responsible homeowners to remain in their homes and avoid foreclosure, while also reducing Oriental’s losses on non-performing mortgage loans.

The Loss Mitigation Program helps mortgage borrowers who are or will become financially unable to meet the current or scheduled mortgage payments. Loans that qualify under this program are those guaranteed by FHA, VA, RURAL, PRHFA, conventional loans guaranteed by Mortgage Guaranty Insurance Corporation (MGIC), conventional loans sold to FNMA and FHLMC, and conventional loans retained by Oriental. The program offers diversified alternatives such as regular or reduced payment plans, payment moratorium, mortgage loan modification, partial claims (only FHA), short sale, and payment in lieu of foreclosure.

The Non-traditional Mortgage Loan Program is for non-traditional mortgages, including balloon payment, interest only/interest first, variable interest rate, adjustable interest rate and other qualified loans. Non-traditional mortgage loan portfolios are segregated into the following categories: performing loans that meet secondary market requirement and are refinanced under the credit underwriting guidelines of FHA/VA/FNMA/ FHLMC, and performing loans not meeting secondary market guidelines processed pursuant Oriental’s current credit and underwriting guidelines. Oriental achieved an affordable and sustainable monthly payment by taking specific, sequential, and necessary steps such as reducing the interest rate, extending the loan term, capitalizing arrearages, deferring the payment of principal or, if the borrower qualifies, refinancing the loan.

In order to apply for any of the loan modification programs, if the borrower is active in Chapter 13 bankruptcy, it must request an authorization from the bankruptcy trustee to allow for the loan modification. Borrowers with discharged Chapter 7 bankruptcies may also apply. Loans in these programs are evaluated by designated underwriters for troubled-debt restructuring classification if Oriental grants a concession for legal or economic reasons due to the debtor’s financial difficulties.

100

TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN

	March 31,		December 31,		Variance
		2018	2017		%
	(Dollars in thousands)
Originated and other loans held for investment
Allowance balance:
Mortgage	$	18,983	$	20,439	-7.1%
Commercial		33,174		30,258	9.6%
Consumer		18,023		16,454	9.5%
Auto and leasing		26,652		25,567	4.2%
Total allowance balance	$	96,832	$	92,718	4.4%
Allowance composition:
Mortgage		19.6%		22.0%	-11.1%
Commercial		34.3%		32.6%	5.0%
Consumer		18.6%		17.8%	4.8%
Auto and leasing		27.5%		27.6%	-0.2%
		100.0%		100.0%
Allowance coverage ratio at end of period applicable to:
Mortgage		2.78%		2.99%	-7.0%
Commercial		2.46%		2.31%	6.5%
Consumer		5.38%		4.99%	7.8%
Auto and leasing		2.78%		2.89%	-3.8%
Total allowance to total originated loans		2.92%		2.89%	1.0%
Allowance coverage ratio to non-performing loans:
Mortgage		29.72%		31.89%	-6.8%
Commercial		70.52%		85.83%	-17.8%
Consumer		796.42%		639.74%	24.5%
Auto and leasing		196.06%		604.14%	-67.5%
Total		76.39%		87.35%	-12.5%

101

TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN (CONTINUED)

	March 31,		December 31,		Variance
		2018	2017		%
	(Dollars in thousands)
Acquired BBVAPR loans accounted for under ASC 310-20
Allowance balance:
Commercial	$	37	$	42	-11.9%
Consumer		2,659		3,225	-17.6%
Auto		488		595	-18.0%
Total allowance balance	$	3,184	$	3,862	-17.6%
Allowance composition:
Commercial		1.2%		1.09%	6.4%
Consumer		83.5%		83.50%	0.0%
Auto		15.3%		15.41%	-0.5%
		100.0%		100.00%
Allowance coverage ratio at end of period applicable to:
Commercial		0.88%		0.96%	-8.3%
Consumer		9.76%		11.15%	-12.5%
Auto		3.02%		2.71%	11.4%
Total allowance to total acquired loans		6.69%		6.99%	-4.3%
Allowance coverage ratio to non-performing loans:
Commercial		3.40%		3.31%	2.7%
Consumer		803.32%		238.01%	237.5%
Auto		316.88%		332.40%	-4.7%
Total		202.42%		137.73%	47.0%

102

TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN (CONTINUED)
	March 31,		December 31,		Variance
		2018	2017		%
	(Dollars in thousands)
Acquired BBVAPR loans accounted for under ASC 310-30
Allowance balance:
Mortgage	$	14,331	$	14,085	1.7%
Commercial		22,047		23,691	-6.9%
Consumer		18		18	0.0%
Auto		6,770		7,961	-15.0%
Total allowance balance	$	43,166	$	45,755	-5.7%
Allowance composition:
Mortgage		33.2%		30.8%	7.9%
Commercial		51.1%		51.8%	-1.4%
Auto		15.7%		17.4%	-9.9%
		100.0%		100.0%

Acquired Eurobank loans accounted for under ASC 310-30
Allowance balance:
Mortgage	$	15,414	$	15,187	1.5%
Commercial		9,992		9,982	0.1%
Consumer		4		5	-20.0%
Total allowance balance	$	25,410	$	25,174	0.9%
Allowance composition:
Mortgage		60.7%		60.3%	0.5%
Commercial		39.3%		39.6%	-0.8%
		100.0%		100.0%

103

TABLE 9 — ALLOWANCE FOR LOAN AND LEASE LOSSES SUMMARY

	Quarter Ended March 31,
					Variance
	2018		2017		%
	(Dollars in thousands)
Originated and other loans:
Balance at beginning of period	$	92,718	$	59,300	56.4%
Provision for loan and lease losses		14,958		11,735	27.5%
Charge-offs		(15,357)		(14,156)	8.5%
Recoveries		4,513		3,604	25.2%
Balance at end of period	$	96,832	$	60,483	60.1%
Acquired loans:
*BBVAPR loans*
Acquired loans accounted for under ASC 310-20:
Balance at beginning of period	$	3,862	$	4,300	-10.2%
Provision for loan and lease losses		184		(33)	-657.6%
Charge-offs		(1,147)		(1,169)	-1.9%
Recoveries		285		517	-44.9%
Balance at end of period	$	3,184	$	3,615	-11.9%
Acquired loans accounted for under ASC 310-30:
Balance at beginning of period	$	45,755	$	31,056	47.3%
Provision for loan and lease losses		179		4,332	-95.9%
Allowance de-recognition		(2,768)		(458)	504.4%
Balance at end of period	$	43,166	$	34,930	23.6%

*Eurobank loans*
Balance at beginning of period	$	25,174	$	21,281	18.3%
Provision for loan and lease losses		139		1,620	-91.4%
Allowance de-recognition		97		(895)	-110.8%
Balance at end of period	$	25,410	$	22,006	15.5%

104

TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING LOANS ACCOUNTED FOR UNDER ASC 310-30

	Quarter Ended March 31,
					Variance
	2018		2017		%
	(Dollars in thousands)
Originated and other loans and leases:
Mortgage
Charge-offs	$	(968)	$	(2,379)	-59.3%
Recoveries		314		56	460.7%
Total		(654)		(2,323)	-71.8%
Commercial
Charge-offs		(1,149)		(856)	34.2%
Recoveries		182		89	104.5%
Total		(967)		(767)	26.1%
Consumer
Charge-offs		(4,258)		(3,358)	26.8%
Recoveries		240		165	45.5%
Total		(4,018)		(3,193)	25.8%
Auto
Charge-offs		(8,982)		(7,563)	18.8%
Recoveries		3,777		3,294	14.7%
Total		(5,205)		(4,269)	21.9%
Net credit losses
Total charge-offs		(15,357)		(14,156)	8.5%
Total recoveries		4,513		3,604	25.2%
Total	$	(10,844)	$	(10,552)	2.8%
Net credit losses to average loans outstanding:
Mortgage		0.38%		1.31%	-71.0%
Commercial		0.30%		0.25%	20.0%
Consumer		5.07%		4.57%	10.9%
Auto		2.23%		2.19%	1.8%
Total		1.34%		1.40%	-4.3%
Recoveries to charge-offs		29.39%		25.46%	15.4%
Average originated loans:
Mortgage	$	683,398		711,553	-4.0%
Commercial		1,310,444		1,245,530	5.2%
Consumer		317,295		279,558	13.5%
Auto		933,456		778,815	19.9%
Total	$	3,244,593	$	3,015,456	7.6%

105

TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING LOANS ACCOUNTED FOR UNDER ASC 310-30 (CONTINUED)

	Quarter Ended March 31,
					Variance
	2018		2017		%
	(Dollars in thousands)
Acquired loans accounted for under ASC 310-20:
Commercial
Charge-offs	$	-	$	(6)	-100.0%
Recoveries		3		1	200.0%
Total		3		(5)	-160.0%
Consumer
Charge-offs		(1,022)		(885)	15.5%
Recoveries		54		64	-15.6%
Total		(968)		(821)	17.9%
Auto
Charge-offs		(125)		(278)	-55.0%
Recoveries		228		452	-49.6%
Total		103		174	-40.8%
Net credit losses
Total charge-offs		(1,147)		(1,169)	-1.9%
Total recoveries		285		517	-44.9%
Total	$	(862)	$	(652)	32.2%
Net credit losses to average loans outstanding:
Commercial		-3.17%		4.88%	-165.1%
Consumer		6.69%		5.60%	19.5%
Auto		-1.20%		-1.42%	-15.3%
Total		3.73%		2.41%	54.5%
Recoveries to charge-offs		24.85%		44.23%	-43.8%
Average loans accounted for under ASC 310-20:
Commercial	$	378		411	-8.0%
Consumer		57,839		58,614	-1.3%
Auto		34,334		49,115	-30.1%
Total	$	92,551	$	108,140	-14.4%

106

TABLE 11 — NON-PERFORMING ASSETS

	March 31,		December 31,		Variance
	2018		2017		(%)
	(Dollars in thousands)
Non-performing assets:
Non-accruing loans
Troubled-Debt Restructuring loans	$	34,261	$	25,354	35.1%
Other loans		86,016		74,360	15.7%
Accruing loans
Troubled-Debt Restructuring loans		6,577		6,704	-1.9%
Other loans		1,486		2,528	-41.2%
Total non-performing loans	$	128,340	$	108,946	17.8%
Foreclosed real estate		40,314		44,174	-8.7%
Other repossessed assets		5,082		3,548	43.2%
	$	173,736	$	156,668	10.9%
Non-performing assets to total assets, excluding acquired loans with deteriorated credit quality (including those by analogy)		2.87%		2.95%	-2.7%
Non-performing assets to total capital		18.38%		16.58%	10.9%

	Quarter Ended March 31,
	2018		2017
	(In thousands)
Interest that would have been recorded in the period if the loans had not been classified as non-accruing loans	$	996	$	934

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TABLE 12 — NON-PERFORMING LOANS

	March 31,		December 31,		Variance
	2018		2017		%
	(Dollars in thousands)
Non-performing loans:
Originated and other loans held for investment
Mortgage	$	63,866	$	64,085	-0.3%
Commercial		47,044		35,253	33.4%
Consumer		2,263		2,572	-12.0%
Auto and leasing		13,594		4,232	221.2%
		126,767		106,142	19.4%
Acquired loans accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)
Commercial		1,088		1,270	-14.3%
Consumer		331		1,355	-75.6%
Auto		154		179	-14.0%
		1,573		2,804	-43.9%
Total	$	128,340	$	108,946	17.8%
Non-performing loans composition percentages:
Originated loans
Mortgage		49.7%		58.7%
Commercial		36.7%		32.4%
Consumer		1.8%		2.4%
Auto and leasing		10.6%		3.9%
Acquired loans accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)
Commercial		0.8%		1.2%
Consumer		0.3%		1.2%
Auto		0.1%		0.2%
Total		100.0%		100.0%
Non-performing loans to:
Total loans, excluding loans accounted for under ASC 310-30 (including those by analogy)		3.81%		3.34%	14.1%
Total assets, excluding loans accounted for under ASC 310-30 (including those by analogy)		2.12%		2.05%	3.4%
Total capital		13.58%		11.53%	17.8%
Non-performing loans with partial charge-offs to:
Total loans, excluding loans accounted for under ASC 310-30 (including those by analogy)		1.09%		1.15%	-5.22%
Non-performing loans		28.62%		34.49%	-17.0%
Other non-performing loans ratios:
Charge-off rate on non-performing loans to non-performing loans on which charge-offs have been taken		58.96%		57.69%	2.2%
Allowance for loan and lease losses to non-performing loans on which no charge-offs have been taken		109.17%		134.26%	-18.7%

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FDIC Indemnification Asset

Oriental recorded the FDIC indemnification asset, measured separately from the covered loans, as part of the Eurobank FDIC-assisted transaction. On February 6, 2017, the Bank and the FDIC agreed to terminate the shared-loss agreements related to the FDIC assisted acquisition.

TABLE 13 - ACTIVITY OF FDIC INDEMNIFICATION ASSET

	Quarter Ended March 31,
	2018		2017
	(In thousands)
FDIC indemnification asset:
Balance at beginning of period	$	-	$	14,411
FDIC indemnification asset benefit (expense)		-		1,403
Shared-loss termination settlement		-		(15,814)
Balance at end of period	$	-	$	-

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TABLE 15 - LIABILITIES SUMMARY AND COMPOSITION
	March 31,		December 31,		Variance
	2018		2017		%
	(Dollars in thousands)
Deposits:
Non-interest bearing deposits	$	1,071,648	$	969,525	10.5%
NOW accounts		1,046,179		1,069,572	-2.2%
Savings and money market accounts		1,274,411		1,251,396	1.8%
Certificates of deposit		1,439,473		1,507,101	-4.5%
Total deposits		4,831,711		4,797,594	0.7%
Accrued interest payable		1,717		1,888	-9.1%
Total deposits and accrued interest payable		4,833,428		4,799,482	0.7%
Borrowings:
Securities sold under agreements to repurchase		273,926		192,869	42.0%
Advances from FHLB		43,934		99,643	-55.9%
Subordinated capital notes		36,083		36,083	0.0%
Other term notes		394		153	157.5%
Total borrowings		354,337		328,748	7.8%
Total deposits and borrowings		5,187,765		5,128,230	1.2%

Other Liabilities:
Derivative liabilities		752		1,281	-41.3%
Acceptances outstanding		25,869		27,644	-6.4%
Other liabilities		85,886		86,791	-1.0%
Total liabilities	$	5,300,272	$	5,243,946	1.1%
Deposits portfolio composition percentages:
Non-interest bearing deposits		22.2%		20.2%
NOW accounts		21.7%		22.3%
Savings and money market accounts		26.3%		26.1%
Certificates of deposit		29.8%		31.4%
		100.0%		100.0%
Borrowings portfolio composition percentages:
Securities sold under agreements to repurchase		77.3%		58.7%
Advances from FHLB		12.4%		30.3%
Other term notes		0.1%		0.0%
Subordinated capital notes		10.2%		11.0%
		100.0%		100.0%
Securities sold under agreements to repurchase (excluding accrued interest)
Amount outstanding at period-end	$	273,500	$	192,500
Daily average outstanding balance	$	251,582	$	393,133
Maximum outstanding balance at any month-end	$	273,500	$	606,210

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Liabilities and Funding Sources

As shown in Table 15 above, at March 31, 2018, Oriental’s total liabilities were $5.300 billion, 1.1% more than the $5.244 billion reported at December 31, 2017. Deposits and borrowings, Oriental’s funding sources, amounted to $5.188 billion at March 31, 2018 versus $5.128 billion at December 31, 2017, a 1.2% increase.

Borrowings consist mainly of repurchase agreements, FHLB-NY advances and subordinated capital notes. At March 31, 2018, borrowings amounted to $354.3 million, representing an increase of 7.8% when compared with the $328.7 million reported at December 31, 2017. The increase in borrowings reflects:

· An increase of $81.1 million in repurchase agreements used for the purchase of investment securities during the quarter ended March 31, 2018; and

· A decrease of $55.7 million attributable to the maturing of $90.0 million FHLB advances which were not renewed, partially offset by $34.7 million in new advances.

At March 31, 2018, deposits represented 93% and borrowings represented 7% of interest-bearing liabilities. At March 31, 2018, deposits, the largest category of Oriental’s interest-bearing liabilities, were $4.833 billion, an increase of 0.7% from $4.799 billion at December 31, 2017.

Stockholders’ Equity

At March 31, 2018, Oriental’s total stockholders’ equity was $946.8 million, a 0.2% increase when compared to $945.1 million at December 31, 2017. This increase in stockholders’ equity reflects increases in retained earnings of $9.1 million, legal surplus of $1.7 million and a decrease in treasury stock, at cost, of $360 thousand, partially offset by a decrease in accumulated other comprehensive income, net of tax of $9.2 million and in additional paid in capital of $196 thousand, respectively. Book value per share was $17.76 at March 31, 2018 compared to $17.73 at December 31, 2017.

From December 31, 2017 to March 31, 2018, tangible common equity to total assets decreased to 11.05% from 11.12%, Leverage capital ratio increased to 14.07% from 13.92%, Common Equity Tier 1 capital ratio decreased to 14.52% from 14.59%, Tier 1 Risk-Based capital ratio decreased to 19.00% from 19.05%, and Total Risk-Based capital ratio decreased to 20.29% from 20.34%.

Capital Rules to Implement Basel III Capital Requirements

OFG Bancorp and the Bank are subject to regulatory capital requirements established by the Federal Reserve Board and the FDIC. The current risk-based capital standards applicable to OFG Bancorp and the Bank (“Basel III capital rules”), which have been effective since January 1, 2015, are based on the final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision. As of March 31, 2018, OFG Bancorp's and the Bank’s capital ratios continue to exceed the minimum requirements for being “well-capitalized” under the Basel III capital rules.

The risk-based capital ratios presented in Table 16, which include common equity tier 1, tier 1 capital, total capital and leverage capital as of March 31, 2018 and December 31, 2017, are calculated based on the Basel III capital rules related to the measurement of capital, risk-weighted assets and average assets.

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The following are the consolidated capital ratios of Oriental under the Basel III capital rules at March 31, 2018 and December 31, 2017:

TABLE 16 — CAPITAL, DIVIDENDS AND STOCK DATA
	March 31,		December 31,		Variance
	2018		2017		%
	(Dollars in thousands, except per share data)
Capital data:
Stockholders’ equity	$	946,849	$	945,107	0.2%
Regulatory Capital Ratios data:
Common equity tier 1 capital ratio		14.52%		14.59%	-0.5%
Minimum common equity tier 1 capital ratio required		4.50%		4.50%	0.0%
Actual common equity tier 1 capital	$	652,012		644,804	1.1%
Minimum common equity tier 1 capital required	$	202,011		198,930	1.5%
Minimum capital conservation buffer required	$	84,189		55,258	52.4%
Excess over regulatory requirement	$	365,812		390,615	-6.3%
Risk-weighted assets	$	4,489,130		4,420,667	1.5%
Tier 1 risk-based capital ratio		19.00%		19.05%	-0.3%
Minimum tier 1 risk-based capital ratio required		6.00%		6.00%	0.0%
Actual tier 1 risk-based capital	$	852,882	$	842,133	1.3%
Minimum tier 1 risk-based capital required	$	269,348	$	265,240	1.5%
Excess over regulatory requirement	$	583,534	$	576,893	1.2%
Risk-weighted assets	$	4,489,130	$	4,420,667	1.5%
Total risk-based capital ratio		20.29%		20.34%	-0.2%
Minimum total risk-based capital ratio required		8.00%		8.00%	0.0%
Actual total risk-based capital	$	910,828	$	899,258	1.3%
Minimum total risk-based capital required	$	359,130	$	353,653	1.5%
Excess over regulatory requirement	$	551,698	$	545,604	1.1%
Risk-weighted assets	$	4,489,130	$	4,420,667	1.5%
Leverage capital ratio		14.07%		13.92%	1.1%
Minimum leverage capital ratio required		4.00%		4.00%	0.0%
Actual tier 1 capital	$	852,882	$	842,133	1.3%
Minimum tier 1 capital required	$	242,395	$	242,057	0.1%
Excess over regulatory requirement	$	610,487	$	600,076	1.7%
Tangible common equity to total assets		11.05%		11.12%	-0.6%
Tangible common equity to risk-weighted assets		15.38%		15.57%	-1.2%
Total equity to total assets		15.16%		15.27%	-0.7%
Total equity to risk-weighted assets		21.09%		21.38%	-1.4%
Stock data:
Outstanding common shares		43,968,342		43,947,442	0.0%
Book value per common share	$	17.76	$	17.73	0.2%
Tangible book value per common share	$	15.71	$	15.67	0.2%
Market price at end of year	$	10.45	$	9.40	11.2%
Market capitalization at end of year	$	459,469	$	413,106	11.2%

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The following table presents a reconciliation of Oriental’s total stockholders’ equity to tangible common equity and total assets to tangible assets at March 31, 2018, and December 31, 2017:

	March 31,		December 31,
	2018		2017
	(In thousands, except share or per share information)
Total stockholders' equity	$	946,849	$	945,107
Preferred stock		(176,000)		(176,000)
Preferred stock issuance costs		10,130		10,130
Goodwill		(86,069)		(86,069)
Core deposit intangible		(3,124)		(3,339)
Customer relationship intangible		(1,233)		(1,348)
Total tangible common equity	$	690,553	$	688,481
Total assets		6,247,121		6,189,053
Goodwill		(86,069)		(86,069)
Core deposit intangible		(3,124)		(3,339)
Customer relationship intangible		(1,233)		(1,348)
Total tangible assets	$	6,156,695	$	6,098,297
Tangible common equity to tangible assets		11.22%		11.29%
Common shares outstanding at end of period		43,968,342		43,947,442
Tangible book value per common share	$	15.71	$	15.67

The tangible common equity ratio and tangible book value per common share are non-GAAP measures and, unlike Tier 1 capital and Common Equity Tier 1 capital, are not codified in the federal banking regulations. Management and many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations. Neither tangible common equity nor tangible assets or related measures should be considered in isolation or as a substitute for stockholders’ equity, total assets or any other measure calculated in accordance with GAAP. Moreover, the manner in which Oriental calculates its tangible common equity, tangible assets and any other related measures may differ from that of other companies reporting measures with similar names.

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. To mitigate these limitations, Oriental has procedures in place to calculate these measures using the appropriate GAAP or regulatory components. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

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The following table presents Oriental’s capital adequacy information under the Basel III capital rules:

	March 31,		December 31,		Variance
	2018		2017		%
	(Dollars in thousands)
Risk-based capital:
Common equity tier 1 capital	$	652,012	$	644,804	1.1%
Additional tier 1 capital		200,870		197,329	1.8%
Tier 1 capital		852,882		842,133	1.3%
Additional Tier 2 capital		57,946		57,125	1.4%
Total risk-based capital	$	910,828	$	899,258	1.3%
Risk-weighted assets:
Balance sheet items	$	4,308,428	$	4,249,042	1.4%
Off-balance sheet items		180,702		171,625	5.3%
Total risk-weighted assets	$	4,489,130	$	4,420,667	1.5%
Ratios:
Common equity tier 1 capital (minimum required - 4.5%)		14.52%		14.59%	-0.5%
Tier 1 capital (minimum required - 6%)		19.00%		19.05%	-0.3%
Total capital (minimum required - 8%)		20.29%		20.34%	-0.2%
Leverage ratio (minimum required - 4%)		14.07%		13.92%	1.1%
Equity to assets		15.16%		15.27%	-0.7%
Tangible common equity to assets		11.05%		11.12%	-0.6%

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The Bank is considered “well capitalized” under the regulatory framework for prompt corrective action. The table below shows the Bank’s regulatory capital ratios at March 31, 2018 and December 31, 2017:


	March 31,		December 31,		Variance
	2018		2017		%
	(Dollars in thousands)
Oriental Bank Regulatory Capital Ratios:
Common Equity Tier 1 Capital to Risk-Weighted Assets		18.52%		18.63%	-0.6%
Actual common equity tier 1 capital	$	830,845	$	822,776	1.0%
Minimum capital requirement (4.5%)	$	201,843	$	198,712	1.6%
Minimum capital conservation buffer requirement (1.875% at March 31, 2018 - 1.25% at December 31, 2017)	$	84,189	$	55,198	52.5%
Minimum to be well capitalized (6.5%)	$	291,551	$	287,028	1.6%
Tier 1 Capital to Risk-Weighted Assets		18.52%		18.63%	-0.6%
Actual tier 1 risk-based capital	$	830,845	$	822,776	1.0%
Minimum capital requirement (6%)	$	269,124	$	264,949	1.6%
Minimum to be well capitalized (8%)	$	358,832	$	353,265	1.6%
Total Capital to Risk-Weighted Assets		19.81%		19.92%	-0.6%
Actual total risk-based capital	$	888,557	$	879,648	1.0%
Minimum capital requirement (8%)	$	358,832	$	353,265	1.6%
Minimum to be well capitalized (10%)	$	448,541	$	441,581	1.6%
Total Tier 1 Capital to Average Total Assets		13.76%		13.63%	1.0%
Actual tier 1 capital	$	830,845	$	822,776	1.0%
Minimum capital requirement (4%)	$	241,559	$	241,417	0.1%
Minimum to be well capitalized (5%)	$	301,948	$	301,771	0.1%

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Oriental’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG.” At March 31, 2018 and December 31, 2017, Oriental’s market capitalization for its outstanding common stock was $459.5 million ($10.45 per share) and $413.1 million ($9.40 per share), respectively.

The following table provides the high and low prices and dividends per share of Oriental’s common stock for each quarter of the last two calendar years:

					Cash
	Price				Dividend
	High		Low		Per share
2018
March 31, 2018	$	12.05	$	8.60	$	0.06
2017
December 31, 2017	$	10.25	$	7.90	$	0.06
September 30, 2017	$	10.40	$	8.40	$	0.06
June 30, 2017	$	12.03	$	9.19	$	0.06
March 31, 2017	$	13.80	$	10.90	$	0.06
2016
December 31, 2016	$	14.30	$	9.56	$	0.06
September 30, 2016	$	11.09	$	8.07	$	0.06
June 30, 2016	$	9.14	$	6.32	$	0.06
March 31, 2016	$	7.32	$	4.77	$	0.06

Under Oriental’s current stock repurchase program, it is authorized to purchase in the open market up to $7.7 million of its outstanding shares of common stock. The shares of common stock repurchased are to be held by Oriental as treasury shares. There were no repurchases during the quarter ended March 31, 2018.

At March 31, 2018, the number of shares that may yet be purchased under such program is estimated at 739,795 and was calculated by dividing the remaining balance of $7.7 million by $10.45 (closing price of Oriental's common stock at March 31, 2018).

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Background

Oriental’s risk management policies are established by its Board of Directors (the “Board”) and implemented by management through the adoption of a risk management program, which is overseen and monitored by the Chief Risk and Compliance Officer, the Board Risk and Compliance Committee and the executive Risk and Compliance Team. Oriental has continued to refine and enhance its risk management program by strengthening policies, processes and procedures necessary to maintain effective risk management.

All aspects of Oriental’s business activities are susceptible to risk. Consequently, risk identification and monitoring are essential to risk management. As more fully discussed below, Oriental’s primary risk exposures include, market, interest rate, credit, liquidity, operational and concentration risks.

Market Risk

Market risk is the risk to earnings or capital arising from adverse movements in market rates or prices, such as interest rates or prices. Oriental evaluates market risk together with interest rate risk. Oriental’s financial results and capital levels are constantly exposed to market risk. The Board and management are primarily responsible for ensuring that the market risk assumed by Oriental complies with the guidelines established by policies approved by the Board. The Board has delegated the management of this risk to the Asset/Liability Management Committee (“ALCO”) which is composed of certain executive officers from the business, treasury and finance areas. One of ALCO’s primary goals is to ensure that the market risk assumed by Oriental is within the parameters established in such policies.

Interest Rate Risk

Interest rate risk is the exposure of Oriental’s earnings or capital to adverse movements in interest rates. It is a predominant market risk in terms of its potential impact on earnings. Oriental manages its asset/liability position in order to limit the effects of changes in interest rates on net interest income. ALCO oversees interest rate risk, liquidity management and other related matters.

In executing its responsibilities, ALCO examines current and expected conditions in global financial markets, competition and prevailing rates in the local deposit market, liquidity, unrealized gains and losses in securities, recent or proposed changes to the investment portfolio, alternative funding sources and their costs, hedging and the possible purchase of derivatives such as swaps, and any tax or regulatory issues which may be pertinent to these areas.

On a quarterly basis, Oriental performs a net interest income simulation analysis on a consolidated basis to estimate the potential change in future earnings from projected changes in interest rates. These simulations are carried out over a five-year time horizon, assuming certain gradual upward and downward interest rate movements, achieved during a twelve-month period. Instantaneous interest rate movements are also modeled. Simulations are carried out in two ways:

(i) using a static balance sheet as Oriental had on the simulation date, and

(ii) using a dynamic balance sheet based on recent growth patterns and business strategies.

The balance sheet is divided into groups of assets and liabilities detailed by maturity or re-pricing and their corresponding interest yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future funding sources and costs, the possible exercise of options, changes in prepayment rates, deposits decay and other factors which may be important in projecting the future growth of net interest income.

Oriental uses a software application to project future movements in Oriental’s balance sheet and income statement. The starting point of the projections generally corresponds to the actual values of the balance sheet on the date of the simulations.

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These simulations are complex, and use many assumptions that are intended to reflect the general behavior of Oriental over the period in question. There can be no assurance that actual events will match these assumptions in all cases. For this reason, the results of these simulations are only approximations of the true sensitivity of net interest income to changes in market interest rates. The following table presents the results of the simulations at March 31, 2018 for the most likely scenario, assuming a one-year time horizon:

	Net Interest Income Risk (one year projection)
	Static Balance Sheet			Growing Simulation
	Amount		Percent	Amount		Percent
	Change		Change	Change		Change
Change in interest rate	(Dollars in thousands)
+ 200 Basis points	$	10,578	3.66%	$	11,514	3.83%
+ 100 Basis points	$	5,357	1.82%	$	5,735	1.91%
- 100 Basis points	$	(5,335)	-1.82%	$	(5,639)	-1.88%

The impact of -200 basis point reduction in interest rates is not presented in view of current level of the federal funds rate and other short-term interest rates.

Future net interest income could be affected by Oriental’s investments in callable securities, prepayment risk related to mortgage loans and mortgage-backed securities, and any structured repurchase agreements and advances from the FHLB-NY in which it may enter into from time to time. As part of the strategy to limit the interest rate risk and reduce the re-pricing gaps of Oriental’s assets and liabilities, Oriental has executed certain transactions which include extending the maturity and the re-pricing frequency of the liabilities to longer terms reducing the amounts of its structured repurchase agreements and entering into hedge-designated swaps to hedge the variability of future interest cash flows of forecasted wholesale borrowings that only consist of advances from the FHLB-NY as of March 31, 2018.

Oriental maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. Oriental’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest margin is not, on a material basis, adversely affected by movements in interest rates. As a result of interest rate fluctuations, hedged fixed-rate assets and liabilities will appreciate or depreciate in market value. Also, for some fixed-rate assets or liabilities, the effect of this variability in earnings is expected to be substantially offset by Oriental’s gains and losses on the derivative instruments that are linked to the forecasted cash flows of these hedged assets and liabilities. Oriental considers its strategic use of derivatives to be a prudent method of managing interest-rate sensitivity as it reduces the exposure of earnings and the market value of its equity to undue risk posed by changes in interest rates. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by Oriental’s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. Another result of interest rate fluctuations is that the contractual interest income and interest expense of hedged variable-rate assets and liabilities, respectively, will increase or decrease.

Derivative instruments that are used as part of Oriental’s interest risk management strategy include interest rate swaps, forward-settlement swaps, futures contracts, and option contracts that have indices related to the pricing of specific balance sheet assets and liabilities. Interest rate swaps generally involve the exchange of fixed and variable-rate interest payments between two parties based on a common notional principal amount and maturity date. Interest rate futures generally involve exchanged-traded contracts to buy or sell U.S. Treasury bonds and notes in the future at specified prices. Interest rate options represent contracts that allow the holder of the option to (i) receive cash or (ii) purchase, sell, or enter into a financial instrument at a specified price within a specified period. Some purchased option contracts give Oriental the right to enter into interest rate swaps and cap and floor agreements with the writer of the option. In addition, Oriental enters into certain transactions that contain embedded derivatives. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated and carried at fair value. Please refer to Note 9 to the accompanying consolidated financial statements for further information concerning Oriental’s derivative activities.

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Following is a summary of certain strategies, including derivative activities, currently used by Oriental to manage interest rate risk:

Interest rate swaps — Oriental entered into hedge-designated swaps to hedge the variability of future interest cash flows of forecasted wholesale borrowings attributable to changes in the one-month LIBOR rate. Once the forecasted wholesale borrowings transactions occurred, the interest rate swap effectively fixes Oriental’s interest payments on an amount of forecasted interest expense attributable to the one-month LIBOR rate corresponding to the swap notional stated rate. A derivative asset of $146 thousand (notional amount of $34.7 million) was recognized at March 31, 2018 related to the valuation of these swaps.

In addition, Oriental has certain derivative contracts, including interest rate swaps not designated as hedging instruments, which are utilized to convert certain variable-rate loans to fixed-rate loans, and the mirror-images of these interest rate swaps in which Oriental enters into to minimize its interest rate risk exposure that results from offering the derivatives to clients. These interest rate swaps are marked to market through earnings. At March 31, 2018, interest rate swaps offered to clients not designated as hedging instruments represented a derivative asset of $459 thousand (notional amounts of $12.5 million), and the mirror-image interest rate swaps in which Oriental entered into represented a derivative liability of $459 thousand (notional amounts of $12.5 million).

Wholesale borrowings — Oriental uses interest rate swaps to hedge the variability of interest cash flows of certain advances from the FHLB-NY that are tied to a variable rate index. The interest rate swaps effectively fix Oriental’s interest payments on these borrowings. As of March 31, 2018, Oriental had $34.7 million in interest rate swaps at an average rate of 2.4% designated as cash flow hedges for $34.7 million in advances from the FHLB-NY that reprice or are being rolled over on a monthly basis.

Credit Risk

Credit risk is the possibility of loss arising from a borrower or counterparty in a credit-related contract failing to perform in accordance with its terms. The principal source of credit risk for Oriental is its lending activities. In Puerto Rico, Oriental’s principal market, economic conditions are very challenging, as they have been for the last twelve years, due to a shrinking population, a protracted economic recession, a housing sector that remains under pressure, the Puerto Rico government’s fiscal and liquidity crisis, and the payment defaults on various Puerto Rico government bonds, with severe austerity measures expected for the Puerto Rico government to be able to restructure its debts under the supervision of the federally-created Fiscal Oversight and Management Board of Puerto Rico. In addition, as was demonstrated with hurricanes Irma and Maria during the month of September 2017, Puerto Rico is susceptible to natural disasters, such as hurricanes and earthquakes, which can have a disproportionate impact on Puerto Rico because of the logistical difficulties of bringing relief to an island far from the United States main land. Moreover, the Puerto Rico government's fiscal challenges and Puerto Rico's unique relationship with the United States also complicate any relief efforts after a natural disaster. These events increase credit risk as debtors may no longer be capable of operating their businesses and the collateral securing Oriental's loans may suffer significant damages.

Oriental manages its credit risk through a comprehensive credit policy which establishes sound underwriting standards by monitoring and evaluating loan portfolio quality, and by the constant assessment of reserves and loan concentrations. Oriental also employs proactive collection and loss mitigation practices.

Oriental may also encounter risk of default in relation to its securities portfolio. The securities held by Oriental are principally agency mortgage-backed securities. Thus, a substantial portion of these instruments are guaranteed by mortgages, a U.S. government-sponsored entity, or the full faith and credit of the U.S. government.

Oriental’s executive Credit Risk Team, composed of its Chief Operating Officer, Chief Risk and Compliance Officer, and other senior executives, has primary responsibility for setting strategies to achieve Oriental’s credit risk goals and objectives. Those goals and objectives are set forth in Oriental’s Credit Policy as approved by the Board.

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Liquidity Risk

Liquidity risk is the risk of Oriental not being able to generate sufficient cash from either assets or liabilities to meet obligations as they become due without incurring substantial losses. The Board has established a policy to manage this risk. Oriental’s cash requirements principally consist of deposit withdrawals, contractual loan funding, repayment of borrowings as these mature, and funding of new and existing investments as required.

Oriental’s business requires continuous access to various funding sources. While Oriental is able to fund its operations through deposits as well as through advances from the FHLB-NY and other alternative sources, Oriental’s business is dependent upon other external wholesale funding sources. Oriental has selectively reduced its use of certain wholesale funding sources, such as repurchase agreements and brokered deposits. As of March 31, 2018, Oriental had $273.5 million in repurchase agreements, excluding accrued interest, and $474.6 million in brokered deposits.

Brokered deposits are typically offered through an intermediary to small retail investors. Oriental’s ability to continue to attract brokered deposits is subject to variability based upon a number of factors, including volume and volatility in the global securities markets, Oriental’s credit rating, and the relative interest rates that it is prepared to pay for these liabilities. Brokered deposits are generally considered a less stable source of funding than core deposits obtained through retail bank branches. Investors in brokered deposits are generally more sensitive to interest rates and will generally move funds from one depository institution to another based on small differences in interest rates offered on deposits.

Although Oriental expects to have continued access to credit from the foregoing sources of funds, there can be no assurance that such financing sources will continue to be available or will be available on favorable terms. In a period of financial disruption or if negative developments occur with respect to Oriental, the availability and cost of Oriental’s funding sources could be adversely affected. In that event, Oriental’s cost of funds may increase, thereby reducing its net interest income, or Oriental may need to dispose of a portion of its investment portfolio, which depending upon market conditions, could result in realizing a loss or experiencing other adverse accounting consequences upon any such dispositions. Oriental’s efforts to monitor and manage liquidity risk may not be successful to deal with dramatic or unanticipated changes in the global securities markets or other reductions in liquidity driven by Oriental or market-related events. In the event that such sources of funds are reduced or eliminated and Oriental is not able to replace these on a cost-effective basis, Oriental may be forced to curtail or cease its loan origination business and treasury activities, which would have a material adverse effect on its operations and financial condition.

As of March 31, 2018, Oriental had approximately $362.4 million in unrestricted cash and cash equivalents, $953.3 million in investment securities that are not pledged as collateral, $925.2 million in borrowing capacity at the FHLB-NY.

Operational Risk

Operational risk is the risk of loss from inadequate or failed internal processes, personnel and systems or from external events. All functions, products and services of Oriental are susceptible to operational risk.

Oriental faces ongoing and emerging risk and regulatory pressure related to the activities that surround the delivery of banking and financial products and services. Coupled with external influences such as the risk of natural disasters, market conditions, security risks, and legal risks, the potential for operational and reputational loss has increased. In order to mitigate and control operational risk, Oriental has developed, and continues to enhance, specific internal controls, policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization. The purpose of these policies and procedures is to provide reasonable assurance that Oriental’s business operations are functioning within established limits.

Oriental classifies operational risk into two major categories: business specific and corporate-wide affecting all business lines. For business specific risks, a risk assessment group works with the various business units to ensure consistency in policies, processes and assessments. With respect to corporate-wide risks, such as information security, business recovery, legal and compliance, Oriental has specialized groups, such as Information Security, Enterprise Risk Management, Corporate Compliance, Information Technology, Legal and Operations. These groups assist the lines of business in the development and implementation of risk management practices specific to the needs of the business groups. All these matters are reviewed and discussed in the executive Risk and Compliance Team. Oriental also has a Business Continuity Plan to address situations where its capacity to perform critical functions is affected. Under such circumstances, a Crisis Management Team is activated to restore such critical functions within established timeframes.

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Oriental is subject to extensive United States federal and Puerto Rico regulations, and this regulatory scrutiny has been significantly increasing over the last several years. Oriental has established and continues to enhance procedures based on legal and regulatory requirements that are reasonably designed to ensure compliance with all applicable statutory and regulatory requirements. Oriental has a corporate compliance function headed by a Chief Risk and Compliance Officer who reports to the Chief Executive Officer and supervises the BSA Officer and Regulatory Compliance Officer. The Chief Risk and Compliance Officer is responsible for the oversight of regulatory compliance and implementation of a company-wide compliance program, including the Bank Secrecy Act/Anti-Money Laundering compliance program.

Concentration Risk

Substantially all of Oriental’s business activities and a significant portion of its credit exposure are concentrated in Puerto Rico. As a consequence, Oriental’s profitability and financial condition may be adversely affected by an extended economic slowdown, adverse political, fiscal or economic developments in Puerto Rico or the effects of a natural disaster, all of which could result in a reduction in loan originations, an increase in non-performing assets, an increase in foreclosure losses on mortgage loans, and a reduction in the value of its loans and loan servicing portfolio.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of Oriental’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of Oriental’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon such evaluation, the CEO and the CFO have concluded that, as of the end of such period, Oriental’s disclosure controls and procedures provided reasonable assurance of effectiveness in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by Oriental in the reports that it files or submits under the Exchange Act. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute assurance that it will detect or uncover failures within Oriental to disclose material information otherwise required to be set forth in Oriental’s periodic reports.

Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2018, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART - II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Oriental and its subsidiaries are defendants in a number of legal proceedings incidental to their business. Oriental is vigorously contesting such claims. Based upon a review by legal counsel and the development of these matters to date, management is of the opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on Oriental’s financial condition or results of operations.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors previously disclosed in Oriental’s annual report on Form 10-K for the year ended December 31, 2017. In addition to other information set forth in this report, you should carefully consider the risk factors included in Oriental’s annual report on Form 10-K, as updated by this report or other filings Oriental makes with the SEC under the Exchange Act. Additional risks and uncertainties not presently known to Oriental at this time or that Oriental currently deems immaterial may also adversely affect Oriental’s business, financial condition or results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibit No. Description of Document:

10.1 Employment Agreement between Oriental and José R. Fernández.

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101 The following materials from OFG Bancorp’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Statements of Financial Condition, (ii) Unaudited Consolidated Statements of Operations, (iii) Unaudited Consolidated Statements of Comprehensive Income, (iv) Unaudited Consolidated Statements of Changes in Stockholders’ Equity, (v) Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

OFG Bancorp

(Registrant)


By:	/s/ José Rafael Fernández	Date: May 4, 2018
	José Rafael Fernández
	President and Chief Executive Officer

By:	/s/ Maritza Arizmendi	Date: May 4, 2018
	Maritza Arizmendi
	Executive Vice President and Chief Financial Officer

By:	/s/ Vanessa de Armas	Date: May 4, 2018
	Vanessa de Armas
	Controller

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