OFG BANCORP - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐ 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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common shares, par value $1.00 per share	OFG	New York Stock Exchange
7.125% Noncumulative Monthly Income Preferred Stock, Series A ($25.00 liquidation preference per share)	OFG.PRA	New York Stock Exchange
7.0% Noncumulative Monthly Income Preferred Stock, Series B ($25.00 liquidation preference per share)	OFG.PRB	New York Stock Exchange
7.125% Noncumulative Perpetual Preferred Stock, Series D ($25.00 liquidation preference per share)	OFG.PRD	New York Stock Exchange

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 ☑No☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑No ☐

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

Large Accelerated Filer ☑	Accelerated Filer ☐	Non-Accelerated Filer ☐	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 ☑

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

51,347,086 common shares ($1.00 par value per share) outstanding as of October 31, 2020

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION			Page
Item 1.	Financial Statements
	Unaudited Consolidated Statements of Financial Condition		3
	Unaudited Consolidated Statements of Operations		5
	Unaudited Consolidated Statements of Comprehensive Income		7
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity		8
	Unaudited Consolidated Statements of Cash Flows		9
	Notes to Unaudited Consolidated Financial Statements

		Note 1 – Significant Accounting Policies	12
		Note 2 – Business Combinations	19
		Note 3 – Restricted Cash	22
		Note 4 – Investment Securities	22
		Note 5 – Loans	27
		Note 6 – Allowance for Credit Losses	41
		Note 7 – Foreclosed Real Estate	44
		Note 8 – Servicing Assets	44
		Note 9 – Derivatives	46
		Note 10 – Core Deposit, customer relationship intangible and other intangibles	47
		Note 11 – Accrued Interest Receivable and Other Assets	47
		Note 12 – Deposits and Related Interest	48
		Note 13 – Borrowings and Related Interest	49
		Note 14 – Offsetting of Financial Assets and Liabilities	51
		Note 15 – Income Taxes	53
		Note 16 – Regulatory Capital Requirements	54
		Note 17 – Stockholders’ Equity	57
		Note 18 – Accumulated Other Comprehensive Income	58
		Note 19 – Earnings per Common Share	61
		Note 20 – Guarantees	61
		Note 21 – Commitments and Contingencies	64
		Note 22 – Operating Leases	65
		Note 23 – Fair Value of Financial Instruments	68
		Note 24 – Banking and Financial Service Revenues	74
		Note 25 – Business Segments	76

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		79
		Critical Accounting Policies and Estimates	81
		Selected Financial Data	84
		Financial Highlights of the Third Quarter of 2020	86
		Analysis of Results of Operations	87
		Analysis of Financial Condition	103
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		125
Item 4.	Controls and Procedures		129
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings		131
Item 1A.	Risk Factors		131
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		132
Item 3.	Default upon Senior Securities		132
Item 4.	Mine Safety Disclosures		132
Item 5.	Other Information		132
Item 6.	Exhibits		133
Signatures			134

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 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;

 a credit default by municipalities of the government of Puerto Rico;

 amendments to the fiscal plan approved by the Financial Oversight and Management Board for 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;

 unforeseen or catastrophic events, including extreme weather events, other natural disasters, man-made disasters or the emergence of pandemics, which could cause a disruption in our operations or other adverse consequences for our business;

 the impact of property, credit and other losses in Puerto Rico as a result of hurricanes, earthquakes and other natural disasters;

 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 and recent earthquakes;

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

 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;

 possible legislative, tax or regulatory changes;

 difficulties in integrating the acquired Puerto Rico operations of Scotiabank de Puerto Rico (“SBPR”) and certain branch assets and liabilities of The Bank of Nova Scotia (“BNS”) in Puerto Rico and the U.S. Virgin Islands (the “Scotiabank PR & USVI Acquisition”) into the Company’s operations;

 the emergence of widespread health emergencies or pandemics, including the magnitude and duration of the COVID-19 pandemic and its impact on the U.S., P.R., and/or global economy, financial market conditions and our business, results of operations and financial condition; and

 the impact of the actions taken by federal and local governmental authorities to try and contain the virus or address the impact of the virus on the United States and Puerto Rico economy (including, without limitation, the CARES Act), and the resulting effect of all of such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;

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; risk of impairment of investment securities, goodwill, other intangible assets or deferred tax assets; 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.

Other factors not identified above, including those described under the headings “Risk Factors”, "Quantitative and Qualitative Disclosures about Market Risk" and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 and in our Annual Report on Form 10-K for the year ended December 31, 2019 may also cause actual results to differ materially from those described in our forward-looking statements.

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 SEPTEMBER 30, 2020 AND DECEMBER 31, 2019

	September 30,		December 31,
	2020		2019
	(In thousands)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	2,267,383	$	844,532
Money market investments		14,617		6,775
Total cash and cash equivalents		2,282,000		851,307
Restricted cash		1,050		1,450
Investments:
Trading securities, at fair value, with amortized cost of $162 (December 31, 2019 - $182)		22		37
Investment securities available-for-sale, at fair value, with amortized cost of $412,900
(December 31, 2019, amortized cost $1,074,475); no allowance for credit losses for any period		423,815		1,074,169
Federal Home Loan Bank (FHLB) stock, at cost		8,322		13,048
Other investments		2,205		560
Total investments		434,364		1,087,814
Loans:
Loans held-for-sale, at lower of cost or fair value		54,526		19,591
Loans held for investment, net of allowance for credit losses of $235,313 (December 31, 2019 - $116,539)		6,524,614		6,622,256
Total loans		6,579,140		6,641,847
Other assets:
Foreclosed real estate		19,456		29,909
Accrued interest receivable		71,830		37,120
Deferred tax asset, net		178,957		176,740
Premises and equipment, net		83,270		81,105
Customers' liability on acceptances		18,291		21,599
Core deposit, customer relationship and other intangibles		48,650		56,965
Servicing assets		47,242		50,779
Goodwill		86,069		86,069
Operating lease right-of-use assets		35,900		39,112
Other assets		132,772		135,845
Total assets	$	10,018,991	$	9,297,661

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF SEPTEMBER 30, 2020 AND DECEMBER 31, 2019 (CONTINUED)

	September 30,		December 31,
	2020		2019
	(In thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits	$	4,682,991	$	3,579,115
Savings accounts		1,949,362		1,836,480
Time deposits		2,000,104		2,283,015
Total deposits		8,632,457		7,698,610
Borrowings:
Securities sold under agreements to repurchase		-		190,274
Advances from FHLB		66,543		78,009
Subordinated capital notes		36,083		36,083
Other borrowings		238		1,195
Total borrowings		102,864		305,561
Other liabilities:
Derivative liabilities		1,895		913
Acceptances executed and outstanding		18,291		21,599
Operating lease liabilities		37,029		39,840
Accrued expenses and other liabilities		162,133		185,660
Total liabilities		8,954,669		8,252,183
Commitments and contingencies (See Note 21)		nil		nil
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, 2019 - 1,340,000 shares; 1,380,000 shares; and 960,000 shares) $25 liquidation value		92,000		92,000
Common stock, $1 par value; 100,000,000 shares authorized; 59,885,234 shares issued: 51,344,586 shares outstanding (December 31, 2019 - 59,885,234;
51,398,956 )		59,885		59,885
Additional paid-in capital		621,978		621,515
Legal surplus		101,233		95,779
Retained earnings		284,053		279,646
Treasury stock, at cost, 8,540,648 shares (December 31, 2019 - 8,486,278 shares)		(103,095)		(102,339)
Accumulated other comprehensive income (loss), net of tax of $-753 (December 31, 2019 - $206)		8,268		(1,008)
Total stockholders’ equity		1,064,322		1,045,478
Total liabilities and stockholders’ equity	$	10,018,991	$	9,297,661

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019

	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2020		2019		2020		2019
	(In thousands, except per share data)
Interest income:
Loans	$	112,047	$	85,772	$	347,014	$	254,971
Mortgage-backed securities		1,498		3,553		5,890		17,465
Investment securities and other		1,392		4,330		7,422		10,184
Total interest income		114,937		93,655		360,326		282,620
Interest expense:
Deposits		14,620		10,554		46,685		29,594
Securities sold under agreements to repurchase		-		1,342		1,335		6,234
Advances from FHLB and other borrowings		476		550		1,521		1,671
Subordinated capital notes		308		499		1,091		1,537
Total interest expense		15,404		12,945		50,632		39,036
Net interest income		99,533		80,710		309,694		243,584
Provision for credit losses		13,669		43,770		78,496		73,724
Net interest income after provision for credit losses		85,864		36,940		231,198		169,860
Non-interest income:
Banking service revenue		16,297		10,813		45,678		32,054
Wealth management revenue		7,272		6,611		20,924		19,162
Mortgage banking activities		3,917		1,118		10,223		2,953
Total banking and financial service revenues		27,486		18,542		76,825		54,169

Net gain on:
Sale of securities		-		3,498		4,728		8,274
Early extinguishment of debt		-		-		(63)		(7)
Bargain purchase from Scotiabank PR & USVI acquisition		3,465		-		7,336		-
Other non-interest income		375		138		1,102		346
Total non-interest income, net		31,326		22,178		89,928		62,782

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019 (CONTINUED)

	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2020		2019		2020		2019
	(In thousands, except per share data)
Non-interest expense:
Compensation and employee benefits		31,955		20,500		102,005		60,716
Occupancy, equipment and infrastructure costs		11,943		7,307		35,220		22,564
Electronic banking charges		8,734		5,505		26,284		15,698
Information technology expenses		5,381		2,247		16,259		6,953
Professional and service fees		3,331		3,662		12,596		10,297
Taxes, other than payroll and income taxes		3,774		2,235		10,123		6,530
Insurance		2,428		(366)		8,667		2,057
Loss on sale of foreclosed real estate, other repossessed assets and credit related expenses		1,323		2,889		6,763		8,839
Loan servicing and clearing expenses		2,345		1,194		4,836		3,562
Advertising, business promotion, and strategic initiatives		1,481		1,333		4,643		3,859
Communication		1,117		956		2,993		2,556
Printing, postage, stationary and supplies		1,094		672		2,767		1,885
Director and investor relations		302		374		928		934
Merger and restructuring charges		2,681		1,556		5,991		2,556
Pandemic expenses		2,090		-		4,266		-
Other		3,465		663		11,906		5,325
Total non-interest expense		83,444		50,727		256,247		154,331
Income before income taxes		33,746		8,391		64,879		78,311
Income tax expense		6,308		1,008		13,853		23,479
Net income		27,438		7,383		51,026		54,832
Less: dividends on preferred stock		(1,628)		(1,628)		(4,884)		(4,884)
Income available to common shareholders	$	25,810	$	5,755	$	46,142	$	49,948
Earnings per common share:
Basic	$	0.50	$	0.11	$	0.90	$	0.97
Diluted	$	0.50	$	0.11	$	0.89	$	0.97
Average common shares outstanding and equivalents		51,527		51,772		51,563		51,695
Cash dividends per share of common stock	$	0.07	$	0.07	$	0.21	$	0.21

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019


	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2020		2019		2020		2019
	(In thousands)

Net income	$	27,438	$	7,383	$	51,026	$	54,832
Other comprehensive income (loss) before tax:
Unrealized gain (loss) on securities available-for-sale		661		5,111		15,949		19,063
Realized gain on sale of securities available-for-sale		-		(3,498)		(4,728)		(8,274)
Unrealized (loss) gain on cash flow hedges		181		(188)		(987)		(1,160)
Other comprehensive income before taxes		842		1,425		10,234		9,629
Income tax effect		(162)		(197)		(958)		(1,124)
Other comprehensive income after taxes		680		1,228		9,276		8,505
Comprehensive income	$	28,118	$	8,611	$	60,302	$	63,337

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY

FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019


	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2020		2019		2020		2019
	(In thousands)
Preferred stock:
Balance at beginning of period	$	92,000	$	92,000	$	92,000	$	92,000
Balance at end of period		92,000		92,000		92,000		92,000
Common stock:
Balance at beginning of period		59,885		59,885		59,885		59,885
Balance at end of period		59,885		59,885		59,885		59,885
Additional paid-in capital:
Balance at beginning of period		621,860		620,368		621,515		619,381
Stock-based compensation expense		144		580		1,468		1,567
Lapsed restricted stock units		(26)		-		(1,005)		-
Balance at end of period		621,978		620,948		621,978		620,948
Legal surplus:
Balance at beginning of period		98,347		95,019		95,779		90,167
Transfer from retained earnings		2,886		764		5,454		5,616
Balance at end of period		101,233		95,783		101,233		95,783
Retained earnings:
Balance at beginning of period		264,724		284,459		279,646		253,040
Topic 326 adoption		-		-		(25,494)		-
Topic 842 adoption		-		-		-		(736)
Balance at beginning of period (as adjusted for change in accounting principle)		264,724		284,459		254,152		252,304
Net income		27,438		7,383		51,026		54,832
Cash dividends declared on common stock		(3,595)		(3,596)		(10,787)		(10,782)
Cash dividends declared on preferred stock		(1,628)		(1,628)		(4,884)		(4,884)
Transfer to legal surplus		(2,886)		(764)		(5,454)		(5,616)
Balance at end of period		284,053		285,854		284,053		285,854
Treasury stock:
Balance at beginning of period		(103,121)		(103,171)		(102,339)		(103,633)
Stock repurchased		-		-		(2,226)		-
Lapsed restricted stock units and options		26		235		1,470		697
Balance at end of period		(103,095)		(102,936)		(103,095)		(102,936)
Accumulated other comprehensive income (loss), net of tax:
Balance at beginning of period		7,588		(3,686)		(1,008)		(10,963)
Other comprehensive income, net of tax		680		1,228		9,276		8,505
Balance at end of period		8,268		(2,458)		8,268		(2,458)
Total stockholders’ equity	$	1,064,322	$	1,049,076	$	1,064,322	$	1,049,076

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019


	Nine-Month Period Ended September 30,
	2020		2019
	(In thousands)
Cash flows from operating activities:
Net income	$	51,026	$	54,832
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred loan origination fees and fair value (discounts) premiums on loans		(7,606)		3,250
Amortization of fair value premiums on acquired deposits		(1,955)		-
Amortization of investment securities premiums, net of accretion of discounts		4,142		3,905
Amortization of core deposit, customer relationships and other intangibles		8,315		877
Net change in operating leases		401		(95)
Depreciation and amortization of premises and equipment		9,382		6,265
Deferred income tax expense, net		12,127		476
Provision for credit losses		78,496		73,724
Stock-based compensation		1,468		1,567
Bargain purchase from Scotiabank PR & USVI acquisition		(7,336)		-
(Gain) loss on:
Sale of securities		(4,728)		(8,274)
Sale of loans		(2,202)		(380)
Early extinguishment of debt		63		7
Foreclosed real estate and other repossessed assets		1,078		2,666
Sale of other assets		(7)		(80)
Originations and purchases of loans held-for-sale		(143,394)		(59,879)
Proceeds from sale of loans held-for-sale		2,188		15,208
Net (increase) decrease in:
Trading securities		15		319
Other investments		-		(54)
Accrued interest receivable		(29,996)		3,784
Servicing assets		3,537		591
Other assets		3,320		463
Net increase (decrease) in:
Accrued interest on deposits and borrowings		(4,038)		(1,875)
Accrued expenses and other liabilities		13,438		(56,288)
Net cash (used in) provided by operating activities		(12,266)		41,009

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019 (CONTINUED)

	Nine-Month Period Ended September 30,
	2020		2019
	(In thousands)
Cash flows from investing activities:
Purchases of:
Investment securities available-for-sale		60,282		(1,117)
FHLB stock		-		(1,167)
Other investments		(1,645)		-
Maturities and redemptions of:
Investment securities available-for-sale		389,139		129,027
FHLB stock		4,726		3,286
Proceeds from sales of:
Investment securities available-for-sale		320,984		680,466
Foreclosed real estate and other repossessed assets, including write-offs		25,517		37,115
Loans held-for-investment		-		14,668
Fully charged-off loans		-		2,382
Premises and equipment		7		2,113
Origination and purchase of loans, excluding loans held-for-sale		(1,101,167)		(834,486)
Principal repayment of loans		1,060,606		722,367
Additions to premises and equipment		(11,512)		(9,160)
Outlays for business acquisitions		402		-
Net cash provided by investing activities	$	747,339	$	745,494

Cash flows from financing activities:
Net increase (decrease) in:
Deposits		915,076		5,242
Securities sold under agreements to repurchase		(190,063)		(264,730)
FHLB advances, federal funds purchased, and other borrowings		(12,361)		775
Exercise of stock options with treasury shares		465		697
Purchase of treasury stock		(2,226)		-
Dividends paid on preferred stock		(4,884)		(4,881)
Dividends paid on common stock		(10,787)		(10,782)
Net cash provided by (used in) financing activities	$	695,220	$	(273,679)
Net change in cash, cash equivalents and restricted cash		1,430,293		512,824
Cash, cash equivalents and restricted cash at beginning of period		852,757		450,063
Cash, cash equivalents and restricted cash at end of period	$	2,283,050	$	962,887
Reconciliation of the Consolidated Statements of Cash Flows to the Consolidated Balance Sheets:
Cash and due from banks	$	2,267,383	$	953,802
Money market investments		14,617		8,035
Restricted cash		1,050		1,050
Total cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	2,283,050	$	962,887
Supplemental Cash Flow Disclosure and Schedule of Non-cash Activities:
Interest paid	$	40,385	$	39,710
Income taxes paid	$	5,941	$	36,924
Operating lease liabilities paid	$	9,747	$	5,174
Mortgage loans securitized into mortgage-backed securities	$	108,244	$	45,716
Transfer from held-to-maturity securities to available-for-sale securities	$	-	$	424,740
Transfer from loans to foreclosed real estate and other repossessed assets	$	14,733	$	34,532
Reclassification of loans held-for-investment portfolio to held-for-sale portfolio	$	261	$	25,933

Reclassification of loans held-for-sale portfolio to held-for-investment portfolio	$	-	$	49
Financed sales of foreclosed real estate	$	-	$	1,016
Interest capitalized on loans subject to the temporary payment moratorium	$	35,593	$	-
Loans booked under the GNMA buy-back option	$	62,651	$	11,403
Initial recognition of operating lease right-of-use assets	$	-	$	21,930
Initial recognition of operating lease liabilities	$	-	$	23,689
See notes to unaudited consolidated financial statements

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

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 LLC (“Oriental Financial Services”), an insurance agency, Oriental Insurance, LLC (“Oriental Insurance”), and a retirement plan administrator, Oriental Pension Consultants, Inc. (“OPC”), and OFG Ventures LLC (“OFG Ventures”). Oriental also has a special purpose entity, Oriental Financial (PR) Statutory Trust II (the “Statutory Trust II”) through which it issued trust preferred securities. Through its operating subsidiaries and their respective divisions, Oriental provides a wide range of banking and financial services such as commercial, consumer and mortgage lending, leasing, 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.” On December 31, 2019, Oriental purchased from the BNS all outstanding common stock of Scotiabank de Puerto Rico (“SBPR”). Immediately following the closing of the Scotiabank Acquisition, Oriental merged SBPR with and into Oriental Bank, with Oriental Bank continuing as the surviving entity. As part of this transaction, Oriental Bank also acquired the U.S. Virgin Islands banking operations of BNS through an acquisition of certain assets and an assumption of certain liabilities, and certain loans and assumed certain liabilities from BNS’s Puerto Rico branch. This transaction is referred to as the “Scotiabank PR & USVI Acquisition.” These acquired businesses have been integrated for financial reporting purposes.

During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of Coronavirus (Covid-19). The pandemic has significantly impacted economic conditions in P.R. and the U.S., creating significant uncertainties. After recent disruptions in economic conditions caused by Covid-19, Oriental offered several deferral programs for the payment of principal and interest for all of its loan portfolios for customers whose payments were not over 89 days past due at March 12, 2020. Refer to footnotes for further disclosure associated to this event.

Basis of Presentation

The accompanying unaudited consolidated financial statements of Oriental have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and in accordance with guidance provided by the Securities and Exchange Commission. Accordingly, these consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows of Oriental on a consolidated basis, and all such adjustments are of a normal recurring nature. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Operating results for the quarter and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The Company evaluated subsequent events through the filing date of its quarterly report on Form 10-Q with the SEC and has recorded or disclosed those material events or transactions as described within the accompanying consolidated financial statements and notes.

Significant Accounting Policies

Oriental’s significant accounting and reporting policies can be found in Note 1 of the Company’s annual financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

New Accounting Updates Adopted in 2020

Accounting for Financial Instruments -- Credit Losses

On January 1, 2020, Oriental adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity debt securities, receivables and other financial assets measured at amortized cost at the time the financial asset is originated or acquired. The allowance for credit losses is adjusted each period for changes in expected lifetime credit losses. The CECL methodology represents a significant change from prior U.S. GAAP and replaced the prior multiple existing impairment methods, which generally required that a loss be incurred before it was recognized. The CECL standard also requires credit losses related to AFS debt securities to be recorded through an allowance for credit losses. Our adoption of this standard on January 1, 2020 did not have an impact on our portfolio of AFS debt securities.

We adopted CECL using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposures. Upon adoption, we recognized an after-tax cumulative effect reduction to retained earnings totaling $25.5 million, as detailed in the table below. Operating results for periods after January 1, 2020 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies described in our 2019 Form 10-K.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table details the impact of the adoption of CECL on the assets, liabilities and retained earnings as of January 1, 2020.

	January 1, 2020
	Pre-Adoption		Impact of adoption		Post-Adoption		Cumulative Effect on Retained Earnings
	(In thousands)
Assets:
Investment securities available for sale	$	1,074,169	$	-	$	1,074,169	$	-
Deferred tax asset		176,740		13,874		190,614		13,874
Loans
Commercial		2,222,085		42,143		2,264,228		-
Mortgage		2,508,821		7,830		2,516,651		-
Consumer		504,507		181		504,688		-
Auto		1,522,973		368		1,523,341		-
		6,758,386		50,522		6,808,908		-
Allowance for credit losses on loans
Commercial		(34,886)		(45,705)		(80,591)		(3,562)
Mortgage		(30,382)		(18,810)		(49,192)		(10,980)
Consumer		(18,446)		(8,599)		(27,045)		(8,418)
Auto		(32,825)		(16,606)		(49,431)		(16,238)
		(116,539)		(89,720)		(206,259)		(39,198)
Net loans		6,641,847		(39,198)		6,602,649		(39,198)

Liabilities:
Allowance for credit losses on off-balance sheet credit exposures		3,688		170		3,858		170
	$	7,889,068	$	(25,494)	$	7,863,574	$	(25,494)

In connection with the adoption of CECL, we revised certain accounting policies and implemented certain accounting policy elections. The revised accounting policies are described below.

Investment securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them until maturity. Oriental had no securities classified as held to maturity on September 30, 2020 or December 31, 2019. Securities to be held for indefinite periods of time are classified as available for sale and carried at fair value, with the unrealized holding gains and losses (those for which no allowance for credit losses are recorded) reported as a component of other comprehensive income, net of tax. Securities held for resale in anticipation of short-term market movements are classified as trading and are carried at fair value, with changes in unrealized holding gains and losses included in income. Management determines the appropriate classification of securities at the time of purchase. Securities with limited marketability, such as stock in the Federal Reserve Bank and the Federal Home Loan Bank, are carried at cost.

Premiums and discounts are amortized to interest income over the life of the related securities using the interest method. Net realized gains or losses on sales of investment securities and unrealized gains and losses valuation adjustments considered other than temporary, if any, on securities classified as either available-for-sale or held-to-maturity are reported separately in the statements of operations. The cost of securities sold is determined by the specific identification method.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Allowance for credit losses – available-for-sale securities: For available-for-sale investment securities in an unrealized loss position, Oriental first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For investment securities available-for-sale that do not meet the aforementioned criteria, Oriental evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of security. If the present value of cash flows expected to be collected is less than amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

All securities held by Oriental are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses.

Management has made the accounting policy election to exclude accrued interest receivable on available-for-sale securities from the estimate of credit losses. Accrued interest receivable on available-for-sale debt securities totaled $1.6 million and $4.1 million on September 30, 2020 and December 31, 2019, respectively, reported in accrued interest receivable on the consolidated statement of financial condition.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs. Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses, except for accrued interest receivable on loans that participated in the Covid-19 deferral programs. Oriental has elected to estimate expected credit losses on accrued interest receivable for loans that participated in the Covid-19 deferral programs separately from other components of the amortized costs basis. Accrued interest receivable totaled $70.2 million and $32.7 million on September 30, 2020 and December 31, 2019, respectively, reported in accrued interest receivable on the consolidated statement of financial condition. Accrued interest receivable on loans that participated in the Covid-19 deferral programs amounted to $43.1 million at September 30, 2020, $39.2 million corresponds to loans in current status. Allowance for credit losses for accrued interest receivable on loans that participated in the Covid-19 deferral programs amounted to $826 thousand at September 30, 2020. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income through the life of the loan.

Loans held for investment that were not purchased with credit deterioration are referred to as Non-PCD loans and loans that were purchased with credit deterioration are referred to as PCD loans.

Oriental discontinues accrual of interest after payments become more than 90 days past due or earlier if Oriental does not expect the full collection of principal or interest, except for residential mortgage loans insured or guaranteed under applicable FHA and VA programs that are not placed in non-accrual status until they become 12 months or more past due, as they are insured loans. At that time, any accrued income is reversed. The delinquency status is based upon the contractual terms of the loans. Loans for which the recognition of interest income has been discontinued are designated as non-accruing. Collections are accounted for on the cash method thereafter, until qualifying to return to accrual status. Such loans are not reinstated to accrual status until interest is received on a current basis and other factors indicative of doubtful collection cease to exist. The determination as to the ultimate collectability of the loan’s balance may involve management’s judgment in the evaluation of the borrower’s financial condition and prospects for repayment. Interest income is based on contractual yield on the Non-PCD loans.

Purchased Credit Deteriorated (PCD) Loans: Oriental has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. Oriental considered the following factors as indicators that an acquired loan had evidence of deterioration in credit quality: loans that were 90 days or more past due; loans that had an internal loan grade of substandard or worse - substandard loans have a well-defined weakness that jeopardizes collection of the loan; loans that were classified as nonaccrual by the acquired bank at the time of acquisition; and loans that had been previously modified in a troubled debt restructuring. As such, our PCD loans are recorded at the purchase price plus the allowance for credit losses expected at the time of acquisition or implementation of the standard. An allowance for credit losses is determined using an undiscounted cashflow methodology.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Upon adoption of CECL, Oriental elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. As such, for these loans the determination of nonaccrual or accrual status is made at the pool level, not the individual loan level. Upon adoption of CECL, the allowance for credit losses was determined for each pool and added to the pool’s carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the pool and the new amortized cost basis is the non-credit premium or discount which will be amortized interest income over the remaining life of the pool. On a quarterly basis, management will monitor the composition and behavior of the pools to assess the ability for cash flow estimation and timing. If based on the analysis performed, the pool is classified as non-accrual the accretion/amortization of the non-credit (discount) premium will cease. Changes to the allowance for credit losses after adoption are recorded through the provision expense.

Allowance for Credit Losses (“ACL”) – Loans: The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Determining the amount of the ACL is complex and requires extensive judgment by management about matters that are inherently uncertain. Re-evaluation of the ACL estimate in future periods in light of changes in composition and characteristics of the loan portfolio, changes in the reasonable and supportable forecast and other factors then prevailing may result in material changes in the amount of the ACL and credit loss expense in those future periods. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed. Oriental continues to monitor and modify the level of the ACL to ensure it is adequate.

Our methodology for estimating lifetime expected credit losses for our loan portfolios include the following key components:

 Expected credit losses are estimated on a collective basis for groups of loans that share similar risk characteristics. Factors that may be considered in aggregating loans for this purpose include but are not necessarily limited to, product or collateral type, internal risk rating, credit characteristics such as credit scores or collateral values, and historical or expected credit loss patterns.

 Credit losses for loans that do not share similar risk characteristics are estimated on an individual basis. Individual evaluations are typically performed for nonaccrual loans and modified loans classified as troubled debt restructurings. The lifetime losses for individually measured loans are estimated based on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows.

 ACL reserves are estimated over the contractual term of the financial asset adjusted for expected prepayments. Expected extensions are generally not considered unless the option to extend the loan cannot be canceled unilaterally by Oriental. Loan modifications are also not considered, unless Oriental has a reasonable expectation that it will execute a troubled debt restructuring (“TDR”). In the case of unconditionally cancelable accounts, such as credit cards, reserves are based on the expected life of the balance as of the evaluation date (assuming no further charges) and do not include any undrawn commitments that are unconditionally cancelable.

 The quantitative model utilizes a discounted cash flow (“DCF”) or undiscounted cash flow (“UDCF”) approach to estimate expected credit losses using probability of default (“PD”), loss given default (“LGD”), and exposure at default ("EAD”). DCF method is used for most of the Non-PCD portfolio using the amortization cost, and UDCF method for the PCD portfolio using the unpaid principal balance.

 An economic forecast period based on the relation of losses with key economic variables for each portfolio segment; Oriental has elected a 2-year reasonable and supportable forecast period, with an additional 1-year to mean straight-line reversion occurring within the credit loss models based on the economic inputs. The length of the reasonable and supportable forecast is evaluated at each reporting period and adjusted if deemed necessary.

 Inclusion of qualitative adjustments to consider factors that have not been accounted. For example, factors that Oriental considers include changes in lending policies and procedures, business conditions, the nature and size of the portfolio, portfolio concentrations, the volume and severity of past due loans and nonaccrual loans, the effect of external factors such as competition, and legal and regulatory requirements, among others.

 The estimate of credit losses includes expected recoveries of amounts previously charged off (i.e., negative allowance) as well as consideration of expected amounts to be written off. If a loan has been charged off, the expected cash flows on the loan are not limited by the current amortized cost balance. Instead, expected cash flows can be assumed up to the unpaid principal balance immediately prior to the charge-off.

 The ACL excludes accrued interest since all our products are subject to a non-accrual and timely write-off policy, except for accrued interest receivable on loans that participated in the Covid-19 deferral programs with delinquency status in 30 to 89 days past due and is calculated by applying the corresponding loan projected loss factors to the accrued interest receivable balance.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In our loss forecasting framework, Oriental incorporates forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets. These macroeconomic scenarios include variables that have historically been key drivers of increases and decreases in credit losses. These variables include, but are not limited to, unemployment rates, real estate prices, gross domestic product levels, business and personal bankruptcies. As any one economic outlook is inherently uncertain, Oriental leverages multiple scenarios. The scenarios that are chosen each quarter and the amount of weighting given to each scenario depend on a variety of factors including recent economic events, leading economic indicators, views of internal as well as third-party economists and industry trends.

The ACL for troubled debt restructurings (TDR) is measured based on the present value of projected future lifetime principal and interest cash flows discounted at the loan’s effective interest rate, or in cases where foreclosure is probable or the loan is collateral dependent, at the loan’s collateral value or its observable market price, if available. For purposes of computing the specific loss component of the allowance, larger impaired loans are evaluated individually, and smaller impaired loans are evaluated as a pool.

Oriental has identified the following portfolio segments, commercial loans, mortgage loans, consumer loans, and auto loans and leases, and measures the allowance for credit losses using the methods described below for each.

Commercial Loans – The segmentation of commercial loans was established by business line, collateral type, and size, delinquency or risk rating/classification to assess the loans based on common risk characteristics. The segmentation aligns with Oriental’s current credit policies, and procedures for these portfolios. The estimate of lifetime expected credit losses on commercial loans is forecasted using models that estimate credit losses over the loan’s contractual life at an individual loan level. The models use the contractual terms to forecast future principal cash flows while also considering expected prepayments, considering that all our lines of credit are unconditionally cancellable. The loss forecasting model determines the probabilities of transition to different credit risk ratings or default at each point over the life of the asset based on the borrower’s current credit risk rating and business segment. Assumptions of expected loss are conditioned to the economic outlook and the model considers key economic variables such as unemployment rate, gross national product (“GNP”) (P.R. projections), gross domestic product (U.S. projections) and retail sales (U.S. projections).

Loans that do not share risk characteristics are evaluated on an individual basis. Individual evaluations are typically performed for nonaccrual loans and modified loans classified as troubled debt restructurings. Loans evaluated individually are not included in the collective evaluation. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate, as Oriental elected the collateral-dependent practical expedient. For loans evaluated individually that are not collateral dependent, a discounted cash flow method is used to determine the allowance for credit losses.

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.

Mortgage Loans – This segment includes traditional mortgages, non-traditional mortgages, mortgages in the loss mitigation program, residential performing TDRs and residential non-performing TDRs. Since these are large groups of smaller balance homogeneous loans, these are collectively evaluated. To estimate the lifetime expected credit losses for mortgage loans, Oriental estimates the number of loans that will default over the life of the existing portfolio, after factoring in estimated prepayments, using quantitative modeling methodologies. The most significant attribute in estimating Oriental’s lifetime expected credit losses is the vintage. The estimates are based on Oriental’s historical experience with the loan portfolio, adjusted to reflect the economic outlook. The outlook on the housing price index and GNP are key factors that impact the frequency and severity of loss estimates. Oriental expects to collect the amortized cost basis of government insured residential loans due to the nature of the government guarantee, so the quantitative ACL is zero for these loans.

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. For loans that are more than 180 days past due, with the exception of Oriental’s fully insured portfolio, the outstanding balance of loans that is in excess of the estimated property value after adjusting for costs to sell is charged off. If the estimated property value decreases in periods subsequent to the initial charge-off, Oriental will record additional charge-offs.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Consumer Loans – This portfolio consists of smaller retail loans such as unsecured personal loans, unsecured personal lines of credit, retail credit cards and overdrafts. Since these are large groups of smaller balance homogeneous loans, these are collectively evaluated. To estimate the lifetime expected credit losses for consumer loans, Oriental estimates the number of loans that will default over the life of the existing portfolio, using quantitative modeling methodologies. The estimates are based on the Oriental’s historical experience with the loan portfolios, adjusted to reflect the economic outlook. The outlook on the GNP and unemployment rate are key factors that impact the frequency and severity of loss estimates. Credit cards are revolving lines of credit without a defined maturity date. Oriental elected to apply the remaining life methodology for the credit cards and revolving line segments. The remaining life methodology takes projected losses based on economic forecast and applies it to a pool of loans on a periodic basis, based on the remaining life expectation of that pool. Economic variables for the forecast are unemployment and personal bankruptcy. Future draws on the credit card lines are excluded from the estimated lifetime expected credit losses as they are unconditionally cancellable.

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.

Auto Loans and Leases - This portfolio consists of auto loans and leases. Since these are large groups of smaller balance homogeneous loans, these are collectively evaluated. To estimate the lifetime expected credit losses for auto loans and leases, Oriental estimates the number of loans that will default over the life of the existing portfolio, after factoring in estimated prepayments, using quantitative modeling methodologies. The most significant attribute in estimating Oriental’s lifetime expected credit losses is the FICO score. The estimates are based on Oriental’s historical experience with the loan portfolio, adjusted to reflect the economic outlook. The outlook on the GNP and unemployment are key factors that impact the frequency and severity of loss estimates.

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.

Off-Balance Sheet Credit Exposures

In the ordinary course of business, Oriental enters into off-balance sheet instruments consisting of commitments to extend credit. Such financial instruments are recorded in the financial statements when these are funded, or related fees are incurred or received. Oriental periodically evaluates the credit risks inherent in these commitments and establishes accruals for such risks if and when these are deemed necessary.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: Oriental also estimates the lifetime expected credit losses related to unfunded lending commitments such as letters of credit, financial guarantees, unfunded banker’s acceptances and binding loan commitments. Reserves are estimated for the unfunded exposure using the same factors as the funded exposure and are reported as reserves for unfunded lending commitments.

Other Financial Assets with Zero Expected Credit Losses

For certain financial assets, zero expected credit losses will be recognized where the expectation of nonpayment of the amortized cost basis is zero, based on there being no history of loss and the nature of the receivables.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Troubled Debt Restructurings

Oriental has implemented various consumer and commercial loan modification programs to provide its borrowers relief from the economic impacts of Covid-19. The majority of Oriental’s Covid-19 related loan modifications have not been considered TDRs as

they represent short-term or other insignificant modifications, whether under Oriental’s regular loan modification assessments or the Inter Agency Statement guidance; or Oriental has elected to apply the option to suspend the application of accounting guidance for TDRs as provided under section 4013 of the CARES Act. To the extent that certain modifications do not meet any of the above criteria, Oriental accounts for them as TDRs. For loan modifications that include a payment deferral and are not TDRs, the borrower’s past due and nonaccrual status will not be impacted during the deferral period. These loans are not considered past due until after the deferral period is over and scheduled payments resume. Accrued interest on these Covid-19 modified loans is due when the deferral period ends. The credit quality of these loans will be re-evaluated after the deferral period ends. Nonaccrual loans are generally loans placed on a nonaccrual basis when they become 90 days past due or when there are otherwise serious doubts about the collectability of principal or interest within the existing terms of the loan. Oriental's policy is to write-off all accrued interest on loans when they are placed on nonaccrual status. Interest income will continue to be recognized over the contractual life of the loan. For more information on Oriental's TDR accounting, see Note 1 – Summary of Significant Accounting Policies to the Consolidated Financial Statements of Oriental’s 2019 Annual Report on Form 10-K.

Cloud computing arrangements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued updated guidance that is intended to reduce potential diversity in practice in accounting for the costs of implementing cloud computing arrangements (i.e., hosting arrangements) that are service contracts. The updated guidance aligns the requirements for capitalizing implementation costs for these arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019. The adoption of this guidance, effective January 1, 2020, did not have a material impact on Oriental’s consolidated financial statements.

Fair value measurements

In August 2018, the FASB issued updated guidance as part of its disclosure framework project intended to improve the effectiveness of disclosures in the notes to the financial statements. The updated guidance eliminates, adds and modifies certain disclosure requirements related to fair value measurements. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019. The adoption of this guidance, effective January 1, 2020, did not have a material impact on the Company’s consolidated financial statements.

Goodwill

In January 2017, the FASB issued updated guidance intended to simplify how an entity tests goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under the updated guidance, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the loss recognized limited to the total amount of goodwill allocated to that reporting unit. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019. The adoption of this guidance, effective January 1, 2020, did not have a material impact on the Company’s consolidated financial statements.

NOTE 2 – BUSINESS COMBINATIONS

On December 31, 2019, Oriental purchased from the Bank of Nova Scotia (“BNS”) all outstanding common stock of Scotiabank de Puerto Rico for an aggregate purchase price of $550.0 million, subject to settlement amounts as described herein. Immediately following the closing, Oriental merged Scotiabank de Puerto Rico with and into Oriental Bank, with Oriental Bank continuing as the surviving entity. As part of this transaction, Oriental Bank also acquired the U.S. Virgin Islands banking operations of BNS through an acquisition of certain assets (including loans, ATMs and physical branch locations) and an assumption of certain liabilities (including deposits) for their net book value plus a $10.0 million premium on deposits which were settled as part of the final consideration from the acquisition. In addition, Oriental acquired certain loans and assumed certain liabilities, from BNS’s Puerto Rico branch for their net book value which were settled as part of the final consideration from the acquisition.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The assets acquired and liabilities assumed as of December 31, 2019 were presented at their fair value. In many cases, the determination of these fair values required management to make estimates about discount rates, expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. The fair values initially assigned to the assets acquired and liabilities assumed were preliminary and subject to refinement for up to one year after the closing date of the acquisition as new information relative to closing date fair values became available. During the nine-month period ended September 30, 2020, Oriental recorded remeasurement adjustments to the preliminary estimated fair values of certain accrued interest receivables that have not been received, the deferred tax asset and accounts receivables to reflect new information obtained during the measurement period (as defined by ASC Topic 805), about facts and circumstances that existed as of the acquisition date that, if known, would have affected the acquisition-date fair value measurements. As detailed in the table below, the adjustment occurred in accrued interest receivable, deferred tax asset, and other assets acquired. The adjustment resulted from the fair value determination of certain accrued interest receivable of loans accounted for under ASC 310-30 and from the receipt of funds from BNS for certain intercompany transactions.

	December 31, 2019						Measurement		Fair Value
			Fair Value				Period		as
	Book Value		Adjustments, net		Fair Value		Adjustments		Remeasured
	(In thousands)

Cash and cash equivalents	$	492,512	$	-	$	492,512	$	-	$	492,512
Investments		576,319		(102)		576,217		-		576,217
Loans		2,237,337		(21,134)		2,216,203		-		2,216,203
Accrued interest receivable		7,722		(2,952)		4,770		5,540		10,310
Foreclosed real estate		8,636		(352)		8,284		-		8,284
Deferred tax asset, net		37,606		22,335		59,941		1,386		61,327
Premises and equipment		10,866		(1,068)		9,798		-		9,798
Servicing asset		40,258		206		40,464		-		40,464
Core deposit intangible		-		41,507		41,507		-		41,507
Customer relationship intangible		-		12,693		12,693		-		12,693
Other intangible		-		567		567		-		567
Operating lease right-of-use assets		15,452		4,011		19,463		-		19,463
Other assets		86,016		(6,507)		79,509		410		79,919
Total identifiable assets acquired		3,512,724		49,204		3,561,928		7,336		3,569,264

Deposits		3,028,066		(2,607)		3,025,459		-		3,025,459
Operating lease liability		16,317		2,091		18,408		-		18,408
Accrued expenses and other liabilities		87,309		-		87,309		-		87,309
Total liabilities assumed		3,131,692		(516)		3,131,176		-		3,131,176
Total identifiable net assets					$	430,752	$	7,336	$	438,088
Bargain purchase gain						315		7,336		7,651
Total consideration					$	430,437	$	-	$	430,437

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Merger and Restructuring Charges

Merger and restructuring charges are recorded in the consolidated statement of operations and include incremental costs to integrate the operations of Oriental and its most recent acquisition. These charges represent costs associated with these one-time activities and do not represent ongoing costs of the fully integrated combined organization. These costs were recorded in merger and restructuring charges within the consolidated statement of operations.

The following table presents severance and employee charges, systems integrations charges, and other merger and restructuring charges, related to the Scotiabank PR & USVI Acquisition, for the quarter and nine-month period ended September 30, 2020:

	Quarter Ended September 30,		Nine-Month Period Ended September 30,
	2020		2020
	(In thousands)		(In thousands)
Severance and employee-related charges	$	-	$	33
Systems integrations and related charges		2,282		5,424
Other		399		534
Total merger and restructuring charges	$	2,681	$	5,991

Restructuring Reserve

Restructuring reserves are established by a charge to merger and restructuring charges, and the restructuring charges are included in the merger and restructuring charges table.

The following table presents the changes in restructuring reserves for the quarter and nine-month period ended September 30, 2020:

	Quarter Ended September 30,		Nine-Month Period Ended September 30,
	2020		2020
	(In thousands)		(In thousands)
Balance at the beginning of the period	$	16,388	$	17,491
Merger and restructuring charges		2,681		5,991
Cash payments		(7,164)		(11,577)
Balance at the end of the period	$	11,905	$	11,905

Payments under merger and restructuring reserves associated with the Scotiabank PR & USVI Acquisition are expected to continue into 2020 and will be under applicable accounting guidance to the cost being incurred.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 3 – RESTRICTED CASH

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

	September 30,		December 31,
	2020		2019
	(In thousands)
Cash pledged as collateral to other financial institutions to secure:
Regulatory requirements	$	-	$	400
Obligations under agreement of loans sold with recourse		1,050		1,050
	$	1,050	$	1,450

At September 30, 2020 and December 31, 2019, the Bank’s international banking entities, OIB and Oriental Overseas, a division of the Bank, held short-term highly liquid securities in the amount of $305 thousand and $325 thousand, respectively, as the legal reserve required for international banking entities under Puerto Rico law. In addition, as part of the Scotiabank PR & USVI acquisition on December 31, 2019, a certificate of deposit of $300 thousand was held for the international banking entity that was retained as part of the integration. As of September 30, 2020, the entity held a $325 thousand in short term high liquidity securities. These instruments cannot be withdrawn or transferred without the prior written approval of the Office of the Commissioner of Financial Institutions of Puerto Rico (the "OCFI").

As part of regulatory requirements for the administration of Individual Retirement Accounts (IRAs), Scotiabank maintained $100 thousand on a certificate of deposit that was registered as part of the integration on December 31, 2019. This certificate matured and was not renewed.

Oriental has a contract with FNMA which requires collateral to guarantee the repurchase, if necessary, of loans sold with recourse. At both, September 30, 2020 and December 31, 2019, 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 September 30, 2020 was $416.1 million (December 31, 2019 - $289.3 million). At September 30, 2020 and December 31, 2019, the Bank complied with this requirement. Cash and due from bank as well as other short-term, highly liquid securities, are used to cover the required average reserve balances.

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 September 30, 2020 and December 31, 2019, money market instruments included as part of cash and cash equivalents amounted to $14.6 million and $6.8 million, respectively.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Investment Securities

The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the securities owned by Oriental at September 30, 2020 and December 31, 2019 were as follows:

	September 30, 2020
			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	$	135,067	$	4,897	$	-	$	139,964	1.96%
GNMA certificates		141,412		4,480		-		145,892	2.29%
CMOs issued by US government-sponsored agencies		42,816		1,048		-		43,864	1.97%
Total mortgage-backed securities		319,295		10,425		-		329,720	2.11%
Investment securities
US Treasury securities		91,109		422		-		91,531	1.61%
Obligations of US government-sponsored agencies		1,688		26		-		1,714	1.39%
Other debt securities		808		42		-		850	2.99%
Total investment securities		93,605		490		-		94,095	1.62%
Total securities available for sale	$	412,900	$	10,915	$	-	$	423,815	2.00%

	December 31, 2019
			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	$	403,227	$	846	$	1,417	$	402,656	2.00%
GNMA certificates		215,755		718		4		216,469	2.33%
CMOs issued by US government-sponsored agencies		55,235		16		490		54,761	1.97%
Total mortgage-backed securities		674,217		1,580		1,911		673,886	2.11%
Investment securities
US Treasury securities		397,183		-		-		397,183	1.60%
Obligations of US government-sponsored agencies		1,967		-		6		1,961	1.38%
Other debt securities		1,108		31		-		1,139	3.00%
Total investment securities		400,258		31		6		400,283	1.60%
Total securities available-for-sale	$	1,074,475	$	1,611	$	1,917	$	1,074,169	1.92%

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The amortized cost and fair value of Oriental’s investment securities at September 30, 2020, 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.

	September 30, 2020
	Available-for-sale
	Amortized Cost		Fair Value
	(In thousands)
Mortgage-backed securities
Due less than one year
FNMA and FHLMC certificates	$	597	$	624
Total due in less than one year		597		624
Due from 1 to 5 years
GNMA certificates		546		550
Total due from 1 to 5 years		546		550
Due after 5 to 10 years
CMOs issued by US government-sponsored agencies	$	35,553	$	36,442
FNMA and FHLMC certificates		103,975	$	107,933
GNMA certificates		64,979	$	66,388
Total due after 5 to 10 years		204,507		210,763
Due after 10 years
FNMA and FHLMC certificates	$	30,495	$	31,407
GNMA certificates		75,888	$	78,954
CMOs issued by US government-sponsored agencies		7,262	$	7,422
Total due after 10 years		113,645		117,783
Total mortgage-backed securities		319,295		329,720
Investment securities
Due less than one year
US Treasury securities	$	81,103	$	81,245
Other debt securities		100	$	100
Total due in less than one year		81,203		81,345
Due from 1 to 5 years
Obligations of US government-sponsored agencies	$	1,688	$	1,714
US Treasury securities		10,006	$	10,286
Total due from 1 to 5 years		11,694		12,000
Due from 5 to 10 years
Other debt securities		708		750
Total due after 5 to 10 years		708		750
Total investment securities		93,605		94,095
Total	$	412,900	$	423,815

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

During the nine-month period ended September 30, 2020, Oriental retained securitized GNMA pools totaling $46.2 million amortized cost, at a yield of 2.69% from its own originations, while during the nine-month period ended on September 30, 2019 that amount totaled $45.7 million amortized cost, at a yield of 3.42%.

During the nine-month period ended September 30, 2020, Oriental sold $316.3 million available-for-sale-mortgage-backed securities and recorded a net gain on sale of securities of $4.7 million. During the nine-month period ended September 30, 2019 Oriental sold $680.5 million available-for-sale mortgage-backed securities and recognized a gain in the sale of $8.3 million.

	Nine-Month Period Ended September 30, 2020
			Book Value
Description	Sale Price		at Sale		Gross Gains		Gross Losses
	(In thousands)
Sale of securities available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates	$	229,571	$	227,213	$	2,358	$	-
GNMA certificates		91,413		89,043		2,370		-
Total	$	320,984	$	316,256	$	4,728	$	-


	Nine-Month Period Ended September 30, 2019
			Book Value
Description	Sale Price		at Sale		Gross Gains		Gross Losses
	(In thousands)
Sale of securities available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates	$	451,081	$	447,305	$	3,776	$	-
GNMA certificates		229,385		224,887		4,498		-
Total	$	680,466	$	672,192	$	8,274	$	-

At September 30, 2020, Oriental did not have investment securities in unrealized loss position. Effective January 1, 2020, Oriental adopted the new accounting standard for credit losses that requires evaluation of available-for-sale debt securities for any expected losses with recognition of an allowance for credit losses, when applicable. For more information, see Note 1 – Significant Accounting Policies. At September 30, 2020, all securities held by Oriental are issued by U.S. government entities and agencies that have a zero-credit loss assumption.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table show Oriental’s gross unrealized losses and fair value of investment securities available-for-sale at December 31, 2019, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:

	December 31, 2019
	12 months or more
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies	$	35,417	$	387	$	35,030
FNMA and FHLMC certificates		259,099		1,415		257,684
Obligations of US Government and sponsored agencies		1,967		6		1,961
GNMA certificates		19		-		19
	$	296,502	$	1,808	$	294,694

	Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies		11,503		103		11,400
FNMA and FHLMC certificates		4,919		2		4,917
GNMA certificates		3,549		4		3,545
US Treasury Securities		627		-		627
	$	20,598	$	109	$	20,489

	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies		46,920		490		46,430
FNMA and FHLMC certificates		264,018		1,417		262,601
Obligations of US government and sponsored agencies		1,967		6		1,961
GNMA certificates		3,568		4		3,564
US Treasury Securities		627		-		627
	$	317,100	$	1,917	$	315,183

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 5 - LOANS

Oriental’s loan portfolio is composed of four segments, commercial, mortgage, consumer, and auto. Loans are further segregated into classes which Oriental uses when assessing and monitoring the risk and performance of the portfolio.

The composition of the amortized cost basis of Oriental’s loan portfolio at September 30, 2020 was as follows:

	September 30, 2020
	Non-PCD		PCD		Total
	(In thousands)
Commercial loans:
Commercial secured by real estate	$	810,755	$	248,653	$	1,059,408
Other commercial and industrial		636,610		103,902		740,512
Commercial Paycheck Protection Program (PPP Loans)		289,218		-		289,218
US Loan Program		337,657		-		337,657
		2,074,240		352,555		2,426,795
Mortgage		847,671		1,504,914		2,352,585
Consumer
Personal loans		327,923		1,934		329,857
Credit lines		46,873		402		47,275
Credit cards		59,618		-		59,618
Overdraft		132		-		132
Auto		1,511,829		31,836		1,543,665
		1,946,375		34,172		1,980,547
		4,868,286		1,891,641		6,759,927
Allowance for credit losses		(156,409)		(78,904)		(235,313)
Total loans held for investment		4,711,877		1,812,737		6,524,614
Mortgage loans held for sale		54,526		-		54,526
Total loans, net	$	4,766,403	$	1,812,737	$	6,579,140

At September 30, 2020, and December 31, 2019, Oriental had a carrying balance of $121.9 million and $134.0 million, respectively, in 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. Loans granted to the Puerto Rico government amounting to $97.8 million and $129.9 million at September 30, 2020, and December 31, 2019, respectively, 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 in current status and one loan amounting to $24.1 million and $4.1 million, respectively, to a public corporation acquired in the Scotiabank PR & USVI Acquisition in non-accrual status with an allowance for credit losses of $20.0 million at September 30, 2020. Loans acquired in the Scotiabank PR & USVI Acquisition accounted for under ASC 310-30 were recognized at fair value as of December 31, 2019, which included the impact of expected credit losses, and therefore, no allowance for credit losses was recorded at acquisition date. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The tables below present the aging of the amortized cost of loans held for investment at September 30, 2020 and December 31, 2019, by class of loans. Mortgage loans past due include $62.7 million and $75.2 million, respectively, of 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.

	September 30, 2020
													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	$	2,987	$	749	$	23,984	$	27,720	$	783,035	$	810,755	$	-
Other commercial and industrial		983		432		6,460		7,875		917,953		925,828		-
US Loan Program		-		-		-		-		337,657		337,657		-
		3,970		1,181		30,444		35,595		2,038,645		2,074,240		-
Mortgage		5,793		10,989		96,986		113,768		733,903		847,671		3,666
Consumer
Personal loans		4,984		4,209		2,237		11,430		316,493		327,923		-
Credit lines		999		196		1,249		2,444		44,429		46,873		-
Credit cards		1,104		509		1,561		3,174		56,444		59,618		-
Overdraft		31		-		-		31		101		132		-
Auto		53,782		34,130		21,823		109,735		1,402,094		1,511,829		-
		60,900		39,044		26,870		126,814		1,819,561		1,946,375		-
Total loans	$	70,663	$	51,214	$	154,300	$	276,177	$	4,592,109	$	4,868,286	$	3,666

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2019
													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	$	994	$	946	$	17,495	$	19,435	$	847,271	$	866,706	$	-
Other commercial and industrial		7,584		371		2,716		10,671		712,855		723,526		-
US Loan Program		-		-		-		-		272,595		272,595		-
		8,578		1,317		20,211		30,106		1,832,721		1,862,827		-
Mortgage		9,285		13,105		94,109		116,499		783,096		899,595		2,418
Consumer
Personal loans		4,978		2,123		1,579		8,680		358,477		367,157		-
Credit lines		533		20		221		774		51,840		52,614		-
Credit cards		1,438		417		896		2,751		72,451		75,202		-
Overdraft		51		-		-		51		165		216		-
Auto		72,336		31,412		14,270		118,018		1,350,864		1,468,882		-
		79,336		33,972		16,966		130,274		1,833,797		1,964,071		-
Total loans	$	97,199	$	48,394	$	131,286	$	276,879	$	4,449,614	$	4,726,493	$	2,418

Before the CECL implementation, certain acquired loans were accounted for by Oriental in accordance with ASC 310-30.

The carrying amount corresponding to acquired loans with deteriorated credit quality, including those accounted under ASC 310-30 by analogy, in the statements of financial condition at December 31, 2019 was as follows:

	December 31, 2019
		Scotiabank PR & USVI		BBVAPR		Eurobank
	(In thousands)
Contractual required payments receivable:	$	2,147,249	$	1,086,367	$	117,107
Less: Non-accretable discount		294,424		340,466		4,285
Cash expected to be collected		1,852,825		745,901		112,822
Less: Accretable yield		458,885		214,886		34,441
Carrying amount, gross		1,393,940		531,015		78,381
Less: allowance for loan and lease losses		-		17,036		14,458
Carrying amount, net	$	1,393,940	$	513,979	$	63,923

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table describes the accretable yield and non-accretable discount activity of acquired BBVAPR loans accounted for under ASC 310-30 for the quarter and nine-month period ended September 30, 2019:

	Quarter Ended September 30, 2019
	Mortgage		Commercial		Auto		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	217,549	$	34,638	$	43	$	288	$	252,518
Accretion		(5,876)		(2,379)		(77)		(151)		(8,483)
Change in expected cash flows		-		3,995		5		151		4,151
Transfer from (to) non-accretable discount		(9,849)		(17,128)		57		(94)		(27,014)
Balance at end of period	$	201,824	$	19,126	$	28	$	194	$	221,172

Non-Accretable Discount Activity:
Balance at beginning of period	$	292,258	$	10,904	$	24,083	$	18,810	$	346,055
Change in actual and expected losses		(21,356)		(3,913)		44		(118)		(25,343)
Transfer (to) from accretable yield		9,849		17,128		(57)		94		27,014
Balance at end of period	$	280,751	$	24,119	$	24,070	$	18,786	$	347,726

	Nine-Month Period Ended September 30, 2019
	Mortgage		Commercial		Auto		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	232,199	$	36,508	$	243	$	560	$	269,510
Accretion		(18,342)		(7,523)		(432)		(639)		(26,936)
Change in expected cash flows		-		8,635		16		639		9,290
Transfer from (to) non-accretable discount		(12,033)		(18,494)		201		(366)		(30,692)
Balance at end of period	$	201,824	$	19,126	$	28	$	194	$	221,172

Non-Accretable Discount Activity:
Balance at beginning of period	$	291,887	$	10,346	$	24,245	$	18,945	$	345,423
Change in actual and expected losses		(23,169)		(4,721)		26		(525)		(28,389)
Transfer (to) from accretable yield		12,033		18,494		(201)		366		30,692
Balance at end of period	$	280,751	$	24,119	$	24,070	$	18,786	$	347,726

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table describes the accretable yield and non-accretable discount activity of acquired Eurobank loans for the quarter and nine-month period ended September 30, 2019:

	Quarter Ended September 30, 2019
	Mortgage		Commercial		Leasing		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	36,538	$	1,856		-	$	-	$	38,394
Accretion		(1,218)		(1,075)		3		(89)		(2,379)
Change in expected cash flows		1,917		550		(93)		132		2,506
Transfer from (to) non-accretable discount		(2,542)		(438)		90		(43)		(2,933)
Balance at end of period	$	34,695	$	893	$	-	$	-	$	35,588

Non-Accretable Discount Activity:
Balance at beginning of period	$	1,681	$	-	$	-	$	118	$	1,799
Change in actual and expected losses		(2,597)		(438)		90		(73)		(3,018)
Transfer (to) from accretable yield		2,542		438		(90)		43		2,933
Balance at end of period	$	1,626	$	-	$	-	$	88	$	1,714


	Nine-Month Period Ended September 30, 2019
	Mortgage		Commercial		Leasing		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	38,389	$	3,310		-	$	-	$	41,699
Accretion		(3,849)		(3,439)		(12)		(152)		(7,452)
Change in expected cash flows		1,524		1,416		(134)		250		3,056
Transfer from (to) non-accretable discount		(1,369)		(394)		146		(98)		(1,715)
Balance at end of period	$	34,695	$	893	$	-	$	-	$	35,588

Non-Accretable Discount Activity:
Balance at beginning of period	$	2,826	$	-	$	-	$	133	$	2,959
Change in actual and expected losses		(2,569)		(394)		146		(143)		(2,960)
Transfer (to) from accretable yield		1,369		394		(146)		98		1,715
Balance at end of period	$	1,626	$	-	$	-	$	88	$	1,714

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Non-accrual Loans

The following table presents the amortized cost basis of loans on nonaccrual status as of September 30, 2020:


	September 30, 2020
	Nonaccrual with		Nonaccrual with no
	Allowance		Allowance
	for Credit Loss		for Credit Loss
	(In thousands)
Non-PCD:
Commercial
Commercial secured by real estate	$	9,902	$	28,015
Other commercial and industrial		3,806		3,219
		13,708		31,234
Mortgage		23,050		12,883
Consumer
Personal loans		1,826		565
Personal lines of credit		1,253		-
Credit cards		1,562		-
Auto and leasing		22,583		-
		27,224		565
Total non-accrual loans	$	63,982	$	44,682

PCD:
Commercial
Commercial secured by real estate	$	14,566	$	3,068
Other commercial and industrial		60,946		1,051
		75,512		4,119
Mortgage		1,003		-
Consumer
Personal loans		4		-
		4		-
Total non-accrual loans	$	76,519	$	4,119
	$	140,501	$	48,801

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents the recorded investment in loans in non-accrual status by class of loans as of December 31, 2019:

	December 31,
	2019
	(In thousands)
Commercial
Commercial secured by real estate	$	32,720
Other commercial and industrial		9,886
		42,606
Mortgage		18,735
Consumer
Personal loans		4,164
Personal lines of credit		227
Credit cards		896
Auto and leasing		14,295
		19,582
Total non-accrual loans	$	80,923

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, those loans are included as non-performing loans but excluded from non-accrual loans.

At September 30, 2020 and December 31, 2019, loans whose terms have been extended and which were classified as troubled-debt restructurings that were not included in non-accrual loans amounted to $98.7 million and $103.7 million, respectively, as they were performing under their new terms.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Modifications

The following tables present the troubled-debt restructurings in all loan portfolios during the quarters and nine-month periods ended September 30, 2020 and 2019.

	Quarter Ended September 30, 2020
	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	22	$	2,438	4.98%	286	$	2,268	4.36%	285
Commercial	1		150	5.50%	12		150	8.00%	36
Consumer	2		32	13.68%	68		32	10.61%	68
Auto	29		187	10.63%	76		187	10.87%	73

	Nine-Month Period Ended September 30, 2020
	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	51	$	5,982	5.04%	327	$	5,736	4.34%	329
Commercial	3		581	6.71%	57		581	7.03%	135
Consumer	20		284	13.11%	67		289	10.63%	78
Auto	31		217	10.88%	74		219	11.02%	71

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Quarter Ended September 30, 2019
	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	21	$	2,446	5.97%	358	$	2,307	5.25%	345
Commercial	1		81	8.50%	60		81	8.50%	95
Consumer	124		1,818	16.50%	65		1,776	11.68%	75
Auto	8		112	6.96%	71		112	8.60%	43

	Nine-Month Period Ended September 30, 2019
	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	109	$	13,940	5.91%	383	$	12,893	5.14%	346
Commercial	3		1,245	7.12%	55		1,245	5.96%	86
Consumer	265		3,833	15.92%	66		3,825	11.69%	75
Auto	21		305	7.35%	70		313	8.97%	45

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents troubled-debt restructurings for which there was a payment default during the twelve-month periods ended September 30, 2020 and 2019:

	Twelve-month Period Ended September 30,
	2020			2019
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in thousands)
Mortgage	17	$	2,394	32	$	4,065
Commercial	1	$	84	2	$	350
Consumer	50	$	627	61	$	710
Auto	-	$	-	3	$	51

Oriental offers various types of concessions when modifying a loan. Concessions made to the original contractual terms of the loan typically consists of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. In these cases, the principal balance on the TDR had matured and/or was in default at the time of restructure, and there were no commitments to lend additional funds to the borrower during the quarters and nine-month periods ended September 30, 2020 and 2019.

TDRs disclosed above were not related to COVID-19 modifications. As discussed in Note 1 to these financial statements, Section 4013 of CARES Act and the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2019 and at the time of modification program implementation, respectively, and meets other applicable criteria. Oriental’s loan deferrals outstanding balances at September 30, 2020 of approximately $135 million resulting from the COVID-19 pandemic were not classified as a TDR.

Collateral-dependent Loans

The table below present the amortized cost of collateral-dependent loans held for investment at September 30, 2020, by class of loans.

	September 30, 2020
	Real Estate
	(In thousands)
Commercial loans:
Commercial secured by real estate	$	29,731
Other commercial and industrial		3,069
Total loans	$	32,800

PCD loans, except for single pooled loans, are not included in the table above as their unit of account is the loan pool.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Credit Quality Indicators

Oriental categorizes its loans into loan grades 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 loan grades:

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 loans.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of September 30, 2020 and based on the most recent analysis performed, the risk category of loans subject to risk rating by class of loans is as follows.

	Term Loans												Revolving
	Amortized Cost Basis by Origination Year												Loans
													Amortized
	2020		2019		2018		2017		2016		Prior		Cost Basis		Total
	(In thousands)
Commercial:
Commercial secured by real estate:
Loan grade:
Pass	$	31,615	$	125,253	$	116,703	$	87,845	$	48,245	$	227,034	$	56,413	$	693,108
Special Mention		10,213		3,048		4,762		16,850		8,621		20,599		6,760		70,853
Substandard		188		398		874		8,738		628		28,478		7,411		46,715
Doubtful		-		-		-		-		-		30		49		79
Loss		-		-		-		-		-		-		-		-
Total commercial secured by real estate		42,016		128,699		122,339		113,433		57,494		276,141		70,633		810,755
Other commercial and industrial:
Loan grade:
Pass		345,220		87,578		97,500		15,175		8,903		15,342		306,602		876,320
Special Mention		301		8,135		-		-		4		5,470		27,984		41,894
Substandard		-		796		168		194		2,912		91		3,385		7,546
Doubtful		-		-		-		-		-		-		68		68
Loss		-		-		-		-		-		-		-		-
Total other commercial and industrial:		345,521		96,509		97,668		15,369		11,819		20,903		338,039		925,828
US Loan Program:
Loan grade:
Pass		57,673		64,563		79,209		7,131		-		-		75,345		283,921
Special Mention		63		1,501		43,101		-		-		-		1,250		45,915
Substandard		-		-		7,821		-		-		-		-		7,821
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total US loan program:		57,736		66,064		130,131		7,131		-		-		76,595		337,657
Total commercial loans	$	445,273	$	291,272	$	350,138	$	135,933	$	69,313	$	297,044	$	485,267	$	2,074,240

At September 30, 2020, the balance of revolving loans converted to term loans was $25.2 million.

Oriental considers the performance of the loan portfolio and its impact on the allowance for credit losses. For mortgage and consumer loan classes, Oriental also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the amortized cost in mortgage and consumer loans based on payment activity:

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

															Revolving Loans
	Term Loans												Revolving		Converted to
	Amortized Cost Basis by Origination Year												Loans		Term Loans
													Amortized		Amortized
	2020		2019		2018		2017		2016		Prior		Cost Basis		Cost Basis		Total
	(In thousands)
Mortgage:
Payment performance:
Performing	$	4,170	$	21,330	$	28,735	$	34,413	$	40,319	$	678,226	$	-	$	-	$	807,193
Nonperforming		-		303		39		626		945		38,565		-		-		40,478
Total mortgage loans:		4,170		21,633		28,774		35,039		41,264		716,791		-		-		847,671
Consumer:
Personal loans:
Payment performance:
Performing		69,033		130,325		66,447		33,686		16,673		9,367		-		-		325,531
Nonperforming		82		543		664		404		326		373		-		-		2,392
Total personal loans		69,115		130,868		67,111		34,090		16,999		9,740		-		-		327,923
Credit lines:
Payment performance:
Performing		-		-		-		-		-		-		45,620		-		45,620
Nonperforming		-		-		-		-		-		-		1,253		-		1,253
Total credit lines		-		-		-		-		-		-		46,873		-		46,873
Credit cards:
Payment performance:
Performing		-		-		-		-		-		-		58,056		-		58,056
Nonperforming		-		-		-		-		-		-		1,562		-		1,562
Total credit cards		-		-		-		-		-		-		59,618		-		59,618
Overdrafts:
Payment performance:
Performing		-		-		-		-		-		-		132		-		132
Nonperforming		-		-		-		-		-		-		-		-		-
Total overdrafts		-		-		-		-		-		-		132		-		132
Total consumer loans		69,115		130,868		67,111		34,090		16,999		9,740		106,623		-		434,546
Total mortgage and consumer loans	$	73,285	$	152,501	$	95,885	$	69,129	$	58,263	$	726,531	$	106,623	$	-	$	1,282,217

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Oriental evaluates credit quality for auto loans and leases based on FICO score. The following table presents the amortized cost in auto loans and leases based on their most recent FICO score:

	Term Loans
	Amortized Cost Basis by Origination Year

	2020		2019		2018		2017		2016		Prior		Total
	(In thousands)
Auto:
FICO score:
1-660		81,738		123,802		105,596		62,980		34,460		28,443		437,019
661-699		54,684		77,710		49,632		25,131		14,147		12,029		233,333
700+		126,267		222,082		176,364		93,445		52,035		40,791		710,984
No FICO		13,656		43,322		34,291		18,861		10,907		9,456		130,493
Total auto:	$	276,345	$	466,916	$	365,883	$	200,417	$	111,549	$	90,719	$	1,511,829

As of December 31, 2019, and based on the most recent analysis performed, the loan grading of gross originated loans and acquired loans accounted for under ASC 310-20 subject to loan grade by class of loans was as follows:

	December 31, 2019
	Loan Grades

	Balance				Special
	Outstanding		Pass		Mention		Substandard		Doubtful		Loss
	(In thousands)
Commercial
Commercial secured by real estate	$	866,706	$	762,443	$	55,870	$	48,357	$	36	$	-
Other commercial and industrial		723,526		706,831		6,634		9,960		101		-
US Loan Program		272,595		262,745		9,850		-		-		-
Total Commercial	$	1,862,827	$	1,732,019	$	72,354	$	58,317	$	137	$	-

	December 31, 2019
	Loan Grades

	Balance				Special
	Outstanding		Pass		Mention		Substandard		Doubtful		Loss

Retail
Mortgage	$	899,595	$	805,486	$	-	$	94,109	$	-	$	-
Consumer:
Personal loans		367,157		365,579		-		1,578		-		-
Personal lines of credit		52,614		52,393		-		221		-		-
Credit cards		75,202		74,306		-		896		-		-
Overdrafts		216		165		-		51		-		-
Auto		1,468,882		1,454,612		-		14,270		-		-
Total consumer loans		1,964,071		1,947,055		-		17,016		-		-
Total retail loans	$	2,863,666	$	2,752,541	$	-	$	111,125	$	-	$	-

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 6 – ALLOWANCE FOR CREDIT LOSSES

On January 1, 2020, Oriental adopted the new accounting standard that requires the measurement of the allowance for credit losses to be based on management’s best estimate of lifetime expected credit losses inherent in Oriental’s relevant financial assets. Upon adoption of the new accounting standard, Oriental recorded a $89.7 million increase in the allowance for credit losses on January 1, 2020. For Non-PCD loans, which represents 70% of the total loan portfolio, a $39.2 million allowance was recorded. For PCD loans, which represents 30% of the total loan portfolio, a $50.5 million adjustment was made through the allowance and loan balances with no impact in capital.

The allowance for credit losses is estimated using quantitative methods that consider a variety of factors such as historical loss experience, the current credit quality of the portfolio as well as an economic outlook over the life of the loan. Also included in the ACL are qualitative reserves to cover losses that are expected but, in Oriental's assessment, may not be adequately represented in the quantitative methods or the economic assumptions. In its loss forecasting framework, Oriental incorporates forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets. The scenarios that are chosen each quarter and the amount of weighting given to each scenario depend on a variety of factors including recent economic events, leading economic indicators, views of internal as well as third-party economists and industry trends. For more information on Oriental's credit loss accounting policies, including the allowance for credit losses, see Note 1 – Summary of Significant Accounting Policies.

As of January 1, 2020, Oriental used a probability weighted scenario approach as it is expected that Puerto Rico’s economic forecast should be close to an average between the baseline, which represents the middle of all projections, and a moderate recession, which places itself in the downside alternative. During the quarter ended March 31, 2020, there was a significant change in the economic outlook impacting the allowance for credit losses, with key economic factors such as the unemployment rate and gross national product projected to deteriorate sharply driven by the impact of COVID-19. In response to these changes, Oriental reassessed the selection and probability weightings as well as analyzed various scenarios with immediate deterioration in economic variables followed by different recovery assumptions as part of the process for setting the allowance for credit loss reserve. Based on these analyses, Oriental is now effectively fully weighted to a moderate recessionary economic environment within our forecast period. In addition, the allowance for credit losses at September 30, 2020 continues to include qualitative reserves for certain segments that Oriental views as higher risk that may not be fully recognized through its quantitative models such as commercial loans concentrated in certain industries. As a result of these developments, Oriental increased the provision for credit losses in the nine-month period ended September 30, 2020 by $39.1 million. There are still many unknowns including the duration of the impact of COVID-19 on the economy and the results of the government fiscal and monetary actions along with recently implemented payment deferral programs.

Loans acquired in the Scotiabank PR & USVI Acquisition were recognized at fair value as of December 31, 2019, which included the impact of expected credit losses, and therefore, no allowance for credit losses was recorded at acquisition date.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents the activity in our allowance for credit losses by segment for the periods indicated:

	Quarter Ended September 30, 2020
	Commercial		Mortgage		Consumer		Auto		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	43,011	$	19,973	$	31,954	$	56,569	$	151,507
Provision for credit losses		(1,771)		(564)		(378)		16,071		13,358
Charge-offs		(298)		(56)		(5,114)		(10,123)		(15,591)
Recoveries		253		269		663		5,950		7,135
Balance at end of period	$	41,195	$	19,622	$	27,125	$	68,467	$	156,409
PCD:
Balance at beginning of period	$	48,913	$	30,920	$	169	$	1,192	$	81,194
Provision for credit losses		(1,262)		1,077		-		9		(176)
Charge-offs		(293)		(1,677)		(60)		(474)		(2,504)
Recoveries		91		89		(1)		211		390
Balance at end of period	$	47,449	$	30,409	$	108	$	938	$	78,904
Total allowance for credit losses at end of period	$	88,644	$	50,031	$	27,233	$	69,405	$	235,313

	Nine-Month Period Ended September 30, 2020
	Commercial		Mortgage		Consumer		Auto		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	25,993	$	8,727	$	18,446	$	31,878	$	85,044
Impact of ASC 326 adoption		3,562		10,980		8,418		16,238		39,198
Provision for credit losses		13,799		47		13,827		43,261		70,934
Charge-offs		(4,566)		(659)		(15,316)		(36,476)		(57,017)
Recoveries		2,407		527		1,750		13,566		18,250
Balance at end of period	$	41,195	$	19,622	$	27,125	$	68,467	$	156,409
PCD:
Balance at beginning of period	$	8,893	$	21,655	$	-	$	947	$	31,495
Impact of ASC 326 adoption		42,143		7,830		181		368		50,522
Provision for credit losses		(1,303)		9,131		356		289		8,473
Charge-offs		(3,036)		(8,998)		(521)		(1,449)		(14,004)
Recoveries		752		791		92		783		2,418
Balance at end of period	$	47,449	$	30,409	$	108	$	938	$	78,904
Total allowance for credit losses at end of period	$	88,644	$	50,031	$	27,233	$	69,405	$	235,313

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Quarter Ended September 30, 2019
	Mortgage		Commercial		Consumer		Auto and Leasing		Total
	(In thousands)
Allowance for loan and lease losses, excluding loans accounted for under ASC 310-30:
Balance at beginning of period	$	15,361	$	29,265	$	17,448	$	29,563	$	91,637
Provision (recapture) for credit losses		8,836		1,324		3,181		10,087		23,428
Charge-offs		(16,299)		(8,421)		(5,316)		(12,383)		(42,419)
Recoveries		493		175		1,463		5,802		7,933
Balance at end of period	$	8,391	$	22,343	$	16,776	$	33,069	$	80,579
Allowance for loan and lease losses for acquired loans accounted for under ASC 310-30:
Balance at beginning of period	$	42,421	$	25,448	$	-	$	3,136	$	71,005
Provision (recapture) for credit losses		8,906		11,832		-		(396)		20,342
Allowance de-recognition		(17,060)		(72)		-		(451)		(17,583)
Balance at end of period	$	34,267	$	37,208	$	-	$	2,289	$	73,764
Total allowance for loan and lease losses at end of period	$	42,658	$	59,551	$	16,776	$	35,358	$	154,343

	Nine-Month Period Ended September 30, 2019
	Mortgage		Commercial		Consumer		Auto and Leasing		Total
	(In thousands)
Allowance for loan and lease losses, excluding loans accounted for under ASC 310-30:
Balance at beginning of period	$	19,783	$	30,348	$	17,476	$	29,643	$	97,250
Provision (recapture) for credit losses		5,002		3,225		12,277		23,171		43,675
Charge-offs		(17,490)		(11,733)		(15,148)		(34,567)		(78,938)
Recoveries		1,096		503		2,171		14,822		18,592
Balance at end of period	$	8,391	$	22,343	$	16,776	$	33,069	$	80,579
Allowance for loan and lease losses for acquired loans accounted for under ASC 310-30:
Balance at beginning of period	$	30,607	$	30,226	$	4	$	6,144	$	66,981
Provision (recapture) for credit losses		21,330		11,429		-		(2,710)		30,049
Allowance de-recognition		(17,670)		(4,447)		(4)		(1,145)		(23,266)
Balance at end of period	$	34,267	$	37,208	$	-	$	2,289	$	73,764
Total allowance for loan and lease losses at end of period	$	42,658	$	59,551	$	16,776	$	35,358	$	154,343

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2019
	Mortgage		Commercial		Consumer		Auto and Leasing		Total
	(In thousands)
Allowance for loan and lease losses, excluding loans accounted for under ASC 310-30:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	6,874	$	8,217	$	-	$	-	$	15,091
Collectively evaluated for impairment		1,853		17,776		18,446		31,878		69,953
Total ending allowance balance	$	8,727	$	25,993	$	18,446	$	31,878	$	85,044
Loans:
Individually evaluated for impairment	$	71,196	$	61,128	$	-	$	-	$	132,324
Collectively evaluated for impairment		506,220		1,608,507		382,432		1,277,867		3,775,026
Total ending loan balance	$	577,416	$	1,669,635	$	382,432	$	1,277,867	$	3,907,350

NOTE 7 — FORECLOSED REAL ESTATE

The following tables present the activity related to foreclosed real estate for the quarters and nine-month periods ended September 30, 2020 and 2019:

	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2020		2019		2020		2019
		(In thousands)

Balance at beginning of period	$	24,792	$	29,509	$	29,909	$	33,768
Decline in value		(740)		(1,093)		(1,763)		(4,416)
Additions		613		4,572		2,560		12,868
Sales		(5,209)		(6,036)		(11,250)		(15,268)
Balance at end of period	$	19,456	$	26,952	$	19,456	$	26,952

NOTE 8 - SERVICING ASSETS

Oriental periodically sells or securitizes mortgage loans while retaining the obligation to perform the servicing of such loans. In addition, Oriental may purchase or assume the right to service mortgage loans originated by others. Whenever Oriental undertakes an obligation to service a loan, management assesses whether a servicing asset and/or liability should be recognized. A servicing asset is recognized whenever the compensation for servicing is expected to more than adequately compensate Oriental for servicing the loans and leases. Likewise, a servicing liability would be recognized in the event that servicing fees to be received are not expected to adequately compensate Oriental for its expected cost. On December 31, 2019, Oriental completed the Scotiabank PR & USVI Acquisition, increasing its servicing assets by $40.1 million.

All separately recognized servicing assets are recognized at fair value using the fair value measurement method. Under the fair value measurement method, Oriental measures servicing rights at fair value at each reporting date, reports changes in fair value of servicing assets in earnings in the period in which the changes occur, and includes these changes, if any, with mortgage banking activities in the consolidated statements of operations. The fair value of servicing rights is subject to fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. The impact of COVID-19 has been considered in the fair value for the quarter and nine-month period ended September 30, 2020.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The fair value of servicing rights 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.

At September 30, 2020, the servicing asset amounted to $47.2 million ($50.8 million — December 31, 2019) related to mortgage servicing rights.

The following table presents the changes in servicing rights measured using the fair value method for the quarters and nine-month periods ended September 30, 2020 and 2019:

	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2020		2019		2020		2019
	(In thousands)
Fair value at beginning of period	$	47,926	$	10,134	$	50,779	$	10,716
Servicing from mortgage securitizations or asset transfers		656		352		1,236		860
Changes due to payments on loans		(1,365)		(243)		(2,810)		(694)
Changes in fair value due to changes in valuation model inputs or assumptions		25		(118)		(1,963)		(757)
Fair value at end of period	$	47,242	$	10,125	$	47,242	$	10,125

The following table presents key economic assumption ranges used in measuring the mortgage-related servicing asset fair value for the nine-month periods ended September 30, 2020 and 2019:

	Nine-Month Period Ended September 30,
	2020	2019
Constant prepayment rate	5.02% - 25.8%	4.38% - 9.44%
Discount rate	10.00% - 15.50%	10.00% - 12.00%

The sensitivity of the current fair value of servicing assets to immediate 10 percent and 20 percent adverse changes in the above key assumptions were as follows:

	September 30, 2020
	(In thousands)
Mortgage-related servicing asset
Carrying value of mortgage servicing asset	$	47,242
Constant prepayment rate
Decrease in fair value due to 10% adverse change	$	(1,040)
Decrease in fair value due to 20% adverse change	$	(2,042)
Discount rate
Decrease in fair value due to 10% adverse change	$	(1,889)
Decrease in fair value due to 20% adverse change	$	(3,648)

These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption.

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

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

Servicing fee income is based on a contractual percentage of the outstanding principal balance and is recorded as income when earned. Servicing fees on mortgage loans for the quarters ended September 30, 2020 and 2019 totaled $4.5 million and $1.0 million, respectively. Servicing fees on mortgage loans for the nine-month periods ended September 30, 2020 and 2019 totaled $13.4 million and $3.2 million, respectively.

NOTE 9 — DERIVATIVES

The following table presents Oriental’s derivative assets and liabilities at September 30, 2020 and December 31, 2019:

	September 30,		December 31,
	2020		2019
	(In thousands)
Derivative assets:
Interest rate caps	$	1	$	6
	$	1	$	6
Derivative liabilities:
Interest rate swaps designated as cash flow hedges	$	1,894	$	907
Interest rate caps		1		6
	$	1,895	$	913

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 and are properly documented as such; 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 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 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 September 30, 2020:

Notional

Fixed

Variable

Trade

Settlement

Maturity

Type

Amount

Rate

Rate Index

Date

(In thousands)

Interest Rate Swaps

30,691

2.4210%

1-Month LIBOR

07/03/13

08/01/23

30,691

Accumulated unrealized losses of $1.9 million and $907 thousand were recognized in accumulated other comprehensive income related to the valuation of these swaps at September 30, 2020 and December 31, 2019, respectively, and the related liability is being reflected in the consolidated statements of financial condition.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 September 30, 2020 and December 31, 2019, the outstanding total notional amount of interest rate caps was $40.7 million and $41.5 million, respectively. At September 30, 2020 and December 31, 2019, the interest rate caps sold to clients represented a liability of $1 thousand and $6 thousand, respectively, and were included as part of derivative liabilities in the consolidated statements of financial condition. At September 30, 2020 and December 31, 2019, the interest rate caps purchased as mirror-images represented an asset of $1 thousand and $6 thousand, respectively, and were included as part of derivative assets in the consolidated statements of financial condition.

NOTE 10 — CORE DEPOSIT, CUSTOMER RELATIONSHIP AND OTHER INTANGIBLES

Core deposit, customer relationship and other intangibles at September 30, 2020 and December 31, 2019 consists of the following:

	September 30,		December 31
	2020		2019
	(In thousands)
Core deposit intangibles	$	37,021	$	43,185
Customer relationship intangibles		11,275		13,213
Other intangibles		354		567
	$	48,650	$	56,965

In connection with the FDIC-assisted acquisition, the BBVAPR Acquisition and the Scotiabank PR & USVI Acquisition, Oriental recorded a core deposit intangible representing the value of checking and savings deposits acquired. At September 30, 2020, this core deposit intangible amounted to $37.0 million. At December 31, 2019, core deposit intangible amounted to $43.2 million, including $41.5 from the Scotiabank PR & USVI Acquisition. In addition, Oriental recorded a customer relationship intangible representing the value of customer relationships acquired with the acquisition of a securities broker-dealer and insurance agency in the BBVAPR Acquisition and an insurance agency in the Scotiabank PR & USVI Acquisitions. At September 30, 2020 this customer relationship intangible amounted to $11.3 million. At December 31, 2019 customer relationship intangible amounted to $13.2 million, including $12.7 million from the Scotiabank PR & USVI Acquisition. Oriental also recorded other intangibles from the Scotiabank PR & USVI Acquisition which amounted to $354 thousand and $567 thousand at September 30, 2020 and December 31, 2019, respectively.

NOTE 11 — ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS

Accrued interest receivable at September 30, 2020 and December 31, 2019 consists of the following:

	September 30,		December 31,
	2020		2019
	(In thousands)
Loans, excluding acquired loans	$	70,185	$	32,728
Investments		1,645		4,053
	$	71,830	$	36,781

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Oriental estimates expected credit losses on accrued interest receivable for loans that participated in the Covid-19 deferral programs. An allowance has been established for loans with delinquency status in 30 to 89 days past due and is calculated by applying the corresponding loan projected loss factors to the accrued interest receivable balance. At September 30, 2020, the allowance for credit losses for accrued interest receivable for loans that participated in the Covid-19 deferral programs amounted to $826 thousand, and is included in accrued interest receivable in the statement of financial condition.

Other assets at September 30, 2020 and December 31, 2019 consist of the following:

	September 30,		December 31,
	2020		2019
	(In thousands)
Prepaid expenses	$	54,611	$	52,558
Other repossessed assets		1,918		3,327
Tax credits		-		277
Investment in Statutory Trust		1,083		1,083
Accounts receivable and other assets		75,160		78,600
	$	132,772	$	135,845

Prepaid expenses amounting to $54.6 million at September 30, 2020, include prepaid municipal, property and income taxes aggregating to $47.0 million. At December 31, 2019 prepaid expenses amounted to $52.6 million, including prepaid municipal, property and income taxes aggregating to $45.3 million, from which $31.9 million corresponded to the Scotiabank PR & USVI Acquisition.

Other repossessed assets totaled $1.9 million and $3.3 million at September 30, 2020 and December 31, 2019, respectively, that consist mainly of repossessed automobiles, which are recorded at their net realizable value.

NOTE 12— DEPOSITS AND RELATED INTEREST

Total deposits, including related accrued interest payable, as of September 30, 2020 and December 31, 2019 consist of the following:

	September 30,		December 31,
	2020		2019
	(In thousands)
Non-interest bearing demand deposits	$	2,333,489	$	1,675,315
Interest-bearing savings and demand deposits		4,269,360		3,718,846
Retail certificates of deposit		1,642,779		1,781,237
Institutional certificates of deposit		290,739		279,714
Total core deposits		8,536,367		7,455,112
Brokered deposits		96,090		243,498
Total deposits	$	8,632,457	$	7,698,610

Brokered deposits include $66.6 million in certificates of deposits and $29.5 million in money market accounts at September 30, 2020, and $222.1 million in certificates of deposits and $21.4 million in money market accounts at December 31, 2019.

The weighted average interest rate of Oriental’s deposits was 0.77% and 0.86%, respectively, at September 30, 2020 and December 31, 2019. Interest expense for the quarters and nine-month periods ended September 30, 2020 and 2019 was as follows:

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2020		2019		2020		2019
	(In thousands)
Demand and savings deposits	$	6,320	$	3,949	$	19,528	$	11,308
Certificates of deposit		8,300		6,605		27,157		18,286
	$	14,620	$	10,554	$	46,685	$	29,594

At September 30, 2020 and December 31, 2019, time deposits in denominations of $250 thousand or higher, excluding accrued interest and unamortized discounts, amounted to $670.4 million and $692.1 million, respectively.

At September 30, 2020 and December 31, 2019, total public fund deposits from various Puerto Rico government municipalities, agencies and corporations amounted to $308.2 million and $278.7 million, respectively. These public funds were collateralized with commercial loans and securities amounting to $322.2 million and $320.8 million at September 30, 2020 and December 31, 2019, respectively.

Excluding accrued interest of approximately $8.0 million and $11.7 million, the scheduled maturities of certificates of deposit at September 30, 2020 and December 31, 2019 are as follows:

	September 30,		December 31,
		2020		2019
	(In thousands)
Within one year:
Three (3) months or less	$	254,168	$	314,796
Over 3 months through 1 year		1,044,051		881,183
		1,298,219		1,195,979
Over 1 through 2 years		343,518		732,421
Over 2 through 3 years		178,202		175,032
Over 3 through 4 years		77,949		89,148
Over 4 through 5 years		94,204		78,706
	$	1,992,092	$	2,271,286

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 $1.3 million and and $1.0 million as of September 30, 2020 and December 31, 2019, respectively.

NOTE 13— BORROWINGS AND RELATED INTEREST

Securities Sold under Agreements to Repurchase

At September 30, 2020, 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 September 30, 2020, Oriental did not have repurchase agreements outstanding because $140 million matured and were not renewed, and $50 million were terminated early during the nine-month period ended September 30, 2020.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table shows Oriental’s repurchase agreements, excluding accrued interest in the amount of $274 thousand at December 31, 2019:

		December 31,
		2019
	(In thousands)
Short-term fixed-rate repurchase agreements, interest ranging from 1.85% to 2.70% (December 31, 2019)		$	140,000
Long-term fixed-rate repurchase agreements, interest ranging from 1.85% to 2.86% (December 31, 2019)			50,000
Total assets sold under agreements to repurchase		$	190,000

Repurchase agreements’ maturities were as follows:

	December 31,
	2019
	(In thousands)
Less than 90 days	$	140,000
Over 90-days		50,000
Total	$	190,000

The following securities were sold under agreements to repurchase:



	December 31, 2019
	Amortized				Approximate		Weighted
	Cost of				Fair Value		Average
	Underlying		Balance of		of Underlying		Interest Rate
Underlying Securities	Securities		Borrowing		Securities		of Security
	(Dollars in thousands)
FNMA and FHLMC Certificates	$	204,225	$	190,000	$	204,068		2.98%
Total	$	204,225	$	190,000	$	204,068		2.98%

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 September 30, 2020 and December 31, 2019, these advances were secured by mortgage and commercial loans amounting to $1.186 billion and $1.060 billion, respectively. Also, at September 30, 2020 and December 31, 2019, Oriental had an additional borrowing capacity with the FHLB-NY of $992 million and $983 million, respectively. At September 30, 2020 and December 31, 2019, the weighted average remaining maturity of FHLB’s advances was 19.8 months and 22.7 months, respectively. The original terms of these advances range between one day and seven years, and the FHLB-NY does not have the right to exercise put options at par on any advances outstanding as of September 30, 2020.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table shows a summary of the advances and their terms, excluding accrued interest in the amount of $97 thousand and $160 thousand at September 30, 2020 and December 31, 2019, respectively:


	September 30,		December 31
		2020		2019
		(In thousands)
Short-term fixed-rate advances from FHLB, with a weighted average interest rate of 0.36% (December 31, 2019 - 1.85% to 2.59%)	$	30,691	$	40,472
Long-term fixed-rate advances from FHLB, with a weighted average interest rate of 2.92% to 3.24% (December 31, 2019 - 2.92% to 3.24% )		35,755		37,377
	$	66,446	$	77,849

Advances from FHLB mature as follows:


	September 30,		December 31,
		2020		2019
	(In thousands)
Under 90 days	$	30,691	$	31,955
Over one to three years		26,725		8,517
Over three to five years		4,764		33,018
Over five years		4,266		4,359
	$	66,446	$	77,849

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 September 30, 2020 and December 31, 2019.

NOTE 14 – 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.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents the potential effect of rights of set-off associated with Oriental’s recognized financial assets and liabilities at September 30, 2020 and December 31, 2019:

September 30, 2020

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

December 31, 2019

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

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

September 30, 2020
							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	$	1,895	$	-	$	1,895	$	-	$	-	$	1,895
Total	$	1,895	$	-	$	1,895	$	-	$	-	$	1,895


December 31, 2019
							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	$	913	$	-	$	913	$	-		-	$	913
Securities sold under agreements to repurchase		190,000		-		190,000		204,068		-		(14,068)
Total	$	190,913	$	-	$	190,913	$	204,068	$	-	$	(13,155)

NOTE 15 — INCOME TAXES

Oriental is subject to the provisions of the Puerto Rico Internal Revenue Code of 2011, as amended (the “Code”), which imposes a maximum statutory corporate tax rate of 37.5% on a corporation’s net taxable income. Under the Code, all corporations are treated as separate taxable entities and are not entitled to file consolidated tax returns. Such entities are subject to Puerto Rico regular income tax or the alternative minimum tax (“AMT”) on income earned from all sources pursuant to the Code. The AMT is payable if it exceeds regular income tax. The excess of AMT over regular income tax paid in any one year may be used to offset regular income tax in future years, subject to certain limitations.

Oriental also has operations in the United States mainland through its wholly owned subsidiary, OPC, a retirement plan administrator based in Florida. In October 2017, Oriental expanded its operations in the United States through the Bank’s wholly owned subsidiary, OFG USA. In addition, on December 31, 2019, Oriental established a new branch in USVI acquired as a result of the Scotiabank PR & USVI Acquisition. The United States subsidiaries are subject to federal income taxes at the corporate level, while the USVI branch is subject to the federal income taxes under a mirror system and a 10% surtax included in the maximum tax rate. OPC is subject to Florida state taxes and OFG USA is subject to North Carolina state taxes.

At September 30, 2020 and December 31, 2019, Oriental’s net deferred tax asset amounted to $179.0 million and $176.7 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 mainly 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

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

deferred tax asset is 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 September 30, 2020 and December 31, 2019. The amount of the deferred tax asset that is considered realizable could be reduced in the near term if there are changes in estimates of future taxable income.

On June 30, 2020, Oriental Financial Services (a wholly owned subsidiary of OFG) made the election to be taxed as a partnership effective on January 1, 2019. As a result of this change in tax status, a valuation allowance of $1.3 million was recorded on certain deferred tax assets during the second quarter of 2020.

Oriental maintained an effective tax rate lower than the statutory rate for the nine-month periods ended September 30, 2020 and 2019 of 21.4% and 30.5%, respectively. The estimated annual effective tax rate for 2020 was 22.3%. The current effective tax rate of 21.4% was lower than the 2019 effective tax rate of 30.5% because of higher levels of exempt income and income taxed at preferential tax rates.

Oriental classifies unrecognized tax benefits in other liabilities. These gross unrecognized tax benefits would affect the effective tax rate if realized. At September 30, 2020 and December 31, 2019, unrecognized tax benefits amounted to $711 thousand and $2.7 million, respectively. This decrease is related to new information that resulted in the reassessment of unrecognized tax benefits and the release of a liability due to the expiration of the statute of limitations. Oriental had accrued $15 thousand at September 30, 2020 (December 31, 2019 - $51 thousand) for the payment of interest and penalties relating to unrecognized tax benefits.

Income tax expense for the quarters ended September 30, 2020 and 2019, was $6.3 million and $1.0 million, respectively. Income tax expense for the nine-month periods ended September 30, 2020 and 2019, was $13.9 million and $23.5 million, respectively.

NOTE 16 — 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 based on the framework of the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”), which became effective January 1, 2015 for OFG Bancorp 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 Basel III capital rules: (i) introduce a 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 Basel III 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 Basel III 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”).

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In July 2019, the federal banking agencies adopted a final rule, pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996, that simplifies for non-advanced approaches banking organizations. It simplifies the regulatory capital treatment for mortgage servicing assets (MSA) and certain deferred tax assets arising from temporary differences (temporary difference DTAs). It increases CET1 capital threshold deductions from 10 percent to 25 percent and removes the aggregate 15 percent CET1 threshold deduction. However, it retains the 250 percent risk weight applicable to non-deducted amounts of MSAs and temporary difference DTAs. In November 2019, the agencies jointly issued a final rule that permits insured depository institutions and depository institution holding companies to implement the simplifications to the capital rule on January 1, 2020, rather than April 1, 2020. These banking organizations may elect to use the revised effective date of January 1, 2020 or wait until the quarter beginning April 1, 2020. Oriental elected to early implement the simplifications to the capital rule on January 1, 2020. The simplification rule increased the capital ratios.

On January 1, 2020, Oriental adopted CECL with the initial implementation adjustment to Non-PCD loans and off-balance sheet instruments against retained earnings. On March 27, 2020, in response to the COVID-19 pandemic, U.S. banking regulators issued an interim final rule that Oriental adopted to delay for two years the initial adoption impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during 2020 and 2021 (i.e., a five-year transition period). During the two-year delay, Oriental will add back to CET1 capital 100 percent of the initial adoption impact of CECL plus 25 percent of the cumulative quarterly changes in the allowance for credit losses (i.e., quarterly transitional amounts). After two years, starting on January 1, 2022, the quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of CET1 capital over the three-year period. For more information, see Note 1 – Significant Accounting Policies.

As of September 30, 2020 and December 31, 2019, OFG Bancorp and the Bank met all capital adequacy requirements to which they are subject. As of September 30, 2020 and December 31, 2019, OFG Bancorp and the Bank are “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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

OFG Bancorp’s and the Bank’s actual capital amounts and ratios as of September 30, 2020 and December 31, 2019 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 September 30, 2020
Total capital to risk-weighted assets	$	1,065,745	15.50%	$	550,009	8.00%	$	687,511	10.00%
Tier 1 capital to risk-weighted assets	$	979,506	14.25%	$	412,506	6.00%	$	550,009	8.00%
Common equity tier 1 capital to risk-weighted assets	$	862,636	12.55%	$	309,380	4.50%	$	446,882	6.50%
Tier 1 capital to average total assets	$	979,506	10.00%	$	391,856	4.00%	$	489,820	5.00%
As of December 31, 2019
Total capital to risk-weighted assets	$	937,962	13.91%	$	539,268	8.00%	$	674,085	10.00%
Tier 1 capital to risk-weighted assets	$	852,311	12.64%	$	404,451	6.00%	$	539,268	8.00%
Common equity tier 1 capital to risk-weighted assets	$	735,441	10.91%	$	303,338	4.50%	$	438,155	6.50%
Tier 1 capital to average total assets	$	852,311	9.24%	$	369,151	4.00%	$	461,438	5.00%



				Minimum Capital			Minimum to be Well
	Actual			Requirement			Capitalized
	Amount		Ratio	Amount		Ratio	Amount		Ratio
	(Dollars in thousands)
Bank Ratios
As of September 30, 2020
Total capital to risk-weighted assets	$	1,019,228	14.89%	$	547,540	8.00%	$	684,425	10.00%
Tier 1 capital to risk-weighted assets	$	933,371	13.64%	$	410,655	6.00%	$	547,540	8.00%
Common equity tier 1 capital to risk-weighted assets	$	933,371	13.64%	$	307,991	4.50%	$	444,876	6.50%
Tier 1 capital to average total assets	$	933,371	9.58%	$	389,708	4.00%	$	487,135	5.00%
As of December 31, 2019
Total capital to risk-weighted assets	$	898,812	13.36%	$	538,279	8.00%	$	672,848	10.00%
Tier 1 capital to risk-weighted assets	$	813,444	12.09%	$	403,709	6.00%	$	538,279	8.00%
Common equity tier 1 capital to risk-weighted assets	$	813,444	12.09%	$	302,782	4.50%	$	437,351	6.50%
Tier 1 capital to average total assets	$	813,444	8.85%	$	367,537	4.00%	$	459,421	5.00%

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 17 – STOCKHOLDERS’ EQUITY

Preferred Stock and Common Stock

At both September 30, 2020 and December 31, 2019, preferred and common stock paid-in capital amounted $92.0 million and $59.9 million, respectively.

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 September 30, 2020 and December 31, 2019, accumulated issuance costs charged against additional paid-in capital amounted to $13.6 million and $10.1 million for common and preferred stock, respectively.

Legal Surplus

The Puerto Rico Banking Act requires that a minimum of 10% of the Bank’s net income 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 September 30, 2020 and December 31, 2019, the Bank’s legal surplus amounted to $101.2 million and $95.8 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 $5.5 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 nine-month period ended September 30, 2020, Oriental purchased 175,000 shares under this program for a total of $2.2 million, at an average price of $12.69 per share. During the nine-month period ended September 30, 2019, Oriental did not repurchase any shares under the program.

At September 30, 2020 the number of shares that may yet be purchased under the $70 million program is estimated at 442,251 and was calculated by dividing the remaining balance of $5.5 million by $12.46 (closing price of Oriental's common stock at September 30, 2020). Oriental did not purchase any shares of its common stock during the nine-month periods ended September 30, 2020, other than through its publicly announced stock repurchase program.

The activity in connection with common shares held in treasury by Oriental for the nine-month periods ended September 30, 2020 and 2019 is set forth below:

		Nine-Month Period Ended September 30,
		2020			2019
			Dollar			Dollar
		Shares	Amount		Shares	Amount
		(In thousands, except shares data)
Beginning of period	$	8,486,278	$	102,339	8,591,310	$	103,633
Common shares used upon lapse of restricted stock units and options		(120,630)		(1,470)	(53,132)		(697)
Common shares repurchased as part of the stock repurchase program		175,000		2,226	-		-
End of period	$	8,540,648	$	103,095	8,538,178	$	102,936

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 18 - ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income, net of income taxes, as of September 30, 2020 and December 31, 2019 consisted of:

	September 30,		December 31,
	2020		2019
	(In thousands)
Unrealized loss on securities available-for-sale which are not other-than-temporarily impaired	$	10,915	$	(306)
Income tax effect of unrealized loss on securities available-for-sale		(1,463)		(135)
Net unrealized gain on securities available-for-sale which are not other-than-temporarily impaired		9,452		(441)
Unrealized (loss) gain on cash flow hedges		(1,894)		(907)
Income tax effect of unrealized (loss) gain on cash flow hedges		710		340
Net unrealized (loss) gain on cash flow hedges		(1,184)		(567)
Accumulated other comprehensive (loss), net of income taxes	$	8,268	$	(1,008)

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents changes in accumulated other comprehensive income by component, net of taxes, for the quarters and nine-months periods ended September 30, 2020 and 2019:

	Quarter Ended September 30,
	2020						2019
	Net unrealized		Net unrealized		Accumulated		Net unrealized		Net unrealized		Accumulated
	gains on		loss on		other		gains on		loss on		other
	securities		cash flow		comprehensive		securities		cash flow		comprehensive
	available-for-sale		hedges		(loss) income		available-for-sale		hedges		(loss) income
	(In thousands)
Beginning balance	$	8,885	$	(1,297)	$	7,588	$	(3,087)	$	(599)	$	(3,686)
Other comprehensive income (loss) before reclassifications		566		(363)		203		(2,143)		(666)		(2,809)
Amounts reclassified out of accumulated other comprehensive income (loss)		1		476		477		3,488		549		4,037
Other comprehensive income (loss)		567		113		680		1,345		(117)		1,228
Ending balance	$	9,452	$	(1,184)	$	8,268	$	(1,742)	$	(716)	$	(2,458)

	Nine-Month Period Ended September 30,
	2020						2019
	Net unrealized		Net unrealized		Accumulated		Net unrealized		Net unrealized		Accumulated
	gains on		loss on		other		gains on		loss on		other
	securities		cash flow		comprehensive		securities		cash flow		comprehensive
	available-for-sale		hedges		(loss) income		available-for-sale		hedges		(loss) income
	(In thousands)
Beginning balance	$	(441)	$	(567)	$	(1,008)	$	(10,972)	$	9	$	(10,963)
Transfer of securities held-to-maturity to available-for-sale		-		-		-		(12,041)		-		(12,041)
Other comprehensive income (loss) before reclassifications		5,165		(2,142)		3,023		13,034		(2,050)		10,984
Amounts reclassified out of accumulated other comprehensive (loss) income		4,728		1,525		6,253		8,237		1,325		9,562
Other comprehensive income (loss)		9,893		(617)		9,276		9,230		(725)		8,505
Ending balance	$	9,452	$	(1,184)	$	8,268	$	(1,742)	$	(716)	$	(2,458)

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents reclassifications out of accumulated other comprehensive income for the quarters and nine-month periods ended September 30, 2020 and 2019:

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

	Quarter Ended September 30,
		2020		2019
	(In thousands)
Cash flow hedges:
Interest-rate contracts	$	476	$	549	Net interest expense
Available-for-sale securities:
Gain on sale of investments		-		3,498	Net gain on sale of securities
Tax effect from changes in tax rates		1		(10)	Income tax expense
	$	477	$	4,037


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

	Nine-Month Period Ended September 30,
		2020		2019
	(In thousands)
Cash flow hedges:
Interest-rate contracts	$	1,525	$	1,325	Net interest expense
Available-for-sale securities:
Gain on sale of investments		4,728		8,274	Net gain on sale of securities
Tax effect from changes in tax rates		1		(38)	Income tax expense
	$	6,254	$	9,561

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 19 – EARNINGS PER COMMON SHARE

The calculation of earnings per common share for the quarters and nine-month periods ended September 30, 2020 and 2019 is as follows:

	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2020		2019		2020		2019
	(In thousands, except per share data)
Net income	$	27,438	$	7,383	$	51,026	$	54,832
Less: Dividends on preferred stock
Non-convertible preferred stock (Series A, B, and D)		(1,628)		(1,628)		(4,884)		(4,884)
Income available to common shareholders	$	25,810	$	5,755	$	46,142	$	49,948

Average common shares outstanding		51,342		51,345		51,361		51,327
Effect of dilutive securities:
Average potential common shares-options		185		427		202		368
Total weighted average common shares outstanding and equivalents		51,527		51,772		51,563		51,695
Earnings per common share - basic	$	0.50	$	0.11	$	0.90	$	0.97
Earnings per common share - diluted	$	0.50	$	0.11	$	0.89	$	0.97

For the quarter ended September 30, 2020, weighted-average stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to 132 thousand. For the quarter ended September 30, 2019, Oriental did not have weighted-average stock options with an anti-dilutive effect on earnings per share. For the nine-month periods ended September 30, 2020, weighted-average stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to 8,105. For the nine-month period ended September 30, 2019, Oriental did not have weighted-average stock options with an anti-dilutive effect on earnings per share.

NOTE 20 – GUARANTEES

At September 30, 2020 and December 31, 2019, the notional amount of the obligations undertaken in issuing the guarantees under standby letters of credit represented a liability of $16.2 million and $47.3 million, respectively.

Oriental has a liability for residential mortgage loans sold subject to credit recourse pursuant to GNMA’s and FNMA’s residential mortgage loan sales and securitization programs. At September 30, 2020, the unpaid principal balance of residential mortgage loans sold subject to credit recourse was $136.8 million. At December 31, 2019, the unpaid principal balance of residential mortgage loans sold subject to credit recourse was $147.4 million, from which $142.5 million were related to the Scotiabank PR & USVI Acquisition.

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 and nine-month periods ended September 30, 2020 and 2019.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2020		2019		2020		2019
	(In thousands)
Balance at beginning of period	$	894	$	225	$	985	$	346
Net (charge-offs/terminations) recoveries		(18)		20		(109)		(101)
Balance at end of period	$	876	$	245	$	876	$	245

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 September 30, 2020, Oriental repurchased $1 thousand in mortgage loans subject to credit recourse. During the quarter ended September 30, 2019, Oriental did not repurchase any mortgage loans subject to the credit recourse provision. During the nine-month periods ended September 30, 2020, Oriental repurchased $481 thousand in mortgage loans subject to credit recourse. During the nine-month periods ended September 30, 2019, Oriental did not repurchase any mortgage loans subject to the credit recourse provision. 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 September 30, 2020, Oriental’s liability for estimated credit losses related to loans sold with credit recourse amounted to $876 thousand (December 31, 2019– $985 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 September 30, 2020, Oriental repurchased $9.6 million (September 30, 2019 – $528 thousand) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to credit recourse provision referred above. During the nine-month periods ended September 30, 2020, Oriental repurchased $18.2 million (September 30, 2019 – $10.5 million) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to credit recourse provision referred above. At September 30, 2020 and December 31, 2019, Oriental had a $2.8 million and a $4.6 million liability, respectively, for the estimated credit losses related to these loans.

During the quarters ended September 30, 2020 and 2019, Oriental recognized $57 thousand and $20 thousand, respectively, in losses from the repurchase of residential mortgage loans sold subject to credit recourse, and $892 thousand in gain and $19 thousand in losses, respectively, from the repurchase of residential mortgage loans as a result of breaches of customary representations and warranties. During the nine-month periods ended September 30, 2020 and 2019, Oriental recognized $1 thousand and $48 thousand, respectively, in losses from the repurchase of residential mortgage loans sold subject to credit recourse, and $1.2 million thousand and $60 thousand, respectively, in losses from the repurchase of residential mortgage loans as a result of breaches of customary representations and warranties.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 September 30, 2020, Oriental serviced $4.3 billion (December 31, 2019 - $4.4 billion) 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 September 30, 2020, the outstanding balance of funds advanced by Oriental under such mortgage loan servicing agreements was approximately $4.6 million (December 31, 2019 - $3.6 million). 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.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 21— 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 September 30, 2020 and December 31, 2019 were as follows:

	September 30,		December 31,
	2020		2019
	(In thousands)
Commitments to extend credit	$	1,050,333	$	853,148
Commercial letters of credit		57		2,178

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 September 30, 2020 and December 31, 2019, 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.

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 September 30, 2020 and December 31, 2019, is as follows:

	September 30,		December 31,
	2020		2019
	(In thousands)
Standby letters of credit and financial guarantees	$	16,225	$	47,251
Loans sold with recourse		136,797		147,399

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 non-performance 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.

On January 1, 2020, Oriental adopted CECL, which requires the measurement of the allowance for credit losses to be based on management’s best estimate of lifetime expected credit losses inherent in all financial assets measured at amortized cost and off-balance-sheet credit exposures. Upon adoption, Oriental recognized an increase in the off-balance sheet allowance of $0.2 million with the corresponding decrease in retained earnings. At September 30, 2020 and December 31, 2019, the allowance for credit losses for off-balance sheet credit exposures corresponding to commitments to extend credit, stand by letters of credit and loans sold with recourse amounted to $1.1 million and $2.7 million, respectively, and is included in other liabilities in the statement of financial condition.

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 arbitration, 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.

In accordance with applicable accounting guidance, Oriental establishes an accrued liability when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a matter develops, Oriental, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, Oriental will establish an accrued liability and record a corresponding amount of expense. At September 30, 2020 and December 31, 2019, this accrued liability amounted to $9.0 million and $6.8 million, respectively. Oriental continues to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established.

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 arbitration, 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.

NOTE 22— OPERATING LEASES

Lessee Accounting

Right of use assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. Lease assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised. The right-of-use asset is measured at the amount of the lease liability adjusted for the remaining balance of any lease incentives received, any cumulative prepaid or accrued rent if the lease payments are uneven throughout the lease term, any unamortized initial direct costs, and any impairment of the right-of-use-asset.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Operating lease expense consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis, and any impairment of the right-of-use asset. Variable lease payments are generally expensed as incurred and include certain nonlease components, such as maintenance and other services provided by the lessor, and other charges included in the lease. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the expense for these short-term leases and for operating leases is recognized on a straight-line basis over the lease term.

Substantially all leases in which Oriental is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2032. Oriental’s leases do not contain residual value guarantees or material variable lease payments. All leases are classified as operating leases and are included on the consolidated statements of financial condition as a right-of-use asset and a corresponding lease liability. Oriental leases to others certain space in its principal offices for terms extending through 2023; all are operating leases.

Operating Lease Cost

	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2020		2019		2020		2019		Statement of Operations Classification
	(In thousands)				(In thousands)
Lease costs	$	3,260	$	1,608	$	10,148	$	4,949	Occupancy and equipment
Variable lease costs		459		350		1,630		1,699	Occupancy and equipment
Short-term lease cost (benefit)		358		81		386		104	Occupancy and equipment
Lease income		(125)		(135)		(374)		(431)	Occupancy and equipment
Total lease cost	$	3,952	$	1,904	$	11,790	$	6,321

Operating Lease Assets and Liabilities

		September 30,	December 31,
		2020	2019		Statement of Financial Condition Classification
	(In thousands)
Right-of-use assets	$	35,900	$	39,112	Operating lease right-of-use assets
Lease Liabilities	$	37,029	$	39,840	Operating leases liabilities

	September 30, 2020
	September 30, 2020
	(In thousands)
Weighted-average remaining lease term		6.2 years
Weighted-average discount rate		6.8%

Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2020 were as follows:

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Minimum Rent
Year Ending December 31,	(In thousands)
2020	$	2,751
2021		9,519
2022		8,158
2023		6,947
2024		4,732
Thereafter		13,924
Total lease payments	$	46,031
Less imputed interest		9,002
Present value of lease liabilities	$	37,029

In April 2020, the FASB staff issued a Q&A document on accounting for lease concessions related to the effects of the COVID-19 pandemic. The FASB staff noted that entities may elect to not evaluate whether certain concessions provided by lessors to mitigate the effects of COVID-19 on lessees are lease modifications. This option is intended to reduce the operational challenges of individually assessing every COVID-19 related lease concession to determine whether it results in having to apply Topic 842 lease modification guidance. This election is available only for concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in either the rights of the lessor or the obligations of the lessee. For entities that choose this election, they may account for the concession as if no changes to the lease contract were made. Under that accounting, a lessor would continue to recognize income. Oriental has elected to apply the relief provided by the FASB not to evaluate individual contracts. Oriental also elected not to apply the lease modification framework for concessions granted.

Oriental, as lessor, leases and subleases real property to lessee tenants under operating leases. As of September 30, 2020, no material lease concessions have been granted to lessees. Oriental, as lessee, also leases real estate property for branch locations, ATM locations, and office space. As of September 30, 2020, Oriental has not requested any lease concessions.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 23 - 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 valuations obtained from an independent pricing provider, ICE Data Pricing (formerly known as IDC). ICE is a well-recognized pricing company and an established leader in financial information. 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 September 30, 2020 and 2019, Oriental did not have investment securities classified as Level 3.

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.

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.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

	September 30, 2020
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
	(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale	$	91,531	$	332,284	$	-	$	423,815
Trading securities		-		22		-		22
Money market investments		14,617		-		-		14,617
Derivative assets		-		1		-		1
Servicing assets		-		-		47,242		47,242
Derivative liabilities		-		(1,895)		-		(1,895)
	$	106,148	$	330,412	$	47,242	$	483,802
Non-recurring fair value measurements:
Collateral dependent loans		-		-		32,800		32,800
Foreclosed real estate		-		-		19,456		19,456
Other repossessed assets		-		-		1,918		1,918
	$	-	$	-	$	54,174	$	54,174

	December 31, 2019
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
	(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale	$	397,183	$	676,986	$	-	$	1,074,169
Trading securities		-		37		-		37
Money market investments		6,775		-		-		6,775
Derivative assets		-		6		-		6
Servicing assets		-		-		50,779		50,779
Derivative liabilities		-		(913)		-		(913)
	$	403,958	$	676,116	$	50,779	$	1,130,853
Non-recurring fair value measurements:
Impaired commercial loans	$	-	$	-	$	61,128	$	61,128
Foreclosed real estate		-		-		29,909		29,909
Other repossessed assets		-		-		3,327		3,327
	$	-	$	-	$	94,364	$	94,364

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 and nine-month periods ended September 30, 2020 and 2019:

Level 3 Instruments Only
	Servicing Assets
	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2020		2019		2020		2019
	(In thousands)
Balance at beginning period	$	47,926	$	10,134	$	50,779	$	10,716
New instruments acquired		656		352		1,236		860
Principal repayments		(1,365)		(243)		(2,810)		(694)
Changes in fair value of servicing assets		25		(118)		(1,963)		(757)
Balance at end of period	$	47,242	$	10,125	$	47,242	$	10,125

There were no transfers into or out of level 3 and no changes in unrealized gains and losses from recurring level 3 fair value measurements held at September 30, 2020 and 2019 during the quarters and nine-month periods then ended included in other comprehensive income. For more information on the qualitative information about level 3 fair value measurements, see Note 8 – Servicing Assets.

During the quarters and nine-month periods ended September 30, 2020 and 2019, there were purchases and sales of assets and liabilities measured at fair value on a recurring basis.

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 September 30, 2020:

	September 30, 2020
	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average
	(In thousands)

Servicing assets	$	47,242	Cash flow valuation	Constant prepayment rate	5.02% - 25.8%	6.87%
				Discount rate	10.00% - 15.50%	11.52%

Collateral dependent loans	$	32,800	Fair value of property or collateral	Appraised value less disposition costs	14.20% - 44.20%	21.45%

Foreclosed real estate	$	19,456	Fair value of property or collateral	Appraised value less disposition costs	14.20% - 40.20%	18.68%

Other repossessed assets	$	1,918	Fair value of property or collateral	Estimated net realizable value less disposition costs	30.00% - 62.00%	52.06%

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The estimated fair value and carrying value of Oriental’s financial instruments at September 30, 2020 and December 31, 2019 is as follows:

	September 30,				December 31,
	2020				2019
	Fair		Carrying		Fair		Carrying
	Value		Value		Value		Value
	(In thousands)
Level 1
Financial Assets:
Cash and cash equivalents	$	2,282,000	$	2,282,000	$	851,307	$	851,307
Restricted cash	$	1,050	$	1,050	$	1,450	$	1,450
Investment securities available-for-sale	$	91,531	$	91,531	$	397,183	$	397,183
Level 2
Financial Assets:
Trading securities	$	22	$	22	$	37	$	37
Investment securities available-for-sale	$	332,284	$	332,284	$	676,986	$	676,986
Federal Home Loan Bank (FHLB) stock	$	8,322	$	8,322	$	13,048	$	13,048
Other investments	$	2,205	$	2,205	$	560	$	560
Derivative assets	$	1	$	1	$	6	$	6
Financial Liabilities:
Derivative liabilities	$	1,895	$	1,895	$	913	$	913
Level 3
Financial Assets:
Total loans (including loans held-for-sale)	$	6,165,071	$	6,579,140	$	5,894,745	$	6,641,847
Accrued interest receivable	$	71,830	$	71,830	$	36,781	$	36,781
Servicing assets	$	47,242	$	47,242	$	50,779	$	50,779
Accounts receivable and other assets	$	75,158	$	75,158	$	78,600	$	78,600
Financial Liabilities:
Deposits	$	8,548,518	$	8,632,457	$	7,679,685	$	7,698,610
Securities sold under agreements to repurchase	$	-	$	-	$	190,345	$	190,274
Advances from FHLB	$	69,410	$	66,543	$	79,620	$	78,009
Other borrowings	$	238	$	238	$	1,195	$	1,195
Subordinated capital notes	$	34,031	$	36,083	$	35,886	$	36,083
Accrued expenses and other liabilities	$	162,133	$	162,133	$	185,660	$	185,660

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following methods and assumptions were used to estimate the fair values of significant financial instruments at September 30, 2020 and December 31, 2019:

• Cash and cash equivalents (including money market investments and time deposits with other banks), restricted cash, accrued interest receivable, accounts receivable and other assets, accrued expenses and other liabilities, and other borrowings 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 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, 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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 24 – BANKING AND FINANCIAL SERVICE REVENUES

The following table presents the major categories of banking and financial service revenues for the quarters and nine-month periods ended September 30, 2020 and 2019:

	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2020		2019		2020		2019
	(In thousands)
Banking service revenues:
Checking accounts fees	$	1,940	$	1,545	$	6,572	$	4,494
Savings accounts fees		354		187		1,192		484
Electronic banking fees		12,760		8,018		34,582		24,121
Credit life commissions		59		158		201		426
Branch service commissions		232		337		959		1,055
Servicing and other loan fees		742		433		1,551		1,069
International fees		157		127		454		393
Miscellaneous income		53		8		167		12
Total banking service revenues		16,297		10,813		45,678		32,054

Wealth management revenue:
Insurance income		2,486		1,576		7,308		4,505
Broker fees		1,746		1,913		5,128		5,637
Trust fees		2,788		2,895		7,818		8,307
Retirement plan and administration fees		252		227		670		713
Total wealth management revenue		7,272		6,611		20,924		19,162

Mortgage banking activities:
Net servicing fees		3,139		1,033		8,506		2,592
Net gains on sale of mortgage loans and valuation		1,368		124		2,187		375
Other		(590)		(39)		(470)		(14)
Total mortgage banking activities		3,917		1,118		10,223		2,953
Total banking and financial service revenues	$	27,486	$	18,542	$	76,825	$	54,169

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Oriental recognizes the revenue from banking services, wealth management and mortgage banking based on the nature and timing of revenue streams from contracts with customer:

Banking Service Revenues

Electronic banking fees are credit and debit card processing services, use of the Bank’s ATMs by non-customers, debit card interchange income and service charges on deposit accounts. Revenue is recorded once the contracted service has been provided.

Service charges on checking and saving accounts as consumer periodic maintenance revenue is recognized once the service is rendered, while overdraft and late charges revenue are recorded after the contracted service has been provided.

Other income as credit life commissions, servicing and other loan fees, international fees, and miscellaneous fees recognized as banking services revenue are out of the scope of ASC 606 – Revenue from Contracts with Customers.

Wealth Management Revenue

Insurance income from commissions and sale of annuities are recorded once the sale has been completed.

Brokers fees consist of two categories:

 Sales commissions generated by advisors for their clients’ purchases and sales of securities and other investment products, which are collected once the stand-alone transactions are completed at trade date or as earned, and managed account fees which are fees charged to advisors’ clients’ accounts on the Company corporate advisory platform. These revenues do not cover future services, as a result there is no need to allocate the amount received to any other service.

 Fees for providing distribution services related to mutual funds, net of compensation paid to a service provider who provides such services, as well as trailer fees (also known as 12b-1 fees). These fees are considered variable and are recognized over time, as the uncertainty of the fees to be received is resolved as the net asset value of the mutual fund is determined and investor activity occurs. Fees do not cover future services, as a result there is no need to allocate the amount received to any other service.

Retirement plan and administration fees are revenues related to the payment received from the clients of OPC for assistance with the planning, design and administration of retirement plans, acting as third-party administrator for such plans, and daily record keeping services of retirement plans. Fees are collected once the stand-alone transaction was completed at trade date. Fees do not cover future services, as a result there is no need to allocate the amount received to any other service.

Trust fees are revenues related to fiduciary services provided to 401K retirement plans, a unit investment trust, and retirement plans, which include investment management, payment of distributions, if any, safekeeping, custodial services of plan assets, servicing of Trust officers, on-going due diligence of the Trust, and recordkeeping of transactions. Fees are billed based on services contracted. Negotiated fees are detailed in the contract. Fees collected in advance, are amortized over the term of the contract. Fees are collected on a monthly basis once the administrative service has been completed. Monthly fee does not include future services.

Investment banking fees as compensation fees are out of the scope of ASC 606.

Mortgage Banking Activities

Mortgage banking activities as servicing fees, gain on sale of mortgage loans valuation and other are out of the scope of ASC 606.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 25 – 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 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Following are the results of operations and the selected financial information by operating segment for the quarters and nine-month periods ended September 30, 2020 and 2019:

	Quarter Ended September 30, 2020
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	112,832	$	14	$	2,091	$	114,937	$	-	$	114,937
Interest expense		(14,092)		-		(1,312)		(15,404)		-		(15,404)
Net interest income		98,740		14		779		99,533		-		99,533
Provision for loan and lease losses, net		(14,461)		-		792		(13,669)		-		(13,669)
Non-interest income		23,994		7,323		9		31,326		-		31,326
Non-interest expenses		(76,988)		(5,138)		(1,318)		(83,444)		-		(83,444)
Intersegment revenue		769		-		-		769		(769)		-
Intersegment expenses		-		(225)		(544)		(769)		769		-
Income before income taxes	$	32,054	$	1,974	$	(282)	$	33,746	$	-	$	33,746
Income tax expense		6,308		(13)		13		6,308		-		6,308
Net income	$	25,746	$	1,987	$	(295)	$	27,438	$	-	$	27,438
Total assets	$	9,367,141	$	33,006	$	1,725,221	$	11,125,368	$	(1,106,377)	$	10,018,991

	Nine-Month Period Ended September 30, 2020
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	351,933	$	46	$	8,347	$	360,326	$	-	$	360,326
Interest expense		(44,307)		-		(6,325)		(50,632)		-		(50,632)
Net interest income		307,626		46		2,022		309,694		-		309,694
Provision for loan and lease losses, net		(77,795)		-		(701)		(78,496)		-		(78,496)
Non-interest income		64,349		21,089		4,490		89,928		-		89,928
Non-interest expenses		(237,943)		(14,819)		(3,485)		(256,247)		-		(256,247)
Intersegment revenue		1,920		-		-		1,920		(1,920)		-
Intersegment expenses		-		(580)		(1,340)		(1,920)		1,920		-
Income before income taxes	$	58,157	$	5,736	$	986	$	64,879	$	-	$	64,879
Income tax expense		9,305		4,506		42		13,853		-		13,853
Net income	$	48,852	$	1,230	$	944	$	51,026	$	-	$	51,026
Total assets	$	9,367,141	$	33,006	$	1,725,221	$	11,125,368	$	(1,106,377)	$	10,018,991

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Quarter Ended September 30, 2019
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	85,147	$	16	$	8,492	$	93,655	$	-	$	93,655
Interest expense		(9,260)		-		(3,685)		(12,945)		-		(12,945)
Net interest income		75,887		16		4,807		80,710		-		80,710
Provision for loan and lease losses, net		(43,678)		-		(92)		(43,770)		-		(43,770)
Non-interest income		11,946		6,719		3,513		22,178		-		22,178
Non-interest expenses		(46,555)		(3,450)		(722)		(50,727)		-		(50,727)
Intersegment revenue		507		-		-		507		(507)		-
Intersegment expenses		-		(141)		(366)		(507)		507		-
Income before income taxes	$	(1,893)	$	3,144	$	7,140	$	8,391	$	-	$	8,391
Income tax expense		(738)		1,226		520		1,008		-		1,008
Net income	$	(1,155)	$	1,918	$	6,620	$	7,383	$	-	$	7,383
Total assets	$	5,919,877	$	26,596	$	1,465,329	$	7,411,802	$	(1,078,297)	$	6,333,505


	Nine-Month Period Ended September 30, 2019
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	253,138	$	53	$	29,429	$	282,620	$	-	$	282,620
Interest expense		(27,083)		-		(11,953)		(39,036)		-		(39,036)
Net interest income		226,055		53		17,476		243,584		-		243,584
Provision for loan and lease losses, net		(73,560)		-		(164)		(73,724)		-		(73,724)
Non-interest income		34,932		19,537		8,313		62,782		-		62,782
Non-interest expenses		(139,384)		(11,675)		(3,272)		(154,331)		-		(154,331)
Intersegment revenue		1,648		-		-		1,648		(1,648)		-
Intersegment expenses		-		(480)		(1,168)		(1,648)		1,648		-
Income before income taxes	$	49,691	$	7,435	$	21,185	$	78,311	$	-	$	78,311
Income tax expense		18,634		2,788		2,057		23,479		-		23,479
Net income	$	31,057	$	4,647	$	19,128	$	54,832	$	-	$	54,832
Total assets	$	5,919,877	$	26,596	$	1,465,329	$	7,411,802	$	(1,078,297)	$	6,333,505

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,” “Risk Factors,” and "Quantitative and Qualitative Disclosures about Market Risk" in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 and set forth in our Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”), for discussion of the uncertainties, risks and assumptions associated with these statements.

Other factors not identified above, including those described under the headings in our Annual Report on Form 10-K for the year ended December 31, 2019 may also cause actual results to differ materially from those described in our forward-looking 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 55 branches in Puerto Rico, 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.

RECENT DEVELOPMENTS

COVID-19 Pandemic 2020

In the first quarter of 2020, the World Health Organization declared the outbreak of Covid-19 a pandemic. The Covid-19 pandemic has resulted in authorities implementing numerous measures attempting to contain the spread and impact of Covid-19, such as travel bans and restrictions, quarantines, shelter-in-place orders and limitations on business activity, including closures. These measures are severely restricting global economic activity, disrupting global supply chains, lowering asset valuations, significantly increasing unemployment and underemployment levels, decreasing liquidity in markets for certain securities and causing significant volatility and disruptions in financial markets. To address the economic impact in the U.S., in March and April 2020, the President signed into law four economic stimulus packages to provide relief to businesses and individuals, including the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Among other measures, the CARES Act created funding for the Small Business Administration (SBA) Paycheck Protection Program (PPP), which provides loans to small businesses to keep their employees on payroll and make other eligible payments. The original funding for the PPP was fully allocated by mid-April 2020, with additional funding made available on April 24, 2020 under the Paycheck Protection Program and Health Care Enhancement Act. On April 9, 2020, the Board of Governors of the Federal Reserve System (Federal Reserve) provided additional funding sources for small and mid-sized businesses as well as for state and local governments as they work through cash flow stresses caused by the Covid-19 pandemic. Additionally, the Federal Reserve has taken other steps to provide fiscal and monetary stimuli, including reducing the federal funds rate and the interest rate on the Federal Reserve’s discount window, and implementing programs to promote liquidity in certain securities markets. The Federal Reserve, along with other U.S. banking regulators, has also issued interagency guidance to financial institutions that are working with borrowers affected by Covid-19. In March, governments in Puerto Rico and U.S. Virgin Islands (“USVI”) shut down non-essential businesses and imposed restrictions on individual’s activities. Puerto Rico-based claims for unemployment have risen considerably since March of 2020. The Puerto Rico and USVI "stay at home" directives excluded essential businesses, including banks, and Oriental remained open and fully operational as described below. These "stay at home" directives significantly reduced economic activity in the Puerto Rico and the USVI. These tough measures, however, enabled Puerto Rico to

begin to relax restrictions on economic activity by the end of the second quarter and beginning of the third, with a noticeable rebound in the economy.

In response to the pandemic, Oriental has implemented protocols and processes to help protect our employees and clients. These measures included:

 Enhancing workplace safety by providing protective gear, increased sanitation and enforcing social distancing.

 Operating our businesses from remote locations, leveraging our business continuity plans and capabilities that include having approximately 50% of employees work from home, and other employees operating using pre-planned contingency strategies for critical site-based operations. These capabilities have allowed us to continue to service our clients. We will continue to manage the increased operational risk related to the execution of our business continuity plans in accordance with our Risk Framework and Operational Risk Management Program.

 Expanding health insurance and benefits for employees, including coverage of the Covid-19 tests and related telemedicine, opening insurance networks of laboratories, pharmacies and doctors to ease employee access, and providing safety kits to all employees for personal or family use.

 Providing uninterrupted and excellent levels of service, achieved through all channels, phone, digital, branch appointments, ATMs, interactive ATMs, and drive-thru tellers, while maintaining employee and customer safety and social distancing. Oriental was the first bank in Puerto Rico and USVI to establish consumer and business relief programs accessible online to clients affected by Covid-19 and scheduling appointments at most branches through its webpage.

 Offering assistance to our commercial, consumer and small business clients affected by the Covid-19 pandemic, which includes payment deferrals, waivers of certain fees, doubling the amount that can be withdrawn or transferred via online banking and mobile check deposit, elimination of adverse credit reports, participation in the CARES Act and Federal Reserve lending programs for businesses, including the SBA PPP, and continuing to provide access to the important financial services on which our clients rely.

 Launching a digital portal, to make it fast and easy for our commercial clients to apply for PPP loan forgiveness.

In connection with reviewing our financial condition in light of the pandemic, we evaluated our assets, including goodwill and other intangibles, for potential impairment. Based upon our review as of September 30, 2020, no impairments have been recorded and there have been no significant changes in fair value hierarchy classifications. We have also elected to delay for two years the phase-in of the capital impact from our adoption of the new accounting standard on credit losses. For more information, see Regulatory Capital section in the MD&A.

On April 7, 2020, the federal banking agencies along with the National Credit Union Administration, and the Consumer Financial Protection Bureau, in consultation with the state financial regulators, issued an interagency statement revising a March 22, 2020 interagency statement on loan modifications and the reporting for financial institutions working with customers affected by the Covid-19 pandemic (the “Inter Agency Statement”). The Inter Agency Statement reconfirmed that efforts to work with borrowers where the loans are prudently underwritten, and not considered past due or carried on nonaccrual status, should not result in the loans automatically being considered modified in a troubled debt restructuring (“TDR”) for accounting and financial reporting purposes, or for purposes of their respective risk-based capital rules, which would otherwise require financial institutions subject to the capital rules to hold more capital. The Inter Agency Statement also clarified the interaction between its previous guidance and Section 4013 of the CARES Act, which provides certain financial institutions with the option to suspend the application of accounting guidance for TDRs for a limited period of time for loan modifications made to address the effects of the Covid-19 pandemic.

Oriental has granted various forms of assistance to customers and clients impacted by the Covid-19 pandemic, including payment deferrals. The majority of Oriental’s Covid-19 related loan modifications have not been considered TDRs as:


•	they represent short-term or other insignificant modifications, whether under Oriental’s regular loan modification assessments or the Inter Agency Statement guidance, or

•	Oriental has elected to apply the option to suspend the application of accounting guidance for TDRs as provided under section 4013 of the CARES Act.

To the extent that certain modifications do not meet any of the above criteria, Oriental accounts for them as TDRs.

As of June 30, 2020, Oriental had processed Covid-19 payment deferrals for more than 44,000 retail customers for $1.4 billion dollars or 32% of our retail loans. For our commercial customers, we had processed relief on $685 million dollars in loans or about 27% of

our commercial portfolio. Deferrals have decreased from 30% of total loans in the second quarter to 2% of total loans in the third quarter. As of September 30, 2020, Oriental had loans subject to Covid-19 payment deferrals as follows:

		Covid-19 Moratoriums				% of Total Population
		Amount		Count		% of Total Population
	(Dollars in thousands)
Mortgage		$	23,951		237		1%
Commercial			112,385		46		5%
Total		$	136,336		283		2%

Mortgage loans in the payment deferral program above consist of FHA and VA insured mortgage loans. Most commercial loans represent well-capitalized customers in the hospitality industry. For payment deferral programs that have expired at September 30, 2020, only 3%, or $14.6 million, in the auto loan portfolio and 2% or $13.5 million, in the mortgage loan portfolio have deteriorated to non-performing status. In accordance with Oriental’s policies, all accrued interest receivable of these loans in non-performing status have been reversed. The rest of the loan portfolios have not shown signs of deterioration.

Additionally, Oriental is a lender for the Small Business Administration's (“SBA”) Paycheck Protection Program ("PPP"), a program under the CARES Act, and other SBA, Federal Reserve or United States Treasury programs that have been created in response to the pandemic and may be a lender for programs created in the future. These programs are new and their effects on the Company’s business are uncertain. Through September 30, 2020, Oriental had approved 5,074 PPP loans amounting to $297 million, impacting more than 50,000 employees.

The macro-economic environment for the quarter ended September 30, 2020 has benefited from reduced Covid-19 related government restrictions on economic activity, combined with growing liquidity from the federal stimulus programs Puerto Rico is receiving related to the recovery from hurricane Maria in 2017, the early 2020 earthquakes, and now the Covid-19 pandemic.

Although the macroeconomic outlook improved modestly in the quarter ended September 30, 2020, the future direct and indirect impact of COVID-19 on our businesses, results of operations and financial condition remain highly uncertain. Should current economic conditions persist or deteriorate, this macroeconomic environment may have an adverse effect on our businesses, results of operations and financial condition. For more information on how the risks related to the COVID-19 pandemic may adversely affect our businesses, results of operations and financial condition, see Part II, Item 1A. Risk Factors.

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 2019 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 2019 Form 10-K, we identified several accounting policies as critical, including the following, 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:

 Business Combinations

 Allowance for Loan and Lease Losses

 Acquisition Accounting for Loans

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary based on changing conditions and update them as necessary, based on changing conditions.

Business Combinations

Oriental accounted for the Scotiabank PR & USVI Acquisition, the BBVAPR Acquisition and the FDIC-assisted acquisition of Eurobank under the accounting guidance of ASC Topic No. 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets and liabilities acquired were initially recorded at fair value. No allowance for loan losses related to the acquired loans was recorded on the acquisition date. Loans acquired were recorded at fair value in accordance with the fair value methodology prescribed in ASC Topic 820.

The fair values initially assigned to assets acquired and liabilities assumed are preliminary and subject to refinement for up to one year after the closing date of the acquisition as new information relative to closing date fair values becomes available. Oriental is currently in the final steps for complete integration, which should be completed during the fourth quarter of the year 2020.

Allowance for Credit Losses

In the first quarter of 2020, we adopted ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) and updated our critical accounting policy and estimate for loan loss reserves. We maintain an allowance for credit losses that represents management’s current estimate of expected credit losses inherent in our commercial, mortgage, consumer and auto loans held for investment as of each balance sheet date.

We have an established process, using analytical tools and management judgment, to determine our allowance for credit losses. Establishing the allowance each quarter involves evaluating many factors including, but not limited to, historical loss and recovery experience, recent trends in delinquencies and charge-offs, risk ratings, the value of collateral underlying secured loans, current general economic conditions, our reasonable and supportable forecasts of future economic conditions, changes in the legal and regulatory environment and uncertainties in forecasting and modeling techniques used in estimating our allowance for credit losses. Key factors that have a significant impact on our allowance for credit losses include assumptions about expected prepayments, unemployment rates, gross domestic product, gross state product, business and personal bankruptcies, and the valuation of commercial properties, FICO and collateral value.

We have a governance framework intended to ensure that our estimate of the allowance for credit losses is appropriate. Our governance framework provides for oversight of methods, models, qualitative adjustments, process controls and results. At least quarterly, representatives from Finance and Risk Management review and assess our allowance methodologies, key assumptions and the appropriateness of the allowance for credit losses. The annual assessment on key assumptions was performed during the quarter ended September 30, 2020 and changes determined have been incorporated into the allowance for credit losses model.

In addition to the allowance for credit losses, on a quarterly basis, we review and assess our estimate of expected losses related to unfunded lending commitments that are not unconditionally cancellable. The factors impacting our assessment generally align with those considered in our evaluation of the allowance for credit losses for the funded exposure and are reported as reserves for unfunded lending commitment. Changes to the reserve for losses on unfunded commitments are recorded through the provision for credit losses in the consolidated statements of income and to other liabilities on the consolidated balance sheets.

Although we examine a variety of externally available data, as well as our internal loan performance data, to determine our allowance for credit losses and reserve for unfunded lending commitments, our estimation process is subject to risks and uncertainties, including a reliance on historical loss and trend information that may not be representative of current conditions and indicative of future performance as well as economic forecasts that may not align with actual future economic conditions. Accordingly, our actual credit loss experience may not be in line with our expectations. We provide additional information on the methodologies and key assumptions used in determining our allowance for credit losses for each of our loan portfolio segments in “Note 1—Summary of Significant Accounting Policies” and changes in our allowance in “Note 6—Allowance for Credit Losses”.

Acquisition Accounting for Loans

Oriental has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. CECL replaces the concept of purchased credit impaired loans with the concept of purchased financial assets with credit deterioration (PCD). PCD accounting is called ‘gross-up accounting’ because, at acquisition, an entity grosses up the amortized cost basis of the PCD asset for the initial estimate of credit losses. PCD loans are recorded at the amount paid. An allowance for credit losses is determined using

the same methodology as other loans held for investment. These loans are not classified as nonperforming even though the customer may be contractually past due because we expect that we will fully collect the carrying value of these loans because the loan pool remains accruing.

Upon adoption of CECL, Oriental elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. Upon adoption of CECL, the allowance for credit losses was determined for each pool and added to the pool’s carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the pool and the new amortized cost basis is the non-credit premium or discount which will be amortized interest income over the remaining life of the pool. Changes to the allowance for credit losses after adoption are recorded through provision expense.

Apart from these changes, there have been no other material changes in the methods used to formulate these critical accounting estimates from those discussed in our 2019 Form 10-K.

SELECTED FINANCIAL DATA

	Quarter Ended September 30,					Nine-Month Period Ended September 30,
					Variance					Variance
	2020		2019		%	2020		2019		%
EARNINGS DATA:	(In thousands, except per share data)					(In thousands, except per share data)
Interest income	$	114,937	$	93,655	22.7%	$	360,326	$	282,620	27.5%
Interest expense		15,404		12,945	19.0%		50,632		39,036	29.7%
Net interest income		99,533		80,710	23.3%		309,694		243,584	27.1%
Provision for loan and lease losses, net		13,669		43,770	-68.8%		78,496		73,724	6.5%
Net interest income after provision for loan and lease losses		85,864		36,940	132.4%		231,198		169,860	36.1%
Non-interest income		31,326		22,178	41.2%		89,928		62,782	43.2%
Non-interest expenses		83,444		50,727	64.5%		256,247		154,331	66.0%
Income before taxes		33,746		8,391	302.2%		64,879		78,311	-17.2%
Income tax expense		6,308		1,008	525.8%		13,853		23,479	-41.0%
Net income		27,438		7,383	271.6%		51,026		54,832	-6.9%
Less: dividends on preferred stock		(1,628)		(1,628)	0.0%		(4,884)		(4,884)	0.0%
Income available to common shareholders	$	25,810	$	5,755	348.5%	$	46,142	$	49,948	-7.6%
PER SHARE DATA:
Basic	$	0.50	$	0.11	354.5%	$	0.90	$	0.97	-7.2%
Diluted	$	0.50	$	0.11	354.5%	$	0.89	$	0.97	-8.2%
Average common shares outstanding		51,342		51,345	0.0%		51,361		51,327	0.1%
Average common shares outstanding and equivalents		51,527		51,772	-0.5%		51,563		51,695	-0.3%
Cash dividends declared per common share	$	0.07	$	0.07	0.0%	$	0.21	$	0.21	0.0%
Cash dividends declared on common shares	$	3,595	$	3,596	0.0%	$	10,787	$	10,782	0.0%
PERFORMANCE RATIOS:
Return on average assets (ROA)		1.11%		0.46%	140.6%		0.71%		1.12%	-36.6%
Return on average tangible common equity		12.23%		2.58%	374.0%		7.44%		7.67%	-3.0%
Return on average common equity (ROE)		10.53%		2.35%	348.0%		6.37%		6.96%	-8.5%
Efficiency ratio		65.69%		51.11%	28.5%		66.30%		51.83%	27.9%
Interest rate spread		4.25%		5.23%	-18.7%		4.60%		5.26%	-12.5%
Interest rate margin		4.30%		5.35%	-19.7%		4.65%		5.38%	-13.6%

SELECTED FINANCIAL DATA - (Continued)

	September 30,		December 31,		Variance
	2020		2019		%
PERIOD END BALANCES AND CAPITAL RATIOS:	(In thousands, except per share data)
Cash, cash equivalents and restricted cash	$	2,283,050	$	852,757	167.7%
Investments and loans
Investment securities	$	434,364	$	1,087,814	-60.1%
Loans and leases, net		6,579,140		6,641,847	-0.9%
Total investments and loans	$	7,013,504	$	7,729,661	-9.3%
Deposits and borrowings
Deposits	$	8,632,457	$	7,698,610	12.1%
Securities sold under agreements to repurchase		-		190,274	-100.0%
Other borrowings		102,864		115,287	-10.8%
Total deposits and borrowings	$	8,735,321	$	8,004,171	9.1%
Stockholders’ equity
Preferred stock	$	92,000	$	92,000	0.0%
Common stock		59,885		59,885	0.0%
Additional paid-in capital		621,978		621,515	0.1%
Legal surplus		101,233		95,779	5.7%
Retained earnings		284,053		279,646	1.6%
Treasury stock, at cost		(103,095)		(102,339)	-0.7%
Accumulated other comprehensive (loss)		8,268		(1,008)	-920.2%
Total stockholders' equity	$	1,064,322	$	1,045,478	1.8%
Per share data
Book value per common share	$	19.13	$	18.75	2.0%
Tangible book value per common share	$	16.51	$	15.96	3.4%
Market price at end of period	$	12.46	$	23.61	-47.2%
Capital ratios
Leverage capital		10.00%		9.24%	8.2%
Common equity Tier 1 capital ratio		12.55%		10.91%	15.0%
Tier 1 risk-based capital		14.25%		12.64%	12.7%
Total risk-based capital		15.50%		13.91%	11.4%
Equity-to-assets ratio		10.62%		11.24%	-5.5%
Financial assets managed
Trust assets managed	$	3,163,803	$	3,136,884	0.9%
Broker-dealer assets	$	2,274,972	$	2,375,871	-4.2%

FINANCIAL HIGHLIGHTS

Oriental had a strong third quarter performance in core business compared to the last quarter due to an improved macro-economic environment in Puerto Rico and the U.S. Virgin Islands coupled with being resilient, agile, and more than ready to service the changing needs of the customers and communities.

Our success was driven by staying close to our customers and the communities we serve, providing the financial solutions they need as we enter what appears to be a nascent and potentially expanding recovery.

The macro-economic environment benefited from reduced Covid-19 related government restrictions on economic activity, combined with growing liquidity from the federal stimulus programs Puerto Rico is receiving related to the recovery from hurricane Maria, the early 2020 earthquakes, and now the Covid-19 pandemic.

Customer accounts grew, and digital migration expanded. Deposit gathering and loan production were robust. Credit quality continued to be under control. Operating efficiency improved, and the Scotiabank integration is proceeding on schedule.

Return on average assets increased to 1.11%, return on average tangible common stockholders' equity expanded to 12.23%, and tangible book value, at $16.51 per share, continued to grow.

Third quarter of 2020:

 Increased Earnings: EPS diluted of $0.50 increased 28% compared to $0.39 in the second quarter of 2020 and 355% compared to $0.11 in the third quarter of 2019. Total core revenues were $127.0 million versus $128.2 million in the second quarter of 2020 and $99.3 million in the third quarter of 2019. Net interest margin was 4.30% compared to 4.78% in the second quarter of 2020. The effective tax rate was 18.7% based on a higher than originally anticipated proportion of exempt income.

 Lower Provision: Provision for credit losses fell 23% to $13.7 million from $17.7 million in the second quarter of 2020 and 69% from $43.8 million in the third quarter of 2019. Credit quality also reflected reduced deferrals (2.0% of total loans compared to 30.0%), $5.2 million in lower net charge offs, and increases in the total delinquency and non-performing loan rates of 11 bps and 52 bps, respectively, for non-PCD loans, from the second quarter of 2020.

 Expense Reduction: Non-interest expenses of $83.4 million fell more than 2% or $2.0 million compared to $85.5 million in the second quarter of 2020, with the efficiency ratio improving 101 bps to 65.7%. Excluding merger and Covid-19 related costs, the adjusted efficiency ratio improved 369 bps to 62.2% from the second quarter of 2020, as increased operating leverage from the Scotiabank acquisition began to kick in.

 Deposit and Cash Growth: Customer deposits grew $212.6 million to $8.5 billion on September 30, 2020 from June 30, 2020. Due to the increased deposits as well as repayments of loans and securities, cash increased $383.0 million, to $2.3 billion. As a result, total assets grew $83.6 million to $10.0 billion, which Oriental does not anticipate exceeding on December 31, 2020.

 Strong Production: Loan production totaled $457.8 million compared to $506.0 million in the second quarter of 2020. Excluding Paycheck Protection Program loans, production increased $227.8 million, driven by commercial, auto, mortgage and consumer lending. Net loans were $6.6 billion on September 30, 2020 compared to $6.7 billion on June 30, 2020.

 Capital Building: Tangible book value per share expanded 3% or $0.50 to $16.51 compared to the second quarter of 2020. All regulatory capital ratios continued to be significantly above requirements for a well-capitalized institution. The CET1 ratio was 12.55% on September 30, 2020 compared to 12.03% on June 30, 2020 and 17.98% on September 30, 2019, the quarter before the Scotiabank acquisition.

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 and nine-month periods ended September 30, 2020 and 2019:

TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED SEPTEMBER 30, 2020 AND 2019

	Interest				Average rate		Average balance
	September		September		September	September	September		September
	2020		2019		2020	2019	2020		2019
	(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets	$	114,938	$	93,655	4.96%	6.21%	$	9,218,717	$	5,981,756
Tax equivalent adjustment		2,427		2,629	0.10%	0.17%		-		-
Interest-earning assets - tax equivalent		117,365		96,284	5.06%	6.38%		9,218,717		5,981,756
Interest-bearing liabilities		15,404		12,945	0.71%	0.98%		8,619,955		5,261,510
Tax equivalent net interest income / spread		101,961		83,339	4.35%	5.40%		598,762		720,246
Tax equivalent interest rate margin					4.45%	5.58%
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities		2,278		3,797	1.81%	2.14%		502,671		708,606
Interest bearing cash and money market investments		613		4,086	0.13%	2.21%		1,929,024		734,105
Total investments		2,891		7,883	0.47%	2.17%		2,431,695		1,442,711
Non-PCD/Non-PCI loans
Mortgage		11,208		8,427	5.51%	5.40%		814,189		623,772
Commercial		27,667		25,614	5.20%	6.36%		2,117,502		1,598,860
Consumer		12,931		11,964	11.31%	12.11%		454,780		391,899
Auto		31,223		28,905	8.37%	9.11%		1,484,282		1,259,212
Total Non-PCD/Non-PCI loans		83,029		74,910	6.78%	7.67%		4,870,753		3,873,743

PCD/PCI loans
Mortgage		21,843		7,093	5.75%	5.76%		1,511,567		488,716
Commercial		6,390		3,456	6.92%	7.90%		367,475		173,472
Consumer		35		240	4.87%	116.30%		2,839		826
Auto		750		73	8.68%	12.66%		34,388		2,288
Total PCD/PCI loans		29,018		10,862	6.06%	6.53%		1,916,269		665,302
Total loans		112,047		85,772	6.57%	7.50%		6,787,022		4,539,045
Total interest-earning assets		114,938		93,655	4.96%	6.21%		9,218,717		5,981,756

	Interest					Average rate		Average balance
	September		September			September	September	September		September
	2020		2019			2020	2019	2020		2019
	(Dollars in thousands)
Interest-bearing liabilities:
Deposits:
NOW Accounts		2,247		1,616		0.40%	0.57%		2,227,687		1,118,214
Savings and money market		2,010		2,012		0.41%	0.67%		1,927,680		1,199,678
Time deposits		7,512		4,427		1.55%	1.55%		1,944,856		1,151,248
Total core deposits		11,769		8,055		0.78%	0.93%		6,100,223		3,469,140
Brokered deposits		812		2,298		2.30%	2.55%		140,416		358,130
		12,581		10,353		0.81%	1.08%		6,240,639		3,827,270
Non-interest bearing deposits		-		-		0.00%	0.00%		2,276,400		1,094,047
Core deposit intangible amortization		2,039		201		0.00%	0.00%		-		-
Total deposits		14,620		10,554		0.68%	0.85%		8,517,039		4,921,317
Borrowings:
Securities sold under agreements to repurchase		-		1,342		0.00%	2.37%		-		224,783
Advances from FHLB and other borrowings		476		550		2.83%	2.75%		66,833		79,328
Subordinated capital notes		308		499		3.39%	5.49%		36,083		36,083
Total borrowings		784		2,391		3.03%	2.79%		102,916		340,194
Total interest bearing liabilities		15,404		12,945		0.71%	0.98%		8,619,955		5,261,511
Net interest income / spread	$	99,534	$	80,710		4.25%	5.24%
Interest rate margin						4.30%	5.35%
Excess of average interest-earning assets over average interest-bearing liabilities								$	598,762	$	720,247
Average interest-earning assets to average interest-bearing liabilities ratio									106.95%		113.69%

C - CHANGES IN NET INTEREST INCOME DUE TO:
	Volume		Rate		Total
	(In thousands)
Interest Income:
Investments	$	5,404	$	(10,396)	$	(4,992)
Loans		39,704		(13,429)		26,275
Total interest income		45,108		(23,825)		21,283
Interest Expense:
Deposits		7,711		(3,645)		4,066
Repurchase agreements		(1,342)		-		(1,342)
Other borrowings		(114)		(151)		(265)
Total interest expense		6,255		(3,796)		2,459
Net Interest Income	$	38,853	$	(20,029)	$	18,824

TABLE 1A - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019

	Interest				Average rate		Average balance
	September		September		September	September	September		September
	2020		2019		2020	2019	2020		2019
	(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets	$	360,326	$	282,620	5.41%	6.24%	$	8,874,886	$	6,055,475
Tax equivalent adjustment		7,869		8,013	0.12%	0.18%		-		-
Interest-earning assets - tax equivalent		368,195		290,633	5.53%	6.42%		8,874,886		6,055,475
Interest-bearing liabilities		50,632		39,036	0.81%	0.98%		8,297,837		5,350,701
Tax equivalent net interest income / spread		317,563		251,597	4.72%	5.44%		577,049		704,774
Tax equivalent interest rate margin					4.84%	5.62%
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities		9,552		18,292	1.88%	2.44%		679,201		1,000,217
Interest bearing cash and money market investments		3,760		9,357	0.35%	2.33%		1,423,781		535,865
Total investments		13,312		27,649	0.85%	2.41%		2,102,982		1,536,082
Non-PCD/Non-PCI loans
Mortgage		33,196		26,022	5.50%	5.44%		804,702		637,680
Commercial		85,528		76,399	5.64%	6.42%		2,019,853		1,589,922
Consumer		42,064		35,022	11.81%	12.11%		474,455		386,585
Auto and leasing		93,555		83,140	8.43%	9.20%		1,481,956		1,208,125
Total Non-PCD/Non-PCI loans		254,343		220,583	7.09%	7.72%		4,780,966		3,822,312

PCD/PCI loans
Mortgage		72,570		22,189	6.19%	5.81%		1,564,153		508,901
Commercial		17,172		10,965	5.98%	8.02%		383,525		182,896
Consumer		323		792	12.54%	128.93%		3,434		819
Auto		2,606		442	8.74%	13.24%		39,826		4,465
Total PCD/PCI loans		92,671		34,388	6.21%	6.58%		1,990,938		697,081
Total loans		347,014		254,971	6.83%	7.54%		6,771,904		4,519,393
Total interest-earning assets		360,326		282,620	5.41%	6.24%		8,874,886		6,055,475

	Interest					Average rate		Average balance
	September		September			September	September	September		September
	2020		2019			2020	2019	2020		2019
	(Dollars in thousands)
Interest-bearing liabilities:
Deposits:
NOW Accounts		6,772		4,800		0.43%	0.57%		2,092,973		1,120,825
Savings and money market		6,426		5,508		0.46%	0.62%		1,845,253		1,187,020
Time deposits		23,480		11,024		2.37%	2.07%		1,991,432		1,070,111
Total core deposits		36,678		21,332		0.85%	0.80%		5,929,658		3,377,956
Brokered deposits		3,844		7,660		2.51%	2.42%		203,779		422,364
		40,522		28,992		0.88%	1.02%		6,133,437		3,800,320
Non-interest bearing deposits		-		-		0.00%	0.00%		1,987,211		1,097,145
Core deposit intangible amortization		6,163		602		0.00%	0.00%		-		-
Total deposits		46,685		29,594		0.77%	0.81%		8,120,648		4,897,465
Borrowings:
Securities sold under agreements to repurchase		1,335		6,235		2.62%	2.47%		67,956		336,859
Advances from FHLB and other borrowings		1,521		1,671		2.77%	2.78%		73,150		80,294
Subordinated capital notes		1,091		1,536		4.02%	5.69%		36,083		36,083
Total borrowings		3,947		9,442		2.97%	2.79%		177,189		453,236
Total interest-bearing liabilities		50,632		39,036		0.81%	0.98%		8,297,837		5,350,701
Net interest income / spread	$	309,694	$	243,584		4.60%	5.26%
Interest rate margin						4.65%	5.38%
Excess of average interest-earning assets over average interest-bearing liabilities								$	577,049	$	704,774
Average interest-earning assets to average interest-bearing liabilities ratio									106.95%	$	113.17%

C - CHANGES IN NET INTEREST INCOME DUE TO:
	Volume		Rate		Total
	(In thousands)
Interest Income:
Investments	$	10,204	$	(24,541)	$	(14,337)
Loans		119,151		(27,108)		92,043
Total interest income		129,355		(51,649)		77,706
Interest Expense:
Deposits		19,477		(2,386)		17,091
Repurchase agreements		(4,977)		77		(4,900)
Other borrowings		(197)		(398)		(595)
Total interest expense		14,303		(2,707)		11,596

Net Interest Income	$	115,052		$	(48,942)		$	66,110

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 of the quarters ended September 30, 2020 and 2019

Net interest income of $99.5 million increased $18.8 million from $80.7 million. Interest rate spread decreased 99 basis points to 4.25% from 5.24% and net interest margin decreased 105 basis points to 4.30% from 5.35%. These decreases are mainly due to the net effect of a decrease of 125 basis points in the average yield of total interest-earning assets and 27 basis points in the total average cost of interest-bearing liabilities.

Net interest income increased as a result of:

 Higher interest income from loans by $26.3 million, reflecting higher balances as a result of the Scotiabank PR & USVI Acquisition and PPP loan originations, partially offset by a 93 basis point decline in yield from higher proportion of 30-year, fixed rate residential mortgages from the Scotiabank acquisition and the effect of Federal Reserve Bank’s rate cuts on variable rate commercial loans; and

 Lower interest expenses in borrowings by $1.6 million, reflecting the maturity and early extinguishment of repurchase agreements during 2020, as Oriental’s strategy to increase lower-cost core deposits and reduce higher-cost borrowings.

Such increases in net interest income were adversely impacted by:

 Lower interest income from interest bearing cash and investment securities by $5.0 million, mainly impacted by the Federal Reserve Bank’s rate cuts in 2020; and

 Higher interest expense from deposits by $4.1 million, mainly related to deposits from the Scotiabank PR & USVI Acquisition and to the increase in customer deposits during the second and third quarter of 2020, reflecting commercial deposits from existing and new clients, and retail deposits from increased liquidity in the economy.

Comparison of the nine-month periods ended September 30, 2020 and 2019

Net interest income of $309.7 million increased $66.1 million from $243.6 million. Interest rate spread decreased 66 basis points to 4.60% from 5.26% and net interest margin decreased 73 basis points to 4.65% from 5.38%. These decreases are mainly due to the net effect of a decrease of 83 basis points in the average yield of total interest-earning assets and a decrease of 17 basis points in the total average cost of interest-bearing liabilities.

Net interest income increased as a result of:

 Higher interest income from loans by $92.0 million, reflecting higher balances as a result of the Scotiabank PR & USVI Acquisition and PPP loan originations, partially offset by a 71 basis points decline in yield from higher proportion of 30-year, fixed rate residential mortgages from the Scotiabank acquisition and the effect of Federal Reserve Bank’s rate cuts on variable rate commercial loans;

 $6.5 million in one-time interest recoveries from acquired PCI Scotiabank loans; and

 Lower interest expenses in borrowings by $5.5 million, reflecting the maturity and early extinguishment of repurchase agreements during 2020.

Such increases in net interest income were adversely impacted by:

 Lower interest income from interest bearing cash and investment securities by $14.3 million, mainly impacted by the Federal Reserve Bank’s rate cuts; and

 Higher interest expense from deposits by $17.1 million, mainly related to deposits from the Scotiabank PR & USVI Acquisition and to the increase in customer deposits during the current period, reflecting commercial deposits from existing and new clients, and retail deposits from increased liquidity in the economy.

TABLE 2 - NON-INTEREST INCOME SUMMARY

	Quarter Ended September 30,					Nine-Month Period Ended September 30,
	2020		2019		Variance	2020		2019		Variance
	(Dollars in thousands)
Banking service revenue	$	16,297	$	10,813	50.7%	$	45,678	$	32,054	42.5%
Wealth management revenue		7,272		6,611	10.0%		20,924		19,162	9.2%
Mortgage banking activities		3,917		1,118	250.4%		10,223		2,953	246.2%
Total banking and financial service revenue		27,486		18,542	48.2%		76,825		54,169	41.8%
Net gain (loss) on:
Sale of securities available for sale		-		3,498	-100.0%		4,728		8,274	-42.9%
Bargain purchase from Scotiabank PR & USVI acquisition		3,465		-	100.0%		7,336		-	100.0%
Early extinguishment of debt		-		-	0.0%		(63)		(7)	-800.0%
Other non-interest income		375		138	171.7%		1,102		346	218.5%
Total non-interest income, net	$	31,326	$	22,178	41.2%	$	89,928	$	62,782	43.2%

Non-Interest Income

Non-interest income is affected by the amount of the trust department 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, fees generated from loans and deposit accounts, and gains on sales of assets.

Comparison of quarters ended September 30, 2020 and 2019

Oriental recorded non-interest income, net, in the amount of $31.3 million, compared to $22.2 million, an increase of 41.2%, or $9.1 million. The net increase in non-interest income was mainly due to:

 An increase of $5.5 million in banking service revenues as electronic banking revenues increased $4.7 million due to Oriental’s larger customer base;

 An increase of $2.8 million in mortgage-banking activities, reflecting the Scotiabank PR & USVI Acquisition, as servicing revenues increased $2.1 million and to an increase of $1.3 million from gains of loans sold; and

 A $3.5 million bargain purchase gain from the Scotiabank PR & USVI Acquisition to adjust the deferred tax asset from new information received during the quarter about facts that existed at Day 1.

The increase in non-interest income was offset by a gain of $3.5 million on the sales of securities recorded during the prior year quarter.

Comparison of nine-month periods ended September 30, 2020 and 2019

Oriental recorded non-interest income, net, in the amount of $89.9 million, compared to $62.8 million, an increase of 43.2%, or $27.1 million. The increase in non-interest income was mainly due to:

 An increase of $13.6 million in banking service revenues reflecting the Scotiabank PR & USVI Acquisition as electronic banking revenues and deposit fees increased $10.5 million and $2.8 million, respectively, due to Oriental’s larger customer base;

 An increase of $1.8 million in wealth management revenue due to higher insurance income by $2.8 million mainly from the Scotiabank PR & USVI Acquisition insurance transaction volume, offset by lower broker-dealer sales by $509 thousand and trust fees by $489 thousand;

 An increase of $7.3 million in mortgage-banking activities, also reflecting the Scotiabank PR & USVI Acquisition, as servicing revenues increased $5.9 million, and to an increase of $1.9 million from gains of loans sold; and

 A $7.3 million bargain purchase gain from the Scotiabank PR & USVI Acquisition to adjust the fair value of accrued interest receivable at the closing and deferred tax asset.

The increase in non-interest income was offset by a gain of $8.3 million on the sales of securities recorded during the prior year period compared to a gain of $4.7 million recorded in the current period.

TABLE 3 - NON-INTEREST EXPENSES SUMMARY

	Quarter Ended September 30,					Nine-Month Period Ended September 30,
	2020		2019		Variance %	2020		2019		Variance %
	(Dollars in thousands)
Compensation and employee benefits	$	31,955	$	20,500	55.9%	$	102,005	$	60,716	68.0%
Occupancy, equipment and infrastructure costs		11,943		7,307	63.4%		35,220		22,564	56.1%
Electronic banking charges		8,734		5,505	58.7%		26,284		15,698	67.4%
Information technology expenses		5,381		2,247	139.5%		16,259		6,953	133.8%
Professional and service fees		3,331		3,662	-9.0%		12,596		10,297	22.3%
Taxes, other than payroll and income taxes		3,774		2,235	68.9%		10,123		6,530	55.0%
Insurance		2,428		(366)	763.4%		8,667		2,057	321.3%
Loss on sale of foreclosed real estate, other repossessed assets and credit related expenses		1,323		2,889	-54.2%		6,763		8,839	-23.5%
Loan servicing and clearing expenses		2,345		1,194	96.4%		4,836		3,562	35.8%
Advertising, business promotion, and strategic initiatives		1,481		1,333	11.1%		4,643		3,859	20.3%
Communication		1,117		956	16.8%		2,993		2,556	17.1%
Printing, postage, stationery and supplies		1,094		672	62.8%		2,767		1,885	46.8%
Director and investor relations		302		374	-19.3%		928		934	-0.6%
Merger and restructuring charges		2,681		1,556	72.3%		5,991		2,556	134.4%
Pandemic expenses		2,090		-	100.0%		4,266		-	100.0%
Other		3,465		663	422.6%		11,906		5,325	123.6%
Total non-interest expenses	$	83,444	$	50,727	64.5%	$	256,247	$	154,331	66.0%
Relevant ratios and data:
Efficiency ratio		65.69%		51.11%			66.30%		51.83%
Compensation and benefits to non-interest expense		38.30%		40.41%			39.81%		39.34%
Compensation to average total assets owned		1.29%		1.27%			2.13%		1.87%
Average number of employees		2,343		1,436			2,405		1,436
Average compensation per employee	$	13.64	$	14.28		$	42.41	$	42.28
Average loans per average employee	$	2,897	$	3,161		$	2,816	$	3,147

Non-Interest Expenses

Comparison of quarters ended September 30, 2020 and 2019

Non-interest expense was $83.4 million, representing an increase of 64.5%, or $32.7 million, compared to $50.7 million.

The increase in non-interest expenses was driven by:

 Higher compensation and employee benefits by $11.5 million, reflecting higher employee count from the Scotiabank PR & USVI Acquisition;

 Increase in occupancy and equipment by $4.6 million mainly driven by $2.8 million increase in facilities, including branches, from the Scotiabank PR & USVI Acquisition and to $1.1 million increase in depreciation expenses also from the premises and equipment acquired;

 Increase in electronic banking charges by $3.2 million mainly driven by $2.4 million increase in debit card billing fees, $624 thousand increase in credit card merchant fees, and $200 thousand increase in debit cards interchange fees, as level of transactions increased due to a larger customer base;

 Increase in information technology expenses by $3.1 million related to the Scotiabank PR & USVI Acquisition system integrations;

 Increase of merger and restructuring charges by $1.1 million;

 Pandemic expenses of $2.1 million incurred during the current quarter; and

 Other expenses increased by $2.8 million related to broker-dealer claims and settlement reserve increase by $849 thousand and amortization of intangibles, which increased by $625 thousand, from the Scotiabank PR & USVI Acquisition. In addition, during the prior year quarter, Oriental received a $1.0 million credit from the government of Puerto Rico as a result of an employee retention benefit for employers affected by Hurricane Maria in 2017.

The efficiency ratio was 65.7%, up from 51.1%. 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, 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 the efficiency ratio computation for the quarters ended September 30, 2020 and 2019 amounted to $3.8 million and $3.6 million, respectively.

Comparison of nine-month periods ended September 30, 2020 and 2019

Non-interest expense was $256.2 million, representing an increase of 66.0%, or $101.9 million, compared to $154.3 million.

The increase in non-interest expenses was driven by:

 Higher compensation and employee benefits by $41.3 million, reflecting higher employee count from the Scotiabank PR & USVI Acquisition;

 Increase in occupancy and equipment by $12.7 million mainly driven by a $7.7 million increase in facilities, including branches, from the Scotiabank PR & USVI Acquisition and to $3.1 million increase in depreciation expenses also from the premises and equipment acquired;

 Increase in electronic banking charges by $10.6 million mainly driven by a $6.5 million increase in debit card billing fees and a $3.2 million increase in credit card merchant fees, as level of transactions increased due to a larger customer base;

 Increase in information technology expenses by $9.3 million related to the Scotiabank PR & USVI Acquisition system integrations;

 Increase in insurance expenses by $6.6 million, $4.9 million related to the FDIC annual assessment as a result of the increase in customer deposits;

 Increase of merger and restructuring charges by $3.4 million;

 Increase in municipal tax and property tax by $3.6 million, mainly from the Scotiabank PR & USVI acquired business;

 Increase in professional and service fees by $2.3 million from higher consulting and advisory expenses by $1.1 million, supervisory examination fees by $407 thousand, audit fees by $274 thousand and legal expenses by $781 thousand;

 Pandemic expenses of $4.3 million incurred during the current period; and

 Other expenses increased by $8.4 million related to broker-dealer claims and settlement reserve increase by $2.2 million and amortization of intangibles, which increased by $1.9 million, from the Scotiabank PR & USVI Acquisition. In addition, during the prior year, Oriental received a $1.0 million credit from the government of Puerto Rico as a result of an employee retention benefit for employers affected by Hurricane Maria in 2017.

The efficiency ratio was 66.30%, up from 51.83%. 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, 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 the efficiency ratio computation for the nine-month periods ended September 30, 2020 and 2019 amounted to $13.1 million and $8.6 million, respectively.

Provision for Credit Losses

Comparison of quarters ended September 30, 2020 and 2019

Provision for credit losses decreased $30.1 million to $13.7 million when compared with the prior year quarter. Current provision for credit losses included a $826 thousand provision to incorporate the potential effects of the Covid-19 pandemic, while the last year quarter included an additional $39.0 million provision placed to cover the sale of non-performing loans, sold during the fourth quarter of 2019.

Comparison of nine-month periods ended September 30, 2020 and 2019

Provision for credit losses increased $4.8 million from $73.7 million to $78.5 million. Current period provision included $39.9 million provision to incorporate changes in the macro-economic scenario and qualitative adjustments as a result of the Covid-19 pandemic. This increase was partially offset by the last year additional $39.0 million provision placed to cover the sale of non-performing loans. Additional increase is mainly due to increase in volume of loans from the Scotiabank PR & USVI Acquisition.

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

Income Taxes

Comparison of quarters ended September 30, 2020 and 2019

Effective tax rate was 18.7% in the quarter ended September 30, 2020, based on a higher than originally anticipated proportion of exempt income, compared to 12.0% in the same quarter of 2019.

Comparison of nine-month periods ended September 30, 2020 and 2019

Income tax expense was $13.9 million, compared to $23.5 million, reflecting the net income before income taxes of $64.9 million compared to $78.3 million for the same period in 2019.

Effective tax rate is based on a higher proportion of exempt income and income taxed at preferential rates.

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 its services 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 and nine-month periods ended September 30, 2020 and 2019.

	Quarter Ended September 30, 2020
				Wealth				Total Major				Consolidated
	Banking			Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	112,832	$	14	$	2,091	$	114,937	$	-	$	114,937
Interest expense		(14,092)		-		(1,312)		(15,404)		-		(15,404)
Net interest income		98,740		14		779		99,533		-		99,533
Provision credit losses		(14,461)		-		792		(13,669)		-		(13,669)
Non-interest income		23,994		7,323		9		31,326		-		31,326
Non-interest expenses		(76,988)		(5,138)		(1,318)		(83,444)		-		(83,444)
Intersegment revenue		769		-		-		769		(769)		-
Intersegment expenses		-		(225)		(544)		(769)		769		-
Income before income taxes	$	32,054	$	1,974		(282)	$	33,746	$	-	$	33,746
Income tax expense		6,308		(13)		13		6,308		-		6,308
Net income	$	25,746	$	1,987	$	(295)	$	27,438	$	-	$	27,438
Total assets	$	9,367,141	$	33,006	$	1,725,221	$	11,125,368	$	(1,106,377)	$	10,018,991


	Nine-Month Period Ended September 30, 2020
				Wealth				Total Major				Consolidated
	Banking			Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	351,933	$	46	$	8,347	$	360,326	$	-	$	360,326
Interest expense		(44,307)		-		(6,325)		(50,632)		-		(50,632)
Net interest income		307,626		46		2,022		309,694		-		309,694
Provision for loan and lease losses		(77,795)		-		(701)		(78,496)		-		(78,496)
Non-interest income		64,349		21,089		4,490		89,928		-		89,928
Non-interest expenses		(237,943)		(14,819)		(3,485)		(256,247)		-		(256,247)
Intersegment revenue		1,920		-		-		1,920		(1,920)		-
Intersegment expenses		-		(580)		(1,340)		(1,920)		1,920		-
Income before income taxes	$	58,157	$	5,736		986	$	64,879	$	-	$	64,879
Income tax expense		9,305		4,506		42		13,853		-		13,853
Net income	$	48,852	$	1,230	$	944	$	51,026	$	-	$	51,026
Total assets	$	9,367,141	$	33,006	$	1,725,221	$	11,125,368	$	(1,106,377)	$	10,018,991

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	Quarter Ended September 30, 2019
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	85,147	$	16	$	8,492	$	93,655	$	-	$	93,655
Interest expense		(9,260)		-		(3,685)		(12,945)		-		(12,945)
Net interest income		75,887		16		4,807		80,710		-		80,710
Provision for loan and lease losses		(43,678)		-		(92)		(43,770)		-		(43,770)
Non-interest income		11,946		6,719		3,513		22,178		-		22,178
Non-interest expenses		(46,555)		(3,450)		(722)		(50,727)		-		(50,727)
Intersegment revenue		507		-		-		507		(507)		-
Intersegment expenses		-		(141)		(366)		(507)		507		-
Income before income taxes	$	(1,893)	$	3,144	$	7,140	$	8,391	$	-	$	8,391
Income tax expense		(738)		1,226		520		1,008		-		1,008
Net income	$	(1,155)	$	1,918	$	6,620	$	7,383	$	-	$	7,383
Total assets	$	5,919,877	$	26,596	$	1,465,329	$	7,411,802	$	(1,078,297)	$	6,333,505

	Nine-Month Period Ended September 30, 2019
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	253,138	$	53	$	29,429	$	282,620	$	-	$	282,620
Interest expense		(27,083)		-		(11,953)		(39,036)		-		(39,036)
Net interest income		226,055		53		17,476		243,584		-		243,584
Provision for loan and lease losses		(73,560)		-		(164)		(73,724)		-		(73,724)
Non-interest income		34,932		19,537		8,313		62,782		-		62,782
Non-interest expenses		(139,384)		(11,675)		(3,272)		(154,331)		-		(154,331)
Intersegment revenue		1,648		-		-		1,648		(1,648)		-
Intersegment expenses		-		(480)		(1,168)		(1,648)		1,648		-
Income before income taxes	$	49,691	$	7,435	$	21,185	$	78,311	$	-	$	78,311
Income tax expense		18,634		2,788		2,057		23,479		-		23,479
Net income	$	31,057	$	4,647	$	19,128	$	54,832	$	-	$	54,832
Total assets	$	5,919,877	$	26,596	$	1,465,329	$	7,411,802	$	(1,078,297)	$	6,333,505

Comparison of quarters ended September 30, 2020 and 2019

Banking

Oriental's banking segment net income before taxes increased $33.9 million from a loss of $1.9 million to $32.1 million, mainly reflecting:

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 Higher interest expense from deposits by $4.1 million, mainly related to deposits from the Scotiabank PR & USVI Acquisition and to the increase in customer deposits during 2020, reflecting commercial deposits from existing and new clients, and retail deposits from increased liquidity in the economy;

 Provision for credit losses decreased $29.2 million to $13.4 million when compared with the last year quarter. Current provision for credit losses included a $826 thousand provision to incorporate the potential effects of the Covid-19 pandemic, while the last year quarter included an additional $39.0 million provision placed to cover the sale of non-performing loans, sold during the fourth quarter of 2019. Additional increase in current period is mainly due to increase in volume of loans from the Scotiabank PR & USVI Acquisition;

 An increase of $5.5 million in banking service revenues as electronic banking revenues increased $4.7 million due to Oriental’s larger customer base;

 A $3.5 million bargain purchase gain from the Scotiabank PR & USVI Acquisition to adjust the deferred tax asset from new information received during the quarter about facts that existed at Day 1; and

 Increase in non-interest expense by $30.4 million reflecting the Scotiabank PR & USVI Acquisition, mainly in compensation and employee benefits, electronic banking charges, occupancy and equipment, information technology, insurance expense, merger and restructuring, Covid-19 pandemic related expenses, municipal taxes and professional services.

Wealth Management

Wealth management segment revenue consists of commissions and fees from fiduciary activities, and securities brokerage and insurance activities. Net income before taxes from this segment decreased $1.2 million as a result of higher income and expenses due to the Scotiabank PR & USVI Acquisition.

Treasury

Treasury segment net income before taxes decreased $7.4 million, mainly reflecting:

 Lower interest income from interest bearing cash and investment securities by $5.0 million, mainly impacted by the Federal Reserve Bank’s rate cuts in 2020;

 Lower interest expenses in borrowings by $1.6 million, reflecting the maturity and early extinguishment of repurchase agreements during 2020 and $0.8 million decrease in interest expenses from brokered deposits, as Oriental’s strategy to increase lower-cost core deposits and reduce higher-cost borrowings; and

 No gain on sale of securities in the current quarter, as compared to $3.5 million gain on sales of securities recorded during the prior year quarter.

Comparison of nine-month periods ended September 30, 2020 and 2019

Banking

Oriental's banking segment net income before taxes increased $8.5 million from $49.7 million to a $58.2 million, mainly reflecting:

 $6.5 million in one-time interest recoveries from acquired PCI Scotiabank loans;

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 A $7.3 million bargain purchase gain from the Scotiabank PR & USVI Acquisition to adjust the fair value of accrued interest receivable at the closing and deferred tax asset; and

 Increase in non-interest expense by $98.6 million reflecting the Scotiabank PR & USVI Acquisition, mainly in compensation and employee benefits, electronic banking charges, occupancy and equipment, information technology, insurance expenses, merger and restructuring charges, Covid-19 pandemic related expenses, municipal taxes and professional services.

Wealth Management

Wealth management segment revenue consists of commissions and fees from fiduciary activities, and securities brokerage and insurance activities. Net income before taxes from this segment decreased $1.7 million as a result of higher income and expenses due the Scotiabank PR & USVI Acquisition.

Treasury

Treasury segment net income before taxes decreased by $20.2 million, mainly reflecting:

 Lower interest income from interest bearing cash and investment securities by $21.1 million, mainly impacted by the Federal Reserve Bank’s rate cuts;

 Lower interest expenses in borrowings by $5.5 million, reflecting the maturity and early extinguishment of repurchase agreements during the current period; and

 A gain of $8.3 million on the sales of securities recorded during the prior year period compared to a gain of $4.7 million recorded in the current period.

ANALYSIS OF FINANCIAL CONDITION

Assets Owned

At September 30, 2020, Oriental’s total assets amounted to $10.019 billion representing an increase of 7.8%, when compared to $9.298 billion at December 31, 2019. Loans portfolio decreased $62.7 million and investments decreased $653.5 million, while cash increased $1.4 billion.

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 September 30, 2020, Oriental’s loan portfolio decreased 0.9%, reflecting repayments and the increase in allowance for credit losses on Non-PCD loans as a result of CECL implementation and to the $39.1 million provision to incorporate changes in the macro-economic scenario and qualitative adjustments as a result of the Covid-19 pandemic during the nine-month period ended September 30, 2020. Loan production during the nine-month period ended September 30, 2020 reached $1.245 billion, compared to $894 million in the year ago period driven by mortgage and commercial lending, including $296.7 million PPP loan originations in response to the Covid-19 pandemic under the CARES Act. The Non-PCD

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loan portfolio, excluding allowance for credit losses, increased $132.7 million from $4.735 billion at December 31, 2019 to $4.868 billion at September 30, 2020.

During the nine-month period ended September 30, 2020, Oriental sold $316.3 million mortgage-backed securities at a gain of $4.7 million and had $306.6 million maturities in US treasury notes that were not renewed.

Cash and cash equivalents of $2.3 billion increased $1.4 billion primarily because of the influx of both commercial and retail deposits

from increased liquidity in the economy.

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. September 30, 2020, total assets managed by Oriental’s trust division and OPC amounted to $3.164 billion, compared to $3.137 billion at December 31, 2019. 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 September 30, 2020, total assets gathered by Oriental Financial Services and Oriental Insurance from its customers’ investment accounts amounted to $2.275 billion, compared to $2.376 billion at December 31, 2019. Decrease was mainly due to decrease in market interest rates.

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. No goodwill was recorded in connection with the recent Scotiabank PR & USVI Acquisition. 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.

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, natural disasters, or similar events.

As of September 30, 2020, 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.

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TABLE 4 - ASSETS SUMMARY AND COMPOSITION

	September 30		December 31,		Variance
	2020		2019		%
	(Dollars in thousands)
Investments:
FNMA and FHLMC certificates	$	139,964	$	402,656	-65.2%
Obligations of US government-sponsored agencies		1,714		1,961	-12.6%
US Treasury securities		91,531		397,184	-77.0%
CMOs issued by US government-sponsored agencies		43,864		54,760	-19.9%
GNMA certificates		145,892		216,470	-32.6%
FHLB stock		8,322		13,048	-36.2%
Other debt securities		850		1,138	-25.3%
Other investments		2,227		597	273.0%
Total investments		434,364		1,087,814	-60.1%
Loans		6,579,140		6,641,847	-0.9%
Total investments and loans		7,013,504		7,729,661	-9.3%
Other assets:
Cash and due from banks (including restricted cash)		2,268,433		845,982	168.1%
Money market investments		14,617		6,775	115.7%
Foreclosed real estate		19,456		29,909	-34.9%
Accrued interest receivable		71,830		36,781	95.3%
Deferred tax asset, net		178,957		176,740	1.3%
Premises and equipment, net		83,270		81,105	2.7%
Servicing assets		47,242		50,779	-7.0%
Goodwill		86,069		86,069	0.0%
Right of use assets		35,900		39,112	-8.2%
Core deposit, customer relationship and other intangibles		48,650		56,965	-14.6%
Other assets and customers' liability on acceptances		151,063		157,783	-4.3%
Total other assets		3,005,487		1,568,000	91.7%
Total assets	$	10,018,991	$	9,297,661	7.8%
Investment portfolio composition:
FNMA and FHLMC certificates		32.2%		37.0%
Obligations of US government-sponsored agencies		0.4%		0.2%
US Treasury securities		21.1%		36.5%
CMOs issued by US government-sponsored agencies		10.1%		5.0%
GNMA certificates		33.6%		19.9%
FHLB stock		1.9%		1.2%
Other debt securities and other investments		0.7%		0.2%
		100.0%		100.0%

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TABLE 5 - LOAN PORTFOLIO COMPOSITON

	September 30,		December 31,
	2020		2019
	(In thousands)
Loans held for investment:
Commercial	$	2,426,795	$	2,222,085
Mortgage		2,352,585		2,489,230
Consumer		436,882		504,507
Auto		1,543,665		1,522,973
		6,759,927		6,738,795
Allowance for credit losses		(235,313)		(116,539)
Total loans held for investment		6,524,614		6,622,256
Mortgage loans held for sale		54,526		19,591
Total loans, net	$	6,579,140	$	6,641,847

Oriental’s loan portfolio is composed of mortgage, commercial, consumer, and auto loans business products. As shown in Table 5 above, total loans, net, amounted to $6.579 billion at September 30, 2020 and $6.642 billion at December 31, 2019. Oriental’s loans held-for-investment portfolio composition and trends were as follows:

 Commercial loan portfolio amounted to $2.427 billion (35.9% of the gross loan portfolio) compared to $2.222 billion (33.0% of the gross loan portfolio) at December 31, 2019. Commercial production, including the U.S. loan program production and PPP loans, increased 137.2% and 143.2% to $184.7 million and $706.6 million for the quarters and nine-month periods ended September 30, 2020, respectively, from $120.4 million and $212.6 million for the same periods in 2019.

 Mortgage loan portfolio amounted to $2.353 billion (34.8% of the gross loan portfolio) compared to $2.489 billion (36.8% of the gross originated loan portfolio) at December 31, 2019. Mortgage loan production totaled $93.7 million and $148.4 million for the quarter and nine-month period ended September 30, 2020, respectively, which represents an increase of 293.4% and an increase of 114.7% from $23.8 million and $69.1 million for the same periods in 2019. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to $62.7 million and $75.2 million at September 30, 2020 and December 31, 2019, 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.

 Consumer loan portfolio amounted to $436.9 million (6.5% of the gross loan portfolio) compared to $504.5 million (7.5% of the gross loan portfolio) at December 31, 2019. Consumer loan production decreased 51.2% to $23.5 million and 43.7% to $77.0 million for the quarter and nine-month period ended September 30, 2020, respectively, from $48.3 million and $136.8 million for the same periods in 2019.

 Auto and leasing portfolio amounted to $1.544 billion (22.8% of the gross loan portfolio) compared to $1.523 billion (22.6% of the gross originated loan portfolio) at December 31, 2019. Auto production increased 10.2% to $155.9 million and decreased 21.5% to $312.6 million for the quarter and nine-month period ended September 30, 2020, respectively, compared to $141.5 million and $398.0 million for the same periods in 2019.

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TABLE 6 — HIGHER RISK RESIDENTIAL MORTGAGE LOANS

	September 30, 2020
	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	$	6,993	$	209	2.99%	$	6,899	$	362	5.25%	$	73,132	$	1,638	2.24%
90 - 119 days		2		-	0.00%		-		-	0.00%		1,221		305	24.98%
120 - 179 days		198		62	31.31%		270		15	5.56%		2,324		312	13.43%
180 - 364 days		10		-	0.00%		-		-	0.00%		1,961		117	5.97%
365+ days		89		3	3.37%		280		15	5.36%		10,395		607	5.84%
Total	$	7,292	$	274	3.76%	$	7,449	$	392	5.26%	$	89,033	$	2,979	3.35%
Percentage of total loans excluding acquired loans accounted for under ASC 310-30		0.19%					0.19%					2.28%
Refinanced or Modified Loans:
Amount	$	2,080	$	149	7.16%	$	572	$	20	3.50%	$	27,272	$	2,304	8.45%
Percentage of Higher-Risk Loan Category		28.52%					7.68%					30.63%
Loan-to-Value Ratio:
Under 70%	$	4,691	$	172	3.67%	$	1,882	$	103	5.47%	$	-	$	-	-
70% - 79%		588		21	3.57%		1,375		74	5.38%		-		-	-
80% - 89%		1,725		27	1.57%		2,822		153	5.42%		-		-	-
90% and over		288		54	18.75%		1,370		62	4.53%		89,033		2,979	3.35%
	$	7,292	$	274	3.76%	$	7,449	$	392	5.26%	$	89,033	$	2,979	3.35%

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

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The following table includes the maturities of Oriental's lending exposure to the Puerto Rico government, which is limited solely to loans to municipalities secured by ad valorem taxation, without limitation as to rate or amount, on all taxable property within the issuing municipalities and one loan to a public corporation acquired in the Scotiabank PR & USVI Acquisition. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations. Deposits from the Puerto Rico government totaled $308.2 million at September 30, 2020.

TABLE 7 - PUERTO RICO GOVERNMENT RELATED LOANS AND SECURITIES

September 30, 2020
						Maturity
		Carrying Value		Less than 1 Year		1 to 3 Years		More than 3 Years
Loans:	(In thousands)
Public corporations	$	24,141	$	24,141	$	-	$	-
Municipalities		97,821		61		18,076		79,684
Total	$	121,962	$	24,202	$	18,076	$	79,684

Credit Risk Management

Allowance for Credit Losses

Oriental maintains an allowance for credit 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 credit losses ("ACL") policy provides for a detailed quarterly analysis of lifetime expected credit losses.

On January 1, 2020, Oriental adopted the new accounting standard that requires the measurement of the allowance for credit losses to be based on management’s best estimate of lifetime expected credit losses inherent in the Company’s relevant financial assets. Upon adoption of the new accounting standard, Oriental recorded a net increase of $89.7 million in the allowance for credit losses on January 1, 2020 which was comprised of a net increase of $39.2 million allowance for credit losses for Non-PCD loans decreasing retained earnings and $50.5 million for PCD loans, made through the allowance and loan balances with no impact in capital. The allowance for credit losses further increased by $29.1 million at September 30, 2020, which included a $39.1 million increase primarily due to the deterioration in the economic outlook resulting from the impact of COVID-19.

Tables 8 through 10 set forth an analysis of activity in the allowance for credit losses and present selected credit loss statistics for September 30, 2020 and December 31, 2019 (prior to the adoption of the CECL accounting standard). In addition, Table 5 sets forth the composition of the loan portfolio.

Please refer to the “Provision for Credit Losses” section in the MD&A for a more detailed analysis of provisions for credit losses.

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Non-performing Assets

Oriental’s non-performing assets include non-performing loans and foreclosed real estate (see Tables 11 and 12). At September 30, 2020 and December 31, 2019, Oriental had $189.3 million and $80.9 million, respectively, of non-accrual loans, including PCD loans accounted for under ASU 2016-13.

At September 30, 2020 and December 31, 2019, loans whose terms have been extended and which are classified as troubled-debt restructurings that are not included in non-performing assets amounted to $98.7 million and $103.7 million, respectively.

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.

At September 30, 2020, Oriental’s non-performing assets increased by 81.3% to $215.2 million, including PCD loans, mainly as a result of the new CECL methodology (2.15% of total assets) from $118.7 million (1.28% of total assets) at December 31, 2019. Foreclosed real estate and other repossessed assets amounting to $19.5 million and $1.9 million, respectively, at September 30, 2020, decreased from $29.9 million and $3.3 million, respectively, at December 31, 2019, recorded at fair value. Oriental does not expect non-performing loans to result in significantly higher losses. At September 30, 2020, the allowance coverage ratio to non-performing loans was 121.4% (99.5% at December 31, 2019).

Upon adoption of CECL, Oriental elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. As such, for PCD loans the determination of nonaccrual or accrual status is made at the pool level, not the individual loan level. Upon adoption of CECL, the allowance for credit losses was determined for each pool and added to the pool’s carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the pool and the new amortized cost basis is the non-credit premium or discount which will be amortized interest income over the remaining life of the pool. On a quarterly basis, management will monitor the composition and behavior of the pools to assess the ability for cash flow estimation and timing. If based on the analysis performed, the pool is classified as non-accrual the accretion/amortization of the non-credit (discount) premium will cease.

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 loans held for investment, Non-PCD and PCDs:

Commercial loans —At September 30, 2020, Oriental’s non-performing commercial loans amounted to $120.1 million (62.0 % of Oriental’s non-performing loans), a 180.4% increase from $42.8 million at December 31, 2019 (50.1% of Oriental’s non-performing loans). Increase was mainly due to PCD loan pools in nonaccrual amounting to $79.6 million. Non-PCD 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.

Residential mortgage loans —At September 30, 2020, Oriental’s non-performing mortgage loans totaled $45.9 million (23.7% of Oriental’s non-performing loans), a 103.7% increase from $22.6 million (26.4% of Oriental’s non-performing loans) at December 31, 2019. Non-PCD 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.

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Consumer loans —At September 30, 2020, Oriental’s non-performing consumer loans amounted to $5.2 million (2.7% of Oriental’s non-performing loans), a 10.0% decrease from $5.8 million at December 31, 2019 (6.8% of Oriental’s non-performing loans). Non-PCD 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.

Auto loans and leases —At September 30, 2020, Oriental’s non-performing auto loans and leases amounted to $22.6 million (11.7% of Oriental’s total non-performing loans), an increase of 58.0% from $14.3 million at December 31, 2019 (16.7% of Oriental’s total non-performing loans). Non-PCD 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.

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 Deed In Lieu.

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.

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TABLE 8 - ALLOWANCE FOR CREDIT LOSSES BREAKDOWN

	September 30,		December 31,		Variance
	2020		2019		%
	(In thousands)
Allowance for credit losses:
Non-PCD
Commercial	$	41,195	$	25,993		58.5%
Mortgage		19,622		8,727		124.8%
Consumer		27,125		18,446		47.1%
Auto and leases		68,467		31,878		114.8%
Total allowance for credit losses	$	156,409	$	85,044	$	83.9%

PCD
Commercial	$	47,449		8,893		433.6%
Mortgage		30,409		21,655		40.4%
Consumer		108		-		100.0%
Auto and leases		938		947		-1.0%
Total allowance for credit losses	$	78,904		31,495		150.5%

Allowance for credit losses summary
Commercial	$	88,644	$	34,886		154.1%
Mortgage		50,031		30,382		64.7%
Consumer		27,233		18,446		47.6%
Auto and leases		69,405		32,825		111.4%
Total allowance for credit losses	$	235,313	$	116,539	$	101.9%

Allowance composition:
Commercial		37.7%		29.9%
Mortgage		21.3%		26.1%
Consumer		11.6%		15.8%
Auto and leases		29.5%		28.2%
		100.0%		100.0%

Allowance coverage ratio at end of period:
Commercial		3.7%		1.6%		132.5%
Mortgage		2.1%		1.2%		74.5%
Consumer		6.2%		3.7%		70.4%
Auto and leases		4.5%		2.2%		108.8%
		3.5%		1.7%		101.2%

Allowance coverage ratio to non-performing loans:
Commercial		73.8%		81.5%		-9.4%
Mortgage		108.9%		134.7%		-19.2%
Consumer		522.7%		318.8%		64.0%
Auto and leases		307.3%		229.6%		33.8%
		121.4%		136.4%		-11.0%

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TABLE 9 - ALLOWANCE FOR CREDIT LOSSES SUMMARY

	Quarter Ended September 30,						Nine-Month Period Ended September 30,
						Variance						Variance
	2020		2019		%		2020		2019		%
	(In thousands)
Allowance for credit losses:
Balance at beginning of period	$	232,701	$	162,642		43.1%	$	116,539	$	164,231		-29.0%
Impact of ASC 326 adoption		-		-		0.0%		89,720		-		100.0%
Provision for credit losses		13,182		43,770		-69.9%		79,407		73,724		7.7%
Charge-offs		(18,095)		(42,419)		-57.3%		(71,021)		(78,938)		-10.0%
Recoveries		7,525		7,933		-5.1%		20,668		18,592		11.2%
Allowance derecognition		-		(17,583)		-100.0%		-		(23,266)		-100.0%
Balance at end of period	$	235,313	$	154,343	$	52.5%	$	235,313	$	154,343	$	52.5%

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TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES

	Quarter Ended September 30,						Nine-Month Period Ended September 30,
					Variance						Variance
	2020		2019		%		2020		2019		%
	(Dollars in thousands)
Non-PCD
Mortgage
Charge-offs	$	(56)	$	(16,299)		-99.7%	$	(659)	$	(17,490)		-96.2%
Recoveries		269		493		-45.4%		527		1,096		-51.9%
Total		213		(15,806)		-101.3%		(132)		(16,394)		-99.2%
Commercial
Charge-offs		(298)		(8,421)		-96.5%		(4,566)		(11,733)		-61.1%
Recoveries		253		175		44.6%		2,407		503		378.5%
Total		(45)		(8,246)		-99.5%		(2,159)		(11,230)		-80.8%
Consumer
Charge-offs		(5,114)		(5,316)		-3.8%		(15,316)		(15,148)		1.1%
Recoveries		663		1,463		-54.7%		1,750		2,171		-19.4%
Total		(4,451)		(3,853)		15.5%		(13,566)		(12,977)		4.5%
Auto and leases
Charge-offs		(10,123)		(12,383)		-18.3%		(36,476)		(34,567)		5.5%
Recoveries		5,950		5,802		2.6%		13,566		14,822		-8.5%
Total		(4,173)		(6,581)		-36.6%		(22,910)		(19,745)		16.0%

PCD Loans:
Mortgage
Charge-offs	$	(1,677)	$	-		100.0%	$	(8,998)	$	-		100.0%
Recoveries		89		-		100.0%		791		-		100.0%
Total		(1,588)		-		100.0%		(8,207)		-		100.0%
Commercial
Charge-offs		(293)		-		100.0%		(3,036)		-		100.0%
Recoveries		91		-		100.0%		752		-		100.0%
Total		(202)		-		100.0%		(2,284)		-		100.0%
Consumer
Charge-offs		(60)		-		100.0%		(521)		-		100.0%
Recoveries		(1)		-		100.0%		92		-		100.0%
Total		(61)		-		100.0%		(429)		-		100.0%
Auto and leases
Charge-offs		(474)		-		100.0%		(1,449)		-		100.0%
Recoveries		211		-		100.0%		783		-		100.0%
Total		(263)		-		100.0%		(666)		-		100.0%

Total charge-offs		(18,095)		(42,419)		-57.3%		(71,021)		(78,938)		-10.0%
Total recoveries		7,525		7,933		-5.1%		20,668		18,592		11.2%
Net charge-offs	$	(10,570)	$	(34,486)		-69.3%	$	(50,353)	$	(60,346)		-16.6%

Net credit losses to average loans outstanding:
Mortgage		0.24%		5.68%		-95.84%		0.47%		1.91%		-75.38%

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Commercial		0.04%		1.86%	-97.86%		0.25%		0.84%	-70.82%
Consumer		3.94%		3.92%	0.50%		3.90%		4.47%	-12.57%
Auto and leases		1.17%		2.09%	-44.01%		2.07%		2.17%	-4.86%
Total		0.62%		3.04%	-79.50%		0.99%		1.78%	-44.31%
Recoveries to charge-offs		41.59%		18.70%	122.37%		29.10%		23.55%	23.56%
Average Loans Held for Investment (a)
Mortgage	$	2,325,756	$	1,112,488	109.1%	$	2,368,855	$	1,146,580	106.6%
Commercial		2,484,977		1,772,332	40.2%		2,403,377		1,772,818	35.6%
Consumer		457,620		392,725	16.5%		477,889		387,404	23.4%
Auto and leases		1,518,669		1,261,501	20.4%		1,521,783		1,212,591	25.5%
Total	$	6,787,022	$	4,539,046	49.5%	$	6,771,904	$	4,519,393	49.8%


(a) CECL replaces the concept of purchased credit impaired loans (PCI assets) with the concept of purchased financial assets with credit deterioration (PCD assets). An entity records a PCD asset at the purchase price plus the allowance for credit losses expected at the time of acquisition. Under this method, there is no credit loss expense affecting net income on acquisition. Changes in estimates of expected credit losses after acquisition are recognized as credit loss expense (or reversal of credit loss expense) in subsequent periods as they arise.

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TABLE 11 — NON-PERFORMING ASSETS

	September 30,		December 31,		Variance
	2020		2019		(%)
	(Dollars in thousands)
Non-performing assets:
Non-PCD
Non-accruing loans
Troubled-Debt Restructuring loans	$	24,117	$	23,587	2.2%
Other loans		84,547		57,336	47.5%
Accruing loans
Troubled-Debt Restructuring loans		3,172		3,317	-4.4%
Other loans		1,371		500	174.2%
Total	$	113,207	$	84,740	33.6%
PCD		80,638		724	11037.8%
Total non-performing loans	$	193,845	$	85,464	126.8%
Foreclosed real estate		19,456		29,909	-34.9%
Other repossessed assets		1,918		3,327	-42.4%
	$	215,219	$	118,700	81.3%

Non-performing assets to total assets		2.15%		1.28%	68.3%
Non-performing assets to total capital		20.22%		11.35%	78.1%

	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2020		2019		2020		2019
	(In thousands)
Interest that would have been recorded in the period if the loans had not been classified as non-accruing loans	$	855	$	590	$	1,879	$	1,180

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TABLE 12 - NON-PERFORMING LOANS

	September 30,		December 31,		Variance
	2020		2019		%
	(In thousands)
Non-performing loans
Non-PCD
Commercial	$	40,477	$	42,606	-5.0%
Mortgage		44,941		22,552	99.3%
Consumer		5,206		5,287	-1.5%
Auto and leases		22,583		14,295	58.0%
Total	$	113,207	$	84,740	33.6%

PCD
Commercial	$	79,631	$	225	35291.6%
Mortgage		1,003		-	100.0%
Consumer		4		499	-99.2%
Total	$	80,638	$	724	11037.8%
Total non-performing loans	$	193,845	$	85,464	126.8%

Non-performing loans composition percentages:
Commercial		62.0%		50.1%
Mortgage		23.7%		26.4%
Consumer		2.7%		6.8%
Auto and leases		11.7%		16.7%
		100.0%		100.0%

Non-performing loans to:
Total loans		2.9%		1.8%	60.3%
Total assets		1.9%		0.9%	112.1%
Total capital		18.2%		8.1%	124.5%

Non-performing loans with partial charge-offs to:
Total loans		0.9%		0.5%	78.8%
Non-performing loans		32.4%		29.3%	10.6%

Other non-performing loans ratios:
Charge-off rate on non-performing loans to non-performing loans on which charge-offs have been taken		75.5%		123.0%	-38.6%
Allowance for credit losses to non-performing loans on which no charge-offs have been taken		179.5%		141.9%	26.5%

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TABLE 13 - LIABILITIES SUMMARY AND COMPOSITION
	September 30,		December 31,		Variance
	2020		2019		%
	(Dollars in thousands)
Deposits:
Non-interest bearing deposits	$	2,333,489	$	1,675,315	39.3%
NOW accounts		2,349,443		1,903,757	23.4%
Savings and money market accounts		1,949,362		1,836,480	6.1%
Certificates of deposit		1,992,092		2,271,286	-12.3%
Total deposits		8,624,386		7,686,838	12.2%
Accrued interest payable		8,071		11,772	-31.4%
Total deposits and accrued interest payable		8,632,457		7,698,610	12.1%
Borrowings:
Securities sold under agreements to repurchase		-		190,274	-100.0%
Advances from FHLB		66,543		78,009	-14.7%
Subordinated capital notes		36,083		36,083	0.0%
Other term notes		238		1,195	-80.1%
Total borrowings		102,864		305,561	-66.3%
Total deposits and borrowings		8,735,321		8,004,171	9.1%

Other Liabilities:
Derivative liabilities		1,895		913	107.6%
Acceptances outstanding		18,291		21,599	-15.3%
Lease liability		37,029		39,840	-7.1%
Other liabilities		162,133		185,660	-12.7%
Total liabilities	$	8,954,669	$	8,252,183	8.5%
Deposits portfolio composition percentages:
Non-interest bearing deposits		27.1%		21.8%
NOW accounts		27.2%		24.8%
Savings and money market accounts		22.6%		23.9%
Certificates of deposit		23.1%		29.5%
		100.0%		100.0%
Borrowings portfolio composition percentages:
Securities sold under agreements to repurchase		0.0%		62.3%
Advances from FHLB		64.7%		25.5%
Other term notes		0.2%		0.4%
Subordinated capital notes		35.1%		11.8%
		100.0%		100.0%
Securities sold under agreements to repurchase (excluding accrued interest)
Amount outstanding at period-end	$	-	$	190,000

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Daily average outstanding balance	$	67,445		$	299,842
Maximum outstanding balance at any month-end	$	190,000		$	461,954

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Liabilities and Funding Sources

As shown in Table 13 above, at September 30, 2020, Oriental’s total liabilities were $8.955 billion, 8.5% more than the $8.252 billion reported at December 31, 2019. Deposits and borrowings, Oriental’s funding sources, amounted to $8.735 billion at September 30, 2020 versus $8.004 billion at December 31, 2019, a 9.1% increase, mainly from higher core deposits by $1.1 billion, while brokered deposits and borrowings decreased $147.4 million and $202.7 million, respectively.

At September 30, 2020, deposits represented 99% and borrowings represented 1% of interest-bearing liabilities. At September 30, 2020, deposits, the largest category of Oriental’s interest-bearing liabilities, were $8.632 billion, an increase of 12.2% from $7.699 billion at December 31, 2019, reflecting higher commercial deposits from existing and new clients and in retail accounts from increased liquidity in the economy.

Borrowings consist mainly of FHLB-NY advances and subordinated capital notes. The overall declines in brokered deposits and borrowings are part of the strategy to replace higher cost funding with lower cost core deposits.

Stockholders’ Equity

At September 30, 2020, Oriental’s total stockholders’ equity was $1.064 billion, a 1.8% increase when compared to $1.045 billion at December 31, 2019. This increase in stockholders’ equity reflects increases in accumulated other comprehensive income, net of tax, of $9.3 million, in legal surplus of $5.5 million, in retained earnings of $4.4 million, in treasury stock of $756 thousand and in additional paid-in capital of $463 thousand. Book value per share was $19.13 at September 30, 2020 compared to $18.75 at December 31, 2019.

From December 31, 2019 to September 30, 2020, tangible common equity to tangible total assets decreased from 8.96% to 8.58%, leverage capital ratio increased from 9.24% to 10.00%, common equity tier 1 capital ratio increased from 10.91% to 12.55%, tier 1 risk-based capital ratio increased from 12.64% to 14.25%, and total risk-based capital ratio increased from 13.91% to 15.50%.

Regulatory Capital

Oriental 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 Oriental 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 September 30, 2020, the capital ratios of Oriental and the Bank continue to exceed the minimum requirements for being “well-capitalized” under the Basel III capital rules.

On January 1, 2020, the Company implemented CECL using the modified retrospective approach. As a result, a $39.2 million allowance for credit losses was recorded for Non-PCD loans and $0.2 million for unused commitments with the corresponding adjustment reducing retained earnings, net of a $13.9 million deferred tax effect. For more information, see Note 1 – Summary of Significant Accounting Policies to the Consolidated Financial Statements. On March 27, 2020, in response to the COVID-19 pandemic, U.S. banking regulators issued an interim final rule that the Company adopted to delay for two years the initial adoption impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during 2020 and 2021 (i.e., a five-year transition period). During the two-year delay, the Company will add back to CET1 capital 100 percent of the initial adoption impact of CECL plus 25 percent of the cumulative quarterly changes in the allowance for credit losses (i.e., quarterly transitional amounts). After two years, starting on January 1, 2022, the quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of CET1 capital over the three-year period.

In July 2019, the federal banking agencies adopted a final rule, pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996, that simplifies for non-advanced approaches banking organizations. It simplifies the regulatory capital treatment for mortgage servicing assets (MSA) and certain deferred tax assets arising from temporary differences (temporary difference DTAs). It increases common equity tier 1 (CET1) capital threshold deductions from 10 percent to 25 percent and removes the aggregate 15 percent CET1 threshold deduction. However, it retains the 250 percent risk weight applicable to non-deducted amounts of MSAs and temporary difference DTAs. In November 2019, the agencies jointly issued a final rule that permits insured depository institutions and depository institution holding companies to implement the simplifications to the capital rule on January 1, 2020, rather than April 1, 2020. These banking organizations may elect to use the revised effective date of January 1, 2020 or wait until the quarter beginning April 1, 2020. On January 1, 2020, the Company elected to early implement the simplifications to the capital rule. As a result, capital ratios increased.

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The risk-based capital ratios presented in Table 14, which include common equity tier 1, tier 1 capital, total capital and leverage capital as of September 30, 2020 and December 31, 2019, 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 September 30, 2020 and December 31, 2019:

TABLE 14 — CAPITAL, DIVIDENDS AND STOCK DATA
	September 30,		December 31,		Variance
	2020		2019		%
	(Dollars in thousands, except per share data)
Capital data:
Stockholders’ equity	$	1,064,322	$	1,045,478	1.8%
Regulatory Capital Ratios data:
Common equity tier 1 capital ratio		12.55%		10.91%	15.0%
Minimum common equity tier 1 capital ratio required		4.50%		4.50%	0.0%
Actual common equity tier 1 capital	$	862,636		735,441	17.3%
Minimum common equity tier 1 capital required	$	309,380		303,338	2.0%
Minimum capital conservation buffer required	$	171,878		168,521	2.0%
Excess over regulatory requirement	$	381,378		263,582	44.7%
Risk-weighted assets	$	6,875,108		6,740,846	2.0%
Tier 1 risk-based capital ratio		14.25%		12.64%	12.7%
Minimum tier 1 risk-based capital ratio required		6.00%		6.00%	0.0%
Actual tier 1 risk-based capital	$	979,506	$	852,311	14.9%
Minimum tier 1 risk-based capital required	$	412,506	$	404,451	2.0%
Excess over regulatory requirement	$	567,000	$	447,860	26.6%
Risk-weighted assets	$	6,875,108	$	6,740,846	2.0%
Total risk-based capital ratio		15.50%		13.91%	11.4%
Minimum total risk-based capital ratio required		8.00%		8.00%	0.0%
Actual total risk-based capital	$	1,065,745	$	937,962	13.6%
Minimum total risk-based capital required	$	550,009	$	539,268	2.0%
Excess over regulatory requirement	$	515,736	$	398,694	29.4%
Risk-weighted assets	$	6,875,108	$	6,740,846	2.0%
Leverage capital ratio		10.00%		9.24%	8.2%
Minimum leverage capital ratio required		4.00%		4.00%	0.0%
Actual tier 1 capital	$	979,506	$	852,311	14.9%
Minimum tier 1 capital required	$	391,856	$	369,151	6.2%
Excess over regulatory requirement	$	587,650	$	483,160	21.6%
Tangible common equity to total assets		8.46%		8.83%	-4.2%
Tangible common equity to risk-weighted assets		12.33%		12.17%	1.3%
Total equity to total assets		10.62%		11.24%	-5.5%
Total equity to risk-weighted assets		15.48%		15.51%	-0.2%
Stock data:
Outstanding common shares		51,344,586		51,398,956	-0.1%
Book value per common share	$	19.13	$	18.75	2.1%
Tangible book value per common share	$	16.51	$	15.96	3.4%
Market price at end of period	$	12.46	$	23.61	-47.2%
Market capitalization at end of period	$	639,754	$	1,213,529	-47.3%

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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 September 30, 2020 and December 31, 2019:

	September 30,		December 31,
	2020		2019
	(In thousands, except share or per share information)
Total stockholders' equity	$	1,064,322	$	1,045,478
Preferred stock		(92,000)		(92,000)
Preferred stock issuance costs		10,130		10,130
Goodwill		(86,069)		(86,069)
Core deposit intangible		(37,021)		(43,185)
Customer relationship intangible		(11,275)		(13,213)
Other intangibles		(354)		(567)
Total tangible common equity (non-GAAP)	$	847,733	$	820,574
Total assets		10,018,991		9,297,661
Goodwill		(86,069)		(86,069)
Core deposit intangible		(37,021)		(43,185)
Customer relationship intangible		(11,275)		(13,213)
Other intangibles		(354)		(567)
Total tangible assets	$	9,884,272	$	9,154,627
Tangible common equity to tangible assets		8.58%		8.96%
Common shares outstanding at end of period		51,344,586		51,398,956
Tangible book value per common share	$	16.51	$	15.96

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:

	September 30,		December 31,		Variance
	2020		2019		%
	(Dollars in thousands)
Risk-based capital:
Common equity tier 1 capital	$	862,636	$	735,441	17.3%
Additional tier 1 capital		116,870		116,870	0.0%
Tier 1 capital		979,506		852,311	14.9%
Additional Tier 2 capital		86,239		85,652	0.7%
Total risk-based capital	$	1,065,745	$	937,963	13.6%
Risk-weighted assets:
Balance sheet items	$	6,413,537	$	6,321,472	1.5%
Off-balance sheet items		461,571		419,374	10.1%
Total risk-weighted assets	$	6,875,108	$	6,740,846	2.0%
Ratios:
Common equity tier 1 capital (minimum required - 4.5%)		12.55%		10.91%	15.0%
Tier 1 capital (minimum required - 6%)		14.25%		12.64%	12.7%
Total capital (minimum required - 8%)		15.50%		13.91%	11.4%
Leverage ratio (minimum required - 4%)		10.00%		9.24%	8.3%
Equity to assets		10.62%		11.24%	-5.6%
Tangible common equity to assets		8.46%		8.83%	-4.2%

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 September 30, 2020 and December 31, 2019:


	September 30,		December 31,		Variance
	2020		2019		%
	(Dollars in thousands)
Oriental Bank Regulatory Capital Ratios:
Common Equity Tier 1 Capital to Risk-Weighted Assets		13.64%		12.09%	12.8%
Actual common equity tier 1 capital	$	933,371	$	813,444	14.7%
Minimum capital requirement (4.5%)	$	307,991	$	302,782	1.7%
Minimum capital conservation buffer requirement (1.875%)	$	171,106	$	168,212	1.7%
Minimum to be well capitalized (6.5%)	$	444,876	$	437,351	1.7%
Tier 1 Capital to Risk-Weighted Assets		13.64%		12.09%	12.8%
Actual tier 1 risk-based capital	$	933,371	$	813,444	14.7%
Minimum capital requirement (6%)	$	410,655	$	403,709	1.7%
Minimum to be well capitalized (8%)	$	547,540	$	538,279	1.7%
Total Capital to Risk-Weighted Assets		14.89%		13.36%	11.5%
Actual total risk-based capital	$	1,019,228	$	898,812	13.4%
Minimum capital requirement (8%)	$	547,540	$	538,279	1.7%
Minimum to be well capitalized (10%)	$	684,425	$	672,848	1.7%
Total Tier 1 Capital to Average Total Assets		9.58%		8.85%	8.2%
Actual tier 1 capital	$	933,371	$	813,444	14.7%
Minimum capital requirement (4%)	$	389,708	$	367,537	6.0%
Minimum to be well capitalized (5%)	$	487,135	$	459,421	6.0%

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Oriental’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG.” At September 30, 2020 and December 31, 2019, Oriental’s market capitalization for its outstanding common stock was $639.8 million ($12.46 per share) and $1.214 billion ($23.61 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 three calendar years:

					Cash
	Price				Dividend
	High		Low		Per share
2020
September 30, 2020	$	14.35	$	12.12	$	0.07
June 30, 2020	$	15.10	$	9.38	$	0.07
March 31, 2020	$	23.50	$	9.32	$	0.07
2019
December 31, 2019	$	23.61	$	20.00	$	0.07
September 30, 2019	$	24.20	$	19.84	$	0.07
June 30, 2019	$	23.77	$	18.78	$	0.07
March 31, 2019	$	21.24	$	16.37	$	0.07
2018
December 31, 2018	$	18.56	$	14.93	$	0.07
September 30, 2018	$	17.60	$	14.45	$	0.06
June 30, 2018	$	14.75	$	10.60	$	0.06
March 31, 2018	$	12.05	$	8.60	$	0.06

Under Oriental’s current stock repurchase program, it is authorized to purchase in the open market up to $5.5 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 nine-month period ended September 30, 2020, Oriental purchased 175,000 shares under this program for a total of $2.2 million, at an average price of $12.69 per share. There were no repurchases during the nine-month period ended September 30, 2019.

At September 30, 2020, the number of shares that may yet be purchased under such program is estimated at 442,251 and was calculated by dividing the remaining balance of $5.5 million by $12.46 (closing price of Oriental's common stock at September 30, 2020). Oriental did not purchase any shares of its common stock during the nine-month periods ended September 30, 2020, other than through its publicly announced stock repurchase program.

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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’s 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 organic growth patterns and core 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 September 30, 2020 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	$	24,883	6.39%	$	20,594	5.28%
+ 100 Basis points	$	13,883	3.57%	$	11,652	2.98%
- 50 Basis points	$	(4,389)	-1.13%	$	(3,833)	-0.98%

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 September 30, 2020.

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 fluctuation 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.

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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 borrowing 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 liability of $1.9 million (notional amount of $30.7 million) was recognized at September 30, 2020 related to the valuation of these swaps.

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 September 30, 2020, Oriental had $30.7 million in interest rate swaps at an average rate of 2.42% designated as cash flow hedges for $66.5 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 for Puerto Rico. In addition, as was demonstrated by the January 2020 earthquakes and hurricanes Irma and Maria in September 2017, Puerto Rico is susceptible to natural disasters, which can have a disproportionate impact because of the logistical difficulties of bringing relief to an island far from the United States mainland. 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 all agency mortgage-backed securities. Thus, 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.

During the nine-month period ended September 30, 2020, the Covid-19 pandemic has negatively impacted economic activity in Puerto Rico, the U.S. and around the world. Nevertheless, we did not see meaningful impacts to loan portfolio delinquencies, nonperforming loans or charge-offs as of and during the nine-month period ended September 30, 2020. To provide relief to individuals and businesses in the U.S., in March and April 2020, the President signed into law four economic stimulus packages, including the CARES Act. U.S. bank regulatory agencies also issued interagency guidance to financial institutions that are working with borrowers affected by Covid-19.

To support our customers, we have implemented various loan modification programs and other forms of support, including offering loan payment deferrals, waiver of certain fees and pausing foreclosure sales, evictions and repossessions. For a description of the loan modification programs that we have implemented, see Executive Summary - Recent Developments – Covid-19 Pandemic 2020 of the MD&A. For information on the accounting for loan modifications related to the Covid-19 pandemic, see Note 1 – Summary of Significant Accounting Policies to the Consolidated Financial Statements.

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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 September 30, 2020, Oriental had $96.1 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.

These liquidity risk management practices have allowed us to effectively manage the market stress that began in the first quarter of 2020 from the Covid-19 pandemic. Requests for loan payment deferrals rose in the second quarter of 2020. Nevertheless, most payment deferrals ended in the third quarter of 2020, with only 2% of total loan remaining at September 30, 2020 compared to 30% at June 30, 2020. Even though Oriental’s liquidity has been impacted by loan principal and interest payment deferrals that have being granted for certain customers due to Covid-19, liquidity has been growing from the federal stimulus programs Puerto Rico is receiving following 2017’s Hurricane Maria, the early 2020 earthquakes, and now the Covid-19 pandemic. In the case of loans serviced by Oriental for the Federal National Mortgage Association ("FNMA"), Oriental is required to advance to the owners the payment of principal and interest on a scheduled basis for six months even when such payment was not collected from the borrower due to payment forbearance granted or payment delinquency. Such amounts advanced are recorded as a receivable by Oriental and are expected to be collected from the borrower and/or government agency (FNMA). Additionally, liquidity could be adversely impacted if customers withdraw significant deposit balances due to Covid-19 concerns.

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 September 30, 2020, Oriental had approximately $2.3 billion in unrestricted cash and cash equivalents, $194.8 million in investment securities that are not pledged as collateral, and $992.2 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.

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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.

The Business Continuity Plan has allowed us to effectively manage the operational disruption that began in the first quarter of 2020 from the Covid-19 pandemic. For more information on the effects of the pandemic, see Executive Summary - Recent Developments – Covid-19 Pandemic 2020 of the MD&A.

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

Most 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.

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Internal Control over Financial Reporting

Effective January 1, 2020, Oriental adopted the CECL accounting standard. The Company designed new controls and modified existing controls as part of its adoption. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data. On December 31, 2019, Oriental closed the Scotiabank PR & USVI Acquisition as described elsewhere in this report. Oriental is still in the process of integrating policies, processes, internal controls, people, technology and operations relating to this transaction into our overall internal controls over financial reporting, which should be completed by December 31, 2020. As integration activities occur, management will modify existing internal controls and/or implement additional internal controls when necessary to appropriately address underlying risks. In addition, during this integration period, management has extended its oversight and monitoring processes that support internal control over financial reporting, and to-date, while this acquisition is considered a significant change to Oriental's internal control over financial reporting, management has not identified any other changes in Oriental’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 September 30, 2020, that has materially affected, or is reasonably likely to materially affect, Oriental’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

Our Annual Report on Form 10-K for the year ended December 31, 2019 (2019 Form 10-K) describes market, credit, and

business operations risk factors that could affect our businesses, results of operations or financial condition. On March 11, 2020, the World Health Organization declared the outbreak of a strain of novel coronavirus disease, Covid-19, a global pandemic. As conditions and circumstances related to the Covid-19 pandemic have evolved subsequent to our 2019 Form 10-K filing, the following supplements the risk factors described in our 2019 Form 10-K.

The Covid-19 pandemic has adversely impacted our business and financial results, and the extent to which the pandemic and measures taken in response to the pandemic could materially and adversely impact our business, financial condition, liquidity, capital and results of operations will depend on future developments, which are highly uncertain and are difficult to predict.

Global health concerns relating to the Covid-19 pandemic and related government actions taken to reduce the spread of the virus have impacted the macroeconomic environment, significantly increased economic uncertainty and reduced economic activity. The pandemic has also caused governmental authorities to implement numerous measures to try to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. These measures have negatively impacted and may further negatively impact consumer and business payment and spending patterns.

The Covid-19 pandemic has adversely impacted, and may continue to adversely impact, our business, financial condition, capital and results of operations. The extent of these impacts depends on future developments, which are highly uncertain and difficult to predict, including, but not limited to, the duration and magnitude of the pandemic, the actions taken to contain the virus or treat its impact, the effectiveness of economic stimulus measures in Puerto Rico and the United States, and how quickly and to what extent economic and operating conditions and consumer and business spending can return to their pre-pandemic levels. As a result, our loan growth and the overall demand for our products and services may be significantly impacted, which could adversely affect our revenue and other results of operations. In addition, we could experience higher credit losses in our loan portfolios and increases in our allowance for credit losses. For example, as a result of the significant uncertainty due to the Covid-19 pandemic we realized a substantial build in our allowance for credit losses for the nine-month period ended September 30, 2020. Oriental’s interest income could also be reduced due to Covid-19. Oriental is continuing to extend loan payment deferrals in the fourth quarter and therefore expects that the accrued interest receivable balance on the deferred loans will continue to increase. Interest and fees still accrue on amounts that are deemed collectible during the deferral period, however, should Oriental later determine that collection of payments is not expected and eventual credit losses on these deferred payments emerge, accrued and unpaid interest income and fees will need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At September 30, 2020, Oriental has established an allowance for credit losses on this accrued interest receivable amounting to $826 thousand. We could also experience impairments of other financial assets and other negative impacts on our financial position, including possible constraints on liquidity and capital, as well as higher costs of capital. Even after the Covid-19 pandemic has subsided, we may continue to experience adverse impacts to our business and results of operations, which could be material, as a result of the macroeconomic impact and any recession that has occurred or may occur in the future.

The spread of Covid-19 has caused us to modify our business practices and operations, including providing forbearance options to our customers in certain circumstances. We may need to further modify our practices and operations as this event unfolds. We have also implemented work-from-home policies for approximately 50% of our employees, and social distancing plans for our employees who are working from Oriental’s facilities. These measures could impair our ability to perform critical functions and may adversely impact our results of operations. We may take further actions as required by government authorities or that we otherwise determine are in the best interests of our customers, employees and business partners.

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Federal, state, and local governmental authorities have enacted, and may enact in the future, legislation, regulations and protocols in response to the Covid-19 pandemic, including governmental programs intended to provide economic relief to businesses and individuals. Our participation in and execution of any such programs may cause operational, compliance, reputational and credit risks, which could result in litigation, governmental action or other forms of loss. The extent of these impacts, which may be substantial, will depend on the degree of our participation in these programs. There remains significant uncertainty regarding the measures that authorities will enact in the future and the ultimate impact of the legislation, regulations and protocols that have been and will be enacted. Moreover, we expect that the effects of the Covid-19 pandemic will heighten many of the other known risks described in the “Risk Factors” section of our 2019 Form 10-K.

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

On June 29, 2011, the Company announced the approval by the Board of Directors of a stock repurchase program to purchase an additional $70 million of the Company’s common stock in the open market.

Any shares of common stock repurchased are held by the Company as treasury shares. The Company records treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. During the nine-month period ended September 30, 2020, the Company purchased 175,000 additional shares under this program for a total of $2.2 million, at an average price of $12.69 per share.

The following table presents the shares repurchased for each month during the nine-month period September 30, 2020, excluding the months of January, February, April, May, June, July, August and September during which no shares were purchased as part of the stock repurchase program:

				Total number of		Maximum approximate
				shares purchased		dollar value of shares
	Total number of	Average price paid		as part of publicly		that may yet be purchased
Period	shares purchased	per share		announced programs		under the programs
						(In thousands)
March 1-31, 2020	175,000	$	12.69	175,000	$	5,510
Nine-month period ended September 30, 2020	175,000	$	12.69	175,000	$	5,510

The number of shares that may yet be purchased under the current $70 million program is estimated at 442,251 and was calculated by dividing the remaining balance of $5.5 million by $12.46 (closing price of the Company’s common stock at September 30, 2020). The Company did not purchase any shares of its common stock other than through its publicly announced stock repurchase program during the nine-month period ended September 30, 2020.

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:

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 Oriental’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline 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: November 6, 2020
	José Rafael Fernández
	President and Chief Executive Officer

By:	/s/ Maritza Arizmendi	Date: November 6, 2020
	Maritza Arizmendi
	Executive Vice President, Chief Financial Officer and Chief Accounting Officer
By:	/s/ Krisen Aguirre Torres	Date: November 6, 2020
	Krisen Aguirre Torres
	Vice President Financial Reporting and Accounting Control

134