OFG BANCORP - Quarter Report: 2021 June (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 June 30, 2021

☐ 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

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:

51,662,157 common shares ($1.00 par value per share) outstanding as of July 31, 2021

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 – Restricted Cash	14
		Note 3 – Investment Securities	14
		Note 4 – Loans	19
		Note 5 – Allowance for Credit Losses	34
		Note 6 – Foreclosed Real Estate	38
		Note 7 – Servicing Assets	38
		Note 8 – Derivatives	40
		Note 9 – Core Deposit, customer relationship intangible and other intangibles	41
		Note 10 – Accrued Interest Receivable and Other Assets	42
		Note 11 – Deposits and Related Interest	43
		Note 12 – Borrowings and Related Interest	44
		Note 13 – Offsetting of Financial Assets and Liabilities	46
		Note 14 – Income Taxes	46
		Note 15 – Regulatory Capital Requirements	47
		Note 16 – Stockholders’ Equity	49
		Note 17 – Accumulated Other Comprehensive Income	50
		Note 18 – Earnings per Common Share	52
		Note 19 – Guarantees	53
		Note 20 – Commitments and Contingencies	54
		Note 21 – Operating Leases	56
		Note 22 – Fair Value of Financial Instruments	58
		Note 23 – Banking and Financial Service Revenues	65
		Note 24 – Business Segments	67
		Note 25 – Subsequent Events	69
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		70
		Critical Accounting Policies and Estimates	71
		Financial Highlights of the First Quarter of 2021	72
		Analysis of Results of Operations	75
		Analysis of Financial Condition	88
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		109
Item 4.	Controls and Procedures		114
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings		116
Item 1A.	Risk Factors		116
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		116
Item 3.	Default upon Senior Securities		116
Item 4.	Mine Safety Disclosures		116
Item 5.	Other Information		116
Item 6.	Exhibits		117
Signatures			118

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 “OFG”), 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 OFG’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 OFG’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 disruption to our operations of a cybersecurity breach, including a ransomware attack or theft of sensitive proprietary or client information;

 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 in 2017 and earthquakes in 2020;

 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;

 the emergence of widespread health emergencies or pandemics, including the magnitude and duration of the Covid-19 pandemic and its impact on the United States, Puerto Rico, 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 Covid-19 virus and its variants 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; OFG’s ability to grow its core businesses; decisions to downsize, sell or close units or otherwise change OFG’s business mix; and management’s ability to identify and manage these and other risks.

All forward-looking statements included in this quarterly report on Form 10-Q are based upon information available to OFG as of the date of this report, and other than as required by law, including the requirements of applicable securities laws, OFG 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 JUNE 30, 2021 AND DECEMBER 31, 2020

	June 30,		December 31,
	2021		2020
	(In thousands)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	2,756,288	$	2,142,294
Money market investments		11,206		11,908
Total cash and cash equivalents		2,767,494		2,154,202
Restricted cash		199		1,375
Investments:
Trading securities, at fair value, with amortized cost of $432 (December 31, 2020 - $432)		29		22
Investment securities available-for-sale, at fair value, with amortized cost of $491,321
(December 31, 2020, amortized cost $432,176); no allowance for credit losses		501,619		446,438
Investment securities held-to-maturity, at amortized cost
no allowance for credit losses		125,138		-
Federal Home Loan Bank (FHLB) stock, at cost		7,541		8,278
Other investments		9,168		3,962
Total investments		643,495		458,700
Loans:
Loans held-for-sale, at lower of cost or fair value		47,665		43,935
Loans held for investment, net of allowance for credit losses of $191,717 (December 31, 2020 - $204,809)		6,306,375		6,457,324
Total loans		6,354,040		6,501,259
Other assets:
Foreclosed real estate		15,093		11,596
Accrued interest receivable		59,850		65,547
Deferred tax asset, net		144,799		162,478
Premises and equipment, net		85,993		83,786
Customers' liability on acceptances		27,703		33,349
Servicing assets		47,712		47,295
Goodwill		86,069		86,069
Other intangible assets		40,995		45,896
Operating lease right-of-use assets		32,621		31,383
Other assets		155,750		143,076
Total assets	$	10,461,813	$	9,826,011

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF JUNE 30, 2021 AND DECEMBER 31, 2020 (CONTINUED)

	June 30,		December 31,
	2021		2020
	(In thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits	$	5,329,429	$	4,613,309
Savings accounts		2,285,558		1,944,415
Time deposits		1,475,505		1,857,916
Total deposits		9,090,492		8,415,640
Borrowings:
Advances from FHLB		63,569		65,561
Subordinated capital notes		36,083		36,083
Other borrowings		298		707
Total borrowings		99,950		102,351
Other liabilities:
Derivative liabilities		1,293		1,712
Acceptances executed and outstanding		27,703		33,349
Operating lease liabilities		34,052		32,566
Accrued expenses and other liabilities		128,326		154,418
Total liabilities		9,381,816		8,740,036
Commitments and contingencies (See Note 26)		nil		nil
Stockholders’ equity:
Preferred stock; 10,000,000 shares authorized;
960,000 shares of Series D issued and outstanding
(December 31, 2020 - 1,340,000 shares; 1,380,000 shares; and 960,000 shares) $25 liquidation value		24,000		92,000
Common stock, $1 par value; 100,000,000 shares authorized; 59,885,234 shares issued: 51,660,507 shares outstanding (December 31, 2020 - 59,885,234;
51,387,071 )		59,885		59,885
Additional paid-in capital		626,995		622,652
Legal surplus		110,235		103,269
Retained earnings		352,001		300,096
Treasury stock, at cost, 8,224,727 shares (December 31, 2020 - 8,498,163 shares)		(100,719)		(102,949)
Accumulated other comprehensive income (loss), net of tax of $1,405 (December 31, 2020 - $1,529)		7,600		11,022
Total stockholders’ equity		1,079,997		1,085,975
Total liabilities and stockholders’ equity	$	10,461,813	$	9,826,011

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2021 AND 2020

	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2021		2020		2021		2020
	(In thousands, except per share data)
Interest income:
Loans	$	110,061	$	118,532	$	218,272	$	234,967
Mortgage-backed securities		2,556		1,619		4,597		4,392
Investment securities and other		846		1,541		1,576		6,030
Total interest income		113,463		121,692		224,445		245,389
Interest expense:
Deposits		10,460		15,445		22,484		32,065
Securities sold under agreements to repurchase		-		335		-		1,335
Advances from FHLB and other borrowings		452		505		911		1,045
Subordinated capital notes		294		347		589		783
Total interest expense		11,206		16,632		23,984		35,228
Net interest income		102,257		105,060		200,461		210,161
(Recapture) provision for credit losses		(8,305)		17,696		(1,981)		64,827
Net interest income after (recapture) provision for credit losses		110,562		87,364		202,442		145,334
Non-interest income:
Banking service revenue		18,248		13,668		34,741		29,381
Wealth management revenue		8,263		6,366		15,651		13,652
Mortgage banking activities		4,537		3,072		10,108		6,306
Total banking and financial service revenues		31,048		23,106		60,500		49,339

Net gain on:
Sale of securities		-		-		-		4,728
Bargain purchase from Scotiabank PR & USVI acquisition		-		3,462		-		3,872
Other non-interest income		1,143		584		2,098		663
Total non-interest income, net		32,191		27,152		62,598		58,602

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2021 AND 2020 (CONTINUED)

	Quarter Ended June 30,					Six-Month Period Ended June 30,
	2021		2020			2021		2020
	(In thousands, except per share data)
Non-interest expense:
Compensation and employee benefits		32,919		34,506		65,537		70,050
Occupancy, equipment and infrastructure costs		12,528		11,837		25,656		23,276
Electronic banking charges		9,316		7,962		17,548		17,550
Information technology expenses		5,532		3,944		9,786		10,878
Professional and service fees		5,399		3,475		9,935		9,264
Taxes, other than payroll and income taxes		3,617		3,171		7,278		6,349
Insurance		2,673		2,761		5,129		6,239
Foreclosed real estate and other repossessed assets (income) expenses		327		2,918		278		5,440
Loan servicing and clearing expenses		1,942		1,148		3,782		2,491
Advertising, business promotion, and strategic initiatives		1,707		1,533		3,137		3,163
Communication		1,039		905		2,004		1,876
Printing, postage, stationary and supplies		941		951		2,159		1,673
Director and investor relations		324		316		623		626
Merger and restructuring charges		-		3,006		-		3,310
Pandemic expenses		1,531		2,033		3,300		2,201
Other		2,881		5,015		4,190		8,417
Total non-interest expense		82,676		85,481		160,342		172,803
Income before income taxes		60,077		29,035		104,698		31,133
Income tax expense		19,250		7,248		33,498		7,545
Net income		40,827		21,787		71,200		23,588
Less: dividends on preferred stock		-		(1,628)		(1,255)		(3,256)
Income available to common shareholders	$	40,827	$	20,159	$	69,945	$	20,332
Earnings per common share:
Basic	$	0.79	$	0.39	$	1.36	$	0.40
Diluted	$	0.78	$	0.39	$	1.35	$	0.39
Average common shares outstanding and equivalents		52,048		51,470		51,885		51,584
Cash dividends per share of common stock	$	0.08	$	0.07	$	0.16	$	0.14

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2021 AND 2020


	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2021		2020		2021		2020
	(In thousands)

Net income	$	40,827	$	21,787	$	71,200	$	23,588
Other comprehensive income (loss) before tax:
Unrealized gain (loss) on securities available-for-sale		1,404		1,359		(3,964)		15,288
Realized gain on sale of securities available-for-sale		-		-		-		(4,728)
Unrealized gain (loss) on cash flow hedges		172		(19)		419		(1,169)
Other comprehensive (loss) income before taxes		1,576		1,340		(3,545)		9,391
Income tax effect		(206)		(42)		123		(795)
Other comprehensive (loss) income after taxes		1,370		1,298		(3,422)		8,596
Comprehensive income	$	42,197	$	23,085	$	67,778	$	32,184

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY

FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2021 AND 2020

	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2021		2020		2021		2020
	(In thousands)
Preferred stock:
Balance at beginning of period	$	92,000	$	92,000	$	92,000	$	92,000
Redemption of preferred stock		(68,000)	$	-		(68,000)		-
Balance at end of period		24,000		92,000		24,000		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		622,935		621,206		622,652		621,515
Stock-based compensation expense		1,405		822		3,614		1,323
Lapsed restricted stock units		(22)		(168)		(1,948)		(978)
Redemption of preferred stock, issuance costs		2,677		-		2,677		-
Balance at end of period		626,995		621,860		626,995		621,860
Legal surplus:
Balance at beginning of period		106,165		95,945		103,269		95,779
Transfer from retained earnings		4,070		2,402		6,966		2,568
Balance at end of period		110,235		98,347		110,235		98,347
Retained earnings:
Balance at beginning of period		322,202		250,557		300,096		279,646
Topic 326 adoption		-		-		-		(25,494)
Balance at beginning of period (as adjusted for change in accounting principle)		322,202		250,557		300,096		254,152
Net income		40,827		21,787		71,200		23,588
Cash dividends declared on common stock^[1]		(4,281)		(3,588)		(8,397)		(7,191)
Cash dividends declared on preferred stock		-		(1,628)		(1,255)		(3,256)
Transfer to legal surplus		(4,070)		(2,403)		(6,966)		(2,568)
Redemption of preferred stock, issuance costs		(2,677)		-		(2,677)		-
Balance at end of period		352,001		264,725		352,001		264,725
Treasury stock:
Balance at beginning of period		(100,994)		(103,289)		(102,949)		(102,339)
Stock repurchased		-		-		-		(2,226)
Lapsed restricted stock units and options		275		168		2,230		1,444
Balance at end of period		(100,719)		(103,121)		(100,719)		(103,121)
Accumulated other comprehensive income (loss), net of tax:
Balance at beginning of period		6,230		6,290		11,022		(1,008)
Other comprehensive income (loss), net of tax		1,370		1,298		(3,422)		8,596
Balance at end of period		7,600		7,588		7,600		7,588
Total stockholders’ equity	$	1,079,997	$	1,041,284	$	1,079,997	$	1,041,284
[1] Dividends declared per common share during the quarter ended June 30, 2021- $0.08 (June 30, 2020 - $0.07). Dividends declared per common share during the six-month period ended June 30, 2021 - $0.16 (June 30, 2020 - $0.14).
See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2021 AND 2020


	Six-Month Period Ended June 30,
	2021		2020
	(In thousands)
Cash flows from operating activities:
Net income	$	71,200	$	23,588
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		997		(5,267)
Amortization of fair value premiums on acquired deposits		-		(1,303)
Amortization of investment securities premiums, net of accretion of discounts		1,583		3,099
Amortization of other intangible assets		4,901		5,559
Net change in operating leases		248		274
Depreciation and amortization of premises and equipment		6,913		6,190
Deferred income tax expense, net		8,733		1,053
Provision for credit losses		(1,981)		64,827
Stock-based compensation		3,614		1,323
(Gain) loss on:
Sale of securities		-		(4,728)
Sale of loans		(3,833)		(819)
Early extinguishment of debt		-		63
Foreclosed real estate and other repossessed assets		(2,757)		1,343
Sale of other assets		(570)		(7)
Originations and purchases of loans held-for-sale		(197,376)		(55,198)
Proceeds from sale of loans held-for-sale		127,053		819
Net (increase) decrease in:
Trading securities		(7)		15
Accrued interest receivable		5,947		(45,363)
Servicing assets		(417)		2,853
Other assets		(3,321)		8,540
Net increase (decrease) in:
Accrued interest on deposits and borrowings		(578)		(1,292)
Accrued expenses and other liabilities		48,085		15,985
Net cash provided by operating activities		68,434		21,554

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2021 AND 2020 (CONTINUED)

	Six-Month Period Ended June 30,
	2021		2020
	(In thousands)
Cash flows from investing activities:
Purchases of:
Investment securities available-for-sale		(27,886)		23,469
Investment securities held-to-maturity		(126,777)		-
Other investments		(5,206)		(516)
Maturities and redemptions of:
Investment securities available-for-sale		51,129		257,278
Investment securities held-to-maturity		1,578		-
FHLB stock		737		4,682
Proceeds from sales of:
Investment securities available-for-sale		-		320,984
Foreclosed real estate and other repossessed assets, including write-offs		19,581		14,824
Premises and equipment		570		32
Origination and purchase of loans, excluding loans held-for-sale		(1,003,889)		(728,791)
Principal repayment of loans		1,093,923		522,880
Additions to premises and equipment		(9,633)		(7,344)
Net cash (used in) provided by investing activities	$	(5,873)	$	407,498

Cash flows from financing activities:
Net increase (decrease) in:
Deposits		629,322		831,303
Securities sold under agreements to repurchase		-		(190,063)
FHLB advances, federal funds purchased, and other borrowings		(2,397)		(10,805)
Exercise of stock options with treasury shares		282		466
Redemption of preferred stock		(68,000)		-
Purchase of treasury stock		-		(2,226)
Dividends paid on preferred stock		(1,255)		(3,256)
Dividends paid on common stock		(8,397)		(7,191)
Net cash provided by financing activities	$	549,555	$	618,228
Net change in cash, cash equivalents and restricted cash		612,116		1,047,280
Cash, cash equivalents and restricted cash at beginning of period		2,155,577		852,757
Cash, cash equivalents and restricted cash at end of period	$	2,767,693	$	1,900,037
Reconciliation of the Consolidated Statements of Cash Flows to the Consolidated Statements of Financial Condition:
Cash and due from banks	$	2,756,288	$	1,888,965
Money market investments		11,206		10,022
Restricted cash		199		1,050
Total cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	2,767,693	$	1,900,037

See notes to unaudited consolidated financial statements


	Six-Month Period Ended June 30,
	2021		2020
	(In thousands)
Supplemental Cash Flow Disclosure and Schedule of Non-cash Activities:
Interest paid	$	17,210	$	26,966
Income taxes paid	$	880	$	5,628
Operating lease liabilities paid	$	5,976	$	6,614
Mortgage loans held-for-sale securitized into mortgage-backed securities	$	83,909	$	55,612
Transfer from loans to foreclosed real estate and other repossessed assets	$	20,637	$	9,083
Reclassification of loans held-for-investment portfolio to held-for-sale portfolio	$	17,993	$	261
Reclassification of loans held-for-sale portfolio to held-for-investment portfolio	$	4,178	$	-
Interest capitalized on loans subject to the temporary payment moratorium		-		34,826
Financed sales of foreclosed real estate	$	407	$	-
Loans booked under the GNMA buy-back option	$	28,118	$	75,091
See notes to unaudited consolidated financial statements

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

OFG is a publicly-owned financial holding company incorporated under the laws of the Commonwealth of Puerto Rico. OFG 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”), among other subsidiaries. OFG 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, OFG 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, OFG 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, OFG purchased from the Bank of Nova Scotia (“BNS”) all outstanding common stock of Scotiabank de Puerto Rico (“SBPR”). 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. Immediately following the closing of the Scotiabank Acquisition, OFG merged SBPR with and into Oriental Bank, with Oriental Bank continuing as the surviving entity. This transaction is referred to as the “Scotiabank Acquisition.” These acquired businesses have been integrated.

Basis of Presentation

The accompanying unaudited consolidated financial statements of OFG 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 OFG 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, 2020. Operating results for the six-months period ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. 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

OFG’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, 2020.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

New Accounting Updates Adopted in 2021

Simplifying the Accounting for Income Taxes. On January 1, 2021, OFG adopted ASU 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes certain exceptions for recognizing deferred taxes for investments, performing intra-period tax allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. Our adoption of this standard did not have an impact on our financial statements.

Investments—Equity Securities. On January 1, 2021, OFG adopted ASU 2020-01, which clarifies accounting for certain equity method investments (ASU 2020-01) clarifies the interactions between Topic 321 (equity securities), Topic 323 (equity method and joint ventures) and Topic 815 (derivatives and hedge accounting). The ASU addresses the accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. Our adoption of this standard did not have an impact on our financial statements.

New Accounting Updates Not Yet Adopted

Certain Leases with Variable Lease Payments. In July 2021, the FASB issued guidance within ASU 2021-05, which amends the

lease classification requirements for lessors to align them with practice under Topic 840. Lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if both: the lease would have been classified as a sales-type lease or a direct financing lease in accordance with the classification criteria in paragraphs 842-10-25-2 through 25-3; and the lessor would have otherwise recognized a day-one loss. OFG does not expect to be materially impacted by this amendment.

Issuer’s Accounting for Certain Modifications on Exchanges of Freestanding Equity-Classified Written Call Options. In May 2021, the FASB issued ASU 2021-04, which clarifies the accounting for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after a modification or exchange and the related EPS effects of such transaction if recognized as an adjustment to equity. Upon adoption of this ASU, we will consider this guidance for modifications or exchanges of freestanding equity-classified written call options.

Reference Rate Reform. In March 2020, the FASB issued guidance within ASU 2020-04, which provides accounting relief from the future impact of the cessation of LIBOR by, among other things, providing optional expedients to treat contract modifications resulting from such reference rate reform as a continuation of the existing contract and for hedging relationships to not be de-designated resulting from such changes provided certain criteria are met. OFG’s LIBOR exposure is mainly concentrated within its commercial loan portfolio, representing 7.6% of total loans held for investment at June 30, 2021. OFG has identified its LIBOR-based contracts that will be impacted by the cessation of LIBOR and is incorporating fallback language in negotiated contracts and incorporating a non-LIBOR reference rate and/or fallback language in new contracts to prepare for these changes. Furthermore, management has established a LIBOR transition team to lead OFG in the execution of its project plan. Notwithstanding these efforts, OFG expects to use the optional expedients provided by ASU 2020-04 for contracts left unmodified.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 2 – RESTRICTED CASH

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

	June 30,		December 31,
	2021		2020
	(In thousands)
Cash pledged as collateral to other financial institutions to secure:
Regulatory requirements	$	-	$	325
Obligations under agreement of loans sold with recourse		199		1,050
	$	199	$	1,375

As of December 31, 2020, cash of $325 thousand was held as the legal reserve required by the Puerto Rico’s Office of the Commissioner of Financial Institutions (“OCFI”) in connection with an international banking entity (“IBE”) unit license acquired in the Scotiabank Acquisition. This cash was released during the six-month period ended June 30, 2021, as a result of the cancellation of this IBE license.

OFG has a contract with FNMA which requires collateral to guarantee the repurchase, if necessary, of loans sold with recourse. At June 30, 2021 and December 31, 2020, OFG delivered as collateral cash amounting to approximately $199 thousand and $1.1 million, respectively.

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 June 30, 2021 was $477.7 million (December 31, 2020 - $408.5 million). At June 30, 2021 and December 31, 2020, 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 3 – INVESTMENT SECURITIES

Money Market Investments

OFG 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 June 30, 2021 and December 31, 2020, money market instruments included as part of cash and cash equivalents amounted to $11.2 million and $11.9 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 OFG at June 30, 2021 and December 31, 2020, were as follows:

	June 30, 2021
			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	$	208,840	$	3,481	$	2,242	$	210,079	1.71%
GNMA certificates		237,547		8,256		176		245,627	2.35%
CMOs issued by US government-sponsored agencies		30,546		762		-		31,308	1.96%
Total mortgage-backed securities		476,933		12,499		2,418		487,014	2.05%
Investment securities
US Treasury securities		10,739		171		-		10,910	1.48%
Obligations of US government-sponsored agencies		1,396		11		-		1,407	1.39%
Other debt securities		2,253		35		-		2,288	4.73%
Total investment securities		14,388		217		-		14,605	1.98%
Total securities available for sale	$	491,321	$	12,716	$	2,418	$	501,619	2.05%

Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates	$	125,138	$	63	$	444	$	124,757	1.70%

	December 31, 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	$	206,195	$	4,786	$	32	$	210,949	1.78%
GNMA certificates		174,472		8,478		178		182,772	2.21%
CMOs issued by US government-sponsored agencies		38,309		905		-		39,214	1.96%
Total mortgage-backed securities		418,976		14,169		210		432,935	1.97%
Investment securities
US Treasury securities		10,740		243		-		10,983	1.49%
Obligations of US government-sponsored agencies		1,585		21		-		1,606	1.39%
Other debt securities		875		39		-		914	2.31%
Total investment securities		13,200		303		-		13,503	1.53%
Total securities available-for-sale	$	432,176	$	14,472	$	210	$	446,438	1.96%

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At June 30, 2021 and December 31, 2020, all securities held by OFG are issued by U.S. government entities and agencies that have a zero-credit loss assumption.

At both June 30, 2021 and December 31, 2020, the Bank’s international banking entities held short-term US Treasury securities in the amount of $305 thousand and $325 thousand as the legal reserve required for international banking entities under Puerto Rico law. These instruments cannot be withdrawn or transferred without the prior written approval of the OCFI.

The amortized cost and fair value of OFG’s investment securities at June 30, 2021, 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.

	June 30, 2021
	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Mortgage-backed securities
Due less than one year
FNMA and FHLMC certificates	$	6	$	6	$	-	$	-
Total due in less than one year		6		6		-		-
Due from 1 to 5 years
GNMA certificates		2,203		2,274		-		-
Total due from 1 to 5 years		2,203		2,274		-		-
Due after 5 to 10 years
CMOs issued by US government-sponsored agencies	$	28,246	$	28,976	$	-	$	-
FNMA and FHLMC certificates		90,140		93,172		-		-
GNMA certificates		45,513		46,827		-		-
Total due after 5 to 10 years		163,899		168,975		-		-
Due after 10 years
FNMA and FHLMC certificates	$	118,694	$	116,901	$	125,138	$	124,757
GNMA certificates		189,831		196,526		-		-
CMOs issued by US government-sponsored agencies		2,300		2,332		-		-
Total due after 10 years		310,825		315,759		125,138		124,757
Total mortgage-backed securities		476,933		487,014		125,138		124,757
Investment securities
Due less than one year
Obligations of US government-sponsored agencies	$	1,396	$	1,407	$	-	$	-
US Treasury securities		735		735		-		-
Other debt securities		250		250		-		-
Total due in less than one year		2,381		2,392		-		-
Due from 1 to 5 years
US Treasury securities	$	10,004	$	10,175	$	-	$	-
Other debt securities		2,003		2,038		-		-
Total due from 1 to 5 years		12,007		12,213		-		-
Due from 5 to 10 years
Total investment securities		14,388		14,605		-		-
Total	$	491,321	$	501,619	$	125,138	$	124,757

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

During the six-month period ended June 30, 2020, OFG sold $316.3 million available-for-sale mortgage-backed securities and recognized a $4.7 million gain in the sale. There were no sales of securities during the six-month period ended on June 30, 2021.

During the six-month periods ended June 30, 2021 and 2020, OFG retained securitized GNMA pools totaling $84.0 million and $31.1 million amortized cost, respectively, at a yield of 2.66% and 2.81%, from its own originations.

	Six-Month Period Ended June 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	$	-

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables show OFG’s gross unrealized losses and fair value of investment securities available-for-sale and held-to-maturity at June 30, 2021 and December 31, 2020, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:

	June 30, 2021
	Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
FNMA and FHLMC certificates	$	106,318	$	2,242	$	104,076
GNMA certificates		967		176		791
	$	107,285	$	2,418	$	104,867

Held-to-maturity
FNMA and FHLMC certificates	$	100,180	$	444	$	99,736

	December 31, 2020
	Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
FNMA and FHLMC certificates	$	34,628	$	32	$	34,596
GNMA certificates		5,104		178		4,926
	$	39,732	$	210	$	39,522

OFG had no investment securities in a continuous loss position for 12 months or more at June 30, 2021 or December 31, 2020.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 4 - LOANS

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

The composition of the amortized cost basis of OFG’s loan portfolio at June 30, 2021 and December 31, 2020 was as follows:

	June 30, 2021						December 31, 2020
	Non-PCD		PCD		Total		Non-PCD		PCD		Total
	(In thousands)						(In thousands)
Commercial loans:
Commercial secured by real estate	$	829,053	$	224,987	$	1,054,040	$	807,284	$	243,229	$	1,050,513
Other commercial and industrial		677,775		35,640		713,415		647,444		39,931		687,375
Commercial Paycheck Protection Program (PPP Loans)		228,677		-		228,677		289,218		-		289,218
US commercial loans		397,038		-		397,038		374,904		-		374,904
		2,132,543		260,627		2,393,170		2,118,850		283,160		2,402,010
Mortgage		760,168		1,324,274		2,084,442		823,443		1,459,932		2,283,375
Consumer:
Personal loans		300,631		673		301,304		313,257		1,043		314,300
Credit lines		31,378		308		31,686		43,805		351		44,156
Credit cards		49,153		-		49,153		56,185		-		56,185
Overdraft		313		-		313		305		-		305
Auto		1,618,788		19,236		1,638,024		1,534,269		27,533		1,561,802
		2,000,263		20,217		2,020,480		1,947,821		28,927		1,976,748
		4,892,974		1,605,118		6,498,092		4,890,114		1,772,019		6,662,133
Allowance for credit losses		(148,314)		(43,403)		(191,717)		(161,015)		(43,794)		(204,809)
Total loans held for investment		4,744,660		1,561,715		6,306,375		4,729,099		1,728,225		6,457,324
Mortgage loans held for sale		37,885		-		37,885		41,654		-		41,654
Other loans held for sale		9,780		-		9,780		2,281		-		2,281
Total loans held for sale		47,665		-		47,665		43,935		-		43,935
Total loans, net	$	4,792,325	$	1,561,715	$	6,354,040	$	4,773,034	$	1,728,225	$	6,501,259

At June 30, 2021 and December 31, 2020, OFG had carrying balances of $99.3 million and $99.1 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. The Bank’s loans to the Puerto Rico government amounting to $98.2 million and $98.0 million at June 30, 2021 and December 31, 2020, 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. 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 June 30, 2021 and December 31, 2020, by class of loans. Mortgage loans past due include $28.1 million and $56.2 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.

	June 30, 2021
													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	$	971	$	335	$	15,790	$	17,096	$	811,957	$	829,053	$	-
Other commercial and industrial		635		284		2,044		2,963		903,489		906,452		-
US commercial loans		1,490		-		-		1,490		395,548		397,038		-
		3,096		619		17,834		21,549		2,110,994		2,132,543		-
Mortgage		8,302		7,206		72,451		87,959		672,209		760,168		3,448
Consumer
Personal loans		2,484		1,031		1,086		4,601		296,030		300,631		-
Credit lines		1,217		197		378		1,792		29,586		31,378		-
Credit cards		661		254		850		1,765		47,388		49,153		-
Overdraft		85		-		2		87		226		313		-
Auto		46,719		19,349		7,192		73,260		1,545,528		1,618,788		-
		51,166		20,831		9,508		81,505		1,918,758		2,000,263		-
Total loans	$	62,564	$	28,656	$	99,793	$	191,013	$	4,701,961	$	4,892,974	$	3,448

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 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	$	2,781	$	750	$	17,862	$	21,393	$	785,891	$	807,284	$	-
Other commercial and industrial		1,674		234		4,695		6,603		930,059		936,662		-
US commercial loans		2,604		-		-		2,604		372,300		374,904		-
		7,059		984		22,557		30,600		2,088,250		2,118,850		-
Mortgage		7,385		14,953		101,528		123,866		699,577		823,443		3,974
Consumer
Personal loans		4,784		2,515		2,062		9,361		303,896		313,257		-
Credit lines		2,136		476		1,269		3,881		39,924		43,805		-
Credit cards		1,357		824		1,585		3,766		52,419		56,185		-
Overdraft		138		-		-		138		167		305		-
Auto		57,176		31,181		20,485		108,842		1,425,427		1,534,269		-
		65,591		34,996		25,401		125,988		1,821,833		1,947,821		-
Total loans	$	80,035	$	50,933	$	149,486	$	280,454	$	4,609,660	$	4,890,114	$	3,974

Upon adoption of Current Expected Credit Losses accounting standard (“CECL”), OFG 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, PCD loans are not included in the tables above.

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 June 30, 2021 and December 31, 2020:


	June 30, 2021						December 31, 2020
	Nonaccrual with		Nonaccrual with no				Nonaccrual with		Nonaccrual with no
	Allowance		Allowance				Allowance		Allowance
	for Credit Loss		for Credit Loss		Total		for Credit Loss		for Credit Loss		Total
	(In thousands)						(In thousands)
Non-PCD:
Commercial
Commercial secured by real estate	$	15,217	$	19,162	$	34,379	$	15,225	$	21,462	$	36,687
Other commercial and industrial		3,119		361		3,480		2,138		3,174		5,312
		18,336		19,523		37,859		17,363		24,636		41,999
Mortgage		21,092		21,913		43,005		24,920		17,747		42,667
Consumer
Personal loans		927		298		1,225		1,752		377		2,129
Personal lines of credit		389		-		389		1,272		-		1,272
Credit cards		848		-		848		1,586		-		1,586
Auto and leasing		7,605		-		7,605		20,766		-		20,766
		9,769		298		10,067		25,376		377		25,753
Total non-accrual loans	$	49,197	$	41,734	$	90,931	$	67,659	$	42,760	$	110,419

PCD:
Commercial
Commercial secured by real estate	$	27,730	$	5,670	$	33,400	$	31,338	$	4,031	$	35,369
Other commercial and industrial		1,102		-		1,102		1,102		-		1,102
		28,832		5,670		34,502		32,440		4,031		36,471
Mortgage		2,067		-		2,067		1,003		-		1,003
Consumer
Personal loans		-		-		-		1		-		1
		-		-		-		1		-		1
Total non-accrual loans	$	30,899	$	5,670	$	36,569	$	33,444	$	4,031	$	37,475
	$	80,096	$	47,404	$	127,500	$	101,103	$	46,791	$	147,894

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.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At June 30, 2021 and December 31 2020, loans whose terms have been extended and which were classified as troubled-debt restructurings that were not included in non-accrual loans amounted to $122.3 million and $109.2 million, respectively, as they were performing under their new terms.

Modifications

OFG 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. The amount of outstanding commitments to lend additional funds to commercial borrowers whose terms have been modified in TDRs amounted to $2.1 million and $7.7 million at June 30, 2021 and December 31, 2020, respectively.

The following table presents the troubled-debt restructurings in all loan portfolios as of June 30, 2021 and December 31, 2020.


	June 30, 2021
							Related
	Accruing		Non-accruing		Total		Allowance
	(In thousands)
Commercial
Commercial secured by real estate	$	11,448	$	14,922	$	26,370	$	233
US commercial loans		7,157		-		7,157		214
Other commercial and industrial		3,594		350		3,944		64
		22,199		15,272		37,471		511
Mortgage		95,820		10,810		106,630		4,245
Consumer
Personal loans		4,000		139		4,139		199
Auto and leasing		269		56		325		21
		4,269		195		4,464		220
Total loans	$	122,288	$	26,277	$	148,565	$	4,976


	December 31, 2020
							Related
	Accruing		Non-accruing		Total		Allowance
	(In thousands)
Commercial
Commercial secured by real estate	$	10,047	$	16,609	$	26,656	$	223
US commercial loans		7,157		-		7,157		345
Other commercial and industrial		3,872		375		4,247		59
		21,076		16,984		38,060		627
Mortgage		87,539		11,202		98,741		4,882
Consumer
Personal loans		4,944		67		5,011		257
Auto and leasing		331		44		375		23
		5,275		111		5,386		280
Total loans	$	113,890	$	28,297	$	142,187	$	5,789

The following table presents the troubled-debt restructurings by loan portfolios and modification type as of June 30, 2021 and December 31, 2020.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	June 30, 2021
					Combination of reduction
	Reduction in		Maturity or term		in interest rate
	interest rate		extension		and extension of maturity		Forbearance		Total
	(In thousands)
Commercial
Commercial secured by real estate	$	911	$	4,651	$	20,808	$	-	$	26,370
US commercial loans		7,157		-		-		-		7,157
Other commercial and industrial		723		2,682		539		-		3,944
		8,791		7,333		21,347		-		37,471
Mortgage		28,370		7,493		33,675		37,092		106,630
Consumer
Personal loans		1,949		312		1,606		272		4,139
Auto and leasing		62		-		45		218		325
		2,011		312		1,651		490		4,464
Total loans	$	39,172	$	15,138	$	56,673	$	37,582	$	148,565


	December 31, 2020
					Combination of reduction
	Reduction in		Maturity or term		in interest rate
	interest rate		extension		and extension of maturity		Forbearance		Total
	(In thousands)
Commercial
Commercial secured by real estate	$	740	$	3,926	$	21,990	$	-	$	26,656
US commercial loans		7,157		-		-		-		7,157
Other commercial and industrial		718		2,960		569		-		4,247
		8,615		6,886		22,559		-		38,060
Mortgage		27,593		6,271		29,734		35,143		98,741
Consumer
Personal loans		2,315		407		1,896		393		5,011
Auto and leasing		38		-		38		299		375
		2,353		407		1,934		692		5,386
Total loans	$	38,561	$	13,564	$	54,227	$	35,835	$	142,187

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

TDRs disclosed above were not related to Covid-19 modifications. 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. OFG’s loan deferrals outstanding balances at June 30, 2021 and December 31, 2020 of approximately $74.9 million and $95.7 million resulting from the Covid-19 pandemic were not classified as a TDR, which consist of commercial loans from well-capitalized customers in the hospitality industry and FHA and VA insured mortgage loans.

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, PCD loans are not included in the table above.

Loan modifications that are considered TDR loans completed during the quarters and six-month periods ended June 30, 2021 and 2020 were as follows:


	Quarter Ended June 30, 2021
	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	44	$	5,104	4.24%	303	$	4,880	3.59%	349
Commercial	1		991	4.25%	175		880	5.75%	60
Consumer	7		139	12.76%	72		139	9.47%	76
Auto	3		44	13.15%	78		44	10.15%	73

	Six-Month Period Ended June 30, 2021
	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	70	$	8,661	4.14%	302	$	8,460	3.60%	342
Commercial	3		1,176	4.72%	157		1,085	5.95%	60
Consumer	9		155	12.65%	70		156	9.52%	75
Auto	8		126	9.04%	70		126	9.93%	49

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Quarter Ended June 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)
Consumer	1		21	5.99%	60		20	6.50%	72

	Six-Month Period Ended June 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	26	$	3,093	5.14%	359	$	3,046	4.29%	360
Commercial	1		281	8.00%	105		281	6.00%	240
Consumer	16		220	12.95%	67		225	10.63%	81

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 June 30, 2021 and 2020:

	Twelve month period ended June 30,
	2021			2020
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in thousands)
Mortgage	19	$	2,191	17	$	2,267
Consumer	1	$	14	90	$	1,231
Auto	11	$	64	3	$	32

As of June 30, 2021, the recorded investment on residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure amounted to $26.1 million. OFG commences the foreclosure process on residential real estate loans when a borrower becomes 120 days delinquent. Puerto Rico and the USVI require the foreclosure to be processed through the state’s court. Foreclosure timelines vary according to local jurisdiction law and investor guidelines. Occasionally, foreclosures may be delayed due to, among other reasons, mandatory mediations, bankruptcy, court delays and title issues.

Collateral-dependent Loans

The table below present the amortized cost of collateral-dependent loans held for investment at June 30, 2021 and December 31, 2020, by class of loans.

	June 30, 2021		December 31, 2020
	(In thousands)
Commercial loans:
Commercial secured by real estate	$	25,189	$	29,279

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

OFG 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.

OFG 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 June 30, 2021 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
	2021		2020		2019		2018		2017		Prior		Cost Basis		Total
	(In thousands)
Commercial:
Commercial secured by real estate:
Loan grade:
Pass	$	59,344	$	125,832	$	97,799	$	84,239	$	66,936	$	206,046	$	37,274	$	677,470
Special Mention		672		10,436		51,806		24,581		10,657		12,031		956		111,139
Substandard		850		314		69		905		8,598		21,130		1,289		33,155
Doubtful		-		-		-		-		-		25		7,264		7,289
Loss		-		-		-		-		-		-		-		-
Total commercial secured by real estate		60,866		136,582		149,674		109,725		86,191		239,232		46,783		829,053
Other commercial and industrial:
Loan grade:
Pass		289,682		165,556		55,504		45,725		10,762		7,459		271,518		846,206
Special Mention		89		320		8,172		19,597		17		-		28,409		56,604
Substandard		446		22		163		496		108		106		2,243		3,584
Doubtful		-		-		-		-		-		-		58		58
Loss		-		-		-		-		-		-		-		-
Total other commercial and industrial:		290,217		165,898		63,839		65,818		10,887		7,565		302,228		906,452
US commercial loans:
Loan grade:
Pass		37,333		59,081		50,358		77,683		-		-		134,118		358,573
Special Mention		-		-		1,512		12,339		-		-		-		13,851
Substandard		-		7,157		-		17,457		-		-		-		24,614
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total US commercial loans:		37,333		66,238		51,870		107,479		-		-		134,118		397,038
Total commercial loans	$	388,416	$	368,718	$	265,383	$	283,022	$	97,078	$	246,797	$	483,129	$	2,132,543

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of December 31, 2020 the risk category of loans subject to risk rating by class of loans is as follows.

	Term Loans
	Amortized Cost Basis by Origination Year												Revolving
													Loans
													Amortized
	2020		2019		2018		2017		2016		Prior		Cost Basis		Total
	(In thousands)
Commercial
Commercial secured by real estate:
Loan grade:
Pass	$	113,474	$	105,156	$	106,283	$	81,338	$	44,008	$	187,189	$	30,686		$	668,134
Special Mention		10,592		20,605		5,233		11,771		8,514		3,090		37,680			97,485
Substandard		183		63		758		8,923		584		23,746		7,331			41,588
Doubtful		-		-		-		-		-		77		-			77
Total commercial secured by real estate		124,249		125,824		112,274		102,032		53,106		214,102		75,697			807,284
Other commercial and industrial:
Loan grade:
Pass		384,901		84,433		75,023		14,502		8,326		7,922		300,429			875,536
Special Mention		151		8,242		19,626		-		-		3,337		23,732			55,088
Substandard		207		66		486		164		2,809		119		2,122			5,973
Doubtful		-		-		-		-		-		-		65			65
Loss		-		-		-		-		-		-		-			-
Total other commercial and industrial:		385,259		92,741		95,135		14,666		11,135		11,378		326,348			936,662
US commercial loans:
Loan grade:
Pass		68,688		62,264		77,762		7,124		-		-		98,324			314,162
Special Mention		-		1,501		33,282		-		-		-		1,250			36,033
Substandard		7,156		-		17,553		-		-		-		-			24,709
Total US commercial loans		75,844		63,765		128,597		7,124		-		-		99,574			374,904
Total Commercial	$	585,352	$	282,330	$	336,006	$	123,822	$	64,241	$	225,480	$	501,619		$	2,118,850

At June 30, 2021 and December 31, 2020, the balance of revolving loans converted to term loans was $20.0 million and $21.0 million, respectively.

OFG considers the performance of the loan portfolio and its impact on the allowance for credit losses. For mortgage and consumer loan classes, OFG also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following tables presents the amortized cost in mortgage and consumer loans based on payment activity as of June 30, 2021:

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
	2021		2020		2019		2018		2017		Prior		Cost Basis		Cost Basis		Total
	(In thousands)
Mortgage:
Payment performance:
Performing	$	8,584	$	15,005	$	15,576	$	21,657	$	26,204	$	620,368	$	-	$	-	$	707,394
Nonperforming		-		126		536		465		2,500		49,147		-		-		52,774
Total mortgage loans:		8,584		15,131		16,112		22,122		28,704		669,515		-		-		760,168
Consumer:
Personal loans:
Payment performance:
Performing		61,458		72,563		90,158		43,084		19,871		12,272		-		-		299,406
Nonperforming		124		182		179		273		93		374		-		-		1,225
Total personal loans		61,582		72,745		90,337		43,357		19,964		12,646		-		-		300,631
Credit lines:
Payment performance:
Performing		-		-		-		-		-		-		30,989		-		30,989
Nonperforming		-		-		-		-		-		-		389		-		389
Total credit lines		-		-		-		-		-		-		31,378		-		31,378
Credit cards:
Payment performance:
Performing		-		-		-		-		-		-		48,305		-		48,305
Nonperforming		-		-		-		-		-		-		848		-		848
Total credit cards		-		-		-		-		-		-		49,153		-		49,153
Overdrafts:
Payment performance:
Performing		-		-		-		-		-		-		313		-		313
Nonperforming		-		-		-		-		-		-		-		-		-
Total overdrafts		-		-		-		-		-		-		313		-		313
Total consumer loans		61,582		72,745		90,337		43,357		19,964		12,646		80,844		-		381,475
Total mortgage and consumer loans	$	70,166	$	87,876	$	106,449	$	65,479	$	48,668	$	682,161	$	80,844	$	-	$	1,141,643

The following tables presents the amortized cost in mortgage and consumer loans based on payment activity as of December 31, 2020:

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	$	14,842	$	20,516	$	27,359	$	33,088	$	38,637	$	642,045	$	-	$	-	$	776,487
Nonperforming		-		347		722		894		950		44,043		-		-		46,956
Total mortgage loans:		14,842		20,863		28,081		33,982		39,587		686,088		-		-		823,443
Consumer:
Personal loans:
Payment performance:
Performing		88,653		115,295		58,009		28,424		13,565		7,181		-		-		311,127
Nonperforming		201		591		492		318		134		394		-		-		2,130
Total personal loans		88,854		115,886		58,501		28,742		13,699		7,575		-		-		313,257
Credit lines:
Payment performance:
Performing		-		-		-		-		-		-		42,531		-		42,531
Nonperforming		-		-		-		-		-		-		1,274		-		1,274
Total credit lines		-		-		-		-		-		-		43,805		-		43,805
Credit cards:
Payment performance:
Performing		-		-		-		-		-		-		54,599		-		54,599
Nonperforming		-		-		-		-		-		-		1,586		-		1,586
Total credit cards		-		-		-		-		-		-		56,185		-		56,185
Overdrafts:
Payment performance:
Performing		-		-		-		-		-		-		305		-		305
Nonperforming		-		-		-		-		-		-		-		-		-
Total overdrafts		-		-		-		-		-		-		305		-		305
Total consumer loans		88,854		115,886		58,501		28,742		13,699		7,575		100,295		-		413,552
Total mortgage and consumer loans	$	103,696	$	136,749	$	86,582	$	62,724	$	53,286	$	693,663	$	100,295	$	-	$	1,236,995

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

OFG 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 as of June 30, 2021 and December 31, 2020:

	Term Loans
	Amortized Cost Basis by Origination Year
	As of June 30, 2021

	2021		2020		2019		2018		2017		Prior		Total
	(In thousands)
Auto:
FICO score:
1-660		75,895		106,442		92,663		79,610		46,518		35,412		436,540
661-699		57,205		90,482		59,027		41,148		20,923		16,544		285,329
700+		123,165		187,673		211,175		156,703		78,045		58,314		815,075
No FICO		21,891		14,994		20,524		12,204		6,889		5,342		81,844
Total auto:	$	278,156	$	399,591	$	383,389	$	289,665	$	152,375	$	115,612	$	1,618,788

	Term Loans
	Amortized Cost Basis by Origination Year
	As of December 31, 2020

	2020		2019		2018		2017		2016		Prior		Total
	(In thousands)
Auto:
FICO score:
1-660		121,878		112,476		97,725		56,935		30,307		22,360		441,681
661-699		84,673		68,698		44,633		23,308		13,571		9,031		243,914
700+		173,834		214,287		164,205		85,743		45,947		32,177		716,193
No FICO		21,512		42,597		33,305		18,127		9,656		7,284		132,481
Total auto:	$	401,897	$	438,058	$	339,868	$	184,113	$	99,481	$	70,852	$	1,534,269

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES

On January 1, 2020, OFG 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 OFG’s relevant financial assets.

The allowance for credit losses (“ACL”) 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 OFG's assessment, may not be adequately represented in the quantitative methods or the economic assumptions. In its loss forecasting framework, OFG 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.

At June 30, 2021, OFG used a probability weighted scenario approach using Moody’s Economic Forecast Scenarios as it is expected that Puerto Rico’s economic performance should be close to the baseline scenario, and to a lesser extent to the S3 (pessimistic) scenario. In addition, the allowance for credit losses at June 30, 2021 continues to include qualitative reserves for certain segments that OFG views as higher risk that may not be fully recognized through its quantitative models such as commercial loans concentrated in certain industries. 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.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables present the activity in OFG’s allowance for credit losses by segment for the quarters and six-month periods ended June 30, 2021 and 2020:

	Quarter Ended June 30, 2021
	Commercial		Mortgage		Consumer		Auto		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	47,683	$	17,035	$	21,191	$	71,069	$	156,978
(Recapture) provision for credit losses		(4,503)		(592)		74		(2,538)		(7,559)
Charge-offs		(653)		(268)		(2,897)		(5,170)		(8,988)
Recoveries		996		193		697		5,997		7,883
Balance at end of period	$	43,523	$	16,368	$	19,065	$	69,358	$	148,314
PCD:
Balance at beginning of period	$	14,306	$	29,939	$	52	$	698	$	44,995
(Recapture) provision for credit losses		(1,974)		1,727		(47)		(285)		(579)
Charge-offs		(6)		(1,742)		-		(226)		(1,974)
Recoveries		430		184		33		314		961
Balance at end of period	$	12,756	$	30,108	$	38	$	501	$	43,403
Total allowance for credit losses at end of period	$	56,279	$	46,476	$	19,103	$	69,859	$	191,717

	Six-Month Period Ended June 30, 2021
	Commercial		Mortgage		Consumer		Auto		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	45,779	$	19,687	$	25,253	$	70,296	$	161,015
(Recapture) provision for credit losses		(2,961)		(3,071)		(85)		1,501		(4,616)
Charge-offs		(720)		(1,056)		(7,366)		(14,253)		(23,395)
Recoveries		1,425		808		1,263		11,814		15,310
Balance at end of period	$	43,523	$	16,368	$	19,065	$	69,358	$	148,314
PCD:
Balance at beginning of period	$	16,405	$	26,389	$	57	$	943	$	43,794
(Recapture) provision for credit losses		(4,466)		7,721		(52)		(457)		2,746
Charge-offs		(50)		(4,332)		(22)		(682)		(5,086)
Recoveries		867		330		55		697		1,949
Balance at end of period	$	12,756	$	30,108	$	38	$	501	$	43,403
Total allowance for credit losses at end of period	$	56,279	$	46,476	$	19,103	$	69,859	$	191,717

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Quarter ended June 30, 2020
	Commercial		Mortgage		Consumer		Auto and Leasing		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	49,196	$	19,694	$	27,763	$	53,308	$	149,961
(Recapture) Provision for credit losses		(6,319)		455		7,935		13,156		15,227
Charge-offs		(497)		(185)		(4,187)		(13,300)		(18,169)
Recoveries		631		9		443		3,405		4,488
Balance at end of period	$	43,011	$	19,973	$	31,954	$	56,569	$	151,507
PCD:
Balance at beginning of period	$	48,836	$	30,603	$	177	$	1,178	$	80,794
Provision (recapture) for credit losses		177		1,915		(8)		385		2,469
Charge-offs		(386)		(2,178)		(30)		(600)		(3,194)
Recoveries		286		580		30		229		1,125
Balance at end of period	$	48,913	$	30,920	$	169	$	1,192	$	81,194
Total allowance for loan and lease losses at end of period	$	91,924	$	50,893	$	32,123	$	57,761	$	232,701

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Six-Month Period Ended June 30, 2020
	Commercial		Mortgage		Consumer		Auto and Leasing		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		15,571		611		14,205		27,190		57,577
Charge-offs		(4,268)		(603)		(10,202)		(26,353)		(41,426)
Recoveries		2,153		258		1,087		7,616		11,114
Balance at end of period	$	43,011	$	19,973	$	31,954	$	56,569	$	151,507
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
(Recapture) provision for credit losses		(41)		8,054		356		280		8,649
Charge-offs		(2,743)		(7,321)		(461)		(975)		(11,500)
Recoveries		661		702		93		572		2,028
Balance at end of period	$	48,913	$	30,920	$	169	$	1,192	$	81,194
Total allowance for loan and lease losses at end of period	$	91,924	$	50,893	$	32,123	$	57,761	$	232,701

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 6 — FORECLOSED REAL ESTATE

The following tables present the activity related to foreclosed real estate for the quarters and six-month periods ended June 30, 2021 and 2020:

	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2021		2020		2021		2020
	(In thousands)

Balance at beginning of period	$	15,598	$	27,292	$	11,596	$	29,909
Additions		2,907		47		9,544		1,946
Sales		(3,098)		(2,074)		(5,521)		(6,040)
Decline in value		(314)		(473)		(526)		(1,023)
Balance at end of period	$	15,093	$	24,792	$	15,093	$	24,792

NOTE 7 - SERVICING ASSETS

At June 30, 2021, the servicing asset amounted to $47.7 million ($47.3 million — December 31, 2020) related to mortgage servicing rights. The impact of Covid-19 has been considered in the fair value for quarter and six-month period ended June 30, 2021.

The following table presents the changes in servicing rights measured using the fair value method for the quarters and six-month periods ended June 30, 2021 and 2020:

	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2021		2020		2021		2020
	(In thousands)
Fair value at beginning of period	$	47,911	$	49,287	$	47,295	$	50,779
Servicing from mortgage securitizations or asset transfers		2,023		124		3,443		580
Changes due to payments on loans^[1]		(1,862)		(678)		(3,369)		(1,445)
Changes in fair value due to changes in valuation model inputs or assumptions		(360)		(807)		343		(1,988)
Fair value at end of period	$	47,712	$	47,926	$	47,712	$	47,926
[1] Represents changes due to collection/realization of expected cash flows over time.

The following table presents key economic assumption ranges used in measuring the mortgage-related servicing asset fair value for the six-month periods ended June 30, 2021 and 2020:

	Six-Month Period Ended June 30,
	2021	2020
Constant prepayment rate	4.82% - 25.64%	5.61% - 20.8%
Discount rate	10.00% - 15.50%	10.00% - 15.50%

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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:

	June 30, 2021
	(In thousands)
Mortgage-related servicing asset
Carrying value of mortgage servicing asset	$	47,712
Constant prepayment rate
Decrease in fair value due to 10% adverse change	$	(1,035)
Decrease in fair value due to 20% adverse change	$	(2,033)
Discount rate
Decrease in fair value due to 10% adverse change	$	(2,107)
Decrease in fair value due to 20% adverse change	$	(4,054)

These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% 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 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 June 30, 2021 and 2020 totaled $5.3 million and $4.2 million, respectively. Servicing fees on mortgage loans for the six-months periods ended June 30, 2021 and 2020 totaled $10.5 million and $8.9 million, respectively.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 8 — DERIVATIVES

The following table presents OFG’s derivatives at June 30, 2021 and December 31, 2020:

	June 30,		December 31,
	2021		2020
	(In thousands)
Derivative liabilities:
Interest rate swaps designated as cash flow hedges	$	1,293	$	1,712

Interest Rate Swaps

OFG 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 OFG’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, OFG 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 June 30, 2021:

Notional

Fixed

Variable

Trade

Settlement

Maturity

Type

Amount

Rate

Rate Index

Date

(In thousands)

Interest Rate Swaps

29,380

2.4210%

1-Month LIBOR

07/03/13

08/01/23

29,380

Accumulated unrealized losses of $1.3 million and $1.7 million were recognized in accumulated other comprehensive income related to the valuation of these swaps at June 30, 2021 and December 31, 2020, respectively, and the related liability is being reflected in the consolidated statements of financial condition.

Interest Rate Caps

OFG 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, OFG 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 June 30, 2021 and December 31, 2020, the outstanding total notional amount of interest rate caps was $26.4 million and $40.4 million, respectively. At both June 30, 2021 and December 31, 2020, the interest rate caps sold to clients represented a liability with zero value. At both June 30, 2021 and December 31, 2020, the interest rate caps purchased as mirror-images represented an asset of zero value.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 9 — GOODWILL AND OTHER INTANGIBLE ASSETS

As of June 30, 2021 and December 31, 2020, OFG had $86.1 million of goodwill allocated as follows: $84.1 million to the banking segment and $2.0 million to the wealth management segment (refer to Note 24 for the definition of OFG’s reportable business segments). There were no changes in the carrying amount of goodwill as of June 30, 2021 and December 31, 2020.

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 Scotiabank Acquisition. OFG performs annual goodwill impairment test as of October 31 and monitors for interim triggering events on an ongoing basis.

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 segments 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 segment 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 segment is less than its carrying amount may include macroeconomic conditions, 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.

OFG performed its annual impairment review of goodwill during the fourth quarter of 2020 using October 31, 2020, respectively, as the annual evaluation date and concluded that there was no impairment at 2020. There were no additional events that caused OFG to perform interim testing during the six-month period ended June 30, 2021.

The following table reflects the components of other intangible assets subject to amortization at June 30, 2021 and December 31, 2020:

	Gross				Net
	Carrying		Accumulated		Carrying
	Amount		Amortization		Value
	(In thousands)
June 30, 2021
Core deposit intangibles	$	51,402	$	20,096	$	31,306
Customer relationship intangibles		17,753		8,254		9,499
Other intangibles		567		377		190
Total other intangible assets	$	69,722	$	28,727	$	40,995
December 31, 2020
Core deposit intangibles	$	51,402	$	16,419	$	34,983
Customer relationship intangibles		17,753		7,124		10,629
Other intangibles		567		283		284
Total other intangible assets	$	69,722	$	23,826	$	45,896

In connection with the Eurobank Acquisition, the BBVAPR Acquisition and the Scotiabank Acquisition, OFG recorded a core deposit intangible representing the value of checking and savings deposits acquired. In addition, OFG 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 Acquisition.

Other intangible assets have a definite useful life. Amortization of other intangible assets for the quarters ended June 30, 2021 and 2020 was $2.5 million and $2.8 million, respectively. Amortization of other intangible assets for the six-month periods ended June 30, 2021 and 2020 was $4.9 million and $5.6 million, respectively.

The following table presents the estimated amortization of other intangible assets for each of the following periods.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Year Ending December 31,	(In thousands)
2021	$	9,802
2022		8,501
2023		6,898
2024		5,913
2025		4,927
Thereafter		9,854

NOTE 10 — ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS

Accrued interest receivable at June 30, 2021 and December 31, 2020 consists of the following:

	June 30,		December 31,
	2021		2020
	(In thousands)
Loans	$	58,373	$	64,465
Investments		1,477		1,082
	$	59,850	$	65,547

OFG 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 June 30, 2021 and December 31, 2020, the allowance for credit losses for accrued interest receivable for loans that participated in the Covid-19 deferral programs amounted to $461 thousand and $711 thousand, respectively, and is included in accrued interest receivable in the statement of financial condition.

Other assets at June 30, 2021 and December 31, 2020 consist of the following:

	June 30,		December 31,
	2021		2020
	(In thousands)
Prepaid expenses	$	61,617	$	61,332
Other repossessed assets		1,725		1,816
Investment in Statutory Trust		1,083		1,083
Accounts receivable and other assets		91,325		78,845
	$	155,750	$	143,076

Prepaid expenses amounting to $61.6 million at June 30, 2021, include prepaid municipal, property and income taxes aggregating to $57.6 million. At December 31, 2020 prepaid expenses amounted to $61.3 million, including prepaid municipal, property and income taxes aggregating to $54.3 million.

Other repossessed assets totaled $1.7 million and $1.8 million at June 30, 2021 and December 31, 2020, respectively, that consist mainly of repossessed automobiles, which are recorded at their net realizable value.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 11— DEPOSITS AND RELATED INTEREST

Total deposits, including related accrued interest payable, as of June 30, 2021 and December 31, 2020 consist of the following:

	June 30,		December 31,
	2021		2020
	(In thousands)
Non-interest bearing demand deposits	$	2,678,799	$	2,259,048
Interest-bearing savings and demand deposits		4,936,188		4,274,586
Retail certificates of deposit		1,215,897		1,540,406
Institutional certificates of deposit		248,237		292,485
Total core deposits		9,079,121		8,366,525
Brokered deposits		11,371		49,115
Total deposits	$	9,090,492	$	8,415,640

Brokered deposits include $11.4 million in certificates of deposits at June 30, 2021, and $25.0 million in certificates of deposits and $24.1 million in money market accounts at December 31, 2020. At June 30, 2021, money market accounts amounting to $23.8 million were reclassified from brokered deposits to interest-bearing savings accounts as a result of a FDIC exemption from the brokered deposit definition.

The weighted average interest rate of OFG’s deposits was 0.60% and 0.80%, respectively, at June 30, 2021 and December 31, 2020. Interest expense for the quarters and six-month periods ended June 30, 2021 and 2020 was as follows:

	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2021		2020		2021		2020
	(In thousands)
Demand and savings deposits	$	6,209	$	6,224	$	12,580	$	13,208
Certificates of deposit		4,251		9,221		9,904		18,857
	$	10,460	$	15,445	$	22,484	$	32,065

At June 30, 2021 and December 31, 2020, time deposits in denominations of $250 thousand or higher, excluding accrued interest and unamortized discounts, amounted to $478.6 million and $628.4 million, respectively.

At June 30, 2021 and December 31, 2020, total public fund deposits from various Puerto Rico government municipalities, agencies and corporations amounted to $255.0 million and $218.9 million, respectively. These public funds were collateralized with commercial loans and securities amounting to $299.9 million and $242.8 million at June 30, 2021 and December 31, 2020, respectively.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Excluding accrued interest of approximately $955 thousand and $1.5 million, the scheduled maturities of certificates of deposit at June 30, 2021 and December 31, 2020 are as follows:

	June 30,		December 31,
		2021		2020
	(In thousands)
Within one year:
Three (3) months or less	$	364,339	$	379,563
Over 3 months through 1 year		446,899		805,117
		811,238		1,184,680
Over 1 through 2 years		370,490		328,336
Over 2 through 3 years		138,638		177,701
Over 3 through 4 years		63,617		75,094
Over 4 through 5 years		90,567		90,590
	$	1,474,550	$	1,856,401

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 $840 thousand and $1.1 million as of June 30, 2021 and December 31, 2020, respectively.

NOTE 12— BORROWINGS AND RELATED INTEREST

Advances from the Federal Home Loan Bank of New York

Advances are received from the FHLB-NY under an agreement whereby OFG is required to maintain a minimum amount of qualifying collateral with a fair value of at least 110% of the outstanding advances. At June 30, 2021 and December 31, 2020, these advances were secured by mortgage and commercial loans amounting to $1.051 billion and $1.159 billion, respectively. Also, at June 30, 2021 and December 31, 2020, OFG had an additional borrowing capacity with the FHLB-NY of $734 million and $814 million, respectively. At June 30, 2021 and December 31, 2020, the weighted average remaining maturity of FHLB’s advances was 15.0 months and 18.2 months, respectively. The original terms of these advances range between one day and five years, and the FHLB-NY does not have the right to exercise put options at par on any advances outstanding as of June 30, 2021.

The following table shows a summary of the advances and their terms, excluding accrued interest in the amount of $93 thousand and $96 thousand at June 30, 2021 and December 31, 2020, respectively:


	June 30,		December 31,
		2021		2020
		(In thousands)
Short-term fixed-rate advances from FHLB, with a weighted average interest rate of 0.35% (December 31, 2020 - 0.34%)	$	29,380	$	30,259
Long-term fixed-rate advances from FHLB, with a weighted average interest rate from 2.92% to 3.24% (December 31, 2020 - from 2.92% to 3.24% )		34,096		35,206
	$	63,476	$	65,465

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Advances from FHLB mature as follows:


	June 30,		December 31,
		2021		2020
	(In thousands)
Under 90 days	$	29,380	$	30,259
Over one to three years		29,925		30,972
Over three to five years		4,171		4,234
	$	63,476	$	65,465

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 June 30, 2021 and December 31, 2020.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 13 – OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES

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

The following table presents the potential effect of rights of set-off associated with OFG’s recognized financial liabilities at June 30, 2021 and December 31, 2020:

June 30, 2021
							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	$	1,293	$	-	$	1,293	$	-	$	-	$	1,293
Total	$	1,293	$	-	$	1,293	$	-	$	-	$	1,293


December 31, 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	$	1,712	$	-	$	1,712	$	-		-	$	1,712
Total	$	1,712	$	-	$	1,712	$	-	$	-	$	1,712

NOTE 14 — INCOME TAXES

OFG 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.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

OFG also has operations in the United States mainland through its wholly owned subsidiary, OPC, a retirement plan administrator based in Florida. In October 2017, OFG expanded its operations in the United States through the Bank’s wholly owned subsidiary, OFG USA. In addition, in March 2019, OFG incorporated in Delaware OFG Ventures, a limited liability company, which will hold new investments; also, on December 31, 2019, OFG 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, OFG USA is subject to North Carolina state taxes, and current investments in OFG Ventures are subject to state taxes in Missouri.

At June 30, 2021 and December 31, 2020, OFG’s net deferred tax asset amounted to $144.8 million and $162.5 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 deferred tax asset is deductible, management believes it is more likely than not that OFG will realize the deferred tax asset, net of the existing valuation allowances recorded at June 30, 2021 and December 31, 2020. 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.

OFG maintained an effective tax rate lower than the statutory rate for the six-month periods ended June 30, 2021 and 2020 of 32.0% and 24.2%, respectively. The estimated annual effective tax rate was 32.7%, however, the current effective tax rate was 32.0% due in essence to discrete tax windfall on stock awards. The current effective tax rate was lower than statutory tax rates mainly due to the exempt income and income taxed at preferential tax rates.

OFG classifies unrecognized tax benefits in other liabilities. These gross unrecognized tax benefits would affect the effective tax rate if realized. At June 30, 2021 and December 31, 2020, unrecognized tax benefits amounted to $763 thousand and $728 thousands, respectively.

Income tax expense for the quarters ended June 30, 2021 and 2020, was $19.3 million and $7.2 million, respectively. Income tax expense for the six-month periods ended June 30, 2021 and 2020, was $33.5 million and $7.5 million, respectively.

NOTE 15 — REGULATORY CAPITAL REQUIREMENTS

Regulatory Capital Requirements

OFG (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 OFG’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, OFG 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.

As of June 30, 2021 and December 31, 2020, OFG and the Bank met all capital adequacy requirements to which they are subject. As of June 30, 2021 and December 31, 2020, OFG 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’s and the Bank’s actual capital amounts and ratios as of June 30, 2021 and December 31, 2020 are as follows:

				Minimum Capital
				Requirement (including			Minimum to be Well
	Actual			capital conservation buffer)			Capitalized
	Amount		Ratio	Amount		Ratio		Amount	Ratio
	(Dollars in thousands)
OFG Bancorp Ratios
As of June 30, 2021
Total capital to risk-weighted assets	$	1,094,786	15.95%	$	720,498	10.50%	$	686,189	10.00%
Tier 1 capital to risk-weighted assets	$	1,008,785	14.70%	$	583,261	8.50%	$	548,951	8.00%
Common equity tier 1 capital to risk-weighted assets	$	957,238	13.95%	$	480,332	7.00%	$	446,023	6.50%
Tier 1 capital to average total assets	$	1,008,785	9.84%	$	409,975	4.00%	$	512,469	5.00%
As of December 31, 2020
Total capital to risk-weighted assets	$	1,096,766	16.04%	$	717,974	10.50%	$	683,785	10.00%
Tier 1 capital to risk-weighted assets	$	1,010,945	14.78%	$	581,217	8.50%	$	547,028	8.00%
Common equity tier 1 capital to risk-weighted assets	$	894,075	13.08%	$	478,649	7.00%	$	444,460	6.50%
Tier 1 capital to average total assets	$	1,010,945	10.30%	$	392,424	4.00%	$	490,530	5.00%


				Minimum Capital
				Requirement (including			Minimum to be Well
	Actual			capital conservation buffer)			Capitalized
	Amount		Ratio	Amount		Ratio	Amount		Ratio
	(Dollars in thousands)
Bank Ratios
As of June 30, 2021
Total capital to risk-weighted assets	$	993,250	14.58%	$	715,375	10.50%	$	681,310	10.00%
Tier 1 capital to risk-weighted assets	$	907,851	13.33%	$	579,113	8.50%	$	545,048	8.00%
Common equity tier 1 capital to risk-weighted assets	$	907,851	13.33%	$	476,917	7.00%	$	442,851	6.50%
Tier 1 capital to average total assets	$	907,851	8.96%	$	405,219	4.00%	$	506,524	5.00%
As of December 31, 2020
Total capital to risk-weighted assets	$	1,044,275	15.32%	$	714,480	10.50%	$	680,457	10.00%
Tier 1 capital to risk-weighted assets	$	786,731	14.06%	$	578,388	8.50%	$	544,366	8.00%
Common equity tier 1 capital to risk-weighted assets	$	956,845	14.06%	$	476,320	7.00%	$	442,297	6.50%
Tier 1 capital to average total assets	$	956,845	9.81%	$	390,304	4.00%	$	487,879	5.00%

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 16 – STOCKHOLDERS’ EQUITY

Preferred Stock and Common Stock

On April 30, 2021, OFG redeemed Series A and Series B preferred stock at a redemption price of $25.00 per share. As of June 30, 2021 and December 31, 2020 preferred stock amounted to $24.0 million and $92.0 million, respectively. At both June 30, 2021 and December 31, 2020, common stock amounted to $59.9 million.

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 June 30, 2021 and December 31, 2020, accumulated preferred stock issuance costs charged against additional paid in capital amounted to $7.5 million and $10.1 million, respectively. At both June 30, 2021 and December 31, 2020, accumulated common stock issuance costs charged against additional paid in capital amounted to $13.6 million.

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 June 30, 2021 and December 31, 2020, the Bank’s legal surplus amounted to $110.2 million and $103.3 million, respectively. The amount transferred to the legal surplus account is not available for the payment of dividends to shareholders.

Treasury Stock

Under OFG’s stock repurchase program in effect at June 30, 2021, it was 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 OFG as treasury shares. During the six-month period ended June 30, 2020, OFG repurchased 175,000 shares under this program for a total of $2.2 million, at an average price of $12.69 per share. OFG did not purchase any shares of its common stock during the six-month period ended June 30, 2020 other than through its publicly announced stock repurchase program. During the six-month period ended June 30, 2021, OFG did not repurchased any shares.

At June 30, 2021 the number of shares that may yet be purchased under the $70 million program is estimated at ,249116 and was calculated by dividing the remaining balance of $5.5 million by $22.12 (closing price of OFG’s common stock at June 30, 2021).

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The activity in connection with common shares held in treasury by OFG for the six-months period ended June 30, 2021 and 2020 is set forth below:

		Six-Month Period Ended June 30,
		2021			2020
			Dollar			Dollar
		Shares	Amount		Shares	Amount
		(In thousands, except shares data)
Beginning of period	$	8,498,163	$	102,949	8,486,278	$	102,339
Common shares used upon lapse of restricted stock units and options		(273,436)		(2,230)	(118,276)		(1,444)
Common shares repurchased as part of the stock repurchase program		-		-	175,000		2,226
End of period	$	8,224,727	$	100,719	8,543,002	$	103,121

NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income, net of income taxes, as of June 30, 2021 and December 31, 2020 consisted of:

	June 30,		December 31,
	2021		2020
	(In thousands)
Unrealized gain on securities available-for-sale which are not other-than-temporarily impaired	$	10,298	$	14,262
Income tax effect of unrealized gain on securities available-for-sale		(1,890)		(2,170)
Net unrealized gain on securities available-for-sale which are not other-than-temporarily impaired		8,408		12,092
Unrealized loss on cash flow hedges		(1,293)		(1,711)
Income tax effect of unrealized loss on cash flow hedges		485		641
Net unrealized loss on cash flow hedges		(808)		(1,070)
Accumulated other comprehensive income, net of income taxes	$	7,600	$	11,022

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 six-month periods ended June 30, 2021 and 2020:

	Quarter Ended June 30,
	2021						2020
	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	$	7,145	$	(915)	$	6,230	$	7,575	$	(1,285)	$	6,290
Other comprehensive loss before reclassifications		1,262		(345)		917		1,310		(517)		793
Amounts reclassified out of accumulated other comprehensive income		1		452		453		-		505		505
Other comprehensive income (loss)		1,263		107		1,370		1,310		(12)		1,298
Ending balance	$	8,408	$	(808)	$	7,600	$	8,885	$	(1,297)	$	7,588

	Six-Month Period Ended June 30,
	2021						2020
	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	$	12,092	$	(1,070)	$	11,022	$	(441)	$	(567)	$	(1,008)
Other comprehensive income (loss) before reclassifications		(3,687)		(649)		(4,336)		4,598		(1,775)		2,823
Amounts reclassified out of accumulated other comprehensive income		3		911		914		4,728		1,045		5,773
Other comprehensive income (loss)		(3,684)		262		(3,422)		9,326		(730)		8,596
Ending balance	$	8,408	$	(808)	$	7,600	$	8,885	$	(1,297)	$	7,588

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents reclassifications out of accumulated other comprehensive income for the quarters and six-month periods ended June 30, 2021 and 2020:

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

	Quarter Ended June 30,
		2021		2020
	(In thousands)
Cash flow hedges:
Interest-rate contracts	$	452	$	505	Net interest expense
Available-for-sale securities:
Tax effect from changes in tax rates		1		-	Income tax expense
	$	453	$	505


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

	Six-Month Period Ended June 30,
		2021		2020
	(In thousands)
Cash flow hedges:
Interest-rate contracts	$	911	$	1,045	Net interest expense
Available-for-sale securities:
Gain on sale of investments		-		4,728	Net gain on sale of securities
Tax effect from changes in tax rates		3		-	Income tax expense
	$	914	$	5,773

NOTE 18 – EARNINGS PER COMMON SHARE

The calculation of earnings per common share for the quarters and six-month periods ended June 30, 2021 and 2020 is as follows:

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2021		2020		2021		2020
	(In thousands, except per share data)
Net income	$	40,827	$	21,787	$	71,200	$	23,588
Less: Dividends on preferred stock
Non-convertible preferred stock (Series A, B, and D)		-		(1,628)		(1,255)		(3,256)
Income available to common shareholders	$	40,827	$	20,159	$	69,945	$	20,332

Average common shares outstanding	$	51,636	$	51,336	$	51,517	$	51,370
Effect of dilutive securities:
Average potential common shares-options		412		134		368		214
Total weighted average common shares outstanding and equivalents	$	52,048	$	51,470	$	51,885	$	51,584
Earnings per common share - basic	$	0.79	$	0.39	$	1.36	$	0.40
Earnings per common share - diluted	$	0.78	$	0.39	$	1.35	$	0.39

For the quarters ended June 30, 2021 and 2020, weighted-average stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to 1,514 and 6,164, respectively. For the six-month periods ended June 30, 2021 and 2020, weighted-average stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to zero and 2,688, respectively.

NOTE 19 – GUARANTEES

At June 30, 2021 and December 31, 2020, the notional amount of the obligations undertaken in issuing the guarantees under standby letters of credit was $36.3 million and $19.5 million, respectively.

OFG 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 June 30, 2021 and December 31, 2020, the unpaid principal balance of residential mortgage loans sold subject to credit recourse was $128.1 million and $135.3 million, respectively.

The following table shows the changes in OFG’s liability for estimated losses from these credit recourse agreements, included in the consolidated statements of financial condition during the quarters and six-month periods ended June 30, 2021 and 2020.

	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2021		2020		2021		2020
	(In thousands)				(In thousands)
Balance at beginning of period	$	195	$	906	$	218	$	985
Net (charge-offs/terminations) recoveries		10		(12)		(13)		(91)
Balance at end of period	$	205	$	894	$	205	$	894

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 OFG is obligated to repurchase the loan.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

If a borrower defaults, pursuant to the credit recourse provided, OFG is required to repurchase the loan or reimburse the third-party investor for the incurred loss. The maximum potential amount of future payments that OFG 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 quarters ended June 30, 2021 and 2020, OFG repurchased $887 thousand and $1 thousand, respectively, in mortgage loans subject to credit recourse. During the six-month periods ended June 30, 2021 and 2020, Oriental repurchased $1.9 million and $480 thousand, respectively, in mortgage loans subject to credit recourse. If a borrower defaults, OFG has rights to the underlying collateral securing the mortgage loan. OFG 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 June 30, 2021, OFG’s liability for estimated credit losses related to loans sold with credit recourse amounted to $205 thousand (December 31, 2020– $218 thousand).

When OFG sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. OFG'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 OFG to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, OFG may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the loans. During the quarter ended June 30, 2021, OFG repurchased $9.9 million (June 30, 2020 – $225 thousand) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to credit recourse provision referred above. During the six-month period ended June 30, 2021, Oriental repurchased $22.5 million (June 30, 2020 – $8.6 million) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to credit recourse provision referred above. At June 30, 2021 and December 31, 2020, OFG had $4.2 million and $2.6 million, respectively, liability for the estimated credit losses related to these loans.

During the quarters ended June 30, 2021 and 2020, OFG recognized $90 thousand and $44 thousand in losses, net of reserves, respectively, from the repurchase of residential mortgage loans sold subject to credit recourse, and $1.4 million in losses and $117 thousand in gain, respectively, from the repurchase of residential mortgage loans as a result of breaches of customary representations and warranties. During the six-month periods ended June 30, 2021 and 2020, Oriental recognized $68 thousand and $58 thousand, respectively, in losses from the repurchase of residential mortgage loans sold subject to credit recourse, and $2.8 million and $288 thousand, respectively, in losses from the repurchase of residential mortgage loans as a result of breaches of customary representations and warranties.

Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including the FHLMC, require OFG to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. At June 30, 2021, OFG serviced $5.6 billion (December 31, 2020 - $5.4 billion) in mortgage loans for third parties. OFG 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, OFG must absorb the cost of the funds it advances during the time the advance is outstanding. OFG 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 OFG would not receive any future servicing income with respect to that loan. At June 30, 2021, the outstanding balance of funds advanced by OFG under such mortgage loan servicing agreements was approximately $17.8 million (December 31, 2020 - $20.7 million). To the extent the mortgage loans underlying OFG's servicing portfolio experience increased delinquencies, OFG would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

NOTE 20— COMMITMENTS AND CONTINGENCIES

Loan Commitments

In the normal course of business, OFG 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 OFG’s involvement in particular types of financial instruments.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

OFG’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. OFG uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Credit-related financial instruments at June 30, 2021 and December 31, 2020 were as follows:

	June 30,		December 31,
	2021		2020
	(In thousands)
Commitments to extend credit	$	1,229,975	$	1,133,503
Commercial letters of credit		519		225

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. OFG evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by OFG upon the extension of credit, is based on management’s credit evaluation of the counterparty.

At June 30, 2021 and December 31, 2020, 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 June 30, 2021 and December 31, 2020, is as follows:

	June 30,		December 31,
	2021		2020
	(In thousands)
Standby letters of credit and financial guarantees	$	36,307	$	19,476
Loans sold with recourse		128,124		135,252

Standby letters of credit and financial guarantees are written conditional commitments issued by OFG 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 OFG upon extension of credit, is based on management’s credit evaluation of the customer.

On January 1, 2020, OFG adopted CECL, which requires the measurement of the allowance for credit losses to be based on management’s best estimate of expected credit losses inherent in all financial assets measured at amortized cost and off-balance-sheet credit exposures. At June 30, 2021 and December 31, 2020, the allowance for credit losses for off-balance sheet credit exposures corresponding to commitments to extend credit and stand by letters of credit amounted to $1.3 million and $1.1 million, respectively, and is included in other liabilities in the statement of financial condition.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At June 30, 2021 and December 31, 2020, OFG maintained other non-credit commitments amounting to $11.4 million and $9.0 million, respectively, primarily for the acquisition of other investments.

Contingencies

OFG and its subsidiaries are defendants in a number of legal proceedings incidental to their business. In the ordinary course of business, OFG and its subsidiaries are also subject to governmental and regulatory examinations. Certain subsidiaries of OFG, 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.

OFG seeks to resolve all arbitration, litigation and regulatory matters in the manner management believes is in the best interests of OFG 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, OFG 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, OFG, 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, OFG will establish an accrued liability and record a corresponding amount of expense. At June 30, 2021 and December 31, 2020, this accrued liability amounted to $5.6 million and $8.1 million, respectively. OFG 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 OFG’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 OFG. 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 OFG’s consolidated results of operations or cash flows in particular quarterly or annual periods. OFG has evaluated all arbitration, litigation and regulatory matters where the likelihood of a potential loss is deemed reasonably possible. OFG has determined that the estimate of the reasonably possible loss is not significant.

NOTE 21— OPERATING LEASES

Substantially all leases in which OFG is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2038. OFG’s leases do not contain residual value guarantees or 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. OFG leases to others certain space in its principal offices for terms extending through 2023; all are operating leases.

Operating Lease Cost

	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2021		2020		2021		2020		Statement of Operations Classification
	(In thousands)
Lease costs	$	2,851	$	3,550	$	6,224	$	6,888	Occupancy and equipment
Variable lease costs		495		583		988		1,171	Occupancy and equipment
Short-term lease cost		126		185		146		28	Occupancy and equipment
Lease income		(112)		(125)		(232)		(248)	Occupancy and equipment
Total lease cost	$	3,360	$	4,193	$	7,126	$	7,839

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Operating Lease Assets and Liabilities

	June 30,		December 31
	2021		2020		Statement of Financial Condition Classification
	(In thousands)
Right-of-use assets	$	32,621	$	31,383	Operating lease right-of-use assets
Lease Liabilities	$	34,052	$	32,566	Operating leases liabilities

	June 30, 2021
	June 30, 2021
	(In thousands)
Weighted-average remaining lease term		5.6 years
Weighted-average discount rate		6.6%

Future minimum payments for operating leases with initial or remaining terms of one year or more as of June 30, 2021 were as follows:

	Minimum Rent
Year Ending December 31,	(In thousands)
2021	$	9,959
2022		9,273
2023		8,197
2024		6,100
2025		4,417
Thereafter		10,264
Total lease payments	$	48,210
Less imputed interest		14,158
Present value of lease liabilities	$	34,052

OFG, as lessor, leases and subleases real property to lessee tenants under operating leases. As of June 30, 2021, no material lease concessions have been granted to lessees. OFG, as lessee, also leases real estate property for branch locations, ATM locations, and office space. As of June 30, 2021, OFG has not requested any lease concessions.

During the year ended December 31, 2020, OFG decided to consolidate several branches as a result of the Scotiabank Acquisition and modified certain lease contracts. These contracts were evaluated under Topic 842 lease modification guidance and removed from books, as they were considered short-term at December 31, 2020.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS

OFG 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.

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 OFG. 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:

	June 30, 2021
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
	(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale	$	10,910	$	490,709	$	-	$	501,619
Trading securities		-		29		-		29
Money market investments		11,206		-		-		11,206
Servicing assets		-		-		47,712		47,712
Derivative liabilities		-		(1,293)		-		(1,293)
	$	22,116	$	489,445	$	47,712	$	559,273
Non-recurring fair value measurements:
Collateral dependent loans		-		-		25,189		25,189
Foreclosed real estate		-		-		15,093		15,093
Other repossessed assets		-		-		1,725		1,725
	$	-	$	-	$	42,007	$	42,007

	December 31, 2020
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
	(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale	$	10,983	$	435,455	$	-	$	446,438
Trading securities		-		22		-		22
Money market investments		11,908		-		-		11,908
Servicing assets		-		-		47,295		47,295
Derivative liabilities		-		(1,712)		-		(1,712)
	$	22,891	$	433,765	$	47,295	$	503,951
Non-recurring fair value measurements:
Collateral dependent loans	$	-	$	-	$	29,279	$	29,279
Foreclosed real estate		-		-		11,596		11,596
Other repossessed assets		-		-		1,816		1,816
	$	-	$	-	$	42,691	$	42,691

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 six-month periods ended June 30, 2021 and 2020:

	Quarter Ended June 30,
	2021		2020
	Servicing Assets
	(In thousands)

Balance at beginning of period	$	47,911	$	49,287
New instruments acquired		2,023		124
Principal repayments		(1,862)		(678)
Changes in fair value of servicing assets		(360)		(807)
Balance at end of period	$	47,712	$	47,926

	Six-Month Period Ended June 30,
	2021		2020
	Servicing Assets
	(In thousands)

Balance at beginning of period	$	47,295	$	50,779
New instruments acquired		3,443		580
Principal repayments		(3,369)		(1,445)
Changes in fair value of servicing assets		343		(1,988)
Balance at end of period	$	47,712	$	47,926

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 June 30, 2021 and 2020 during the quarters and six-month periods then ended included in other comprehensive income. For more information on the qualitative information about level 3 fair value measurements, see Note 7 – Servicing Assets.

During the quarters and six-month periods ended June 30, 2021 and 2020, 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 June 30, 2021:

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	June 30, 2021
	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average
	(In thousands)

Servicing assets	$	47,712	Cash flow valuation	Constant prepayment rate	4.82% - 25.64%	6.54%
				Discount rate	10.00% - 15.50%	11.47%

Collateral dependent loans	$	25,189	Fair value of property or collateral	Appraised value less disposition costs	18.20% - 29.20%	19.57%

Foreclosed real estate	$	15,093	Fair value of property or collateral	Appraised value less disposition costs	18.20% - 29.20%	19.19%

Other repossessed assets	$	1,725	Fair value of property or collateral	Estimated net realizable value less disposition costs	37.00% - 68.00%	54.86%

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 OFG’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 OFG.

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 OFG’s financial instruments at June 30, 2021 and December 31, 2020 is as follows:

	June 30,				December 31,
	2021				2020
	Fair		Carrying		Fair		Carrying
	Value		Value		Value		Value
	(In thousands)
Level 1
Financial Assets:
Cash and cash equivalents	$	2,767,494	$	2,767,494	$	2,154,202	$	2,154,202
Restricted cash	$	199	$	199	$	1,375	$	1,375
Investment securities available-for-sale	$	10,910	$	10,910	$	10,983	$	10,983
Level 2
Financial Assets:
Trading securities	$	29	$	29	$	22	$	22
Investment securities available-for-sale	$	490,709	$	490,709	$	435,455	$	435,455
Investment securities held-to-maturity	$	124,757	$	125,138	$	-	$	-
Federal Home Loan Bank (FHLB) stock	$	7,541	$	7,541	$	8,278	$	8,278
Other investments	$	9,168	$	9,168	$	3,962	$	3,962
Financial Liabilities:
Derivative liabilities	$	1,293	$	1,293	$	1,712	$	1,712
Level 3
Financial Assets:
Total loans (including loans held-for-sale)	$	6,130,109	$	6,354,040	$	6,323,689	$	6,501,259
Accrued interest receivable	$	59,850	$	59,850	$	65,547	$	65,547
Servicing assets	$	47,712	$	47,712	$	47,295	$	47,295
Accounts receivable and other assets	$	91,325	$	91,325	$	78,845	$	78,845
Financial Liabilities:
Deposits	$	9,130,934	$	9,090,492	$	8,422,599	$	8,415,640
Advances from FHLB	$	65,296	$	63,569	$	68,147	$	65,561
Other borrowings	$	298	$	298	$	707	$	707
Subordinated capital notes	$	36,405	$	36,083	$	33,325	$	36,083
Accrued expenses and other liabilities	$	128,326	$	128,326	$	154,418	$	154,418

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 June 30, 2021 and December 31, 2020:

• 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 23 – BANKING AND FINANCIAL SERVICE REVENUES

The following table presents the major categories of banking and financial service revenues for the quarters and six-month periods ended June 30, 2021 and 2020:

	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2021		2020		2021		2020
	(In thousands)				(In thousands)
Banking service revenues:
Checking accounts fees	$	2,084	$	1,971	$	4,048	$	4,631
Savings accounts fees		297		397		549		838
Electronic banking fees		14,640		10,574		27,523		21,822
Credit life commissions		70		13		187		142
Branch service commissions		275		216		636		727
Servicing and other loan fees		713		299		1,472		809
International fees		154		141		305		297
Miscellaneous income		15		57		21		115
Total banking service revenues		18,248		13,668		34,741		29,381

Wealth management revenue:
Insurance income		2,995		2,412		5,226		4,821
Broker fees		2,328		1,467		4,452		3,382
Trust fees		2,717		2,276		5,499		5,029
Retirement plan and administration fees		223		211		474		420
Total wealth management revenue		8,263		6,366		15,651		13,652

Mortgage banking activities:
Net servicing fees		3,127		2,676		7,477		5,366
Net gains on sale of mortgage loans and valuation		2,931		318		5,423		1,067
Other		(1,521)		78		(2,792)		(127)
Total mortgage banking activities		4,537		3,072		10,108		6,306
Total banking and financial service revenues	$	31,048	$	23,106	$	60,500	$	49,339

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

OFG 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 investment advisory services provided to a registered investment company and fiduciary services provided to 401K retirement plans, an IRA 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 24 – BUSINESS SEGMENTS

OFG 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 OFG’s organization, nature of its products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. OFG 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. OFG’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 OFG’s own portfolio. As part of its mortgage banking activities, OFG 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, investment advisory services, insurance sales activity, corporate and individual trust and retirement services, as well as retirement plan administration services.

The Treasury segment encompasses all of OFG’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 six-month periods ended June 30, 2021 and 2020:

	Quarter Ended June 30, 2021
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	110,452	$	6	$	3,005	$	113,463	$	-	$	113,463
Interest expense		(10,712)		-		(494)		(11,206)		-		(11,206)
Net interest income		99,740		6		2,511		102,257		-		102,257
Recapture of credit losses, net		7,737		-		568		8,305		-		8,305
Non-interest income		24,209		7,974		8		32,191		-		32,191
Non-interest expenses		(76,623)		(5,015)		(1,038)		(82,676)		-		(82,676)
Intersegment revenue		545		-		-		545		(545)		-
Intersegment expenses		-		(302)		(243)		(545)		545		-
Income before income taxes	$	55,608	$	2,663	$	1,806	$	60,077	$	-	$	60,077
Income tax expense		19,239		-		11		19,250		-		19,250
Net income	$	36,369	$	2,663	$	1,795	$	40,827	$	-	$	40,827
Total assets	$	8,271,348	$	31,165	$	3,232,968	$	11,535,481	$	(1,073,668)	$	10,461,813

	Six-Month Period Ended June 30, 2021
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	218,688	$	18	$	5,739	$	224,445	$	-	$	224,445
Interest expense		(22,848)		-		(1,136)		(23,984)		-		(23,984)
Net interest income		195,840		18		4,603		200,461		-		200,461
Recapture of credit losses, net		1,149		-		832		1,981		-		1,981
Non-interest income		47,076		15,505		17		62,598		-		62,598
Non-interest expenses		(150,497)		(7,844)		(2,001)		(160,342)		-		(160,342)
Intersegment revenue		1,098		-		-		1,098		(1,098)		-
Intersegment expenses		-		(593)		(505)		(1,098)		1,098		-
Income before income taxes	$	94,666	$	7,086	$	2,946	$	104,698	$	-	$	104,698
Income tax expense		33,475		-		23		33,498		-		33,498
Net income	$	61,191	$	7,086	$	2,923	$	71,200	$	-	$	71,200
Total assets	$	8,271,348	$	31,165	$	3,232,968	$	11,535,481	$	(1,073,668)	$	10,461,813

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Quarter Ended June 30, 2020
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	119,722	$	14	$	1,956	$	121,692	$	-	$	121,692
Interest expense		(14,326)		-		(2,306)		(16,632)		-		(16,632)
Net interest income		105,396		14		(350)		105,060		-		105,060
Provision for credit losses, net		(16,211)		-		(1,485)		(17,696)		-		(17,696)
Non-interest income		20,811		6,391		(50)		27,152		-		27,152
Non-interest expenses		(78,402)		(5,957)		(1,122)		(85,481)		-		(85,481)
Intersegment revenue		694		-		-		694		(694)		-
Intersegment expenses		-		(201)		(493)		(694)		694		-
Income before income taxes	$	32,288	$	247	$	(3,500)	$	29,035	$	-	$	29,035
Income tax expense		5,316		3,201		(1,269)		7,248		-		7,248
Net income	$	26,972	$	(2,954)	$	(2,231)	$	21,787	$	-	$	21,787
Total assets	$	9,462,407	$	30,214	$	1,524,913	$	11,017,534	$	(1,084,815)	$	9,932,719


	Six-Month Period Ended June 30, 2020
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	239,101	$	32	$	6,256	$	245,389	$	-	$	245,389
Interest expense		(30,215)		-		(5,013)		(35,228)		-		(35,228)
Net interest income		208,886		32		1,243		210,161		-		210,161
Provision for credit losses, net		(63,334)		-		(1,493)		(64,827)		-		(64,827)
Non-interest income		40,355		13,766		4,481		58,602		-		58,602
Non-interest expenses		(160,955)		(9,681)		(2,167)		(172,803)		-		(172,803)
Intersegment revenue		1,151		-		-		1,151		(1,151)		-
Intersegment expenses		-		(355)		(796)		(1,151)		1,151		-
Income before income taxes	$	26,103	$	3,762	$	1,268	$	31,133	$	-	$	31,133
Income tax expense		2,997		4,519		29		7,545		-		7,545
Net income	$	23,106	$	(757)	$	1,239	$	23,588	$	-	$	23,588
Total assets	$	9,462,407	$	30,214	$	1,524,913	$	11,017,534	$	(1,084,815)	$	9,932,719

NOTE 25 – SUBSEQUENT EVENTS

On March 29, 2021, OFG announced the redemption of all three series of currently outstanding preferred stock, each at a redemption price of $25.00 per share. The last remaining series of preferred stock, the Series D Preferred Stock, was redeemed on July 15, 2021.

On July 28, 2021, OFG announced that its Board of Directors increased the regular quarterly cash dividend by 50%, to $0.12 per common share from $0.08 per share, for the quarter ending September 30, 2021. Such quarterly dividends are only payable as and when declared by the Board and there is no entitlement to any dividends prior thereto

On July 28, 2021, OFG announced that its Board of Directors approved a new stock repurchase authorization plan of $50.0 million as part of OFG’s capital actions thus far in 2021. The new stock repurchase program replaces and supersedes the previous stock repurchase program approved by the Board.

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

INTRODUCTION

The following discussion of OFG’s financial condition and results of operations should be read in conjunction with the “Selected Financial Data” and OFG’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 June 30, 2021 and set forth in our Form 10-K for the year ended December 31, 2020 (the “2020 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 may also cause actual results to differ materially from those described in our forward-looking statements.

OFG 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. OFG operates through three major business segments: Banking, Wealth Management, and Treasury, and distinguishes itself based on quality service. OFG has 53 branches in Puerto Rico, 2 branches in the USVI, a subsidiary in Boca Raton, Florida, and a non-bank operating subsidiary in Cornelius, North Carolina. OFG’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.

OFG’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, OFG’s commitment is to continue producing a balanced and growing revenue stream.

RECENT DEVELOPMENTS

Capital Actions

On July 28, 2021, OFG announced that its Board of Directors approved a 50% increase in its common stock dividend payable to shareholders of record on September 30, 2021, to $0.12 per share. OFG also announced that its Board of Directors approved a $50 million stock repurchase program.

Covid-19 Pandemic 2020

In the first quarter of 2020, the World Health Organization declared the outbreak of Covid-19 a pandemic. OFG has been and may continue to be impacted by the Covid-19 pandemic. Puerto Rico’s economy is improving as more people get vaccinated and restrictive measures have eased. However, uncertainty remains about the duration of the pandemic and the timing and strength of Puerto Rico’s economic recovery. In response to the pandemic, the federal government enacted several economic relief packages providing trillions of dollars in relief to businesses and individuals and have also decreased interest rates to further stimulate the economy. In addition to these government relief initiatives, OFG and other banks in Puerto Rico granted various forms of assistance to customers and clients impacted by the Covid-19 pandemic, including payment deferrals and extending forgivable loans to businesses for payroll and certain other expenses under the Paycheck Protection Program of the Small Business Administration. These relief measures have led to a surge in liquidity in Puerto Rico that have substantially increased OFG’s deposits ($9.1 billion as of June 30, 2021) and cash balances ($2.8 billion as of June 30, 2021). This increase in deposits caused OFG to exceed $10 billion in assets for the first time during the first quarter of 2021, and OFG has commenced preparing for the increased regulatory oversight and other requirements that will apply as a result of crossing such size threshold.

With respect to our loan portfolios, the increased liquidity has significantly reduced delinquent and non-performing loans by $89.4 million and $14.9 million, respectively, compared to December 31, 2020. Moreover, such liquidity coupled with the decrease in interest rates has led to increases in new home purchases, real estate values, and refinancing of owned residential mortgage loans with

lower-rate residential mortgage loans sold to agency investors. These refinancing together with the decrease in PPP loans as they are forgiven have been partially offset by increases in the production of commercial and auto loans as the economy reopened and started to show signs of growth.

The macroeconomic outlook for Puerto Rico has improved from reduced Covid-19 related restrictions on economic activity, combined with the additional federal stimulus funds Puerto Rico is expected to receive related to the recovery from hurricane Maria in 2017, the early 2020 earthquakes, and now the Covid-19 pandemic.

Given OFG’s cash position and capital levels, OFG will seek opportunities to continue growing our loan portfolios organically and will continue to evaluate returning capital to shareholders through is stock repurchase program and quarterly common stock dividend.

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 2020 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 2020 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:

 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. There have been no material changes in the methods used to formulate these critical accounting estimates from those discussed in our 2020 Form 10-K.

FINANCIAL HIGHLIGHTS

OFG generated outstanding second quarter results. This reflects our larger scale and our focus on digital utilization and differentiation, combined with Puerto Rico’s early economic and post-pandemic recovery.

The economy is clearly benefitting from a massive amount of federal reconstruction and COVID stimulus, which are more meaningful here compared to mainland states given the size of our economy as it relates to reconstruction funds and the size of stimulus payments compared to average income levels.

OFG saw the effects of all this across all our businesses. New loan origination increased 27.7% from the first quarter of 2021 with gains in all major categories, led by commercial and auto lending. Interest income grew 2.2% from the first quarter of 2021 as average loan balances expanded 1.3%, excluding residential mortgage. Banking and financial services revenues rose 5.4%.

Asset quality trends continued to improve as reconstruction and stimulus funds provided significant liquidity to businesses and individuals. As a result of this, the provision for credit losses was a net benefit of $8.3 million.

Results were enhanced by a 12.3% reduction in cost of funds compared to the first quarter of 2021 and the previously announced deployment of excess capital to redeem all three of our outstanding series of preferred stock, eliminating $1.6 million in quarterly dividends.

Return on average assets and on average tangible equity expanded to 1.58% and 17.78%, respectively, compared to the previous and year ago quarters.

As Puerto Rico continues experiencing stronger signs of economic revival, OFG is strategically well-positioned to continue to benefit from and play a major role in this long-awaited development.

Second quarter of 2021:

Earnings: Earnings per share diluted was $0.78 compared to $0.56 in the first quarter of 2021 and $0.39 in the second quarter of 2020. Total core revenues were $133.3 million compared to $127.7 million in the first quarter of 2021 and $128.2 million in the second quarter of 2020. Net interest margin was 4.22% compared to 4.26% in the first quarter of 2021 and 4.78% in the second quarter of 2020.

Revenues: Total interest income of $113.5 million increased 2.2% from the first quarter of 2021 primarily due to higher income from increased average balances of commercial and auto loans and investment securities. Average loan balances were $6.60 billion compared to $6.64 billion in the first quarter of 2021 and $6.84 billion in the second quarter of 2020. Banking and Financial Services Revenues were $31.0 million compared to $29.5 million in the first quarter of 2021 and $23.1 million in in the second quarter of 2020. Second quarter of 2021 increased 5.4% from the first quarter of 2021 and 34.4% from the second quarter of 2020 primarily due to increased activity as pandemic related economic restrictions have subsided.

Expenses: Non-Interest Expenses were $82.7 million compared to $77.7 million in the first quarter of 2021 and $85.5 million in the second quarter of 2020. The first quarter of 2021 reflected previously announced cost savings, a $2.2 million technology project write down, and higher variable expenses related to higher revenues.

Pre-Provision Net Revenues: PPNR was $51.8 million, which includes the above non-cash write down, compared to $50.9 million in the first quarter of 2021 and $46.7 million in the second quarter of 2020.

Asset Quality and Provision for Credit Losses: The second quarter of 2021 reflected continued improvement in asset quality trends with the rates for net charge offs (0.13%) and early (1.86%) and total (3.90%) delinquency at their lowest levels in five quarters. Provision for credit losses was a net benefit of $8.3 million, resulting from $2.1 million net charge-offs and $10.4 million net reserve releases, compared to a provision expense of $6.3 million in the first quarter of 2021 and $17.7 million in the second quarter of 2020.

Loan Generation: New loan origination totaled $673.6 million compared to $527.6 million in the first quarter of 2021 and $506.0 million in the second quarter of 2020. Second quarter of 2021 increased 27.7% from the first quarter of 2021 due to gains in all major categories, led by commercial and auto lending.

Deposit Balances and Cost of Funds: Interest expense was $11.2 million compared to $12.8 million in the first quarter 2021 and $16.6 million in the second quarter of 2020. Interest expense declined 12.3% from the first quarter of 2021 primarily due to lower cost of core deposits, which was 38 bps compared to 47 bps in the first quarter of 2021 and 61 bps in the second quarter of 2020. Average customer deposit balances were $8.96 billion compared to $8.54 billion in the first quarter of 2021 and $7.85 billion in the second quarter of 2020.

Capital: Tangible book value per share was $18.13 compared to $17.39 in the first quarter of 2021 and $16.01 in the second quarter of 2020. The CET1 ratio was 13.95% compared to 13.56% in the first quarter of 2021 and 12.02% in the second quarter of 2020.

	Quarter Ended June 30,					Six-Month Period Ended June 30,
					Variance					Variance
	2021		2020		%	2021		2020		%
EARNINGS DATA:	(In thousands, except per share data)					(In thousands, except per share data)
Interest income	$	113,463	$	121,692	-6.8%	$	224,445	$	245,389	-8.5%
Interest expense		11,206		16,632	-32.6%		23,984		35,228	-31.9%
Net interest income		102,257		105,060	-2.7%		200,461		210,161	-4.6%
Provision for loan and lease losses, net		(8,305)		17,696	-146.9%		(1,981)		64,827	-103.1%
Net interest income after provision for loan and lease losses		110,562		87,364	26.6%		202,442		145,334	39.3%
Non-interest income		32,191		27,152	18.6%		62,598		58,602	6.8%
Non-interest expenses		82,676		85,481	-3.3%		160,342		172,803	-7.2%
Income before taxes		60,077		29,035	106.9%		104,698		31,133	236.3%
Income tax expense		19,250		7,248	165.6%		33,498		7,545	344.0%
Net income		40,827		21,787	87.4%		71,200		23,588	201.8%
Less: dividends on preferred stock		-		(1,628)	100.0%		(1,255)		(3,256)	61.5%
Income available to common shareholders	$	40,827	$	20,159	102.5%	$	69,945	$	20,332	244.0%
PER SHARE DATA:
Basic	$	0.79	$	0.39	102.6%	$	1.36	$	0.40	240.0%
Diluted	$	0.78	$	0.39	100.0%	$	1.35	$	0.39	246.2%
Average common shares outstanding		51,636		51,336	0.6%		51,517		51,370	0.3%
Average common shares outstanding and equivalents		52,048		51,470	1.1%		51,885		51,584	0.6%
Cash dividends declared per common share	$	0.08	$	0.07	14.2%	$	0.16	$	0.14	14.3%
Cash dividends declared on common shares	$	4,281	$	3,595	19.1%	$	8,397	$	7,191	16.8%
PERFORMANCE RATIOS:
Return on average assets (ROA)		1.58%		0.92%	71.7%		1.40%		0.50%	180.0%
Return on average tangible common equity		17.78%		9.88%	80.0%		15.48%		4.97%	211.5%
Return on average common equity (ROE)		15.60%		8.44%	84.8%		13.54%		4.24%	219.4%
Efficiency ratio		62.02%		66.70%	-7.0%		61.44%		66.57%	-7.7%
Interest rate spread		4.19%		4.72%	-11.2%		4.20%		4.79%	-12.3%
Interest rate margin		4.22%		4.78%	-11.8%		4.24%		4.84%	-12.5%


	June 30,		December 31,		Variance
	2021		2020		%
PERIOD END BALANCES AND CAPITAL RATIOS:	(In thousands, except per share data)
Cash, cash equivalents and restricted cash	$	2,767,693	$	2,155,577	28.4%
Investments and loans
Investment securities	$	643,495	$	458,700	40.3%
Loans and leases, net		6,354,040		6,501,259	-2.3%
Total investments and loans	$	6,997,535	$	6,959,959	0.5%
Deposits and borrowings
Deposits	$	9,090,492	$	8,415,640	8.0%
Other borrowings		99,950		102,351	-2.3%
Total deposits and borrowings	$	9,190,442	$	8,517,991	7.9%
Stockholders’ equity
Preferred stock	$	24,000	$	92,000	-73.9%
Common stock		59,885		59,885	0.0%
Additional paid-in capital		626,995		622,652	0.7%
Legal surplus		110,235		103,269	6.7%
Retained earnings		352,001		300,096	17.3%
Treasury stock, at cost		(100,719)		(102,949)	2.2%
Accumulated other comprehensive (loss)		7,600		11,022	-31.0%
Total stockholders' equity	$	1,079,997	$	1,085,975	-0.6%
Per share data
Book value per common share	$	20.59	$	19.54	5.3%
Tangible book value per common share	$	18.13	$	16.97	6.8%
Market price at end of period	$	22.12	$	18.54	19.3%
Capital ratios
Leverage capital		9.84%		10.30%	-4.5%
Common equity Tier 1 capital ratio		13.95%		13.08%	6.7%
Tier 1 risk-based capital		14.70%		14.78%	-0.5%
Total risk-based capital		15.95%		16.04%	-0.6%
Equity-to-assets ratio		10.32%		11.05%	-6.6%
Financial assets managed
Trust assets managed	$	3,685,968	$	3,476,491	6.0%
Broker-dealer assets	$	2,380,286	$	2,474,234	-3.8%

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 six-month periods ended June 30, 2021 and 2020. Comparative June 30, 2020 to June 30, 2019 information has been omitted pursuant to Item 303(b) of Regulation S-K. For such comparative information, please see Management’s Discussion and Analysis of Financial Condition and Results of Operations in Oriental’s June 30, 2020 quarterly report on Form 10-Q.

TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED JUNE 30, 2021 AND 2020

	Interest				Average rate		Average balance
	June		June		June	June	June		June
	2021		2020		2021	2020	2021		2020
	(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets	$	113,463	$	121,692	4.68%	5.53%	$	9,726,905	$	8,845,744
Tax equivalent adjustment		2,195		2,361	0.09%	0.11%		-		-
Interest-earning assets - tax equivalent		115,658		124,053	4.77%	5.64%		9,726,905		8,845,744
Interest-bearing liabilities		11,206		16,632	0.49%	0.81%		9,097,792		8,245,775
Tax equivalent net interest income / spread		104,452		107,421	4.28%	4.83%		629,113		599,969
Tax equivalent interest rate margin					4.36%	4.94%
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities		2,696		2,801	1.77%	1.83%		608,930		611,907
Interest bearing cash and money market investments		706		359	0.11%	0.10%		2,519,406		1,393,187
Total investments		3,402		3,160	0.44%	0.63%		3,128,336		2,005,094
Non-PCD:
Mortgage		10,018		10,745	5.17%	5.28%		775,303		814,513
Commercial		29,650		28,030	5.46%	5.38%		2,177,052		2,096,691
Consumer		11,212		14,046	11.28%	11.86%		398,852		476,406
Auto		34,301		31,011	8.67%	8.49%		1,586,395		1,469,671
Total Non-PCD loans		85,181		83,832	6.92%	6.94%		4,937,602		4,857,281

PCD loans:
Mortgage		20,731		28,051	5.97%	7.27%		1,372,625		1,552,087
Commercial		3,521		5,537	5.30%	5.74%		266,355		387,883
Consumer		76		162	20.11%	18.21%		1,513		3,551
Auto		552		950	10.81%	9.59%		20,474		39,848
Total PCD loans		24,880		34,700	5.99%	7.00%		1,660,967		1,983,369
Total loans		110,061		118,532	6.69%	6.97%		6,598,569		6,840,650
Total interest-earning assets		113,463		121,692	4.68%	5.53%		9,726,905		8,845,744

	Interest					Average rate		Average balance
	June		June			June	June	June		June
	2021		2020			2021	2020	2021		2020
	(Dollars in thousands)
Interest-bearing liabilities:
Deposits:
NOW Accounts		2,259		2,138		0.36%	0.42%		2,542,018		2,069,247
Savings and money market		2,097		1,976		0.38%	0.44%		2,236,281		1,809,517
Time deposits		4,243		7,835		1.08%	0.78%		1,579,414		1,990,639
Total core deposits		8,599		11,949		0.54%	0.82%		6,357,713		5,869,403
Brokered deposits		24		1,446		0.28%	2.47%		34,506		235,611
		8,623		13,395		0.28%	2.47%		6,392,219		6,105,014
Non-interest bearing deposits		-		-		0.00%	0.00%		2,605,623		1,983,092
Fair value premium and core deposit intangible amortizations		1,837		2,050		0.00%	0.00%		-		-
Total deposits		10,460		15,445		0.47%	0.77%		8,997,842		8,088,106
Borrowings:
Securities sold under agreements to repurchase		-		335		0.00%	2.91%		-		46,154
Advances from FHLB and other borrowings		452		505		2.84%	2.69%		63,867		75,432
Subordinated capital notes		294		347		3.27%	3.87%		36,083		36,083
Total borrowings		746		1,187		2.99%	3.03%		99,950		157,669
Total interest bearing liabilities		11,206		16,632		0.49%	0.81%		9,097,792		8,245,775
Net interest income / spread	$	102,257	$	105,060		4.19%	4.72%
Interest rate margin						4.22%	4.78%
Excess of average interest-earning assets over average interest-bearing liabilities								$	629,113	$	599,969
Average interest-earning assets to average interest-bearing liabilities ratio									106.92%		107.28%

C - CHANGES IN NET INTEREST INCOME DUE TO:
	Volume		Rate		Total
	(In thousands)
Interest Income:
Investments	$	1,770	$	(1,528)	$	242
Loans		(4,255)		(4,216)		(8,471)
Total interest income		(2,485)		(5,744)		(8,229)
Interest Expense:
Deposits		1,737		(6,722)		(4,985)
Repurchase agreements		(335)		-		(335)
Other borrowings		(88)		(18)		(106)
Total interest expense		1,314		(6,740)		(5,426)
Net Interest Income	$	(3,799)	$	996	$	(2,803)

TABLE 1A - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2021 AND 2020

	Interest				Average rate		Average balance
	June		June		June	June	June		June
	2021		2020		2021	2020	2021		2020
	(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets	$	224,445	$	245,389	4.74%	5.66%	$	9,543,525	$	8,679,358
Tax equivalent adjustment		4,366		5,442	0.09%	0.13%		-		-
Interest-earning assets - tax equivalent		228,811		250,831	4.83%	5.79%		9,543,525		8,679,358
Interest-bearing liabilities		23,984		35,228	0.54%	0.87%		8,891,198		8,135,010
Tax equivalent net interest income / spread		204,827		215,603	4.29%	4.92%		652,327		544,348
Tax equivalent interest rate margin					4.38%	5.05%
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities		4,872		7,275	1.73%	1.89%		563,735		768,436
Interest bearing cash and money market investments		1,301		3,147	0.11%	0.54%		2,362,788		1,168,384
Total investments		6,173		10,422	0.43%	1.08%		2,926,523		1,936,820
Non-PCD
Mortgage		20,798		21,988	5.26%	5.50%		790,611		799,906
Commercial		57,376		57,856	5.38%	5.89%		2,151,963		1,970,492
Consumer		22,827		29,140	11.36%	12.06%		405,080		484,400
Auto and leasing		67,116		62,331	8.63%	8.46%		1,568,068		1,480,782
Total Non-PCD loans		168,117		171,315	6.90%	7.26%		4,915,722		4,735,580

PCD
Mortgage		40,763		50,728	5.80%	6.47%		1,404,929		1,569,012
Commercial		8,107		10,781	6.01%	5.54%		272,232		391,636
Consumer		113		288	13.54%	15.44%		1,663		3,735
Auto		1,172		1,855	10.52%	8.76%		22,456		42,575
Total PCD loans		50,155		63,652	5.90%	6.28%		1,701,280		2,006,958
Total loans		218,272		234,967	6.65%	6.97%		6,617,002		6,742,538
Total interest-earning assets		224,445		245,389	4.74%	5.66%		9,543,525		8,679,358

	Interest					Average rate		Average balance
	June		June			June	June	June		June
	2021		2020			2021	2020	2021		2020
	(Dollars in thousands)
Interest-bearing liabilities:
Deposits:
NOW Accounts		4,652		4,525		0.38%	0.45%		2,470,244		2,024,876
Savings and money market		4,220		4,416		0.40%	0.49%		2,120,764		1,803,587
Time deposits		9,748		15,967		1.17%	1.59%		1,677,079		2,014,975
Total core deposits		18,620		24,908		0.30%	0.43%		6,268,087		5,843,438
Brokered deposits		187		3,032		0.94%	2.58%		40,199		235,809
		18,807		27,940		0.60%	0.92%		6,308,286		6,079,247
Non-interest bearing deposits		-		-		0.00%	0.00%		2,482,464		1,841,028
Fair value premium and core deposit intangible amortizations		3,677		4,125		-	-		-		-
Total deposits		22,484		32,065		0.52%	0.81%		8,790,750		7,920,275
Borrowings:
Securities sold under agreements to repurchase		-		1,335		0.00%	2.62%		-		102,308
Advances from FHLB and other borrowings		911		1,045		2.86%	2.74%		64,365		76,344
Subordinated capital notes		589		783		3.29%	4.35%		36,083		36,083
Total borrowings		1,500		3,163		3.01%	5.64%		100,448		214,735
Total interest-bearing liabilities		23,984		35,228		0.54%	0.87%		8,891,198		8,135,010
Net interest income / spread	$	200,461	$	210,161		4.20%	4.79%
Interest rate margin						4.24%	4.84%
Excess of average interest-earning assets over average interest-bearing liabilities								$	652,327	$	544,348
Average interest-earning assets to average interest-bearing liabilities ratio									107.34%	$	106.69%

C - CHANGES IN NET INTEREST INCOME DUE TO:
	Volume		Rate		Total
	(In thousands)
Interest Income:
Investments	$	5,326	$	(9,575)	$	(4,249)
Loans		(3,178)		(13,517)		(16,695)
Total interest income		2,148		(23,092)		(20,944)
Interest Expense:
Deposits		3,524		(13,105)		(9,581)
Repurchase agreements		(1,335)		-		(1,335)
Other borrowings		(195)		(133)		(328)
Total interest expense		1,994		(13,238)		(11,244)
Net Interest Income	$	154	$	(9,854)	$	(9,700)

Net Interest Income

Net interest income is a function of the difference between rates earned on OFG’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). OFG 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 June 30, 2021 and 2020

Net interest income of $102.3 million decreased $2.8 million from $105.1 million. Interest rate spread decreased 54 basis points to 4.19% from 4.72% and net interest margin decreased 67 basis points to 4.22% from 4.78%. These decreases are mainly due to the net effect of a decrease of 85 basis points in the average yield of total interest-earning assets and a decrease of 31 basis points in the total average cost of interest-bearing liabilities.

Net interest income was adversely impacted by:

 Lower interest income from loans by $8.5 million, reflecting lower average balances in the mortgage and commercial PCD portfolios and the effect of Federal Reserve Board’s rate cuts on variable rate commercial loans offset by interest income of $2.0 million from unamortized yield for $140.6 million of forgiven PPP loans.

Net interest income was positively impacted by:

 Lower interest expense from deposits by $5.0 million, mainly related to pricing changes implemented during fourth quarter of 2020 and to the maturity and cancelation of higher cost time and brokered deposits and migration of these time deposits to checking and savings accounts at lower costs.

Comparison of the six-month periods ended June 30, 2021 and 2020

Net interest income of $200.5 million decreased $9.7 million from $210.2 million. Interest rate spread decreased 59 basis points to 4.20% from 4.79% and net interest margin decreased 60 basis points to 4.24% from 4.84%. These decreases are mainly due to the net effect of a decrease of 92 basis points in the average yield of total interest-earning assets and a decrease of 33 basis points in the total average cost of interest-bearing liabilities.

Net interest income was adversely impacted by:

 Lower interest income from loans by $16.7 million, reflecting lower average balances in the mortgage and commercial PCD portfolios, and the effect of Federal Reserve Board’s rate cuts on variable rate commercial loans, partially offset by interest income of $3.6 million from unamortized yield for $240 million of forgiven PPP loans;

 $6.0 million in one-time interest recoveries from acquired PCD loans recorded during prior year quarter; and

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

Net interest income was positively impacted by:

 Lower interest expense from deposits by $9.6 million, mainly related to pricing changes implemented during fourth quarter of 2020 and to the maturity and cancelation of higher cost time and brokered deposits and migration of these time deposits to checking and savings accounts at lower costs; and

 Lower interest expense in borrowings by $1.7 million, reflecting the maturity and early extinguishment of repurchase agreements during the year 2020.

TABLE 2 - NON-INTEREST INCOME SUMMARY

	Quarter Ended June 30,					Six-Month Period Ended June 30,
	2021		2020		Variance	2021		2020		Variance
	(In thousands)
Banking service revenue	$	18,248	$	13,668	33.5%	$	34,741	$	29,381	18.2%
Wealth management revenue		8,263		6,366	29.8%		15,651		13,652	14.6%
Mortgage banking activities		4,537		3,072	47.7%		10,108		6,306	60.3%
Total banking and financial service revenue		31,048		23,106	34.4%		60,500		49,339	22.6%
Net gain (loss) on:
Sale of securities available for sale		-		-	0.0%		-		4,728	-100.0%
Bargain purchase from Scotiabank PR & USVI acquisition		-		3,462	-100.0%		-		3,872	-100.0%
Early extinguishment of debt		-		(63)	100.0%		-		(63)	100.0%
Other non-interest income		1,143		647	76.7%		2,098		726	189.0%
Total non-interest income, net	$	32,191	$	27,152	18.6%	$	62,598	$	58,602	6.8%

Non-Interest Income

Non-interest income is affected by the amount of the Bank’s trust department assets under management, transactions generated by clients’ financial assets serviced by OFG’s 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 June 30, 2021 and 2020

OFG recorded non-interest income, net, in the amount of $32.2 million, compared to $27.2 million, an increase of 18.6%, or $5.0 million. The increase in non-interest income was mainly due to:

 An increase of $4.6 million in banking service revenues, mainly from higher transaction volume in electronic banking;

 An increase of $1.9 million in wealth management revenues, mainly related to by higher broker-dealer sales and insurance income of $1.0 million and $583 thousand, respectively; and

 An increase of $1.5 million in mortgage-banking activities, as quarterly mortgage-servicing rights valuation and gains on loans sold increased by $450 thousand and $1.0 million, respectively.

The decrease in non-interest income was offset by:

 A $3.5 million bargain purchase gain from the Scotiabank Acquisition to adjust the fair value of accrued interest receivable at closing, net of taxes recorded during prior year quarter.

Comparison of six-month periods ended June 30, 2021 and 2020

OFG recorded non-interest income, net, in the amount of $62.6 million, compared to $58.6 million, an increase of 6.8%, or $4.0 million. The increase in non-interest income was mainly due to:

 An increase of $5.4 million in banking service revenues, mainly from higher transaction volume in electronic banking;

 An increase of $2.0 million in wealth management revenue due to higher broker-dealer sales, insurance income and trust fees of $1.0 million, $404 thousand, and $469 thousand, respectively; and

 An increase of $3.8 million in mortgage-banking activities, as mortgage-servicing rights valuation and gains on loans sold increased by $2.1 million and $1.7 million, respectively.

The increase in non-interest income was offset by:

 A $4.7 million gain recorded during 2020 on the sales of $316.0 million mortgage-backed securities; and

 A $3.8 million bargain purchase gain from the Scotiabank Acquisition to adjust the fair value of accrued interest receivable at closing, net of taxes recorded during 2020.

TABLE 3 - NON-INTEREST EXPENSES SUMMARY

	Quarter Ended June 30,					Six-Month Period Ended June 30,
	2021		2020		Variance %	2021		2020		Variance %
	(In thousands)
Compensation and employee benefits	$	32,919	$	34,506	-4.6%	$	65,537	$	70,050	-6.4%
Occupancy, equipment and infrastructure costs		12,528		11,837	5.8%		25,656		23,276	10.2%
Electronic banking charges		9,316		7,962	17.0%		17,548		17,550	0.0%
Information technology expenses		5,532		3,944	40.3%		9,786		10,878	-10.0%
Professional and service fees		5,399		3,475	55.4%		9,935		9,264	7.2%
Taxes, other than payroll and income taxes		3,617		3,171	14.1%		7,278		6,349	14.6%
Insurance		2,673		2,761	-3.2%		5,129		6,239	-17.8%
Foreclosed real estate and other repossessed assets (income) expenses		327		2,918	-88.8%		278		5,440	-94.9%
Loan servicing and clearing expenses		1,942		1,148	69.2%		3,782		2,491	51.8%
Advertising, business promotion, and strategic initiatives		1,707		1,533	11.4%		3,137		3,163	-0.8%
Communication		1,039		905	14.8%		2,004		1,876	6.8%
Printing, postage, stationery and supplies		941		951	-1.1%		2,159		1,673	29.0%
Director and investor relations		324		316	2.5%		623		626	-0.5%
Merger and restructuring charges		-		3,006	-100.0%		-		3,310	-100.0%
Pandemic expenses		1,531		2,033	-24.7%		3,300		2,201	49.9%
Other		2,881		5,015	-42.6%		4,190		8,417	-50.2%
Total non-interest expenses	$	82,676	$	85,481	-3.3%	$	160,342	$	172,803	-7.2%
Relevant ratios and data:
Efficiency ratio		62.02%		66.70%			61.44%		66.59%
Compensation and benefits to non-interest expense		39.82%		40.37%			40.87%		40.54%
Compensation to average total assets owned (annualized)		1.27%		1.45%			1.29%		1.49%
Average number of employees		2,239		2,413			2,235		2,436
Average compensation per employee (annualized, in thousands)	$	58.8	$	57.2		$	58.6	$	57.5
Average loans per average employee	$	2,947	$	2,835		$	2,960	$	2,777

Non-Interest Expenses

Comparison of quarters ended June 30, 2021 and 2020

Non-interest expense was $82.7 million, representing a decrease of 3.3%, or $2.8 million, compared to $85.5 million.

Non-interest expenses were positively impacted by:

 Lower compensation and employee benefits by $1.6 million, reflecting lower employee count;

 Decrease in foreclosed real estate and other repossessed assets expenses by $1.8 million reflecting higher valuation and higher gains on sales;

 Merger and restructuring charges amounting $3.0 million in 2020 related to the Scotiabank Acquisition; and

 Decrease in claims and settlements accruals by $2.5 million.

The efficiency ratio improved to 62.02% from 66.70%. The efficiency ratio measures how much of OFG’s revenues is used to pay operating expenses. OFG 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 June 30, 2021 and 2020 amounted to $1.1 million and $4.0 million, respectively.

Comparison of six-month periods ended June 30, 2021 and 2020

Non-interest expense was $160.3 million, representing an decrease of 7.2%, or $12.5 million, compared to $172.8 million.

Non-interest expenses were positively impacted by:

 Lower compensation and employee benefits by $4.5 million, reflecting lower employee count and a $1.3 million Covid-19 employee tax credit;

 Decrease in foreclosed real estate and other repossessed assets expenses by $3.3 million reflecting higher valuation and higher gains on sales;

 Merger and restructuring charges amounting $3.3 million in 2020 related to the Scotiabank Acquisition; and

 Decrease in claims and settlements accruals by $3.5 million.

The efficiency ratio improved to 61.44% from 66.59%. Amounts presented as part of non-interest income that are excluded from the efficiency ratio computation for the six-months ended June 30, 2021 and 2020 amounted to $2.1 million and $9.3 million, respectively.

Provision for Credit Losses

Comparison of quarters ended June 30, 2021 and 2020

Based on an analysis of the credit quality and the composition of OFG’s loan portfolio, management determined that the provision for the quarter ended June 30, 2021 was adequate to maintain the allowance for credit losses at an appropriate level to provide for expected credit losses based upon an evaluation of known and inherent risks.

Provision for credit losses decreased $26.0 million from $17.7 million to a recapture of $8.3 million resulting from $2.1 million net charge-offs and a $10.4 million net reserve releases. The prior year quarter provision included a $5.0 million provision to incorporate changes in the macro-economic scenario and qualitative adjustments as a result of the Covid-19 pandemic.

Comparison of six-month periods ended June 30, 2021 and 2020

Based on an analysis of the credit quality and the composition of OFG’s loan portfolio, management determined that the provision for the six-month period ended June 30, 2021 was adequate to maintain the allowance for credit losses at an appropriate level to provide for expected credit losses based upon an evaluation of known and inherent risks.

Provision for credit losses decreased $66.8 million from $64.8 million to a recapture of $2.0 million reflecting continued improvement in asset quality trends. Prior year provision included a $39.1 million provision to incorporate changes in the macro-economic scenario and qualitative adjustments as a result of the Covid-19 pandemic.

Income Taxes

Comparison of quarters ended June 30, 2021 and 2020

OFG’s effective tax rate (ETR) was 32.0% in 2021 compared to 25.0% in 2020. The increase in ETR is mainly related to an increase in the projected proportion of taxable income to total income as per management’s projections for the year 2021.

Comparison of six-month periods ended June 30, 2021 and 2020

OFG’s effective tax rate (ETR) was 32.0% in 2021 compared to 24.2% in 2020. The increase in ETR is mainly related to an increase in the projected proportion of taxable income to total income as per management’s projections for the year 2021.

Business Segments

OFG 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 OFG’s organization, nature of its products, distribution channels and economic characteristics of its services were also considered in the determination of the reportable segments. OFG 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. OFG’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 six-month periods ended June 30, 2021 and 2020.

	Quarter Ended June 30, 2021
				Wealth				Total Major				Consolidated
	Banking			Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	110,452	$	6	$	3,005	$	113,463	$	-	$	113,463
Interest expense		(10,712)		-		(494)		(11,206)		-		(11,206)
Net interest income		99,740		6		2,511		102,257		-		102,257
Recapture of credit losses		7,737		-		568		8,305		-		8,305
Non-interest income		24,209		7,974		8		32,191		-		32,191
Non-interest expenses		(76,623)		(5,015)		(1,038)		(82,676)		-		(82,676)
Intersegment revenue		545		-		-		545		(545)		-
Intersegment expenses		-		(302)		(243)		(545)		545		-
Income before income taxes	$	55,608	$	2,663		1,806	$	60,077	$	-	$	60,077
Income tax expense		19,239		-		11		19,250		-		19,250
Net income	$	36,369	$	2,663	$	1,795	$	40,827	$	-	$	40,827
Total assets	$	8,271,348	$	31,165	$	3,232,968	$	11,535,481	$	(1,073,668)	$	10,461,813


	Six-Month Period Ended June 30, 2021
				Wealth				Total Major				Consolidated
	Banking			Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	218,688	$	18	$	5,739	$	224,445	$	-	$	224,445
Interest expense		(22,848)		-		(1,136)		(23,984)		-		(23,984)
Net interest income		195,840		18		4,603		200,461		-		200,461
Recapture of credit losses		1,149		-		832		1,981		-		1,981
Non-interest income		47,076		15,505		17		62,598		-		62,598
Non-interest expenses		(150,497)		(7,844)		(2,001)		(160,342)		-		(160,342)
Intersegment revenue		1,098		-		-		1,098		(1,098)		-
Intersegment expenses		-		(593)		(505)		(1,098)		1,098		-
Income before income taxes	$	94,666	$	7,086		2,946	$	104,698	$	-	$	104,698
Income tax expense		33,475		-		23		33,498		-		33,498
Net income	$	61,191	$	7,086	$	2,923	$	71,200	$	-	$	71,200
Total assets	$	8,271,348	$	31,165	$	3,232,968	$	11,535,481	$	(1,073,668)	$	10,461,813

	Quarter Ended June 30, 2020
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	119,722	$	14	$	1,956	$	121,692	$	-	$	121,692
Interest expense		(14,326)		-		(2,306)		(16,632)		-		(16,632)
Net interest income		105,396		14		(350)		105,060		-		105,060
Provision for loan and lease losses		(16,211)		-		(1,485)		(17,696)		-		(17,696)
Non-interest income		20,811		6,391		(50)		27,152		-		27,152
Non-interest expenses		(78,402)		(5,957)		(1,122)		(85,481)		-		(85,481)
Intersegment revenue		694		-		-		694		(694)		-
Intersegment expenses		-		(201)		(493)		(694)		694		-
Income before income taxes	$	32,288	$	247	$	(3,500)	$	29,035	$	-	$	29,035
Income tax expense		5,316		3,201		(1,269)		7,248		-		7,248
Net income	$	26,972	$	(2,954)	$	(2,231)	$	21,787	$	-	$	21,787
Total assets	$	9,462,407	$	30,214	$	1,524,913	$	11,017,534	$	(1,084,815)	$	9,932,719

	Six-Month Period Ended June 30, 2020
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	239,101	$	32	$	6,256	$	245,389	$	-	$	245,389
Interest expense		(30,215)		-		(5,013)		(35,228)		-		(35,228)
Net interest income		208,886		32		1,243		210,161		-		210,161
Provision for loan and lease losses		(63,334)		-		(1,493)		(64,827)		-		(64,827)
Non-interest income		40,355		13,766		4,481		58,602		-		58,602
Non-interest expenses		(160,955)		(9,681)		(2,167)		(172,803)		-		(172,803)
Intersegment revenue		1,151		-		-		1,151		(694)		457
Intersegment expenses		-		(355)		(796)		(1,151)		694		(457)
Income before income taxes	$	26,103	$	3,762	$	1,268	$	31,133	$	-	$	31,133
Income tax expense		2,997		4,519		29		7,545		-		7,545
Net income	$	23,106	$	(757)	$	1,239	$	23,588	$	-	$	23,588
Total assets	$	9,462,407	$	30,214	$	1,524,913	$	11,017,534	$	(1,084,815)	$	9,932,719

Comparison of quarters ended June 30, 2021 and 2020

Banking

OFG's banking segment net income before taxes increased $23.3 million from $32.3 million to income of $55.6 million, mainly reflecting:

 Decrease in provision for credit losses by $23.9 million, mainly due to prior year quarter $5.0 million provision to incorporate changes in the macro-economic scenario and qualitative adjustments as a result of the Covid-19 pandemic and the current quarter $10.4 million provision release as continued improvement in asset quality show rates for net charge offs and delinquency at their lowest levels in the last five quarters;

 Lower interest expense from deposits by $3.6 million, mainly related to pricing changes implemented during fourth quarter of 2020 and to the maturity and cancelation of higher cost time and brokered deposits and migration of these time deposits to checking and savings accounts at lower costs; and

 An increase of $4.6 million in banking service revenues, mainly from higher transaction volume in electronic banking.

Offset by:

 Lower interest income from loans by $8.5 million, reflecting lower balances in the mortgage and commercial PCD portfolios and the effect of Federal Reserve Board’s rate cuts on variable rate commercial loans offset by interest income of $2.0 million from unamortized yield for $140.6 million of forgiven PPP loans.

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 increased $2.4 million, mainly from a decrease in claims and settlements accruals.

Treasury

Treasury segment net income before taxes increased by $5.3 million, mainly reflecting:

 Lower interest expenses in borrowings by $1.8 million, reflecting the maturity and early extinguishment of repurchase agreements during 2020; and

 Decrease in provision for credit losses in US commercial loans by $2.1 million, mainly due asset quality improvements during the current period.

Comparison of six-month periods ended June 30, 2021 and 2020

Banking

OFG's banking segment net income before taxes increased $68.6 million from $26.1 million to $94.7 million, mainly reflecting:

 Decrease in provision for credit losses by $64.5 million, mainly due to prior year quarter $39.1 million provision to incorporate changes in the macro-economic scenario and qualitative adjustments as a result of the Covid-19 pandemic and the current year release of provision due to asset quality improvements as reflected in charge-off and delinquency rates;

 Lower interest expense from deposits by $7.4 million, mainly related to pricing changes implemented during fourth quarter of 2020 and to the maturity and cancelation of higher cost time and brokered deposits and migration of these time deposits to checking and savings accounts at lower costs;

 An increase of $5.4 million in banking service revenues, mainly from higher transaction volume in electronic banking;

 An increase of $3.8 million in mortgage-banking activities from higher mortgage-servicing rights valuation and gains on loans sold; and

 Decrease in non-interest expenses by $10.5 million mainly in compensation and employee benefits, foreclosed real estate and other repossessed assets expenses, merger and restructuring, and insurance expenses.

Partially offset by:

 Lower interest income from loans by $16.7 million, reflecting lower balances in the mortgage and commercial PCD portfolios and the effect of Federal Reserve Board’s rate cuts on variable rate commercial loans offset by interest income of $3.6 million from unamortized yield for $240 million of forgiven PPP loans.

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 increased $3.3 million, mainly from a decrease in claims and settlements accruals.

Treasury

Treasury segment net income before taxes increased by $1.7 million, mainly reflecting:

 Lower interest expenses in borrowings by $3.8 million, from the maturity and early extinguishment of repurchase agreements during 2020; and

 Decrease in provision for credit losses in US commercial loans by $2.3 million, mainly due asset quality improvements during the current period.

Partially offset by:

 A gain of $4.7 million on the sales of securities recorded in prior period.

ANALYSIS OF FINANCIAL CONDITION

Assets Owned

At ##D<QTDL>, 2021, OFG’s total assets amounted to $10.462 billion representing an increase of 6.5%, when compared to $9.826 billion at December 31, 2020. Cash and due from banks and investments portfolios increased by $612.8 million and $184.8 million, respectively, while loans decreased by $147.2 million.

Cash and cash equivalents of $2.768 billion increased by $613.3 million primarily because of the influx of both commercial and retail deposits from increased liquidity in the economy as a result of government stimulus programs.

OFG’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 ##D<QTDL>, 2021, OFG’s loan portfolio decreased by 2.26% mainly due to loan portfolios run-off. PCD loan portfolio, excluding allowance for credits losses, decreased $166.9 million to $1.605 billion at ##D<QTDL>, 2021. This decrease was offset by loan production in the six-month period of 2021 of $1.201 billion, compared to $786.8 million in the year ago period, driven by mortgage and commercial lending, including $159.0 million PPP loan originations, which reflected an increase in our Non-PCD gross portfolio of $2.9 million when compared to $4.890 billion at December 31, 2020.

Financial Assets Managed

OFG’s financial assets include those managed by OFG’s trust division, retirement plan administration subsidiary, and assets gathered by its broker-dealer and insurance subsidiaries. OFG’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 manages private retirement plans. At ##D<QTDL>, 2021, the total assets managed by OFG’s trust division and retirement plan administration subsidiary amounted to $3.686 billion, compared to $3.476 billion at December 31, 2020. OFG’s broker-dealer subsidiary 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 ##D<QTDL>, 2021, total assets gathered by the broker-dealer

and insurance agency subsidiaries from their customers’ investment accounts amounted to $2.380 billion, compared to $2.474 billion at December 31, 2020.

Goodwill

OFG’s goodwill is not amortized to expense but is tested at least annually for impairment. A quantitative annual impairment test is not required if, based on a qualitative analysis, OFG determines that the existence of events and circumstances indicate that it is more likely than not that goodwill is not impaired. OFG completes its annual goodwill impairment test as of October 31 of each year. OFG 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.

As of ##D<QTDL>, 2021, OFG had $86.1 million of goodwill allocated as follows: $84.1 million to the banking segment and $2.0 million to the wealth management segment. Please refer to Note 9 Goodwill and Other Intangible Assets for more information on the annual goodwill impairment test.

TABLE 4 - ASSETS SUMMARY AND COMPOSITION

	June 30		December 31,		Variance
	2021		2020		%
	(In thousands)
Investments:
FNMA and FHLMC certificates	$	335,217	$	210,949	58.9%
Obligations of US government-sponsored agencies		1,407		1,606	-12.4%
US Treasury securities		10,910		10,983	-0.7%
CMOs issued by US government-sponsored agencies		31,308		39,214	-20.2%
GNMA certificates		245,627		182,772	34.4%
FHLB stock		7,541		8,278	-8.9%
Other debt securities		2,288		914	150.3%
Other investments		9,197		3,984	130.8%
Total investments		643,495		458,700	40.3%
Loans		6,354,040		6,501,259	-2.3%
Total investments and loans		6,997,535		6,959,959	0.5%
Other assets:
Cash and due from banks (including restricted cash)		2,756,487		2,143,669	28.6%
Money market investments		11,206		11,908	-5.9%
Foreclosed real estate		15,093		11,596	30.2%
Accrued interest receivable		59,850		65,547	-8.7%
Deferred tax asset, net		144,799		162,478	-10.9%
Premises and equipment, net		85,993		83,786	2.6%
Servicing assets		47,712		47,295	0.9%
Goodwill		86,069		86,069	0.0%
Operating lease right-of-use assets		32,621		31,383	3.9%
Other intangible assets		40,995		45,896	-10.7%
Other assets and customers' liability on acceptances		183,453		176,425	4.0%
Total other assets		3,464,278		2,866,052	20.9%
Total assets	$	10,461,813	$	9,826,011	6.5%
Investment portfolio composition:
FNMA and FHLMC certificates		52.1%		46.0%
Obligations of US government-sponsored agencies		0.2%		0.4%
US Treasury securities		1.7%		2.4%
CMOs issued by US government-sponsored agencies		4.9%		8.5%
GNMA certificates		38.2%		39.8%
FHLB stock		1.2%		1.8%
Other debt securities and other investments		1.7%		1.1%
		100.0%		100.0%

TABLE 5 - LOAN PORTFOLIO COMPOSITON

	June 30,		December 31,
	2021		2020
	(In thousands)
Loans held for investment:
Commercial	$	2,393,170	$	2,402,010
Mortgage		2,084,442		2,283,375
Consumer		382,456		414,946
Auto		1,638,024		1,561,802
		6,498,092		6,662,133
Allowance for credit losses		(191,717)		(204,809)
Total loans held for investment		6,306,375		6,457,324
Mortgage loans held for sale		37,885		41,654
Other loans held for sale		9,780		2,281
Total loans, net	$	6,354,040	$	6,501,259

OFG’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 $6.354 billion at June 30, 2021 and $6.501 billion at December 31, 2020. OFG’s loans held-for-investment portfolio composition and trends were as follows:

 Commercial loan portfolio amounted to $2.393 billion (36.8% of the gross loan portfolio) compared to $2.402 billion (36.1% of the gross loan portfolio) at December 31, 2020. Commercial production, excluding PPP loan production, increased 144.2%, or $193.7 million, and 93.9% or $221.1 million to $327.9 million and $456.6 million in the quarter and six-month period ended June 30, 2021, respectively, from $134.3 and $235.5 million for the same periods in 2020. PPP loan production decreased $253.7 million and $127.4 million in quarter and six-months period ended June 30, 2021, respectively, from $286.4 million and $286.4 million for the same periods in 2020, as PPP program was initially launched in the second quarter of 2020.

 Mortgage loan portfolio amounted to $2.084 billion (32.1% of the gross loan portfolio) compared to $2.283 billion (34.3% of the gross originated loan portfolio) at December 31, 2020. Mortgage loan production totaled $103.8 million and $199.7 million for the quarter and six-month period ended June 30, 2021, respectively, which represents an increase of 337.3% and 264.8% from $23.7 million and $54.7 million for the same periods in 2020. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to $28.1 million and $56.2 million at June 30, 2021 and December 31, 2020, 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 $382.5 million (5.9% of the gross loan portfolio) compared to $414.9 million (6.2% of the gross loan portfolio) at December 31, 2020. Consumer loan production increased 167.3% to $38.0 million and 22.6% to $65.5 million for the quarter and six-month period ended June 30, 2021, respectively, from $14.2 million and $53.4 million for the same periods in 2020.

 Auto and leasing portfolio amounted to $1.638 billion (25.2% of the gross loan portfolio) compared to $1.562 billion (23.4% of the gross loan portfolio) at December 31, 2020. Auto production increased 261.2% to $171.1 million and 104.5% to $320.5 million in the quarter and six-month period ended June 30, 2021, respectively, compared to $47.4 million and 156.7 million for the same periods in 2020.

The following table includes the maturities of OFG'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 a loan to a public corporation acquired in the Scotiabank 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 $255.0 million at June 30, 2021.

TABLE 6 - PUERTO RICO GOVERNMENT RELATED LOANS AND SECURITIES

June 30, 2021
						Maturity
		Carrying Value		Less than 1 Year		1 to 3 Years		More than 3 Years
Loans:	(In thousands)
Public corporations	$	1,102	$	1,102	$	-	$	-
Municipalities		98,176		79		18,515		79,582
Total	$	99,278	$	1,181	$	18,515	$	79,582

At June 30, 2021, OFG has $99.3 million of direct credit exposure to the Puerto Rico government, a $211 thousand increase from December 31, 2020.

Credit Risk Management

Allowance for Credit Losses

OFG maintains an allowance for credit losses at a level that management considers adequate to provide for lifetime expected losses based upon an evaluation of known and inherent risks and reasonable and supportable forecasts. OFG’s allowance for credit losses (“ACL”) policy provides for a detailed quarterly analysis of expected credit losses.

On January 1, 2020, OFG adopted the new CECL accounting standard that requires the measurement of the allowance for credit losses to be based on management’s best estimate of future expected credit losses over the life of the Company’s relevant financial assets

The allowance for credit losses for the six-month period ended June 30, 2020 included a $39.1 million provision to incorporate changes in the macro-economic scenario and qualitative adjustments as a result of the Covid-19 pandemic. The allowance for credit losses for the six-month period ended June 30, 2021 included a $10.2 million provision release of last year’s Covid-19 related loan reserves and the effect of improvements in asset quality during the period.

Tables 7 through 9 set forth an analysis of activity in the allowance for credit losses for the quarters and six-month periods ended June 30, 2021 and 2020 and present selected credit loss statistics for June 30, 2021 and December 31, 2020. 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.

Non-performing Assets

OFG’s non-performing assets include non-performing loans and foreclosed real estate (see Tables 10 and 11). At June 30, 2021, OFG had $127.5 million of non-accrual loans, including $36.6 million PCD loans accounted for under ASU 2016-13, compared to $147.9 million at December 31, 2020.

At June 30, 2021 and December 31, 2020, loans whose terms have been extended and which are classified as troubled-debt restructurings that are not included in non-performing assets amounted to $122.3 million and $109.2 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 June 30, 2021, OFG’s non-performing assets decreased by 7% to $154.1 million (1.47% of total assets) from $165.6 million (1.69% of total assets) at December 31, 2020. Foreclosed real estate and other repossessed assets amounting to $15.1 million and $1.7 million, respectively, at June 30, 2021, increased from $11.6 million and $1.8 million, respectively, at December 31, 2020, recorded at fair value. OFG does not expect non-performing loans to result in significantly higher losses. At June 30, 2021, the allowance coverage ratio to non-performing loans was 139.7% (134.6% at December 31, 2020).

Upon adoption of CECL, OFG 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.

OFG 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, OFG 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 June 30, 2021, OFG’s non-performing commercial loans amounted to $87.3 million (63.58 % of OFG’s non-performing loans), a 4.6% increase from $83.4 million at December 31, 2020 (54.8% of OFG’s non-performing loans). 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 June 30, 2021, OFG’s non-performing mortgage loans totaled $39.9 million (29.1% of OFG’s non-performing loans), a 7.2% decrease from $43.0 million (28.3% of OFG’s non-performing loans) at December 31, 2020. 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.

Consumer loans —At June 30, 2021, OFG’s non-performing consumer loans amounted to $2.5 million (1.8% of OFG’s non-performing loans), a 50.6% decrease from $5.0 million at December 31, 2020 (3.3% of OFG’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 June 30, 2021, OFG’s non-performing auto loans and leases amounted to $7.6 million (5.5% of OFG’s total non-performing loans), a decrease of 63.4% from $20.8 million at December 31, 2020 (13.6% of OFG’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.

OFG has two mortgage loan modification programs. These are the Loss Mitigation Program and the Non-Conforming Mortgage Loan Program. Both programs are intended to help responsible homeowners to remain in their homes and avoid foreclosure, while also reducing OFG’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 OFG. 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 of foreclosure.

The Non-Conforming Mortgage Loan Program is for non-conforming mortgages, including balloon payment, interest only/interest first, variable interest rate, adjustable interest rate and other qualified loans. Non-conforming 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 OFG’s current credit and underwriting guidelines. OFG 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 our 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 OFG grants a concession for legal or economic reasons due to the debtor’s financial difficulties.

TABLE 7 - ALLOWANCE FOR CREDIT LOSSES BREAKDOWN

	June 30,		December 31,		Variance
	2021		2020		%
	(In thousands)
Allowance for credit losses:
Non-PCD:
Commercial	$	43,523	$	45,779		-4.9%
Mortgage		16,368		19,687		-16.9%
Consumer		19,065		25,253		-24.5%
Auto and leases		69,358		70,296		-1.3%
Total allowance for credit losses	$	148,314	$	161,015	$	-7.9%

PCD:
Commercial	$	12,756		16,405		-22.2%
Mortgage		30,108		26,389		14.1%
Consumer		38		57		-33.3%
Auto and leases		501		943		-46.9%
Total allowance for credit losses	$	43,403		43,794		-0.9%

Allowance for credit losses summary
Commercial	$	56,279	$	62,184		-9.5%
Mortgage		46,476		46,076		0.9%
Consumer		19,103		25,310		-24.5%
Auto and leases		69,859		71,239		-1.9%
Total allowance for credit losses	$	191,717	$	204,809	$	-6.4%

Allowance composition:
Commercial		29.4%		30.4%
Mortgage		24.2%		22.5%
Consumer		10.0%		12.4%
Auto and leases		36.4%		34.8%
		100.0%		100.0%

Allowance coverage ratio at end of period:
Commercial		2.4%		2.6%		-9.3%
Mortgage		2.2%		2.0%		10.4%
Consumer		5.0%		6.1%		-18.2%
Auto and leases		4.3%		4.6%		-6.6%
		2.95%		3.07%		-3.9%

Allowance coverage ratio to non-performing loans:
Commercial		64.5%		74.5%		-13.5%
Mortgage		116.4%		107.2%		8.6%
Consumer		774.7%		507.4%		52.7%
Auto and leases		918.5%		343.1%		167.7%
		139.7%		134.6%		3.8%

TABLE 8 - ALLOWANCE FOR CREDIT LOSSES SUMMARY


	Quarter Ended June 30,					Variance	Six-Month Period Ended June 30,					Variance
	2021		2020		%		2021		2020		%
	(In thousands)
Allowance for credit losses:
Balance at beginning of period	$	201,973	$	230,755		-12.5%	$	204,809	$	116,539		75.7%
Impact of ASC 326 adoption		-		-		0.0%		-		89,720		-100.0%
Provision for credit losses		(8,138)		17,696		-146.0%		(1,870)		66,226		-102.8%
Charge-offs		(10,962)		(21,363)		-48.7%		(28,481)		(52,926)		-46.2%
Recoveries		8,844		5,613		57.6%		17,259		13,142		31.3%
Balance at end of period	$	191,717	$	232,701		-17.6%	$	191,717	$	232,701	$	-17.6%

TABLE 9 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES

	Quarter Ended June 30,				Variance		Six-Month Period Ended June 30,				Variance
		2021	2020		%			2021	2020		%
	(Dollars in thousands)
Non-PCD:
Mortgage
Charge-offs	$	(268)	$	(185)		44.9%	$	(1,056)	$	(603)		75.1%
Recoveries		193		9		2044.4%		808		258		213.2%
Total		(75)		(176)		-57.4%		(248)		(345)		-28.1%
Commercial
Charge-offs		(653)		(497)		31.4%		(720)		(4,268)		-83.1%
Recoveries		996		631		57.8%		1,425		2,153		-33.8%
Total		343		134		156.0%		705		(2,115)		-133.3%
Consumer
Charge-offs		(2,897)		(4,187)		-30.8%		(7,366)		(10,202)		-27.8%
Recoveries		697		443		57.3%		1,263		1,087		16.2%
Total		(2,200)		(3,744)		-41.2%		(6,103)		(9,115)		-33.0%
Auto and leases
Charge-offs		(5,170)		(13,300)		-61.1%		(14,253)		(26,353)		-45.9%
Recoveries		5,997		3,405		76.1%		11,814		7,616		55.1%
Total		827		(9,895)		-108.4%		(2,439)		(18,737)		-87.0%

PCD:
Mortgage
Charge-offs	$	(1,742)	$	(2,178)		-20.0%	$	(4,332)	$	(7,321)		-40.8%
Recoveries		184		580		-68.3%		330		702		-53.0%
Total		(1,558)		(1,598)		-2.5%		(4,002)		(6,619)		-39.5%
Commercial
Charge-offs		(6)		(386)		-98.4%		(50)		(2,743)		-98.2%
Recoveries		430		286		50.3%		867		661		31.2%
Total		424		(100)		-524.0%		817		(2,082)		-139.2%
Consumer
Charge-offs		-		(30)		-100.0%		(22)		(461)		-95.2%
Recoveries		33		30		10.0%		55		93		-40.9%
Total		33		-		100.0%		33		(368)		-109.0%
Auto and leases
Charge-offs		(226)		(600)		-62.3%		(682)		(975)		-30.1%
Recoveries		314		229		37.1%		697		572		21.9%
Total		88		(371)		-123.7%		15		(403)		-103.7%

Total charge-offs		(10,962)		(21,363)		-48.7%		(28,481)		(52,926)		-46.2%
Total recoveries		8,844		5,613		57.6%		17,259		13,142		31.3%
Net charge-offs	$	(2,118)	$	(15,750)		-86.6%	$	(11,222)	$	(39,784)		-71.8%

Net credit losses to average loans outstanding:

Mortgage		0.30%		0.30%	1.42%		0.39%		0.58%	-33.55%
Commercial		-0.13%		-0.01%	2193.89%		-0.13%		0.36%	-135.33%
Consumer		2.17%		3.12%	-30.61%		2.98%		3.89%	-23.18%
Auto and leases		-0.23%		2.72%	-108.37%		0.30%		2.51%	-87.87%
Total		0.13%		0.92%	-86.06%		0.34%		1.18%	-71.16%
Recoveries to charge-offs		80.68%		26.27%	207.06%		60.60%		24.83%	144.04%
Average Loans Held for Investment
Mortgage	$	2,147,927	$	2,366,600	-9.2%	$	2,195,540	$	2,390,643	-8.2%
Commercial		2,443,407		2,484,573	-1.7%		2,424,383		2,362,096	2.6%
Consumer		400,365		479,957	-16.6%		406,743		488,167	-16.7%
Auto and leases		1,606,870		1,509,521	6.4%		1,590,336		1,523,356	4.4%
Total	$	6,598,569	$	6,840,651	-3.5%	$	6,617,002	$	6,764,262	-2.2%

TABLE 10 — NON-PERFORMING ASSETS

	June 30,		December 31,		Variance
	2021		2020		(%)
	(Dollars in thousands)
Non-performing assets:
Non-PCD
Non-accruing loans
Troubled-Debt Restructuring loans	$	26,276	$	28,297	-7.1%
Other loans		64,657		82,122	-21.3%
Accruing loans
Troubled-Debt Restructuring loans		8,184		3,411	139.9%
Other loans		1,586		889	78.4%
Total	$	100,703	$	114,719	-12.2%
PCD		36,569		37,475	-2.4%
Total non-performing loans	$	137,272	$	152,194	-9.8%
Foreclosed real estate		15,093		11,596	30.2%
Other repossessed assets		1,725		1,816	-5.0%
	$	154,090	$	165,606	-7.0%

Non-performing assets to total assets		1.47%		1.69%	-13.0%
Non-performing assets to total capital		14.27%		15.25%	-6.4%

	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2021		2020		2021		2020
	(In thousands)				(In thousands)
Interest that would have been recorded in the period if the loans had not been classified as non-accruing loans	$	694	$	686	$	1,274	$	1,102

TABLE 11 - NON-PERFORMING LOANS

	June 30,		December 31,		Variance
	2021		2020		%
	(Dollars in thousands)
Non-performing loans
Non-PCD
Commercial	$	52,773	$	46,967	12.4%
Mortgage		37,858		41,999	-9.9%
Consumer		2,466		4,987	-50.6%
Auto and leases		7,606		20,766	-63.4%
Total	$	100,703	$	114,719	-12.2%

PCD
Commercial	$	34,502	$	36,471	-5.4%
Mortgage		2,067		1,003	100.0%
Consumer		-		1	-100.0%
Total	$	36,569	$	37,475	-2.4%
Total non-performing loans	$	137,272	$	152,194	-9.8%

Non-performing loans composition percentages:
Commercial		63.6%		54.8%
Mortgage		29.1%		28.3%
Consumer		1.8%		3.3%
Auto and leases		5.5%		13.6%
		100.0%		100.0%

Non-performing loans to:
Total loans		2.1%		2.3%	-7.5%
Total assets		1.3%		1.6%	-15.5%
Total capital		12.7%		14.0%	-9.3%

Non-performing loans with partial charge-offs to:
Total loans		0.6%		0.6%	5.3%
Non-performing loans		28.6%		24.8%	15.2%

Other non-performing loans ratios:
Charge-off rate on non-performing loans to non-performing loans on which charge-offs have been taken		134.2%		151.3%	-11.3%
Allowance for credit losses to non-performing loans on which no charge-offs have been taken		195.6%		179.0%	9.3%

100

TABLE 12 - LIABILITIES SUMMARY AND COMPOSITION
	June 30,		December 31,		Variance
	2021		2020		%
	(Dollars in thousands)
Deposits:
Non-interest bearing deposits	$	2,678,800	$	2,259,048	18.6%
NOW accounts		2,650,592		2,354,194	12.6%
Savings and money market accounts		2,285,553		1,944,426	17.5%
Certificates of deposit		1,474,549		1,856,400	-20.6%
Total deposits		9,089,494		8,414,068	8.0%
Accrued interest payable		998		1,572	-36.5%
Total deposits and accrued interest payable		9,090,492		8,415,640	8.0%
Borrowings:
Advances from FHLB		63,569		65,561	-3.0%
Subordinated capital notes		36,083		36,083	0.0%
Other term notes		298		707	-57.9%
Total borrowings		99,950		102,351	-2.3%
Total deposits and borrowings		9,190,442		8,517,991	7.9%

Other Liabilities:
Derivative liabilities		1,293		1,712	-24.5%
Acceptances outstanding		27,703		33,349	-16.9%
Lease liability		34,052		32,566	4.6%
Other liabilities		128,326		154,418	-16.9%
Total liabilities	$	9,381,816	$	8,740,036	7.3%
Deposits portfolio composition percentages:
Non-interest bearing deposits		29.5%		26.8%
NOW accounts		29.2%		28.0%
Savings and money market accounts		25.1%		23.1%
Certificates of deposit		16.2%		22.1%
		100.0%		100.0%
Borrowings portfolio composition percentages:
Advances from FHLB		63.6%		64.1%
Other term notes		0.3%		0.7%
Subordinated capital notes		36.1%		35.2%
		100.0%		100.0%
Securities sold under agreements to repurchase (excluding accrued interest)
Daily average outstanding balance	$	-	$	50,492
Maximum outstanding balance at any month-end	$	-	$	190,000

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Liabilities and Funding Sources

As shown in Table 12 above, at June 30, 2021, OFG’s total liabilities were $9.382 billion, 7.3% more than the $8.740 billion reported at December 31, 2020. Deposits and borrowings, OFG’s funding sources, amounted to $9.190 billion at June 30, 2021 versus $8.518 billion at December 31, 2020, a 7.9% increase, mainly from higher core deposits by $1.081 billion, while time deposits, brokered deposits and borrowings decreased by $368.8 million, $37.7 million and $2.4 million, respectively.

At June 30, 2021, deposits represented 99% and borrowings represented 1% of interest-bearing liabilities. At June 30, 2021, deposits, the largest category of OFG’s interest-bearing liabilities, were $9.090 billion, an increase of 8% from $8.416 billion at December 31, 2020, reflecting higher commercial deposits from existing and new clients and higher retail deposits as a result of increased liquidity in the economy from government stimulus.

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

Stockholders’ Equity

At June 30, 2021, OFG’s total stockholders’ equity was $1.080 billion, a 0.6% decrease when compared to $1.086 billion at December 31, 2020. This decrease in stockholders’ equity reflects decrease in preferred stock of $68.0 million due to the Series A and Series B preferred stock redemptions and decrease in accumulated other comprehensive income, net of tax, of $3.4 million offset by, increase in legal surplus of $7.0 million, in retained earnings of $51.9 million, in treasury stock of $2.2 million and additional paid-in capital of $4.3 million. Book value per share was $20.59 at June 30, 2021 compared to $19.54 at December 31, 2020.

From December 31, 2020 to June 30, 2021, tangible common equity to tangible total assets increased from 9.00% to 9.06%, leverage capital ratio decreased from 10.30% to 9.84%, common equity tier 1 capital ratio increased from 13.08% to 13.95%, tier 1 risk-based capital ratio decreased from 14.78% to 14.70%, and total risk-based capital ratio decreased from 16.04% to 15.95%, as a result of the preferred stock redemptions.

Regulatory Capital

OFG and the Bank are subject to regulatory capital requirements established by the Federal Reserve Board and the FDIC. The current risk-based capital standards applicable to OFG 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 June 30, 2021, the capital ratios of OFG 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, OFG will add back to common equity tier 1 (“CET1”) capital 100% of the initial adoption impact of CECL plus 25% 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 a three-year period.

In July 2019, the federal banking regulatory 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 the regulatory capital treatment for mortgage servicing assets (“MSAs”) and certain deferred tax assets arising from temporary differences (temporary difference DTAs). It increases CET1 capital threshold deductions from 10% to 25% and removes the aggregate 15% CET1 threshold deduction. However, it retains the 250% risk weight applicable to non-deducted amounts of MSAs and temporary difference DTAs. On January 1, 2020, the Company elected to early implement the simplifications to the capital rule.

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On November 13, 2019, the agencies jointly issued a final rule to simplify regulatory capital requirements for qualifying community banking organizations, as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act. Under the final rule, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9 percent, will be eligible to opt into the community bank leverage ratio framework (qualifying community banking organizations). Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than 9 percent will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules be considered to have met the well-capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act. The final rule was effective on January 1, 2020. Even though OFG qualified for this ratio, the Company elected to opt-out.

The risk-based capital ratios presented in Table 13, which include common equity tier 1, tier 1 capital, total capital and leverage capital as of June 30, 2021 and December 31, 2020, 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 OFG’s consolidated capital ratios under the Basel III capital rules at June 30, 2021 and December 31, 2020:

TABLE 13 — CAPITAL, DIVIDENDS AND STOCK DATA
	June 30,		December 31,		Variance
	2021		2020		%
	(Dollars in thousands, except per share data)
Capital data:
Stockholders’ equity	$	1,079,997	$	1,085,975	-0.6%
Regulatory Capital Ratios data:
Common equity tier 1 capital ratio		13.95%		13.08%	6.7%
Minimum common equity tier 1 capital ratio required		4.50%		4.50%	0.0%
Actual common equity tier 1 capital	$	957,238		894,075	7.1%
Minimum common equity tier 1 capital required	$	308,785		307,703	0.4%
Minimum capital conservation buffer required (2.5%)	$	171,547		170,946	0.4%
Excess over regulatory requirement	$	476,906		415,426	14.8%
Risk-weighted assets	$	6,861,890		6,837,846	0.4%
Tier 1 risk-based capital ratio		14.70%		14.78%	-0.6%
Minimum tier 1 risk-based capital ratio required		6.00%		6.00%	0.0%
Actual tier 1 risk-based capital	$	1,008,785	$	1,010,945	-0.2%
Minimum tier 1 risk-based capital required	$	411,713	$	410,271	0.4%
Minimum capital conservation buffer required (2.5%)	$	171,547		170,946	0.4%
Excess over regulatory requirement	$	425,525	$	429,728	-1.0%
Risk-weighted assets	$	6,861,890	$	6,837,846	0.4%
Total risk-based capital ratio		15.95%		16.04%	-0.5%
Minimum total risk-based capital ratio required		8.00%		8.00%	0.0%
Actual total risk-based capital	$	1,094,786	$	1,096,766	-0.2%
Minimum total risk-based capital required	$	548,951	$	547,028	0.4%
Minimum capital conservation buffer required (2.5%)	$	171,547		170,946	0.4%
Excess over regulatory requirement	$	374,288	$	378,972	-1.2%
Risk-weighted assets	$	6,861,890	$	6,837,846	0.4%
Leverage capital ratio		9.84%		10.30%	-4.5%
Minimum leverage capital ratio required		4.00%		4.00%	0.0%
Actual tier 1 capital	$	1,008,785	$	1,010,945	-0.2%
Minimum tier 1 capital required	$	409,975	$	392,424	4.5%
Excess over regulatory requirement	$	598,810	$	618,521	-3.2%
Tangible common equity to total assets		8.95%		8.88%	0.8%
Tangible common equity to risk-weighted assets		13.65%		12.75%	7.1%
Total equity to total assets		10.32%		11.05%	-6.6%
Total equity to risk-weighted assets		15.74%		15.88%	-0.9%
Stock data:
Outstanding common shares		51,660,507		51,387,071	0.5%
Book value per common share	$	20.59	$	19.54	5.3%
Tangible book value per common share	$	18.13	$	16.97	6.8%
Market price at end of period	$	22.12	$	18.54	19.3%
Market capitalization at end of period	$	1,142,730	$	952,716	19.9%

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The following table presents a reconciliation of OFG’s total stockholders’ equity to tangible common equity and total assets to tangible assets at June 30, 2021 and December 31, 2020:

	June 30,		December 31,
	2021		2020
	(In thousands, except share or per share information)
Total stockholders' equity	$	1,079,997	$	1,085,975
Preferred stock		(24,000)		(92,000)
Preferred stock issuance costs		7,453		10,130
Goodwill		(86,069)		(86,069)
Core deposit intangible		(31,306)		(34,983)
Customer relationship intangible		(9,499)		(10,629)
Other intangibles		(190)		(284)
Total tangible common equity (non-GAAP)	$	936,386	$	872,140
Total assets		10,461,813		9,826,011
Goodwill		(86,069)		(86,069)
Core deposit intangible		(31,306)		(34,983)
Customer relationship intangible		(9,499)		(10,629)
Other intangibles		(190)		(284)
Total tangible assets	$	10,334,749	$	9,694,046
Tangible common equity to tangible assets		9.06%		9.00%
Common shares outstanding at end of period		51,660,507		51,387,071
Tangible book value per common share	$	18.13	$	16.97

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 OFG 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, OFG 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 OFG’s capital adequacy information under the Basel III capital rules:

	June 30,		December 31,		Variance
	2021		2020		%
	(Dollars in thousands)
Risk-based capital:
Common equity tier 1 capital	$	957,238	$	894,075	7.1%
Additional tier 1 capital		51,547		116,870	-55.9%
Tier 1 capital		1,008,785		1,010,945	-0.2%
Additional Tier 2 capital		86,001		85,820	0.2%
Total risk-based capital	$	1,094,786	$	1,096,765	-0.2%
Risk-weighted assets:
Balance sheet items	$	6,320,381	$	6,338,524	-0.3%
Off-balance sheet items		541,509		499,322	8.4%
Total risk-weighted assets	$	6,861,890	$	6,837,846	0.4%
Ratios:
Common equity tier 1 capital (minimum required, including capital conservation buffer - 7%)		13.95%		13.08%	6.7%
Tier 1 capital (minimum required, including capital conservation buffer - 8.5%)		14.70%		14.78%	-0.5%
Total capital (minimum required, including capital conservation buffer - 10.5%)		15.95%		16.04%	-0.6%
Leverage ratio (minimum required - 4%)		9.84%		10.30%	-4.5%
Equity to assets		10.32%		11.05%	-6.6%
Tangible common equity to assets		8.95%		8.88%	0.8%

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The Bank is considered “well capitalized” under the regulatory framework for prompt corrective action. The table below shows the Bank’s regulatory capital ratios at June 30, 2021 and December 31, 2020:


	June 30,		December 31,		Variance
	2021		2020		%
	(Dollars in thousands)
Oriental Bank Regulatory Capital Ratios:
Common Equity Tier 1 Capital to Risk-Weighted Assets		13.33%		14.06%	-5.2%
Actual common equity tier 1 capital	$	907,851	$	956,845	-5.1%
Minimum capital requirement (4.5%)	$	306,589	$	306,206	0.1%
Minimum capital conservation buffer requirement (2.5%)	$	170,327	$	170,114	0.1%
Minimum to be well capitalized (6.5%)	$	442,851	$	442,297	0.1%
Tier 1 Capital to Risk-Weighted Assets		13.33%		14.06%	-5.2%
Actual tier 1 risk-based capital	$	907,851	$	956,845	-5.1%
Minimum capital requirement (6%)	$	408,786	$	408,274	0.1%
Minimum capital conservation buffer requirement (2.5%)	$	170,327	$	170,114	0.1%
Minimum to be well capitalized (8%)	$	545,048	$	544,366	0.1%
Total Capital to Risk-Weighted Assets		14.58%		15.32%	-4.8%
Actual total risk-based capital	$	993,250	$	1,042,255	-4.7%
Minimum capital requirement (8%)	$	545,048	$	544,366	0.1%
Minimum capital conservation buffer requirement (2.5%)	$	170,327	$	170,114	0.1%
Minimum to be well capitalized (10%)	$	681,310	$	680,457	0.1%
Total Tier 1 Capital to Average Total Assets		8.96%		9.81%	-8.7%
Actual tier 1 capital	$	907,851	$	956,845	-5.1%
Minimum capital requirement (4%)	$	405,219	$	390,304	3.8%
Minimum to be well capitalized (5%)	$	506,524	$	487,879	3.8%

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OFG’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG.” At ##D<QTDL>, 2021 and December 31, 2020, OFG’s market capitalization for its outstanding common stock was $1.143 billion ($22.12 per share) and $952.7 million ($18.54 per share), respectively.

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

					Cash
	Price				Dividend
	High		Low		Per share
2021
June 30, 2021	$	25.14	$	21.61	$	0.08
March 31, 2021	$	22.93	$	16.48	$	0.08
2020
December 31, 2020	$	18.54	$	12.59	$	0.07
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

Under OFG’s stock repurchase program in effect at June 30, 2021, it was 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 OFG as treasury shares. In the quarter ended June 30, 2020, OFG repurchased 175,000 shares under this program for a total of $2.2 million, at an average price of $12.69 per share. OFG did not repurchase any shares of its common stock in the quarter ended on June 30, 2020, other than through its publicly announced stock repurchase program. There were no stock repurchases by OFG in the quarter ended on June 30, 2021.

At June 30, 2021, the number of shares that may yet be purchased under such program is estimated at 249,116 and was calculated by dividing the remaining balance of $5.5 million by $22.12 (closing price of OFG's common stock at June 30, 2021).

Impact of Inflation and Changing Prices

The financial statements and related data presented herein (except for certain non-GAAP measures as previously indicated) have been prepared in accordance with GAAP which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.

Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services since such prices are affected by inflation.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Background

OFG’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, the executive Risk and Compliance Team, the executive Credit Risk Team, and the executive Asset/Liability Team (“ALT”). OFG 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 OFG’s business activities are susceptible to risk. Consequently, risk identification and monitoring are essential to risk management. As more fully discussed below, OFG’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. OFG evaluates market risk together with interest rate risk. OFG’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 OFG complies with the guidelines established by policies approved by the Board. The Board has delegated the management of this risk to the ALT which is composed of certain executive officers from the business, treasury and finance areas. One of ALT’s primary goals is to ensure that the market risk assumed by OFG is within the parameters established in such policies.

Interest Rate Risk

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

In executing its responsibilities, ALT 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, OFG 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 OFG 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.

OFG uses a software application to project future movements in OFG’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 OFG 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 June 30, 2021 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	$	35,755	8.72%	$	24,510	4.93%
+ 100 Basis points	$	18,392	4.48%	$	12,721	2.56%
- 50 Basis points	$	754	0.18%	$	207	0.04%

Future net interest income could be affected by OFG’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 OFG’s assets and liabilities, OFG 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 June 30, 2021.

OFG 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. OFG’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 OFG’s gains and losses on the derivative instruments that are linked to the forecasted cash flows of these hedged assets and liabilities. OFG 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 OFG’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 OFG’s interest risk management strategy include interest rate swaps 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 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 OFG the right to enter into interest rate swaps and cap and floor agreements with the writer of the option. In addition, OFG 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 OFG to manage interest rate risk:

Interest rate swaps and wholesale borrowings — OFG 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 OFG’s interest payments on these borrowings. As of June 30, 2021, OFG had $29.4 million in interest rate swaps at an average rate of 2.42% designated as cash flow hedges for $63.5 million in advances from the FHLB-NY that reprice or are being rolled over on a monthly basis. A derivative liability of $1.3 million was recognized at June 30, 2021 related to the valuation of these swaps.

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 OFG is its lending activities. In Puerto Rico, OFG’s principal market, economic conditions have been very challenging for over a decade due to a shrinking population, a protracted economic recession, declining real estate values, 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. Possible future climate changes may increase this risk. 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 OFG's loans may suffer significant damages.

OFG 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. OFG also employs proactive collection and loss mitigation practices.

OFG may also encounter risk of default in relation to its securities portfolio. The securities held by OFG 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.

OFG’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 OFG’s credit risk goals and objectives. Those goals and objectives are set forth in OFG’s Credit Policy as approved by the Board.

In the year 2020, the Covid-19 pandemic negatively impacted economic activity in Puerto Rico, the U.S. and around the world. To provide relief to individuals and businesses in the U.S., the government enacted several economic stimulus packages, including the CARES Act, the Coronavirus Response and Relief Supplemental Appropriations Act, and the American Rescue Plan. The federal banking regulatory agencies also issued interagency guidance to financial institutions working with borrowers affected by Covid-19. Stimulus funds have provided significant liquidity to businesses and individuals, and, during the six-month period ended June 30, 2021, Puerto Rico is experiencing signs of economic revival and asset quality trends continue to improve.

To support our customers, we 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 Recent Developments – Covid-19 Pandemic 2020 of the MD&A in this quarterly report. For information on the accounting for loan modifications related to the Covid-19 pandemic, see Note 1 – Summary of Significant Accounting Policies in the 2020 10-K Annual Report.

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Liquidity Risk

Liquidity risk is the risk of OFG 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. OFG’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.

OFG’s business requires continuous access to various funding sources. While OFG is able to fund its operations through deposits as well as through advances from the FHLB-NY and other alternative sources, OFG’s business may at times need to rely upon other external wholesale funding sources. OFG has selectively reduced its use of certain wholesale funding sources, such as repurchase agreements and brokered deposits. As of June 30, 2021, OFG had $11.0 million in brokered deposits.

Brokered deposits are typically offered through an intermediary to small retail investors. OFG’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, OFG’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. As a result of the increase in core deposits from the Scotiabank Acquisition and organic growth, OFG has been limiting the offering of brokered deposits.

Commitments to extend credit are agreements to lend to customers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates, bear variable interest rate and may require payment of a fee. Since the commitments may expire unexercised, the total commitment amounts do not necessarily represent future cash requirements. OFG evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by OFG upon extension of credit, is based on management’s credit evaluation of the customer. Loan commitments, which represent unused lines of credit, increased to $1.230 billion at June 30, 2021 as compared to $1.134 billion at December 31, 2020, while letters of credit provided to customers increased to $36.8 million as compared to $19.7 million at December 31, 2020. Loans sold with recourse at June 30, 2021 and December 31, 2020 amounted to $128.1 million and $135.3 million, respectively. In addition, at June 30, 2021 and December 31, 2020, OFG maintained other non-credit commitments amounting to $11.4 million and $9.0 million, respectively, primarily for the acquisition of other investments.

Our 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 1% of total loans remaining at June 30, 2021 compared to 30% at June 30, 2020. Even though OFG’s liquidity has been impacted by loan principal and interest payment deferrals that have been 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 OFG for FNMA, OFG 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 OFG 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 OFG 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 OFG, the availability and cost of OFG’s funding sources could be adversely affected. In that event, OFG’s cost of funds may increase, thereby reducing its net interest income, or OFG 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. OFG’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 OFG or market-related events. In the event that such sources of funds are reduced or eliminated, and OFG is not able to replace these on a cost-effective basis, OFG 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 June 30, 2021, OFG had approximately $2.8 billion in unrestricted cash and cash equivalents, $414.2 million in investment securities that are not pledged as collateral, and $734.1 million in borrowing capacity at the FHLB-NY.

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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 OFG are susceptible to operational risk.

OFG 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, OFG 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 OFG’s business operations are functioning within established limits.

OFG 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, OFG 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 and the executive Consumer Compliance Team. OFG 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 Recent Developments – Covid-19 Pandemic 2020 of the MD&A in this quarterly report.

OFG is subject to extensive United States federal and Puerto Rico regulations, and this regulatory scrutiny has been significantly increasing over the last several years. OFG 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. OFG 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 OFG’s business activities and a significant portion of its credit exposure are concentrated in Puerto Rico. As a consequence, OFG’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 OFG’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of OFG’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, OFG’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 OFG 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 OFG to disclose material information otherwise required to be set forth in OFG’s periodic reports.

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Internal Control over Financial Reporting

There have not been any 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 June 30, 2021, 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

OFG and its subsidiaries are defendants in a number of legal proceedings incidental to their business. OFG 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 OFG’s financial condition or results of operations.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors previously disclosed in Oriental’s annual report on Form 10-K for the year ended December 31, 2020. In addition to other information set forth in this report, you should carefully consider the risk factors included in Oriental’s annual report on Form 10-K, as updated by this report or other filings Oriental makes with the SEC under the Exchange Act. Additional risks and uncertainties not presently known to Oriental at this time or that Oriental currently deems immaterial may also adversely affect Oriental’s business, financial condition or results of operations.

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

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibit No. Description of Document:

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

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

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

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

101 The following materials from OFG’s Quarterly Report on Form 10-Q for the quarter ended ##D<QTDL>, 2021, 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: August 6, 2021
	José Rafael Fernández
	Chief Executive Officer

By:	/s/ Maritza Arizmendi	Date: August 6, 2021
	Maritza Arizmendi
	Chief Financial Officer
By:	/s/ Krisen Aguirre Torres	Date: August 6, 2021
	Krisen Aguirre Torres
	Director, Reporting and Accounting Control

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