OFG BANCORP - Quarter Report: 2021 March (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 March 31, 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

7.125% Noncumulative Perpetual Preferred Stock, Series D ($25.00 liquidation preference per share)	OFG.PRD	New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑No ☐

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

Large Accelerated Filer ☑	Accelerated Filer ☐	Non-Accelerated Filer ☐	Smaller Reporting Company ☐
Emerging Growth Company ☐

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

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

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

51,639,240 common shares ($1.00 par value per share) outstanding as of April 30, 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	32
		Note 6 – Foreclosed Real Estate	34
		Note 7 – Servicing Assets	34
		Note 8 – Derivatives	36
		Note 9 – Core Deposit, customer relationship intangible and other intangibles	37
		Note 10 – Accrued Interest Receivable and Other Assets	38
		Note 11 – Deposits and Related Interest	39
		Note 12 – Borrowings and Related Interest	40
		Note 13 – Offsetting of Financial Assets and Liabilities	42
		Note 14 – Income Taxes	42
		Note 15 – Regulatory Capital Requirements	43
		Note 16 – Stockholders’ Equity	46
		Note 17 – Accumulated Other Comprehensive Income	47
		Note 18 – Earnings per Common Share	49
		Note 19 – Guarantees	50
		Note 20 – Commitments and Contingencies	51
		Note 21 – Operating Leases	53
		Note 22 – Fair Value of Financial Instruments	55
		Note 23 – Banking and Financial Service Revenues	61
		Note 24 – Business Segments	63

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		65
		Critical Accounting Policies and Estimates	68
		Financial Highlights of the First Quarter of 2021	69
		Analysis of Results of Operations	71
		Analysis of Financial Condition	79
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		100
Item 4.	Controls and Procedures		104
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings		106
Item 1A.	Risk Factors		106
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		106
Item 3.	Default upon Senior Securities		106
Item 4.	Mine Safety Disclosures		106
Item 5.	Other Information		106
Item 6.	Exhibits		107
Signatures			108

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 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 MARCH 31, 2021 AND DECEMBER 31, 2020

	March 31,		December 31,
	2021		2020
	(In thousands)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	2,396,965	$	2,142,294
Money market investments		11,401		11,908
Total cash and cash equivalents		2,408,366		2,154,202
Restricted cash		1,050		1,375
Investments:
Trading securities, at fair value, with amortized cost of $432 (December 31, 2020 - $432)		23		22
Investment securities available-for-sale, at fair value, with amortized cost of $462,115
(December 31, 2020, amortized cost $432,176); no allowance for credit losses		471,009		446,438
Investment securities held-to-maturity, at amortized cost
no allowance for credit losses		126,767		-
Federal Home Loan Bank (FHLB) stock, at cost		8,233		8,278
Other investments		5,557		3,962
Total investments		611,589		458,700
Loans:
Loans held-for-sale, at lower of cost or fair value		40,526		43,935
Loans held for investment, net of allowance for credit losses of $201,973 (December 31, 2020 - $204,809)		6,391,553		6,457,324
Total loans		6,432,079		6,501,259
Other assets:
Foreclosed real estate		15,598		11,596
Accrued interest receivable		61,028		65,547
Deferred tax asset, net		154,540		162,478
Premises and equipment, net		83,756		83,786
Customers' liability on acceptances		24,389		33,349
Servicing assets		47,911		47,295
Goodwill		86,069		86,069
Other intangible assets		43,445		45,896
Operating lease right-of-use assets		32,714		31,383
Other assets		150,808		143,076
Total assets	$	10,153,342	$	9,826,011

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF MARCH 31, 2021 AND DECEMBER 31, 2020 (CONTINUED)

	March 31,		December 31,
	2021		2020
	(In thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits	$	4,885,311	$	4,613,309
Savings accounts		2,166,161		1,944,415
Time deposits		1,705,290		1,857,916
Total deposits		8,756,762		8,415,640
Borrowings:
Advances from FHLB		64,570		65,561
Subordinated capital notes		36,083		36,083
Other borrowings		443		707
Total borrowings		101,096		102,351
Other liabilities:
Derivative liabilities		1,465		1,712
Acceptances executed and outstanding		24,389		33,349
Operating lease liabilities		34,017		32,566
Accrued expenses and other liabilities		127,190		154,418
Total liabilities		9,044,919		8,740,036
Commitments and contingencies (See Note 26)		nil		nil
Stockholders’ equity:
Preferred stock; 10,000,000 shares authorized;
1,340,000 shares of Series A, 1,380,000 shares of Series B, and 960,000 shares of Series D issued and outstanding
(December 31, 2020 - 1,340,000 shares; 1,380,000 shares; and 960,000 shares) $25 liquidation value		92,000		92,000
Common stock, $1 par value; 100,000,000 shares authorized; 59,885,234 shares issued: 51,579,245 shares outstanding (December 31, 2020 - 59,885,234;
51,387,071 )		59,885		59,885
Additional paid-in capital		622,935		622,652
Legal surplus		106,165		103,269
Retained earnings		322,202		300,096
Treasury stock, at cost, 8,305,989 shares (December 31, 2020 - 8,498,163 shares)		(100,994)		(102,949)
Accumulated other comprehensive income (loss), net of tax of $-1,200 (December 31, 2020 - $-1,529)		6,230		11,022
Total stockholders’ equity		1,108,423		1,085,975
Total liabilities and stockholders’ equity	$	10,153,342	$	9,826,011

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS ENDED MARCH 31, 2021 AND 2020

	Quarter Ended March 31,
	2021		2020
	(In thousands, except per share data)
Interest income:
Loans	$	108,211	$	116,435
Mortgage-backed securities		2,041		2,773
Investment securities and other		730		4,489
Total interest income		110,982		123,697
Interest expense:
Deposits		12,024		16,620
Securities sold under agreements to repurchase		-		1,002
Advances from FHLB and other borrowings		459		539
Subordinated capital notes		295		435
Total interest expense		12,778		18,596
Net interest income		98,204		105,101
Provision for credit losses		6,324		47,131
Net interest income after provision for credit losses		91,880		57,970
Non-interest income:
Banking service revenue		16,493		15,713
Wealth management revenue		7,388		7,286
Mortgage banking activities		5,571		3,234
Total banking and financial service revenues		29,452		26,233

Net gain on:
Sale of securities		-		4,728
Bargain purchase from Scotiabank PR & USVI acquisition		-		409
Other non-interest income		955		80
Total non-interest income, net		30,407		31,450

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS ENDED MARCH 31, 2021 AND 2020 (CONTINUED)

	Quarter Ended March 31,
	2021		2020
	(In thousands, except per share data)
Non-interest expense:
Compensation and employee benefits		32,618		35,544
Occupancy, equipment and infrastructure costs		13,128		11,439
Electronic banking charges		8,232		9,588
Information technology expenses		4,254		6,934
Professional and service fees		4,536		5,789
Taxes, other than payroll and income taxes		3,661		3,177
Insurance		2,455		3,478
Foreclosed real estate and other repossessed assets (income) expenses		(50)		2,522
Loan servicing and clearing expenses		1,841		1,343
Advertising, business promotion, and strategic initiatives		1,431		1,629
Communication		966		971
Printing, postage, stationary and supplies		1,217		722
Director and investor relations		300		310
Merger and restructuring charges		-		304
Pandemic expenses		1,769		168
Other		1,308		3,404
Total non-interest expense		77,666		87,322
Income before income taxes		44,621		2,098
Income tax expense		14,248		297
Net income		30,373		1,801
Less: dividends on preferred stock		(1,255)		(1,628)
Income available to common shareholders	$	29,118	$	173
Earnings per common share:
Basic	$	0.57	$	-
Diluted	$	0.56	$	-
Average common shares outstanding and equivalents		51,616		51,713
Cash dividends per share of common stock	$	0.08	$	0.07

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE QUARTERS ENDED MARCH 31, 2021 AND 2020


	Quarter Ended March 31,
	2021		2020
	(In thousands)

Net income	$	30,373	$	1,801
Other comprehensive income (loss) before tax:
Unrealized (loss) gain on securities available-for-sale		(5,367)		13,929
Realized gain on sale of securities available-for-sale		-		(4,728)
Unrealized gain (loss) on cash flow hedges		247		(1,150)
Other comprehensive (loss) income before taxes		(5,120)		8,051
Income tax effect		328		(753)
Other comprehensive (loss) income after taxes		(4,792)		7,298
Comprehensive income	$	25,581	$	9,099

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY

FOR THE QUARTERS ENDED MARCH 31, 2021 AND 2020

	Quarter Ended March 31,
	2021		2020
	(In thousands)
Preferred stock:
Balance at beginning of period	$	92,000	$	92,000
Balance at end of period		92,000		92,000
Common stock:
Balance at beginning of period		59,885		59,885
Balance at end of period		59,885		59,885
Additional paid-in capital:
Balance at beginning of period		622,652		621,515
Stock-based compensation expense		2,209		501
Lapsed restricted stock units		(1,926)		(810)
Balance at end of period		622,935		621,206
Legal surplus:
Balance at beginning of period		103,269		95,779
Transfer from retained earnings		2,896		166
Balance at end of period		106,165		95,945
Retained earnings:
Balance at beginning of period		300,096		279,646
Topic 326 adoption		-		(25,494)
Balance at beginning of period (as adjusted for change in accounting principle)		300,096		254,152
Net income		30,373		1,801
Cash dividends declared on common stock^[1]		(4,116)		(3,602)
Cash dividends declared on preferred stock		(1,255)		(1,628)
Transfer to legal surplus		(2,896)		(166)
Balance at end of period		322,202		250,557
Treasury stock:
Balance at beginning of period		(102,949)		(102,339)
Stock repurchased		-		(2,226)
Lapsed restricted stock units and options		1,955		1,276
Balance at end of period		(100,994)		(103,289)
Accumulated other comprehensive income (loss), net of tax:
Balance at beginning of period		11,022		(1,008)
Other comprehensive income (loss), net of tax		(4,792)		7,298
Balance at end of period		6,230		6,290
Total stockholders’ equity	$	1,108,423	$	1,022,594
[1] Dividends declared per common share during the quarter ended March 31, 2021 - $0.08 (March 31, 2020 - $0.07).

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE QUARTERS ENDED MARCH 31, 2021 AND 2020


	Quarter Ended March 31,
	2021		2020
	(In thousands)
Cash flows from operating activities:
Net income	$	30,373	$	1,801
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		51		(2,239)
Amortization of investment securities premiums, net of accretion of discounts		787		1,906
Amortization of other intangible assets		2,451		2,791
Net change in operating leases		120		130
Depreciation and amortization of premises and equipment		3,366		3,001
Deferred income tax expense, net		8,451		(6,226)
Provision for credit losses		6,324		47,131
Stock-based compensation		2,209		501
(Gain) loss on:
Sale of securities		-		(4,728)
Sale of loans		(1,894)		(565)
Foreclosed real estate and other repossessed assets		(1,583)		554
Sale of other assets		(181)		(7)
Originations and purchases of loans held-for-sale		(92,264)		(31,401)
Proceeds from sale of loans held-for-sale		62,886		19,133
Net (increase) decrease in:
Trading securities		(1)		8
Accrued interest receivable		4,519		(3,067)
Servicing assets		(616)		1,492
Other assets		(7,190)		18,791
Net increase (decrease) in:
Accrued interest on deposits and borrowings		(291)		(1,136)
Accrued expenses and other liabilities		18,887		(28,815)
Net cash (used in) provided by operating activities		36,404		19,055

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE QUARTERS ENDED MARCH 31, 2021 AND 2020 (CONTINUED)

	Quarter Ended March 31,
	2021		2020
	(In thousands)
Cash flows from investing activities:
Purchases of:
Investment securities available-for-sale		(25,894)		(618)
Investment securities held-to-maturity		(126,777)		-
Other investments		(1,595)		(413)
Maturities and redemptions of:
Investment securities available-for-sale		25,218		135,149
FHLB stock		45		2,747
Proceeds from sales of:
Investment securities available-for-sale		-		320,984
Foreclosed real estate and other repossessed assets, including write-offs		10,159		11,010
Premises and equipment		580		7
Origination and purchase of loans, excluding loans held-for-sale		(435,363)		(249,157)
Principal repayment of loans		470,510		241,638
Additions to premises and equipment		(3,564)		(3,730)
Net cash provided by (used in) investing activities	$	(86,681)	$	457,617

Cash flows from financing activities:
Net increase (decrease) in:
Deposits		310,712		145,096
Securities sold under agreements to repurchase		-		(140,000)
FHLB advances, federal funds purchased, and other borrowings		(1,254)		(1,598)
Exercise of stock options with treasury shares		29		466
Purchase of treasury stock		-		(2,226)
Dividends paid on preferred stock		(1,255)		(1,628)
Dividends paid on common stock		(4,116)		(3,598)
Net cash provided by (used in) financing activities	$	304,116	$	(3,488)
Net change in cash, cash equivalents and restricted cash		253,839		473,184
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	$	2,409,416	$	1,325,941
Reconciliation of the Consolidated Statements of Cash Flows to the Consolidated Statements of Financial Condition:
Cash and due from banks	$	2,396,965	$	1,314,688
Money market investments		11,401		10,203
Restricted cash		1,050		1,050
Total cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	2,409,416	$	1,325,941
See notes to unaudited consolidated financial statements


	Quarter Ended March 31,
	2021		2020
	(In thousands)
Supplemental Cash Flow Disclosure and Schedule of Non-cash Activities:
Interest paid	$	9,393	$	15,584
Income taxes paid	$	-	$	5,000
Operating lease liabilities paid	$	3,253	$	3,208
Mortgage loans held-for-sale securitized into mortgage-backed securities	$	30,040	$	26,783
Transfer from loans to foreclosed real estate and other repossessed assets	$	13,583	$	8,716
Reclassification of loans held-for-investment portfolio to held-for-sale portfolio	$	-	$	261
Reclassification of loans held-for-sale portfolio to held-for-investment portfolio	$	4,544	$	-
Financed sales of foreclosed real estate	$	53	$	-
Loans booked under the GNMA buy-back option	$	40,777	$	75,314
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”), and OFG Ventures LLC (“OFG Ventures”). 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 BNS all outstanding common stock of Scotiabank de Puerto Rico (“SBPR”). Immediately following the closing of the Scotiabank Acquisition, OFG merged SBPR with and into Oriental Bank, with Oriental Bank continuing as the surviving entity. As part of this transaction, Oriental Bank also acquired the U.S. Virgin Islands banking operations of BNS through an acquisition of certain assets and an assumption of certain liabilities, and certain loans and assumed certain liabilities from BNS’s Puerto Rico branch. This transaction is referred to as the “Scotiabank PR & USVI Acquisition.” These acquired businesses have been integrated for financial reporting purposes.

During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of Coronavirus (Covid-19). The pandemic has significantly impacted economic conditions in P.R. and the U.S., creating significant uncertainties. To address the economic impact in the U.S., in March and April 2020, the President signed into law four economic stimulus packages to provide relief to businesses and individuals, including the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). On December 27, 2020, the President signed into law the Coronavirus Response and Relief Supplemental Appropriations Act, a $900 billion coronavirus relief bill as part of a larger $1.4 trillion omnibus spending and appropriations bill. Refer to Management Discussion and Analysis for additional information. On March 11, 2021, the President signed into law the American Rescue Plan Act of 2021, a $1.9 trillion coronavirus rescue package designed to facilitate the United States’ recovery from the devastating economic and health effects of the COVID-19 pandemic. The package includes direct stimulus payments of $1,400, extends unemployment compensation, continues eviction and foreclosure moratoriums, and increases the Child Tax Credit while making it fully refundable. It provides funds for state and local governments to help compensate for lost tax revenues, money for schools from kindergarten through eighth grade to safely reopen amid the pandemic and subsidizes Covid-19 testing and vaccination programs.

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 three months ended March 31, 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.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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.

New Accounting Updates Adopted in 2021

Simplifying the Accounting for Income Taxes (Topic 740)

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 (Topic 321), Investments—Equity Method And Joint Ventures (Topic 323), And Derivatives And Hedging (Topic 815)—Clarifying The Interactions Between Topic 321, Topic 323, And Topic 815 (A Consensus Of The Emerging Issues Task Force)

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 an impact on our financial statements.

Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848)

On January 1, 2021, OFG adopted 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. Our adoption of this standard did not have an impact on our contracts that referenced to Libor rate. OFG will continue to monitor to identify when these changes take effect in order to take advantage of this ASU.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 2 – RESTRICTED CASH

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

	March 31,		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		1,050		1,050
	$	1,050	$	1,375

At both March 31, 2021 and December 31, 2020, the Bank’s international banking entities held short-term highly liquid securities in the amount of $305 thousand and $325 thousand as the legal reserve required for international banking entities under Puerto Rico law. In addition, as part of the Scotiabank PR & USVI acquisition on December 31, 2020, cash of $325 thousand was held for the acquired international banking entity that was retained as part of the integration. These instruments cannot be withdrawn or transferred without the prior written approval of the OCFI.

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

The Bank is required by Puerto Rico law to maintain average weekly reserve balances to cover demand deposits. The amount of those minimum average reserve balances for the week that covered March 31, 2021 was $441.5 million (December 31, 2020 - $408.5 million). At March 31, 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 March 31, 2021 and December 31, 2020, money market instruments included as part of cash and cash equivalents amounted to $11.4 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 March 31, 2021 and December 31, 2020, were as follows:

	March 31, 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	$	220,735	$	3,854	$	3,593	$	220,996	1.73%
GNMA certificates		193,884		7,624		160		201,348	2.20%
CMOs issued by US government-sponsored agencies		34,422		907		-		35,329	1.96%
Total mortgage-backed securities		449,041		12,385		3,753		457,673	1.95%
Investment securities
US Treasury securities		10,739		207		-		10,946	1.49%
Obligations of US government-sponsored agencies		1,496		16		-		1,512	1.39%
Other debt securities		839		39		-		878	2.28%
Total investment securities		13,074		262		-		13,336	1.53%
Total securities available for sale	$	462,115	$	12,647	$	3,753	$	471,009	1.94%

Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates	$	126,767	$	-	$	1,289	$	125,478	1.21%

	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)

Effective January 1, 2020, OFG adopted the new accounting standard for credit losses that requires evaluation of available-for-sale and held-to-maturity debt securities for any expected losses with recognition of an allowance for credit losses, when applicable. At March 31, 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.

The amortized cost and fair value of OFG’s investment securities at March 31, 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.

	March 31, 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	$	141	$	148	$	-	$	-
Total due in less than one year		141		148		-		-
Due from 1 to 5 years
GNMA certificates		395		396		-		-
Total due from 1 to 5 years		395		396		-		-
Due after 5 to 10 years
CMOs issued by US government-sponsored agencies	$	29,295	$	30,106	$	-	$	-
FNMA and FHLMC certificates		92,424		95,664		-		-
GNMA certificates		52,748		54,294		-		-
Total due after 5 to 10 years		174,467		180,064		-		-
Due after 10 years
FNMA and FHLMC certificates	$	128,170	$	125,184	$	126,767	$	125,478
GNMA certificates		140,741		146,658		-		-
CMOs issued by US government-sponsored agencies		5,127		5,223		-		-
Total due after 10 years		274,038		277,065		126,767		125,478
Total mortgage-backed securities		449,041		457,673		126,767		125,478
Investment securities
Due less than one year
Obligations of US government-sponsored agencies	$	1,496	$	1,512	$	-	$	-
US Treasury securities		735		735		-		-
Other debt securities		250		250		-		-
Total due in less than one year		2,481		2,497		-		-
Due from 1 to 5 years
US Treasury securities	$	10,004	$	10,211	$	-	$	-
Other debt securities		589		628		-		-
Total due from 1 to 5 years		10,593		10,839		-		-
Due from 5 to 10 years
Total investment securities		13,074		13,336		-		-
Total	$	462,115	$	471,009	$	126,767	$	125,478

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

During the quarter ended March 31, 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 quarter ended on March 31, 2021.

During the quarters ended March 31, 2021 and 2020, OFG retained securitized GNMA pools totaling $30.0 million and $26.8 million amortized cost, respectively, at a yield of 2.22% and 2.82%, from its own originations.

	Quarter Ended March 31, 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 table show OFG’s gross unrealized losses and fair value of investment securities available-for-sale and held-to-maturity at March 31, 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:

	March 31, 2021
	Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
FNMA and FHLMC certificates	$	108,552	$	3,750	$	104,802
GNMA certificates		536		3		533
	$	109,088	$	3,753	$	105,335

Held-to-maturity
FNMA and FHLMC certificates	$	126,767	$	1,289	$	125,478

	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
FNMA and FHLMC certificates	$	108,552	$	3,750	$	104,802
GNMA certificates		536		3		533
	$	109,088	$	3,753	$	105,335

Held-to-maturity
FNMA and FHLMC certificates	$	126,767	$	1,289	$	125,478

	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

	Total
	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 with continuous loss position for 12 months or more at March 31, 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 March 31, 2021 and December 31, 2020 was as follows:

	March 31, 2021						December 31, 2020
	Non-PCD		PCD		Total		Non-PCD		PCD		Total
	(In thousands)						(In thousands)
Commercial loans:
Commercial secured by real estate	$	825,735	$	233,161	$	1,058,896	$	807,284	$	243,229	$	1,050,513
Other commercial and industrial		620,184		39,632		659,816		647,444		39,931		687,375
Commercial Paycheck Protection Program (PPP Loans)		311,823		-		311,823		289,218		-		289,218
US Loan Program		381,183		-		381,183		374,904		-		374,904
		2,138,925		272,793		2,411,718		2,118,850		283,160		2,402,010
Mortgage		791,062		1,406,044		2,197,106		823,443		1,459,932		2,283,375
Consumer:
Personal loans		301,204		814		302,018		313,257		1,043		314,300
Credit lines		41,600		306		41,906		43,805		351		44,156
Credit cards		52,066		-		52,066		56,185		-		56,185
Overdraft		203		-		203		305		-		305
Auto		1,565,473		23,036		1,588,509		1,534,269		27,533		1,561,802
		1,960,546		24,156		1,984,702		1,947,821		28,927		1,976,748
		4,890,533		1,702,993		6,593,526		4,890,114		1,772,019		6,662,133
Allowance for credit losses		(156,978)		(44,995)		(201,973)		(161,015)		(43,794)		(204,809)
Total loans held for investment		4,733,555		1,657,998		6,391,553		4,729,099		1,728,225		6,457,324
Mortgage loans held for sale		38,220		-		38,220		41,654		-		41,654
Other loans held for sale		2,306		-		2,306		2,281		-		2,281
Total loans held for sale		40,526		-		40,526		43,935		-		43,935
Total loans, net	$	4,774,081	$	1,657,998	$	6,432,079	$	4,773,034	$	1,728,225	$	6,501,259

At March 31, 2021 and December 31, 2020, OFG had carrying balances of $99.2 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 $98.1 million and $98.0 million at March 31, 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 March 31, 2021 and December 31, 2020, by class of loans. Mortgage loans past due include $40.8 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.

	March 31, 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	$	1,065	$	1,250	$	17,248	$	19,563	$	806,172	$	825,735	$	-
Other commercial and industrial		800		796		4,907		6,503		925,504		932,007		-
US Loan Program		-		-		-		-		381,183		381,183		-
		1,865		2,046		22,155		26,066		2,112,859		2,138,925		-
Mortgage		7,985		9,363		86,253		103,601		687,461		791,062		3,579
Consumer
Personal loans		3,699		1,760		1,372		6,831		294,373		301,204		-
Credit lines		779		523		575		1,877		39,723		41,600		-
Credit cards		1,006		430		844		2,280		49,786		52,066		-
Overdraft		53		-		-		53		150		203		-
Auto		51,821		23,628		11,468		86,917		1,478,556		1,565,473		-
		57,358		26,341		14,259		97,958		1,862,588		1,960,546		-
Total loans	$	67,208	$	37,750	$	122,667	$	227,625	$	4,662,908	$	4,890,533	$	3,579

	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 Loan Program		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

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 March 31, 2021 and December 31, 2020:


	March 31, 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	$	17,019	$	19,915	$	36,934	$	15,225	$	21,462	$	36,687
Other commercial and industrial		2,701		3,141		5,842		2,138		3,174		5,312
		19,720		23,056		42,776		17,363		24,636		41,999
Mortgage		24,128		18,356		42,484		24,920		17,747		42,667
Consumer
Personal loans		1,132		315		1,447		1,752		377		2,129
Personal lines of credit		609		-		609		1,272		-		1,272
Credit cards		845		-		845		1,586		-		1,586
Auto and leasing		11,842		-		11,842		20,766		-		20,766
		14,428		315		14,743		25,376		377		25,753
Total non-accrual loans	$	58,276	$	41,727	$	100,003	$	67,659	$	42,760	$	110,419

PCD:
Commercial
Commercial secured by real estate	$	29,795	$	4,010	$	33,805	$	31,338	$	4,031	$	35,369
Other commercial and industrial		1,102		-		1,102		1,102		-		1,102
		30,897		4,010		34,907		32,440		4,031		36,471
Mortgage		957		-		957		1,003		-		1,003
Consumer
Personal loans		-		-		-		1		-		1
		-		-		-		1		-		1
Total non-accrual loans	$	31,854	$	4,010	$	35,864	$	33,444	$	4,031	$	37,475
	$	90,130	$	45,737	$	135,867	$	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.

At March 31, 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 $119.5 million and $109.2 million, respectively, as they were performing under their new terms.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 $3.7 million and $7.7 million at March 31, 2021 and December 31, 2020, respectively.

The following table presents the troubled-debt restructurings in all loan portfolios at March 31, 2021 and December 31, 2020.


	March 31, 2021
							Related
	Accruing		Non-accruing		Total		Allowance
	(In thousands)
Commercial
Commercial secured by real estate	$	9,911	$	16,279	$	26,190	$	201
US loan program		7,157	$	-	$	7,157	$	252
Other commercial and industrial		3,741		363		4,104		104
		20,809		16,642		37,451		557
Mortgage		93,930		11,378		105,308		4,578
Consumer
Personal loans		4,436	$	91		4,527		237
Auto and leasing		300	$	67		367		21
		4,736		158		4,894		258
Total loans	$	119,475	$	28,178	$	147,653	$	5,393


	December 31, 2020
							Related
	Accruing		Non-accruing		Total		Allowance
	(In thousands)
Commercial
Commercial secured by real estate	$	5,319	$	16,609	$	21,928	$	72
US loan program		7,157		-		7,157		345
Other commercial and industrial		3,872		375		4,247		59
		16,348		16,984		33,332		476
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	$	109,162	$	28,297	$	137,459	$	5,638

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 March 31, 2021 and December 31, 2020 of approximately $81.7 million and $95.7 million resulting from the Covid-19 pandemic were not classified as a TDR.

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 ended March 31, 2021 and 2020 were as follows:


	Quarter Ended March 31, 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	26	$	3,557	3.99%	300	$	3,580	3.61%	333
Commercial	2		185	7.21%	58		204	6.80%	58
Consumer	2		16	11.76%	54		17	9.93%	63
Auto	5		82	6.81%	66		82	9.81%	36

	Quarter Ended March 31, 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	15		199	13.70%	67		204	11.05%	82
Auto	1		14	18.95%	60		17	13.95%	84

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 March 31, 2021 and 2020:

	Twelve month period ended March 31,
	2021			2020
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in thousands)
Mortgage	13	$	1,507	26	$	3,037
Consumer	-	$	-	107	$	1,543
Auto	10	$	57	-	$	-

As of March 31, 2021, the recorded investment on residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure amounted to $26.6 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 March 31, 2021 and December 31, 2020, by class of loans.

	March 31, 2021		December 31, 2020
	(In thousands)
Commercial loans:
Commercial secured by real estate	$	27,737	$	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 March 31, 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	$	29,153	$	126,942	$	100,998	$	91,870	$	81,103	$	214,032	$	32,247	$	676,345
Special Mention		683		10,535		49,923		23,023		10,420		12,092		941		107,617
Substandard		873		492		132		944		8,869		22,266		8,170		41,746
Doubtful		-		-		-		-		-		27		-		27
Loss		-		-		-		-		-		-		-		-
Total commercial secured by real estate		30,709		137,969		151,053		115,837		100,392		248,417		41,358		825,735
Other commercial and industrial:
Loan grade:
Pass		134,725		285,991		57,689		71,665		13,104		15,498		291,380		870,052
Special Mention		403		97		8,257		19,701		20		-		27,404		55,882
Substandard		718		23		58		503		135		2,885		1,689		6,011
Doubtful		-		-		-		-		-		-		62		62
Loss		-		-		-		-		-		-		-		-
Total other commercial and industrial:		135,846		286,111		66,004		91,869		13,259		18,383		320,535		932,007
US Loan Program:
Loan grade:
Pass		25,365		63,707		64,054		77,425		1,174		-		88,957		320,682
Special Mention		63		-		1,499		33,024		-		-		1,250		35,836
Substandard		-		7,157		-		17,508		-		-		-		24,665
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total US loan program:		25,428		70,864		65,553		127,957		1,174		-		90,207		381,183
Total commercial loans	$	191,983	$	494,944	$	282,610	$	335,663	$	114,825	$	266,800	$	452,100	$	2,138,925

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
Total other commercial and industrial:		385,259		92,741		95,135		14,666		11,135		11,378		326,348			936,662
US Loan Program:
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 loan program		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 March 31, 2021 and December 31, 2020, the balance of revolving loans converted to term loans was $22.4 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 March 31, 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	$	1,401	$	15,224	$	19,075	$	25,374	$	31,350	$	647,705	$	-	$	-	$	740,129
Nonperforming		-		292		848		576		1,239		47,978		-		-		50,933
Total mortgage loans:		1,401		15,516		19,923		25,950		32,589		695,683		-		-		791,062
Consumer:
Personal loans:
Payment performance:
Performing		26,562		80,435		102,397		50,340		24,050		15,975		-		-		299,759
Nonperforming		41		287		297		311		105		404		-		-		1,445
Total personal loans		26,603		80,722		102,694		50,651		24,155		16,379		-		-		301,204
Credit lines:
Payment performance:
Performing		-		-		-		-		-		-		40,991		-		40,991
Nonperforming		-		-		-		-		-		-		609		-		609
Total credit lines		-		-		-		-		-		-		41,600		-		41,600
Credit cards:
Payment performance:
Performing		-		-		-		-		-		-		51,221		-		51,221
Nonperforming		-		-		-		-		-		-		845		-		845
Total credit cards		-		-		-		-		-		-		52,066		-		52,066
Overdrafts:
Payment performance:
Performing		-		-		-		-		-		-		203		-		203
Nonperforming		-		-		-		-		-		-		-		-		-
Total overdrafts		-		-		-		-		-		-		203		-		203
Total consumer loans		26,603		80,722		102,694		50,651		24,155		16,379		93,869		-		395,073
Total mortgage and consumer loans	$	28,004	$	96,238	$	122,617	$	76,601	$	56,744	$	712,062	$	93,869	$	-	$	1,186,135

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 March 31, 2021 and December 31, 2020:

	Term Loans
	Amortized Cost Basis by Origination Year
	As of March 31, 2021

	2021		2020		2019		2018		2017		Prior		Total
	(In thousands)
Auto:
FICO score:
1-660		29,952		122,644		107,378		93,079		54,146		45,453		452,652
661-699		22,478		90,880		64,106		43,649		22,486		20,131		263,730
700+		49,001		186,997		216,481		164,041		83,684		68,988		769,192
No FICO		10,010		20,124		22,078		13,465		7,616		6,606		79,899
Total auto:	$	111,441	$	420,645	$	410,043	$	314,234	$	167,932	$	141,178	$	1,565,473

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

The allowance for credit losses is estimated using quantitative methods that consider a variety of factors such as historical loss experience, the current credit quality of the portfolio as well as an economic outlook over the life of the loan. Also included in the ACL are qualitative reserves to cover losses that are expected but, in 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 March 31, 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 March 31, 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 ended March 31, 2021 and 2020:

	Quarter Ended March 31, 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
Provision (recapture) for credit losses		1,542		(2,480)		(158)		4,039		2,943
Charge-offs		(68)		(787)		(4,469)		(9,083)		(14,407)
Recoveries		430		615		565		5,817		7,427
Balance at end of period	$	47,683	$	17,035	$	21,191	$	71,069	$	156,978
PCD:
Balance at beginning of period	$	16,405	$	26,389	$	57	$	943	$	43,794
Provision (recapture) for credit losses		(2,492)		5,994		(4)		(172)		3,326
Charge-offs		(43)		(2,590)		(22)		(456)		(3,111)
Recoveries		436		146		21		383		986
Balance at end of period	$	14,306	$	29,939	$	52	$	698	$	44,995
Total allowance for credit losses at end of period	$	61,989	$	46,974	$	21,243	$	71,767	$	201,973

	Quarter ended March 31, 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		21,890		156		6,270		14,034		42,350
Charge-offs		(3,771)		(418)		(6,015)		(13,053)		(23,257)
Recoveries		1,522		249		644		4,211		6,626
Balance at end of period	$	49,196	$	19,694	$	27,763	$	53,308	$	149,961
PCD:
Balance at beginning of period	$	8,893	$	21,655	$	-	$	947	$	31,495
Impact of ASC 326 adoption		42,143		7,830		181		368		50,522
Provision (recapture) for credit losses		(218)		6,139		364		(105)		6,180
Charge-offs		(2,357)		(5,143)		(431)		(375)		(8,306)
Recoveries		375		122		63		343		903
Balance at end of period	$	48,836	$	30,603	$	177	$	1,178	$	80,794
Total allowance for loan and lease losses at end of period	$	98,032	$	50,297	$	27,940	$	54,486	$	230,755

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 ended March 31, 2021 and 2020:

	Quarter Ended March 31,
	2021		2020
	(In thousands)

Balance at beginning of period	$	11,596	$	29,909
Additions		6,637		1,900
Sales		(2,423)		(3,967)
Decline in value		(212)		(550)
Balance at end of period	$	15,598	$	27,292

NOTE 7 - SERVICING ASSETS

At March 31, 2021, the servicing asset amounted to $47.9 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 ended March 31, 2021.

The following table presents the changes in servicing rights measured using the fair value method for the quarters ended March 31, 2021 and 2020:

	Quarter Ended March 31,
	2021		2020
	(In thousands)
Fair value at beginning of period	$	47,295	$	50,779
Servicing from mortgage securitizations or asset transfers		1,420		456
Changes due to payments on loans^[1]		(1,507)		(767)
Changes in fair value due to changes in valuation model inputs or assumptions		703		(1,181)
Fair value at end of period	$	47,911	$	49,287
[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 quarters ended March 31, 2021 and 2020:

	Quarter Ended March 31,
	2021	2020
Constant prepayment rate	4.5% - 40.5%	5.02% - 19.08%
Discount rate	10.00% - 15.50%	10.00% - 15.50%

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:

	March 31, 2021
	(In thousands)
Mortgage-related servicing asset
Carrying value of mortgage servicing asset	$	47,911
Constant prepayment rate
Decrease in fair value due to 10% adverse change	$	(969)
Decrease in fair value due to 20% adverse change	$	(1,905)
Discount rate

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Decrease in fair value due to 10% adverse change	$	(2,150)
Decrease in fair value due to 20% adverse change	$	(4,136)

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 March 31, 2021 and 2020 totaled $5.2 million and $4.8 million, respectively.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 8 — DERIVATIVES

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

	March 31,		December 31,
	2021		2020
	(In thousands)
Derivative liabilities:
Interest rate swaps designated as cash flow hedges	$	1,465	$	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 March 31, 2021:

Notional

Fixed

Variable

Trade

Settlement

Maturity

Type

Amount

Rate

Rate Index

Date

(In thousands)

Interest Rate Swaps

29,822

2.4210%

1-Month LIBOR

07/03/13

08/01/23

29,822

Accumulated unrealized losses of $1.5 million and $1.7 million were recognized in accumulated other comprehensive income related to the valuation of these swaps at March 31, 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 March 31, 2021 and December 31, 2020, the outstanding total notional amount of interest rate caps was $26.6 million and $40.4 million, respectively. At both March 31, 2021 and December 31, 2020, the interest rate caps sold to clients represented a liability with zero value. At both March 31, 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 March 31, 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 March 31, 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 PR & USVI Acquisition. 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 performs annual goodwill impairment test as of October 31 and monitors for interim triggering events on an ongoing basis. OFG tests for impairment by first allocating its goodwill and other assets and liabilities, as necessary, to defined reporting segments. A fair value is then determined for each reporting segment. If the fair values of the reporting segments exceed their book values, no write-down of the recorded goodwill is necessary.

Reporting segment valuation is inherently subjective, with a number of factors based on assumptions and management judgments or estimates. Actual values may differ significantly from such estimates. Among these are future growth rates for the reporting units, selection of comparable market transactions, discount rates and earnings capitalization rates. Changes in assumptions and results due to economic conditions, industry factors, and reporting unit performance and cash flow projections could result in different assessments of the fair values of reporting 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 (such as a further deterioration of the Puerto Rico economy or the liquidity for Puerto Rico securities or loans secured by assets in Puerto Rico), adverse changes in legal factors or in the business climate, adverse actions by a regulator, unanticipated competition, the loss of key employees, natural disasters, or similar events.

OFG performed its annual impairment review of goodwill during the fourth quarters 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 quarter ended March 31, 2021.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

	Gross				Net
	Carrying		Accumulated		Carrying
	Amount		Amortization		Value
	(In thousands)
March 31, 2021
Core deposit intangibles	$	51,402	$	18,258	$	33,144
Customer relationship intangibles		17,753		7,689		10,064
Other intangibles		567		330		237
Total other intangible assets	$	69,722	$	26,277	$	43,445
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 FDIC-assisted acquisition, the BBVAPR Acquisition and the Scotiabank PR & USVI Acquisition, OFG recorded a core deposit intangible representing the value of checking and savings deposits acquired. At March 31, 2021 and December 31, 2020, this core deposit intangible amounted to $33.1 million and $35.0 million, respectively. 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 PR & USVI Acquisitions. At March 31, 2021 and December 31, 2020, this customer relationship intangible amounted to $10.1 million and $10.6 million, respectively. OFG also recorded other intangibles from the Scotiabank PR & USVI Acquisition which amounted to $237 thousand and $284 thousand at March 31, 2021 and December 31, 2020, respectively.

Other intangible assets have a definite useful life. Amortization of other intangible assets for the quarters ended March 31, 2021 and 2020 was $2.5 million and $2.8 million, respectively.

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


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 March 31, 2021 and December 31, 2020 consists of the following:

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	March 31,		December 31,
	2021		2020
	(In thousands)
Loans	$	59,743	$	64,465
Investments		1,285		1,082
	$	61,028	$	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 both March 31, 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 $711 thousand, and is included in accrued interest receivable in the statement of financial condition.

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

	March 31,		December 31,
	2021		2020
	(In thousands)
Prepaid expenses	$	58,154	$	61,332
Other repossessed assets		2,768		1,816
Investment in Statutory Trust		1,083		1,083
Accounts receivable and other assets		88,803		78,845
	$	150,808	$	143,076

Prepaid expenses amounting to $58.2 million at March 31, 2021, include prepaid municipal, property and income taxes aggregating to $51.9 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 $2.8 million and $1.8 million at March 31, 2021 and December 31, 2020, respectively, that consist mainly of repossessed automobiles, which are recorded at their net realizable value.

NOTE 11— DEPOSITS AND RELATED INTEREST

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

	March 31,		December 31,
	2021		2020
	(In thousands)
Non-interest bearing demand deposits	$	2,451,987	$	2,259,048
Interest-bearing savings and demand deposits		4,575,897		4,274,586
Retail certificates of deposit		1,422,472		1,540,406
Institutional certificates of deposit		271,452		292,485
Total core deposits		8,721,808		8,366,525
Brokered deposits		34,954		49,115
Total deposits	$	8,756,762	$	8,415,640

Brokered deposits include $11.4 million in certificates of deposits and $23.6 million in money market accounts at March 31, 2021, and $25.0 million in certificates of deposits and $24.1 million in money market accounts at December 31, 2020.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The weighted average interest rate of OFG’s deposits was 0.66% and 0.80%, respectively, at March 31, 2021 and December 31, 2020. Interest expense for the quarters ended March 31, 2021 and 2020 was as follows:

	Quarter Ended March 31,
	2021		2020
	(In thousands)
Demand and savings deposits	$	6,371	$	6,985
Certificates of deposit		5,653		9,635
	$	12,024	$	16,620

At March 31, 2021 and December 31, 2020, time deposits in denominations of $250 thousand or higher, excluding accrued interest and unamortized discounts, amounted to $573.3 million and $628.4 million, respectively.

At March 31, 2021 and December 31, 2020, total public fund deposits from various Puerto Rico government municipalities, agencies and corporations amounted to $217.8 million and $218.9 million, respectively. These public funds were collateralized with commercial loans and securities amounting to $246.9 million and $242.8 million at March 31, 2021 and December 31, 2020, respectively.

Excluding accrued interest of approximately $1.2 million and $1.5 million, the scheduled maturities of certificates of deposit at March 31, 2021 and December 31, 2020 are as follows:

	March 31,		December 31,
		2021		2020
	(In thousands)
Within one year:
Three (3) months or less	$	493,880	$	379,563
Over 3 months through 1 year		564,934		805,117
		1,058,814		1,184,680
Over 1 through 2 years		337,488		328,336
Over 2 through 3 years		146,596		177,701
Over 3 through 4 years		69,511		75,094
Over 4 through 5 years		91,675		90,590
	$	1,704,084	$	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 $1.3 million and $1.1 million as of March 31, 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 March 31, 2021 and December 31, 2020, these advances were secured by mortgage and commercial loans amounting to $1.117 billion and $1.159 billion, respectively. Also, at March 31, 2021 and December 31, 2020, OFG had an additional borrowing capacity with the FHLB-NY of $786 million and $814 million, respectively. At March 31, 2021 and December 31, 2020, the weighted average remaining maturity of FHLB’s advances was 16.6 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 March 31, 2021.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table shows a summary of the advances and their terms, excluding accrued interest in the amount of $95 thousand and $96 thousand at March 31, 2021 and December 31, 2020, respectively:


	March 31,		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%)	$	29,822	$	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% )		34,653		35,206
	$	64,475	$	65,465

Advances from FHLB mature as follows:


	March 31,		December 31,
		2021		2020
	(In thousands)
Under 90 days	$	29,822	$	30,259
Over one to three years		30,450		30,972
Over three to five years		4,203		4,234
	$	64,475	$	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 March 31, 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 March 31, 2021 and December 31, 2020:

March 31, 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	$	1,465	$	-	$	1,465	$	-	$	-	$	1,465
Total	$	1,465	$	-	$	1,465	$	-	$	-	$	1,465


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 March 31, 2021 and December 31, 2020, OFG’s net deferred tax asset amounted to $154.5 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 March 31, 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 quarters ended March 31, 2021 and 2020 of 31.9% and 14.2%, respectively. 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 March 31, 2021 and December 31, 2020, unrecognized tax benefits amounted to $746 thousand and $1.9 million, respectively.

Income tax expense for the quarters ended March 31, 2021 and 2020, was $14.2 million and $297 thousand, 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.

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

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

4.5% CET1 to risk-weighted assets;

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

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

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

as the “leverage ratio”).

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 simplifies 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. In November 2019, the agencies jointly issued a final rule that permits insured depository institutions and depository institution holding companies to implement the simplifications to the capital rule on January 1, 2020, rather than April 1, 2020. These banking organizations may elect to use the revised effective date of January 1, 2020 or wait until the quarter beginning April 1, 2020. OFG elected to early implement the simplifications to the capital rule on January 1, 2020. The simplification rule increased the capital ratios.

On January 1, 2020, OFG adopted CECL with the initial implementation adjustment to Non-PCD loans and off-balance sheet instruments against retained earnings. On March 27, 2020, in response to the Covid-19 pandemic, U.S. banking regulators issued an interim final rule that OFG 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 CET1 capital 100 percent of the initial adoption impact of CECL plus 25 percent of the cumulative quarterly changes in the allowance for credit losses (i.e., quarterly transitional amounts). After two years, starting on January 1, 2022, the quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of CET1 capital over the three-year period.

As of March 31, 2021 and December 31, 2020, OFG and the Bank met all capital adequacy requirements to which they are subject. As of March 31, 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 March 31, 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 March 31, 2021
Total capital to risk-weighted assets	$	1,121,829	16.54%	$	712,182	10.50%	$	678,268	10.00%
Tier 1 capital to risk-weighted assets	$	1,036,726	15.28%	$	576,528	8.50%	$	542,615	8.00%
Common equity tier 1 capital to risk-weighted assets	$	919,856	13.56%	$	474,788	7.00%	$	440,874	6.50%
Tier 1 capital to average total assets	$	1,036,726	10.48%	$	395,615	4.00%	$	494,519	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 March 31, 2021
Total capital to risk-weighted assets	$	963,619	14.32%	$	706,569	10.50%	$	672,923	10.00%
Tier 1 capital to risk-weighted assets	$	879,176	13.07%	$	571,985	8.50%	$	538,339	8.00%
Common equity tier 1 capital to risk-weighted assets	$	879,176	13.07%	$	471,046	7.00%	$	437,400	6.50%
Tier 1 capital to average total assets	$	879,176	8.95%	$	392,720	4.00%	$	490,900	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

At both March 31, 2021 and December 31, 2020, preferred and common stock paid-in capital amounted $92.0 million and $59.9 million, respectively.

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 Series A and Series B Preferred Stock were redeemed on April 30, 2021, and the Series D Preferred Stock will be redeemed on July 15, 2021.

Additional Paid-in Capital

Additional paid-in capital represents contributed capital in excess of par value of common and preferred stock net of the costs of issuance. As of both March 31, 2021 and December 31, 2020, accumulated issuance costs charged against additional paid-in capital amounted to $13.6 million and $10.1 million for common and preferred stock, respectively.

Legal Surplus

The Puerto Rico Banking Act requires that a minimum of 10% of the Bank’s net income for the year be transferred to a reserve fund until such fund (legal surplus) equals the total paid in capital on common and preferred stock. At March 31, 2021 and December 31, 2020, the Bank’s legal surplus amounted to $106.2 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 current stock repurchase program, it is authorized to purchase in the open market up to $5.5 million of its outstanding shares of common stock. The shares of common stock repurchased are to be held by OFG as treasury shares. During the quarter ended March 31, 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 quarter ended March 31, 2020 other than through its publicly announced stock repurchase program. During the quarter ended March 31, 2021, OFG did not repurchased any shares.

At March 31, 2021 the number of shares that may yet be purchased under the $70 million program is estimated at 243,609 and was calculated by dividing the remaining balance of $5.5 million by $22.62 (closing price of OFG’s common stock at March 31, 2021).

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The activity in connection with common shares held in treasury by OFG for the quarters ended March 31, 2021 and 2020 is set forth below:

		Quarter Ended March 31,
		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		(192,174)		(1,955)	(103,042)		(1,276)
Common shares repurchased as part of the stock repurchase program		-		-	175,000		2,226
End of period	$	8,305,989	$	100,994	8,558,236	$	103,289

NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE INCOME

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

	March 31,		December 31,
	2021		2020
	(In thousands)
Unrealized gain on securities available-for-sale which are not other-than-temporarily impaired	$	8,894	$	14,262
Income tax effect of unrealized gain on securities available-for-sale		(1,749)		(2,170)
Net unrealized gain on securities available-for-sale which are not other-than-temporarily impaired		7,145		12,092
Unrealized loss on cash flow hedges		(1,464)		(1,711)
Income tax effect of unrealized loss on cash flow hedges		549		641
Net unrealized loss on cash flow hedges		(915)		(1,070)
Accumulated other comprehensive income, net of income taxes	$	6,230	$	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 ended March 31, 2021 and 2020:

	Quarter Ended March 31, 2021
	Net unrealized		Net unrealized		Accumulated
	gains on		loss on		other
	Securities		cash flow		comprehensive
	available-for-sale		hedges		(loss) income
	(In thousands)
Beginning balance	$	12,092	$	(1,070)	$	11,022
Other comprehensive loss before reclassifications		(4,948)		(304)		(5,252)
Amounts reclassified out of accumulated other comprehensive income		1		459		460
Other comprehensive income (loss)		(4,947)		155		(4,792)
Ending balance	$	7,145	$	(915)	$	6,230

	Quarter Ended March 31, 2020
	Net unrealized		Net unrealized		Accumulated
	gains on		loss on		other
	Securities		cash flow		comprehensive
	available-for-sale		hedges		(loss) income
	(In thousands)
Beginning balance	$	(441)	$	(567)	$	(1,008)
Other comprehensive income (loss) before reclassifications		3,288		(828)		2,460
Amounts reclassified out of accumulated other comprehensive income		4,728		110		4,838
Other comprehensive income (loss)		8,016		(718)		7,298
Ending balance	$	7,575	$	(1,285)	$	6,290

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents reclassifications out of accumulated other comprehensive income for the quarters ended March 31, 2021 and 2020:

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

	Quarter Ended March 31,
		2021		2020
	(In thousands)
Cash flow hedges:
Interest-rate contracts	$	459	$	110	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		1		-	Income tax expense
	$	460	$	4,838

NOTE 18 – EARNINGS PER COMMON SHARE

The calculation of earnings per common share for the quarters ended March 31, 2021 and 2020 is as follows:

	Quarter Ended March 31,
	2021		2020
	(In thousands, except per share data)
Net income	$	30,373	$	1,801
Less: Dividends on preferred stock
Non-convertible preferred stock (Series A, B, and D)		(1,255)		(1,628)
Income available to common shareholders	$	29,118	$	173

Average common shares outstanding	$	51,397	$	51,404
Effect of dilutive securities:
Average potential common shares-options		219		309
Total weighted average common shares outstanding and equivalents	$	51,616	$	51,713
Earnings per common share - basic	$	0.57	$	-
Earnings per common share - diluted	$	0.56	$	-

For the quarter ended March 31, 2021, weighted-average stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to 35,236. For the quarter ended March 31, 2020, OFG did not have weighted-average stock options with an anti-dilutive effect on earnings per share.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 19 – GUARANTEES

At March 31, 2021 and December 31, 2020, the notional amount of the obligations undertaken in issuing the guarantees under standby letters of credit represented a liability of $20.6 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 March 31, 2021 and December 31, 2020, the unpaid principal balance of residential mortgage loans sold subject to credit recourse was $131.5 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 ended March 31, 2021 and 2020 .

	Quarter Ended March 31,
	2021		2020
	(In thousands)
Balance at beginning of period	$	218	$	985
Net (charge-offs/terminations) recoveries		(23)		(79)
Balance at end of period	$	195	$	906

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.

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 March 31, 2021 and 2020, OFG repurchased $980 thousand and $479 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 March 31, 2021, OFG’s liability for estimated credit losses related to loans sold with credit recourse amounted to $195 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 quarters ended March 31, 2021, OFG repurchased $12.6 million (March 31, 2020 – $8.4 million) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to credit recourse provision referred above. At both March 31, 2021 and December 31, 2020, OFG had a $2.6 million liability for the estimated credit losses related to these loans.

During the quarters ended March 31, 2021 and 2020, OFG recognized $22 thousand in gains, and $14 thousand in losses, net of reserves, respectively, from the repurchase of residential mortgage loans sold subject to credit recourse, and $1.3 million and $405 thousand, respectively, in losses from the repurchase of residential mortgage loans as a result of breaches of customary representations and warranties.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including the FHLMC, require 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 March 31, 2021, OFG serviced $5.5 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 March 31, 2021, the outstanding balance of funds advanced by OFG under such mortgage loan servicing agreements was approximately $19.1 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’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 March 31, 2021 and December 31, 2020 were as follows:

	March 31,		December 31,
	2021		2020
	(In thousands)
Commitments to extend credit	$	1,108,614	$	1,133,503
Commercial letters of credit		349		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 March 31, 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.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The summary of instruments that are considered financial guarantees in accordance with the authoritative guidance related to guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others, at March 31, 2021 and December 31, 2020, is as follows:

	March 31,		December 31,
	2021		2020
	(In thousands)
Standby letters of credit and financial guarantees	$	20,632	$	19,476
Loans sold with recourse		131,539		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. Upon adoption, OFG recognized an increase in the off-balance sheet allowance of $0.2 million with the corresponding decrease in retained earnings. At March 31, 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 $1.2 million and $1.1 million, respectively, and is included in other liabilities in the statement of financial condition.

At March 31, 2021 and December 31, 2020, OFG maintained other non-credit commitments amounting to $11.9 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 March 31, 2021 and December 31, 2020, this accrued liability amounted to $7.8 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.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 material variable lease payments. All leases are classified as operating leases and are included on the consolidated statements of financial condition as a right-of-use asset and a corresponding lease liability. OFG leases to others certain space in its principal offices for terms extending through 2023; all are operating leases.

Operating Lease Cost

	Quarter Ended March 31,
	2021		2020		Statement of Operations Classification
	(In thousands)
Lease costs	$	3,373	$	3,338	Occupancy and equipment
Variable lease costs		493		588	Occupancy and equipment
Short-term lease cost (benefit)		20		(157)	Occupancy and equipment
Lease income		(120)		(123)	Occupancy and equipment
Total lease cost	$	3,766	$	3,646

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Operating Lease Assets and Liabilities

	March 31,		December 31
	2021		2020		Statement of Financial Condition Classification
	(In thousands)
Right-of-use assets	$	32,714	$	31,383	Operating lease right-of-use assets
Lease Liabilities	$	34,017	$	32,566	Operating leases liabilities

	March 31, 2021
	March 31, 2021
	(In thousands)
Weighted-average remaining lease term		5.97 years
Weighted-average discount rate		6.7%

Future minimum payments for operating leases with initial or remaining terms of one year or more as of March 31, 2021 were as follows:

	Minimum Rent
Year Ending December 31,	(In thousands)
2021	$	9,905
2022		8,792
2023		7,726
2024		5,638
2025		4,036
Thereafter		10,161
Total lease payments	$	46,258
Less imputed interest		12,241
Present value of lease liabilities	$	34,017

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

OFG, as lessor, leases and subleases real property to lessee tenants under operating leases. As of March 31, 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 March 31, 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 PR & USVI 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. At March 31, 2021 and 2020, OFG did not have investment securities classified as Level 3.

Derivative instruments

The fair value of the interest rate swaps is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, for the most part, on the shape of the yield curve, the level of interest rates, as well as the expectations for rates in the future. The fair value of most of these derivative instruments is based on observable market parameters, which include discounting the instruments’ cash flows using the U.S. dollar LIBOR-based discount rates, and also applying yield curves that account for the industry sector and the credit rating of the counterparty and/or 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:

	March 31, 2021
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
	(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale	$	10,946	$	460,063	$	-	$	471,009
Trading securities		-		23		-		23
Money market investments		11,401		-		-		11,401
Servicing assets		-		-		47,911		47,911
Derivative liabilities		-		(1,465)		-		(1,465)
	$	22,347	$	458,621	$	47,911	$	528,879
Non-recurring fair value measurements:
Collateral dependent loans		-		-		27,737		27,737
Foreclosed real estate		-		-		15,598		15,598
Other repossessed assets		-		-		2,768		2,768
	$	-	$	-	$	46,103	$	46,103

	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 ended March 31, 2021 and 2020:

Level 3 Instruments Only
	Servicing Assets
	Quarter Ended March 31,
	2021		2020
	(In thousands)
Balance at beginning of period	$	47,295	$	50,779
New instruments acquired		1,420		456
Principal repayments		(1,507)		(767)
Changes in fair value of servicing assets		703		(1,181)
Balance at end of period	$	47,911	$	49,287

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 March 31, 2021 and 2020 during the quarters 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 ended March 31, 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 March 31, 2021:

	March 31, 2021
	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average
	(In thousands)

Servicing assets	$	47,911	Cash flow valuation	Constant prepayment rate	4.5% - 40.5%	6.54%
				Discount rate	10.00% - 15.50%	11.49%

Collateral dependent loans	$	27,737	Fair value of property or collateral	Appraised value less disposition costs	18.20% - 29.20%	19.91%

Foreclosed real estate	$	15,598	Fair value of property or collateral	Appraised value less disposition costs	18.20% - 29.20%	19.37%

Other repossessed assets	$	2,768	Fair value of property or collateral	Estimated net realizable value less disposition costs	45.00% - 55.00%	53.57%

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 March 31, 2021 and December 31, 2020 is as follows:

	March 31,				December 31,
	2021				2020
	Fair		Carrying		Fair		Carrying
	Value		Value		Value		Value
	(In thousands)
Level 1
Financial Assets:
Cash and cash equivalents	$	2,408,366	$	2,408,366	$	2,154,202	$	2,154,202
Restricted cash	$	1,050	$	1,050	$	1,375	$	1,375
Investment securities available-for-sale	$	10,946	$	10,946	$	10,983	$	10,983
Level 2
Financial Assets:
Trading securities	$	23	$	23	$	22	$	22
Investment securities available-for-sale	$	460,063	$	460,063	$	435,455	$	435,455
Investment securities held-to-maturity	$	125,478	$	126,767	$	-	$	-
Federal Home Loan Bank (FHLB) stock	$	8,233	$	8,233	$	8,278	$	8,278
Other investments	$	5,557	$	5,557	$	3,962	$	3,962
Financial Liabilities:
Derivative liabilities	$	1,465	$	1,465	$	1,712	$	1,712
Level 3
Financial Assets:
Total loans (including loans held-for-sale)	$	6,296,880	$	6,432,079	$	6,323,689	$	6,501,259
Accrued interest receivable	$	61,028	$	61,028	$	65,547	$	65,547
Servicing assets	$	47,911	$	47,911	$	47,295	$	47,295
Accounts receivable and other assets	$	88,803	$	88,803	$	78,845	$	78,845
Financial Liabilities:
Deposits	$	8,781,079	$	8,756,762	$	8,422,599	$	8,415,640
Advances from FHLB	$	66,896	$	64,570	$	68,147	$	65,561
Other borrowings	$	443	$	443	$	707	$	707
Subordinated capital notes	$	33,381	$	36,083	$	33,325	$	36,083
Accrued expenses and other liabilities	$	127,190	$	127,190	$	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 March 31, 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 ended March 31, 2021 and 2020:

	Quarter Ended March 31,
	2021		2020
	(In thousands)
Banking service revenues:
Checking accounts fees	$	1,964	$	2,660
Savings accounts fees		252		440
Electronic banking fees		12,883		11,249
Credit life commissions		117		128
Branch service commissions		361		512
Servicing and other loan fees		759		510
International fees		151		156
Miscellaneous income		6		58
Total banking service revenues		16,493		15,713

Wealth management revenue:
Insurance income		2,231		2,410
Broker fees		2,124		1,915
Trust fees		2,781		2,753
Retirement plan and administration fees		252		208
Total wealth management revenue		7,388		7,286

Mortgage banking activities:
Net servicing fees		4,351		2,690
Net gains on sale of mortgage loans and valuation		2,492		748
Other		(1,272)		(204)
Total mortgage banking activities		5,571		3,234
Total banking and financial service revenues	$	29,452	$	26,233

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

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

Mortgage Banking Activities

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

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 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, 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 ended March 31, 2021 and 2020:

	Quarter Ended March 31, 2021
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	108,236	$	12	$	2,734	$	110,982	$	-	$	110,982
Interest expense		(12,136)		-		(642)		(12,778)		-		(12,778)
Net interest income		96,100		12		2,092		98,204		-		98,204
Provision for loan and lease losses, net		(6,588)		-		264		(6,324)		-		(6,324)
Non-interest income		22,867		7,531		9		30,407		-		30,407
Non-interest expenses		(73,874)		(2,829)		(963)		(77,666)		-		(77,666)
Intersegment revenue		553		-		-		553		(553)		-
Intersegment expenses		-		(291)		(262)		(553)		553		-
Income before income taxes	$	39,058	$	4,423	$	1,140	$	44,621	$	-	$	44,621
Income tax expense		14,236		-		12		14,248		-		14,248
Net income	$	24,822	$	4,423	$	1,128	$	30,373	$	-	$	30,373
Total assets	$	8,312,367	$	28,505	$	2,849,709	$	11,190,581	$	(1,037,239)	$	10,153,342

	Quarter Ended March 31, 2020
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	119,379	$	18	$	4,300	$	123,697	$	-	$	123,697
Interest expense		(15,889)		-		(2,707)		(18,596)		-		(18,596)
Net interest income		103,490		18		1,593		105,101		-		105,101
Provision for loan and lease losses, net		(47,131)		-		-		(47,131)		-		(47,131)
Non-interest income		19,544		7,375		4,531		31,450		-		31,450
Non-interest expenses		(82,545)		(3,724)		(1,053)		(87,322)		-		(87,322)
Intersegment revenue		457		-		-		457		(457)		-
Intersegment expenses		-		(154)		(303)		(457)		457		-
Income before income taxes	$	(6,185)	$	3,515	$	4,768	$	2,098	$	-	$	2,098
Income tax expense		(2,319)		1,318		1,298		297		-		297
Net income	$	(3,866)	$	2,197	$	3,470	$	1,801	$	-	$	1,801
Total assets	$	9,207,848	$	34,014	$	1,069,334	$	10,311,196	$	(1,072,625)	$	9,238,571

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 March 31, 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 54 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

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 the global economy’s recovery. To address the economic impact in the U.S., in March and April 2020, the President signed into law four economic stimulus packages to provide relief to businesses and individuals, including the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Among other measures, the CARES Act provided $349 billion funding for the Small Business Administration (the “SBA”) Paycheck Protection Program (the “PPP”), which provides loans to small businesses to keep their employees on payroll and make other eligible payments. The original funding for the PPP was fully allocated by mid-April 2020, with additional funding made available on April 24, 2020 under the Paycheck Protection Program and Health Care Enhancement Act. On December 27, 2020, the President signed into law the Coronavirus Response and Relief Supplemental Appropriations Act, a $900 billion coronavirus relief bill as part of a larger $1.4 trillion omnibus spending and appropriations bill. This bill clarifies certain aspects of the first round of PPP and reopens another round of PPP funding for the hardest hit businesses. It also extends until March 31, 2021 the opportunity for employers to seek tax credits for wages paid for Families First Coronavirus Response Act qualifying emergency paid sick leave or emergency paid Family and Medical Leave Act. The new Coronavirus Relief Act also impacts the real estate sector through new rounds of rental assistance and an extension of the federal eviction moratorium. On March 11, 2021, the President signed into law the American Rescue Plan Act of 2021, a $1.9 trillion coronavirus rescue package designed to facilitate the United States’ recovery from the devastating economic and health effects of the COVID-19 pandemic. The package includes direct stimulus payments of $1,400, extends unemployment compensation, continues eviction and foreclosure moratoriums, and increases the Child Tax Credit while making it fully refundable. It provides funds for state and local governments to help compensate for lost tax revenues, money for schools from kindergarten through eighth grade to safely reopen amid the pandemic and subsidizes Covid-19 testing and vaccination programs. The Paycheck Protection Program (PPP) will receive an additional $7.25 billion, and more nonprofits will now be allowed to apply for forgivable loans to help cover payroll and other operating expenses. The PPP's application

deadline was extended to May 31, 2021. This bill provides an estimated funding between $10 to $12 billion for Puerto Rico in the following provisions: state and local aids, K-12 public schools, disaster relief fund, nutrition assistance, higher education emergency relief fund, Child Tax Credit, Earned Income Tax Credit, stimulus payments, federal pandemic unemployment compensation plus up, child care, emergency rental, mortgage and utilities assistance, urban transit funding, low income home energy assistance program, Coronavirus capital projects fund, airport improvement program, broadband (e-rate), rural and paratransit funding, and home delivered and congregate food.

On April 9, 2020, the Federal Reserve Board provided additional funding sources for small and mid-sized businesses as well as for state and local governments as they work through cash flow stresses caused by the Covid-19 pandemic. Additionally, the Federal Reserve Board has taken other steps to provide fiscal and monetary stimuli, including reducing the federal funds rate and the interest rate on the Federal Reserve’s discount window and implementing programs to promote liquidity in certain securities markets. The Federal Reserve Board, along with other federal banking regulators, has also issued interagency guidance to financial institutions that are working with borrowers affected by Covid-19.

As the pandemic evolves, we continue to evaluate protocols and processes in place to execute our business continuity plans and help promote the health and safety of our employees and clients. We also continue to support the communities we serve by engaging in various initiatives to help those affected by Covid-19. OFG has implemented the following protocols and processes:

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

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

 Expanding health insurance and benefits for employees, including coverage of the Covid-19 tests and related telemedicine, opening insurance networks of laboratories, pharmacies and doctors to ease employee access, and providing safety kits to all employees for personal or family use. Enabled vaccinations for more than 40% of our staff.

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

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

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

In connection with reviewing our financial condition in light of the pandemic, we evaluated our assets, including goodwill and other intangibles, for potential impairment. Based upon our review as of March 31, 2021, no impairments have been recorded and there have been no significant changes in fair value hierarchy classifications. We have also elected to delay for two years the phase-in of the capital impact from our adoption of the new accounting standard on credit losses. For more information, see Regulatory Capital section in the MD&A.

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

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


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

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

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

As of March 31, 2021, OFG had processed Covid-19 payment deferrals for more than 47,000 retail customers for $2.2 billion dollars. For our commercial customers, we had processed relief on $642.6 million dollars in loans. Deferrals have decreased from 30% of total loans in the second quarter of 2020 to 1% of total loans in the first quarter of 2021. As of March 31, 2021, OFG had loans subject to Covid-19 payment deferrals as follows:

	Covid-19 Moratoriums				% of Total Population
	Amount		Count		% of Total Population
	(Dollars in thousands)
Mortgage	$	18,654		186		1%
Commercial		63,076		15		3%
Total	$	81,730		201		1%

Mortgage loans in the payment deferral program above consist of FHA and VA insured mortgage loans. Most commercial loans represent well-capitalized customers in the hospitality industry.

Additionally, OFG is a lender for the SBA PPP, a CARES Act program, and other SBA, Federal Reserve Board or United States Treasury programs that have been created in response to the pandemic and may be a lender for programs created in the future. These programs are new and their effects on the Company’s business are uncertain. During the quarter ended March 31, 2021, OFG approved 2,638 PPP loans amounting to $126.3 million.

Although the macroeconomic outlook for the first quarter of 2021 has improved from reduced Covid-19 related government restrictions on economic activity, combined with growing liquidity from the federal stimulus programs Puerto Rico is receiving related to the recovery from hurricane Maria in 2017, the early 2020 earthquakes, and now the Covid-19 pandemic, the future direct and indirect impact of Covid-19 on our businesses, results of operations and financial condition remain uncertain. Should current economic conditions persist or deteriorate, this macroeconomic environment may have an adverse effect on our businesses, results of operations and financial condition. For more information on how the risks related to the Covid-19 pandemic may adversely affect our businesses, results of operations and financial condition, see Part I, Item 1A. Risk Factors, of our 2020 Form 10-K.

London Interbank Offered Rate (“LIBOR”)

On July 27, 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates the LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In March 2021, the FCA, which regulates LIBOR, announced the dates for the cessation of all LIBOR benchmark settings currently published by the ICE Benchmark Administration. The FCA confirmed that publication of all Euro and Swiss Franc LIBOR settings and most British Pound Sterling and Japanese Yen LIBOR settings will cease or become no longer representative of the underlying market the rates seek to measure (i.e., non-representative) immediately after December 31, 2021, and most U.S. Dollar LIBOR settings will become non-representative immediately after June 30, 2023. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next several years.

OFG’s LIBOR exposure is mainly concentrated within its commercial loan portfolio, representing 8% of total loans held for investment at March 31, 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. Nevertheless, uncertainty remains as to the nature of replacement choices potential changes or other reforms. For more information on the expected replacement of LIBOR, see Item 1A. Risk Factors in our 2020 Form 10-K.

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:

 Business Combinations

 Allowance for Loan and Lease Losses

 Acquisition Accounting for Loans

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

First quarter 2021 results reflected strong core performance based on the continued success of OFG’s strategies focusing on agility and service. Our results also reflected the federal stimulus, increased liquidity, and an improving Puerto Rico economy as more people get vaccinated.

OFG benefitted from strong new loan generation and deposit growth, significantly reduced cost of funds, a more efficient operating structure, and the release of some COVID-related loan reserves.

OFG followed up last year’s efforts to help small businesses and their employees with another $126 million in Paycheck Protection Program loans. Our proprietary PPP portal enables clients to apply for funds, receive them, and then apply for forgiveness, quickly and easily, and all online.

Performance metrics improved with a loan yield of 6.61%, return on average assets of 1.21%, return on average tangible common stockholders’ equity of 13.11%, and an efficiency ratio of 60.84%. Credit metrics also improved as net charge-offs, delinquency rates, and loan deferrals all fell.

OFG’s capital strategies are working well. In January, we increased the regular quarterly cash dividend 14%. In March, we announced the redemption of all three outstanding series of preferred stock, which will improve our capital structure, enable us to effectively deploy excess liquidity, and increase net income available to shareholders.

As of March 31, 2021, OFG more than earned back all the tangible book value per common share dilution involved in the Scotiabank acquisition significantly ahead of schedule.

As Puerto Rico and USVI continue experiencing stronger signs of economic revival, at OFG we are strategically well-positioned to benefit from and play a major part in this long-awaited development.

First quarter of 2021:

Earnings: EPS diluted was $0.56 compared to $0.42 in the fourth quarter of 2020 and $0.00 in the first quarter of 2020, which was the first quarter to be impacted by the pandemic.

Revenues: Total core revenues were $127.7 million compared to $132.8 million in the fourth quarter of 2020. Fourth quarter of 2020 benefited from $3.9 million in seasonal annual insurance commissions, $2.0 million in mortgage sales held back from third quarter of 2020, and $3.1 million interest income from acquired loan pre-payments. First quarter of 2021 included $1.6 million in interest income from unamortized yield from approximately $92 million of forgiven PPP loans and benefitted from $1.4 million lower cost of deposits.

Expenses: Non-interest expenses were $77.7 million compared to $89.0 million in the fourth quarter of 2020 and $87.3 million in the first quarter of 2020. The fourth quarter of 2020 included $10.1 million in merger and restructuring expenses. The first quarter of 2021 reflected previously announced cost savings. The efficiency ratio improved to 60.84% from 67.06% in the fourth quarter of 2020 and 66.49% in the first quarter of 2020.

Pre-Provision Net Revenues: PPNR was $50.9 million compared to $44.1 million in the fourth quarter of 2020 and $49.2 million in the first quarter of 2020.

Provision: Provision for credit losses was $6.3 million compared to $14.2 million in the fourth quarter of 2020 and $47.1 million in the first quarter of 2020. The first quarter of 2021 included a $3.7 million release of last year’s COVID-19 related loan reserves and $3.5 million for a commercial loan in workout prior to the pandemic. The first quarter of 2020 included $34.1 million related to the pandemic.

Loan Generation and Balances: New loan originations totaled $527.6 million ($401.4 million excluding PPP), compared to $485.3 million in the fourth quarter of 2020 and $280.8 million in the first quarter of 2020. In addition to PPP loans, first quarter of 2021 was driven year-over-year by increases in mortgage, auto, and commercial lending. Net loans were $6.43 billion at first quarter of 2021 compared to $6.50 billion at fourth quarter of 2020 and $6.54 billion at first quarter of 2020. Net interest margin was 4.26% compared to 4.24% in fourth quarter of 2020 and 4.94% in the first quarter of 2020.

Deposit Balances and Cost of Funds: Customer deposits at first quarter of 2021 were $8.72 billion compared to $8.37 billion at fourth quarter of 2020 and $7.56 billion at last year quarter. Cost of funds was 48 bps compared to 53 bps in fourth quarter of 2020 and 69 bps in first quarter of 2020. Total interest expense was $12.8 million compared to $14.3 million in the fourth quarter of 2020 and $18.6 million in the first quarter of 2020.

Asset Quality: Net charge-offs were $9.1 million (or 0.55% of total loans) compared to $44.8 million (2.67%) in the fourth quarter of 2020 and $24.0 million (1.44%) in the first quarter of 2020. The nonperforming loan rate was 2.22% compared to 2.35% in the fourth quarter of 2020 and 2.07% in the first quarter of 2020. Total delinquency rate was 2.15% compared to 2.68% in the fourth quarter of 2020 and 3.16% in the first quarter of 2020.

Capital: Tangible book value per share was $17.39 compared to $16.97 in the fourth quarter of 2020 and $15.60 in the first quarter of 2020. The CET1 ratio was 13.56% compared to 13.08% in the fourth quarter of 2020 and 11.69% in the first quarter of 2020.

	Quarter Ended March 31,
					Variance
	2021		2020		%
EARNINGS DATA:	(In thousands, except per share data)
Interest income	$	110,982	$	123,697	-10.3%
Interest expense		12,778		18,596	-31.3%
Net interest income		98,204		105,101	-6.6%
Provision for loan and lease losses, net		6,324		47,131	-86.6%
Net interest income after provision for loan and lease losses		91,880		57,970	58.5%
Non-interest income		30,407		31,450	-3.3%
Non-interest expenses		77,666		87,322	-11.1%
Income before taxes		44,621		2,098	2026.8%
Income tax expense		14,248		297	4697.3%
Net income		30,373		1,801	1586.5%
Less: dividends on preferred stock		(1,255)		(1,628)	22.9%
Income available to common shareholders	$	29,118	$	173	16731.2%
PER SHARE DATA:
Basic	$	0.57	$	-	100.0%
Diluted	$	0.56	$	-	100.0%
Average common shares outstanding		51,397		51,404	0.0%
Average common shares outstanding and equivalents		51,616		51,713	-0.2%
Cash dividends declared per common share	$	0.08	$	0.07	13.7%
Cash dividends declared on common shares	$	4,100	$	3,607	13.7%
PERFORMANCE RATIOS:
Return on average assets (ROA)		1.21%		0.08%	1412.5%
Return on average tangible common equity		13.11%		0.08%	16287.5%
Return on average common equity (ROE)		11.43%		0.07%	16225.8%
Efficiency ratio		60.84%		66.49%	-8.5%
Interest rate spread		4.21%		4.88%	-13.7%
Interest rate margin		4.26%		4.94%	-13.9%


	March 31,		December 31,		Variance
	2021		2020		%
PERIOD END BALANCES AND CAPITAL RATIOS:	(In thousands, except per share data)
Cash, cash equivalents and restricted cash	$	2,409,416	$	2,155,577	11.8%
Investments and loans
Investment securities	$	611,589	$	458,700	33.3%
Loans and leases, net		6,432,079		6,501,259	-1.1%
Total investments and loans	$	7,043,668	$	6,959,959	1.2%
Deposits and borrowings
Deposits	$	8,756,762	$	8,415,640	4.1%
Other borrowings		101,096		102,351	-1.2%
Total deposits and borrowings	$	8,857,858	$	8,517,991	4.0%
Stockholders’ equity
Preferred stock	$	92,000	$	92,000	0.0%
Common stock		59,885		59,885	0.0%
Additional paid-in capital		622,935		622,652	0.0%
Legal surplus		106,165		103,269	2.8%
Retained earnings		322,202		300,096	7.4%
Treasury stock, at cost		(100,994)		(102,949)	1.9%
Accumulated other comprehensive (loss)		6,230		11,022	-43.5%
Total stockholders' equity	$	1,108,423	$	1,085,975	2.1%
Per share data
Book value per common share	$	19.90	$	19.54	1.9%
Tangible book value per common share	$	17.39	$	16.97	2.5%
Market price at end of period	$	22.62	$	18.54	22.0%
Capital ratios
Leverage capital		10.48%		10.30%	1.7%
Common equity Tier 1 capital ratio		13.56%		13.08%	3.7%
Tier 1 risk-based capital		15.28%		14.78%	3.4%
Total risk-based capital		16.54%		16.04%	3.1%
Equity-to-assets ratio		10.92%		11.05%	-1.2%
Financial assets managed
Trust assets managed	$	3,555,775	$	3,476,491	2.3%
Broker-dealer assets	$	2,552,775	$	2,474,234	3.2%

ANALYSIS OF RESULTS OF OPERATIONS

The following tables show major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for the quarters ended March 31, 2021 and 2020. Comparative March 31, 2020 to March 31, 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 March 31, 2020 quarterly report on Form 10-Q.

TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE

FOR THE QUARTERS ENDED MARCH 31, 2021 AND 2020

Interest

Average rate

Average balance

March

	2021		2020		2021	2020	2021		2020
	(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets	$	110,982	$	123,697	4.81%	5.81%	$	9,358,101	$	8,556,421
Tax equivalent adjustment		2,170		3,080	0.09%	0.14%		-		-
Interest-earning assets - tax equivalent		113,152		126,777	4.90%	5.95%		9,358,101		8,556,421
Interest-bearing liabilities		12,778		18,596	0.60%	0.93%		8,682,309		8,024,243
Tax equivalent net interest income / spread		100,374		108,181	4.30%	5.02%		675,792		532,178
Tax equivalent interest rate margin					4.39%	5.16%
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities		2,176		4,474	1.68%	1.93%		518,038		924,965
Interest bearing cash and money market investments		595		2,788	0.11%	1.19%		2,204,431		943,581
Total investments		2,771		7,262	0.41%	1.56%		2,722,469		1,868,546
Non-PCD:
Mortgage		10,780		11,243	5.35%	5.73%		806,090		785,299
Commercial		27,726		29,822	5.29%	6.50%		2,126,596		1,844,294
Consumer		11,615		15,097	11.45%	12.33%		411,377		492,393
Auto		32,815		31,320	8.59%	8.44%		1,549,535		1,491,892
Total Non-PCD loans		82,936		87,482	6.87%	7.63%		4,893,598		4,613,878

PCD loans:
Mortgage		20,031		22,676	5.57%	5.60%		1,437,213		1,629,386
Commercial		4,588		5,244	6.68%	5.33%		278,547		395,391
Consumer		37		127	8.05%	12.93%		1,814		3,919
Auto		619		906	10.26%	8.04%		24,460		45,301
Total PCD loans		25,275		28,953	5.80%	5.58%		1,742,034		2,073,997
Total loans		108,211		116,435	6.61%	7.00%		6,635,632		6,687,875
Total interest-earning assets		110,982		123,697	4.81%	5.81%		9,358,101		8,556,421

	Interest					Average rate		Average balance
	March		March			March	March	March		March
	2021		2020			2021	2020	2021		2020
	(Dollars in thousands)
Interest-bearing liabilities:
Deposits:
NOW Accounts		2,393		2,389		0.40%	0.48%		2,397,673		1,980,505
Savings and money market		2,124		2,440		0.43%	0.55%		2,003,963		1,797,658
Time deposits		5,507		8,131		1.26%	1.60%		1,775,828		2,039,311
Total core deposits		10,024		12,960		0.66%	0.90%		6,177,464		5,817,474
Brokered deposits		163		1,586		1.44%	2.70%		45,955		236,008
		10,187		14,546		0.66%	0.97%		6,223,419		6,053,482
Non-interest bearing deposits		-		-		0.00%	0.00%		2,357,938		1,698,964
Fair value premium and core deposit intangible amortizations		1,837		2,074		0.00%	0.00%		-		-
Total deposits		12,024		16,620		0.57%	0.86%		8,581,357		7,752,446
Borrowings:
Securities sold under agreements to repurchase		-		1,002		0.00%	2.54%		-		158,462
Advances from FHLB and other borrowings		459		539		2.87%	2.81%		64,868		77,255
Subordinated capital notes		295		435		3.31%	4.85%		36,083		36,083
Total borrowings		754		1,976		3.03%	2.92%		100,951		271,800
Total interest bearing liabilities		12,778		18,596		0.60%	0.93%		8,682,308		8,024,246
Net interest income / spread	$	98,204	$	105,101		4.21%	4.88%
Interest rate margin						4.26%	4.94%
Excess of average interest-earning assets over average interest-bearing liabilities								$	675,793	$	532,175
Average interest-earning assets to average interest-bearing liabilities ratio									107.78%		106.63%

C - CHANGES IN NET INTEREST INCOME DUE TO:
	Volume		Rate		Total
	(In thousands)
Interest Income:
Investments	$	3,319	$	(7,810)	$	(4,491)
Loans		670		(8,894)		(8,224)
Total interest income		3,989		(16,704)		(12,715)
Interest Expense:
Deposits		1,777		(6,373)		(4,596)
Repurchase agreements		(1,002)		-		(1,002)
Other borrowings		(106)		(114)		(220)
Total interest expense		669		(6,487)		(5,818)
Net Interest Income	$	3,320	$	(10,217)	$	(6,897)

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 March 31, 2021 and 2020

Net interest income of $98.2 million decreased $6.9 million from $105.1 million. Interest rate spread decreased 67 basis points to 4.21% from 4.88% and net interest margin decreased 68 basis points to 4.26% from 4.94%. These decreases are mainly due to the net effect of a decrease of 100 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 positively impacted by:

 Lower interest expense from deposits by $4.6 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

 Lower interest expense in borrowings by $1.2 million, reflecting the maturity and early extinguishment of repurchase agreements during the year 2020.

Net interest income was adversely impacted by:

 Lower interest income from loans by $8.2 million, reflecting lower balances in the mortgage and consumer portfolios, and the effect of Federal Reserve Board’s rate cuts on variable rate commercial loans, partially offset by interest income of $1.6 million from unamortized yield for $92 million of forgiven PPP loans; and

 Lower interest income from interest bearing cash and investment securities by $4.5 million, mainly impacted by the Federal Reserve Board’s rate cuts.

TABLE 2 - NON-INTEREST INCOME SUMMARY

	Quarter Ended March 31,
	2021		2020		Variance
	(In thousands)
Banking service revenue	$	16,493	$	15,713	5.0%
Wealth management revenue		7,388		7,286	1.4%
Mortgage banking activities		5,571		3,234	72.3%
Total banking and financial service revenue		29,452		26,233	12.3%
Net gain (loss) on:
Sale of securities available for sale		-		4,728	-100.0%
Bargain purchase from Scotiabank PR & USVI acquisition		-		409	-100.0%
Other non-interest income		955		80	1093.8%
Total non-interest income, net	$	30,407	$	31,450	-3.3%

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 the securities broker-dealer and insurance agency subsidiaries, the level of mortgage banking activities, fees generated from loans and deposit accounts, and gains on sales of assets.

Comparison of quarters ended March 31, 2021 and 2020

OFG recorded non-interest income, net, in the amount of $30.4 million, compared to $31.5 million, a decrease of 3.3%, or $1.0 million. The decrease in non-interest income was mainly due to:

 A $4.7 million gain recorded during the quarter ended March 31, 2020 on the sales of mortgage-backed securities amounting to $316.0 million. There were no sales of securities during the quarter ended March 31, 2021.

The decrease in non-interest income was offset by:

 An increase of $2.3 million in mortgage-banking activities, as quarterly mortgage-servicing rights valuation and gains on loans sold increased by $1.3 million and $1.4 million, respectively;

 An increase of $875 thousand in other non-interest income, mainly related to serviced loans receivable recoveries of $610 thousand, charged-off during the Scotiabank PR & USVI Acquisition; and

 An increase of $780 thousand in banking service revenues, mainly from higher transaction volume in electronic banking.

TABLE 3 - NON-INTEREST EXPENSES SUMMARY

	Quarter Ended March 31,
	2021		2020		Variance %
	(In thousands)
Compensation and employee benefits	$	32,618	$	35,544	-8.2%
Occupancy, equipment and infrastructure costs		13,128		11,439	14.8%
Electronic banking charges		8,232		9,588	-14.1%
Information technology expenses		4,254		6,934	-38.7%
Professional and service fees		4,536		5,789	-21.6%
Taxes, other than payroll and income taxes		3,661		3,177	15.2%
Insurance		2,455		3,478	-29.4%
Foreclosed real estate and other repossessed assets (income) expenses		(50)		2,522	-102.0%
Loan servicing and clearing expenses		1,841		1,343	37.1%
Advertising, business promotion, and strategic initiatives		1,431		1,629	-12.2%
Communication		966		971	-0.5%
Printing, postage, stationery and supplies		1,217		722	68.6%
Director and investor relations		300		310	-3.2%
Merger and restructuring charges		-		304	-100.0%
Pandemic expenses		1,769		168	953.0%
Other		1,308		3,404	-61.6%
Total non-interest expenses	$	77,666	$	87,322	-11.1%
Relevant ratios and data:
Efficiency ratio		60.84%		66.49%
Compensation and benefits to non-interest expense		42.00%		40.70%
Compensation to average total assets owned		1.30%		1.52%
Average number of employees		2,231		2,460
Average compensation per employee (annualized, in thousands)	$	58.5	$	57.8
Average loans per average employee	$	2,974	$	2,719

Non-Interest Expenses

Comparison of quarters ended March 31, 2021 and 2020

Non-interest expense was $77.7 million, representing a decrease of 11.1%, or $9.7 million, compared to $87.3 million.

Non-interest expenses were positively impacted by:

 Lower compensation and employee benefits by $2.9 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 $1.6 million reflecting higher valuation adjustments and higher gains on sales;

 Decrease in electronic banking charges by $1.4 million driven by lower credit card merchant fees;

 Decrease in professional and service fees by $1.3 million from lower supervisory examination fees and audit fees as a result of Scotiabank’s system conversions in 2020; and

 Lower insurance expenses by $1.0 million, mainly related to a decrease in the FDIC Deposit Insurance Assessment (SAIF).

The efficiency ratio improved to 60.84% from 66.49%. 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 March 31, 2021 and 2020 amounted to $955 thousand and $5.2 million, respectively.

Provision for Credit Losses

Comparison of quarters ended March 31, 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 March 31, 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 $40.8 million from $48.5 million to $6.3 million. The prior year quarter provision included a $34.1 million provision to incorporate changes in the macro-economic scenario and qualitative adjustments as a result of the Covid-19 pandemic. Current quarter provision included a $3.7 million release of last year’s Covid-19 related loan reserves and $3.5 million for a commercial loan in workout prior to the pandemic.

Income Taxes

Comparison of quarters ended March 31, 2021 and 2020

OFG’s effective tax rate (ETR) was 31.9% in 2021 compared to 14.2% 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 ended March 31, 2021 and 2020.

	Quarter Ended March 31, 2021
				Wealth				Total Major				Consolidated
	Banking			Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	108,236	$	12	$	2,734	$	110,982	$	-	$	110,982
Interest expense		(12,136)		-		(642)		(12,778)		-		(12,778)
Net interest income		96,100		12		2,092		98,204		-		98,204
Provision credit losses		(6,588)		-		264		(6,324)		-		(6,324)
Non-interest income		22,867		7,531		9		30,407		-		30,407
Non-interest expenses		(73,874)		(2,829)		(963)		(77,666)		-		(77,666)
Intersegment revenue		553		-		-		553		(553)		-
Intersegment expenses		-		(291)		(262)		(553)		553		-
Income before income taxes	$	39,058	$	4,423		1,140	$	44,621	$	-	$	44,621
Income tax expense		14,236		-		12		14,248		-		14,248
Net income	$	24,822	$	4,423	$	1,128	$	30,373	$	-	$	30,373
Total assets	$	8,312,367	$	28,505	$	2,849,709	$	11,190,581	$	(1,037,239)	$	10,153,342

	Quarter Ended March 31, 2020
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	119,379	$	18	$	4,300	$	123,697	$	-	$	123,697
Interest expense		(15,889)		-		(2,707)		(18,596)		-		(18,596)
Net interest income		103,490		18		1,593		105,101		-		105,101
Provision for loan and lease losses		(47,131)		-		-		(47,131)		-		(47,131)
Non-interest income		19,544		7,375		4,531		31,450		-		31,450
Non-interest expenses		(82,545)		(3,724)		(1,053)		(87,322)		-		(87,322)
Intersegment revenue		457		-		-		457		(457)		-
Intersegment expenses		-		(154)		(303)		(457)		457		-
Income before income taxes	$	(6,185)	$	3,515	$	4,768	$	2,098	$	-	$	2,098
Income tax expense		(2,319)		1,318		1,298		297		-		297
Net income	$	(3,866)	$	2,197	$	3,470	$	1,801	$	-	$	1,801
Total assets	$	9,207,848	$	34,014	$	1,069,334	$	10,311,196	$	(1,072,625)	$	9,238,571

Comparison of quarters ended March 31, 2021 and 2020

Banking

OFG's banking segment net income before taxes increased $45.2 million from a loss of $6.2 million to income of $39.1 million, mainly reflecting:

 Decrease in provision for credit losses by $40.5 million, mainly due to prior year quarter $34.1 million provision to incorporate changes in the macro-economic scenario and qualitative adjustments as a result of the Covid-19 pandemic and the current quarter $3.7 million provision release of last year’s Covid-19 related loan reserves, partially offset by a $3.5 million provision for a commercial loan in workout prior to the pandemic;

 Decrease in non-interest expenses by $8.7 million mainly in compensation and employee benefits, professional and service fees, foreclosed real estate and other repossessed assets expenses, electronic banking charges, and insurance expenses.

Partially offset by:

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 $908 thousand, mainly from a decrease in claims and settlements accruals as a result of claim settled in favor of OFG during the quarter that was previously reserved.

Treasury

Treasury segment net income before taxes decreased by $3.6 million, mainly reflecting:

 A gain of $4.7 million on the sales of securities recorded in prior year quarter. There were no sales of securities during the quarter ended March 31, 2021; and

 Lower interest income from interest bearing cash and investment securities by $1.6 million, mainly impacted by the Federal Reserve Board’s rate cuts.

Partially offset by:

 Lower interest expenses in borrowings by $2.1 million, reflecting the maturity and early extinguishment of repurchase agreements during 2020.

ANALYSIS OF FINANCIAL CONDITION

Assets Owned

At March 31, 2021, OFG’s total assets amounted to $10.153 billion representing an increase of 3.3%, when compared to $9.826 billion at December 31, 2020. Cash and due from banks and investments portfolios increased by $254.3 million and $152.9 million, respectively, while loans decreased by $69.2 million.

Cash and cash equivalents of $2.409 billion increased by $253.8 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 March 31, 2021, OFG’s loan portfolio decreased by 1.1% mainly due to loan portfolios run-off. PCD loan portfolio, excluding allowance for credits losses, decreased $69.0 million to $1.703 billion at March 31, 2021. This decrease was offset by loan production in the first quarter of 2021 of $527.6 million, compared to $280.8 million in the year ago quarter, driven by mortgage and commercial lending, including $126.3 million PPP loan originations, which reflected an increase in our Non-PCD portfolio of $4.5 million, excluding allowance for credits losses, 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 March 31, 2021, the total assets managed by OFG’s trust division and retirement plan administration subsidiary amounted to $3.556 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 March 31, 2021, total assets gathered by the broker-dealer and insurance agency subsidiaries from their customers’ investment accounts amounted to $2.553 billion, compared to $2.474 billion at December 31, 2020. This increase is mainly due to increased liquidity and improvement in the local economy as a result of government incentives in light of Covid-19 pandemic.

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.

In connection with reviewing our financial condition given the pandemic, we evaluated our assets, including goodwill and other intangibles, for potential impairment. Based upon our review as of March 31, 2021, no impairments have been recorded.

As of March 31, 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

	March 31		December 31,		Variance
	2021		2020		%
	(In thousands)
Investments:
FNMA and FHLMC certificates	$	347,763	$	210,949	64.9%
Obligations of US government-sponsored agencies		1,512		1,606	-5.9%
US Treasury securities		10,946		10,983	-0.3%
CMOs issued by US government-sponsored agencies		35,329		39,214	-9.9%
GNMA certificates		201,348		182,772	10.2%
FHLB stock		8,233		8,278	-0.5%
Other debt securities		878		914	-3.9%
Other investments		5,580		3,984	40.1%
Total investments		611,589		458,700	33.3%
Loans		6,432,079		6,501,259	-1.1%
Total investments and loans		7,043,668		6,959,959	1.2%
Other assets:
Cash and due from banks (including restricted cash)		2,398,015		2,143,669	11.9%
Money market investments		11,401		11,908	-4.3%
Foreclosed real estate		15,598		11,596	34.5%
Accrued interest receivable		61,028		65,547	-6.9%
Deferred tax asset, net		154,540		162,478	-4.9%
Premises and equipment, net		83,756		83,786	0.0%
Servicing assets		47,911		47,295	1.3%
Goodwill		86,069		86,069	0.0%
Right of use assets		32,714		31,383	4.2%
Core deposit, customer relationship and other intangibles		43,445		45,896	-5.3%
Other assets and customers' liability on acceptances		175,197		176,425	-0.7%
Total other assets		3,109,674		2,866,052	8.5%
Total assets	$	10,153,342	$	9,826,011	3.3%
Investment portfolio composition:
FNMA and FHLMC certificates		56.9%		46.0%
Obligations of US government-sponsored agencies		0.2%		0.4%
US Treasury securities		1.8%		2.4%
CMOs issued by US government-sponsored agencies		5.8%		8.5%
GNMA certificates		32.9%		39.8%
FHLB stock		1.3%		1.8%
Other debt securities and other investments		1.1%		1.1%
		100.0%		100.0%

TABLE 5 - LOAN PORTFOLIO COMPOSITON

	March 31,		December 31,
	2021		2020
	(In thousands)
Loans held for investment:
Commercial	$	2,411,718	$	2,402,010
Mortgage		2,197,106		2,283,375
Consumer		396,193		414,946
Auto		1,588,509		1,561,802
		6,593,526		6,662,133
Allowance for credit losses		(201,973)		(204,809)
Total loans held for investment		6,391,553		6,457,324
Mortgage loans held for sale		38,220		41,654
Other loans held for sale		2,306		2,281
Total loans, net	$	6,432,079	$	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 $6.432 billion at March 31, 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 $2.412 billion (36.6% of the gross loan portfolio) compared to $2.402 billion (36.1% of the gross loan portfolio) at December 31, 2020. Commercial production, including the U.S. loan program production and PPP loans, increased 151.8% to $254.9 million in the quarter ended March 31, 2021 from $101.2 million in prior year quarter.

 Mortgage loan portfolio amounted to $2.197 billion (33.3% 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 $95.9 million for the quarter ended March 31, 2021, which represents an increase of 209.3% from $31.0 million in the same quarter in 2020. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to $40.8 million and $56.2 million at March 31, 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 $396.2 million (6.0% of the gross loan portfolio) compared to $414.9 million (6.2% of the gross loan portfolio) at December 31, 2020. Consumer loan production decreased 29.9% to $27.5 million in the quarter ended March 31, 2021 from $39.2 million in prior year quarter.

 Auto and leasing portfolio amounted to $1.589 billion (24.1% of the gross loan portfolio) compared to $1.562 billion (23.4% of the gross loan portfolio) at December 31, 2020. Auto production increased 36.6% to $149.3 million in the quarter ended March 31,2021 compared to $109.3 million in prior year quarter.

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 PR & USVI Acquisition. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations. Deposits from the Puerto Rico government totaled $217.8 million at March 31, 2021.

TABLE 6 - PUERTO RICO GOVERNMENT RELATED LOANS AND SECURITIES

March 31, 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		98,064		72		18,376		79,616
Total	$	99,166	$	1,174	$	18,376	$	79,616

At March 31, 2021, OFG has $99.2 million of direct credit exposure to the Puerto Rico government, a $99 thousand decrease 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 probable losses based upon an evaluation of known and inherent risks. 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 inherent in the Company’s relevant financial assets.

The allowance for credit losses for the quarter ended March 31, 2020 included a $34.1 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 quarter ended March 31, 2021 included a $3.7 million provision release of last year’s Covid-19 related loan reserves and a $3.5 million provision for a commercial loan in workout prior to the pandemic.

Tables 7 through 9 set forth an analysis of activity in the allowance for credit losses for the quarters ended March 31, 2021 and 2020 and present selected credit loss statistics for March 31, 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 March 31, 2021, OFG had $135.9 million of non-accrual loans, including $35.9 million PCD loans accounted for under ASU 2016-13, compared to $147.9 million at December 31, 2020.

At March 31, 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 $100.0 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 March 31, 2021, OFG’s non-performing assets decreased by 1.8% to $162.7 million (1.60% 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 $15.6 million and $2.8 million, respectively, at March 31, 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 March 31, 2021, the allowance coverage ratio to non-performing loans was 140.0% (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 March 31, 2021, OFG’s non-performing commercial loans amounted to $85.8 million (59.5 % of OFG’s non-performing loans), a 2.9% 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 March 31, 2021, OFG’s non-performing mortgage loans totaled $43.7 million (30.3% of OFG’s non-performing loans), a 1.7% increase 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 March 31, 2021, OFG’s non-performing consumer loans amounted to $2.9 million (2.0% of OFG’s non-performing loans), a 41.9% 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 March 31, 2021, OFG’s non-performing auto loans and leases amounted to $11.8 million (8.2% of OFG’s total non-performing loans), a decrease of 43.0% 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

	March 31,		December 31,		Variance
	2021		2020		%
	(In thousands)
Allowance for credit losses:
Non-PCD:
Commercial	$	47,683	$	45,779		4.2%
Mortgage		17,035		19,687		-13.5%
Consumer		21,191		25,253		-16.1%
Auto and leases		71,069		70,296		1.1%
Total allowance for credit losses	$	156,978	$	161,015	$	-2.5%

PCD:
Commercial	$	14,307		16,405		-12.8%
Mortgage		29,938		26,389		13.4%
Consumer		52		57		100.0%
Auto and leases		698		943		-26.0%
Total allowance for credit losses	$	44,995		43,794		2.7%

Allowance for credit losses summary
Commercial	$	61,990	$	62,184		-0.3%
Mortgage		46,973		46,076		1.9%
Consumer		21,243		25,310		-16.1%
Auto and leases		71,767		71,239		0.7%
Total allowance for credit losses	$	201,973	$	204,809	$	-1.4%

Allowance composition:
Commercial		30.7%		30.4%
Mortgage		23.3%		22.5%
Consumer		10.5%		12.4%
Auto and leases		35.5%		34.8%
		100.0%		100.0%

Allowance coverage ratio at end of period:
Commercial		2.6%		2.6%		-0.8%
Mortgage		2.1%		2.0%		5.9%
Consumer		5.4%		6.1%		-12.1%
Auto and leases		4.5%		4.6%		-0.9%
		3.06%		3.07%		-0.3%

Allowance coverage ratio to non-performing loans:
Commercial		72.2%		74.5%		-3.1%
Mortgage		107.4%		107.2%		0.2%
Consumer		732.5%		507.4%		44.4%
Auto and leases		606.0%		343.1%		76.7%
		140.0%		134.6%		4.0%

TABLE 8 - ALLOWANCE FOR CREDIT LOSSES SUMMARY


	Quarter Ended March 31,					Variance
	2021		2020		%
	(Dollars in thousands)
Allowance for credit losses:
Balance at beginning of period	$	204,809	$	116,539		75.7%
Impact of ASC 326 adoption		-		89,720		-100.0%
Provision for credit losses		6,269		48,530		-87.1%
Charge-offs		(17,518)		(31,563)		-44.5%
Recoveries		8,413		7,529		11.7%
Balance at end of period	$	201,973	$	230,755	$	-12.5%

TABLE 9 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES

	Quarter Ended March 31,				Variance
		2021	2020		%
	(Dollars in thousands)
Non-PCD:
Mortgage
Charge-offs	$	(787)	$	(418)		88.3%
Recoveries		615		249		147.0%
Total		(172)		(169)		1.8%
Commercial
Charge-offs		(68)		(3,771)		-98.2%
Recoveries		430		1,522		-71.7%
Total		362		(2,249)		-116.1%
Consumer
Charge-offs		(4,469)		(6,015)		-25.7%
Recoveries		565		644		-12.3%
Total		(3,904)		(5,371)		-27.3%
Auto and leases
Charge-offs		(9,083)		(13,053)		-30.4%
Recoveries		5,817		4,211		38.1%
Total		(3,266)		(8,842)		-63.1%

PCD:
Mortgage
Charge-offs	$	(2,590)	$	(5,143)		-49.6%
Recoveries		146		122		19.7%
Total		(2,444)		(5,021)		-51.3%
Commercial
Charge-offs		(43)		(2,357)		-98.2%
Recoveries		436		375		16.3%
Total		393		(1,982)		-119.8%
Consumer
Charge-offs		(22)		(431)		-94.9%
Recoveries		21		63		-66.7%
Total		(1)		(368)		-99.7%
Auto and leases
Charge-offs		(456)		(375)		21.6%
Recoveries		383		343		11.7%
Total		(73)		(32)		128.1%

Total charge-offs		(17,518)		(31,563)		-44.5%
Total recoveries		8,413		7,529		11.7%
Net charge-offs	$	(9,105)	$	(24,034)		-62.1%

Net credit losses to average loans outstanding:
Mortgage		0.47%		0.86%		-45.74%
Commercial		-0.13%		0.76%		-116.62%

Consumer		3.78%		4.63%	-18.27%
Auto and leases		0.85%		2.31%	-63.25%
Total		0.55%		1.44%	-61.82%
Recoveries to charge-offs		48.02%		23.85%	101.33%
Average Loans Held for Investment (a)
Mortgage	$	2,243,303	$	2,414,685	-7.1%
Commercial		2,405,143		2,239,684	7.4%
Consumer		413,191		496,313	-16.7%
Auto and leases		1,573,995		1,537,193	2.4%
Total	$	6,635,632	$	6,687,875	-0.8%


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

TABLE 10 — NON-PERFORMING ASSETS

	March 31,		December 31,		Variance
	2021		2020		(%)
	(Dollars in thousands)
Non-performing assets:
Non-PCD
Non-accruing loans
Troubled-Debt Restructuring loans	$	28,177	$	28,297	-0.4%
Other loans		71,826		82,122	-12.5%
Accruing loans
Troubled-Debt Restructuring loans		7,195		3,411	110.9%
Other loans		1,255		889	41.2%
Total	$	108,453	$	114,719	-5.5%
PCD		35,864		37,475	-4.3%
Total non-performing loans	$	144,317	$	152,194	-5.2%
Foreclosed real estate		15,598		11,596	34.5%
Other repossessed assets		2,768		1,816	52.4%
	$	162,683	$	165,606	-1.8%

Non-performing assets to total assets		1.60%		1.69%	-5.3%
Non-performing assets to total capital		14.68%		15.25%	-3.7%

	Quarter Ended March 31,
	2021		2020
	(In thousands)
Interest that would have been recorded in the period if the loans had not been classified as non-accruing loans	$	797	$	607

TABLE 11 - NON-PERFORMING LOANS

	March 31,		December 31,		Variance
	2021		2020		%
	(Dollars in thousands)
Non-performing loans
Non-PCD
Commercial	$	50,933	$	46,967	8.4%
Mortgage		42,778		41,999	1.9%
Consumer		2,900		4,987	-41.8%
Auto and leases		11,842		20,766	-43.0%
Total	$	108,453	$	114,719	-5.5%

PCD
Commercial	$	34,907	$	36,471	-4.3%
Mortgage		957		1,003	100.0%
Consumer		-		1	-100.0%
Total	$	35,864	$	37,475	-4.3%
Total non-performing loans	$	144,317	$	152,194	-5.2%

Non-performing loans composition percentages:
Commercial		59.5%		54.8%
Mortgage		30.3%		28.3%
Consumer		2.0%		3.3%
Auto and leases		8.2%		13.6%
		100.0%		100.0%

Non-performing loans to:
Total loans		2.2%		2.3%	-3.9%
Total assets		1.4%		1.6%	-8.4%
Total capital		13.0%		14.0%	-7.1%

Non-performing loans with partial charge-offs to:
Total loans		0.6%		0.6%	3.5%
Non-performing loans		26.9%		24.8%	8.5%

Other non-performing loans ratios:
Charge-off rate on non-performing loans to non-performing loans on which charge-offs have been taken		145.4%		151.3%	-3.9%
Allowance for credit losses to non-performing loans on which no charge-offs have been taken		191.5%		179.0%	7.0%

TABLE 12 - LIABILITIES SUMMARY AND COMPOSITION
	March 31,		December 31,		Variance
	2021		2020		%
	(Dollars in thousands)
Deposits:
Non-interest bearing deposits	$	2,451,986	$	2,259,048	8.5%
NOW accounts		2,433,251		2,354,194	3.4%
Savings and money market accounts		2,166,159		1,944,426	11.4%
Certificates of deposit		1,704,085		1,856,400	-8.2%
Total deposits		8,755,481		8,414,068	4.1%
Accrued interest payable		1,281		1,572	-18.5%
Total deposits and accrued interest payable		8,756,762		8,415,640	4.1%
Borrowings:
Advances from FHLB		64,570		65,561	-1.5%
Subordinated capital notes		36,083		36,083	0.0%
Other term notes		443		707	-37.3%
Total borrowings		101,096		102,351	-1.2%
Total deposits and borrowings		8,857,858		8,517,991	4.0%

Other Liabilities:
Derivative liabilities		1,465		1,712	-14.4%
Acceptances outstanding		24,389		33,349	-26.9%
Lease liability		34,017		32,566	4.5%
Other liabilities		127,190		154,418	-17.6%
Total liabilities	$	9,044,919	$	8,740,036	3.5%
Deposits portfolio composition percentages:
Non-interest bearing deposits		28.0%		26.8%
NOW accounts		27.8%		28.0%
Savings and money market accounts		24.7%		23.1%
Certificates of deposit		19.5%		22.1%
		100.0%		100.0%
Borrowings portfolio composition percentages:
Advances from FHLB		63.9%		64.1%
Other term notes		0.4%		0.7%
Subordinated capital notes		35.7%		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

Liabilities and Funding Sources

As shown in Table 12 above, at March 31, 2021, OFG’s total liabilities were $9.045 billion, 3.5% more than the $8.740 billion reported at December 31, 2020. Deposits and borrowings, OFG’s funding sources, amounted to $8.858 billion at March 31, 2021 versus $8.518 billion at December 31, 2020, a 4.0% increase, mainly from higher core deposits by $355.3 million, while time deposits, brokered deposits and borrowings decreased by $139.0 million, $14.2 million and $1.3 million, respectively.

At March 31, 2021, deposits represented 99% and borrowings represented 1% of interest-bearing liabilities. At March 31, 2021, deposits, the largest category of OFG’s interest-bearing liabilities, were $8.757 billion, an increase of 4.1% 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.

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 March 31, 2021, OFG’s total stockholders’ equity was $1.108 billion, a 2.1% increase when compared to $1.086 billion at December 31, 2020. This increase in stockholders’ equity reflects increases in legal surplus of $2.9 million, in retained earnings of $22.1 million, in treasury stock of $2.0 million and in additional paid-in capital of $283 thousand offset by, a decrease in accumulated other comprehensive income, net of tax, of $4.8 million. Book value per share was $19.90 at March 31, 2021 compared to $19.54 at December 31, 2020.

From December 31, 2020 to March 31, 2021, tangible common equity to tangible total assets decreased from 9.00% to 8.95%, leverage capital ratio increased from 10.30% to 10.48%, common equity tier 1 capital ratio increased from 13.08% to 13.56%, tier 1 risk-based capital ratio increased from 14.78% to 15.28%, and total risk-based capital ratio increased from 16.04% to 16.54%.

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 March 31, 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.

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 March 31, 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.

The following are OFG’s consolidated capital ratios under the Basel III capital rules at March 31, 2021 and December 31, 2020:

TABLE 13 — CAPITAL, DIVIDENDS AND STOCK DATA
	March 31,		December 31,		Variance
	2021		2020		%
	(Dollars in thousands, except per share data)
Capital data:
Stockholders’ equity	$	1,108,423	$	1,085,975	2.1%
Regulatory Capital Ratios data:
Common equity tier 1 capital ratio		13.56%		13.08%	3.7%
Minimum common equity tier 1 capital ratio required		4.50%		4.50%	0.0%
Actual common equity tier 1 capital	$	919,856		894,075	2.9%
Minimum common equity tier 1 capital required	$	305,221		307,703	-0.8%
Minimum capital conservation buffer required (2.5%)	$	169,567		170,946	-0.8%
Excess over regulatory requirement	$	445,068		415,426	7.1%
Risk-weighted assets	$	6,782,685		6,837,846	-0.8%
Tier 1 risk-based capital ratio		15.28%		14.78%	3.4%
Minimum tier 1 risk-based capital ratio required		6.00%		6.00%	0.0%
Actual tier 1 risk-based capital	$	1,036,726	$	1,010,945	2.6%
Minimum tier 1 risk-based capital required	$	406,961	$	410,271	-0.8%
Minimum capital conservation buffer required (2.5%)	$	169,567		170,946	-0.8%
Excess over regulatory requirement	$	460,198	$	429,728	7.1%
Risk-weighted assets	$	6,782,685	$	6,837,846	-0.8%
Total risk-based capital ratio		16.54%		16.04%	3.1%
Minimum total risk-based capital ratio required		8.00%		8.00%	0.0%
Actual total risk-based capital	$	1,121,830	$	1,096,766	2.3%
Minimum total risk-based capital required	$	542,615	$	547,028	-0.8%
Minimum capital conservation buffer required (2.5%)	$	169,567		170,946	-0.8%
Excess over regulatory requirement	$	409,648	$	378,972	8.1%
Risk-weighted assets	$	6,782,685	$	6,837,846	-0.8%
Leverage capital ratio		10.48%		10.30%	1.7%
Minimum leverage capital ratio required		4.00%		4.00%	0.0%
Actual tier 1 capital	$	1,036,726	$	1,010,945	2.6%
Minimum tier 1 capital required	$	395,615	$	392,424	0.8%
Excess over regulatory requirement	$	641,111	$	618,521	3.7%
Tangible common equity to total assets		8.83%		8.88%	-0.6%
Tangible common equity to risk-weighted assets		13.23%		12.75%	3.8%
Total equity to total assets		10.92%		11.05%	-1.2%
Total equity to risk-weighted assets		16.34%		15.88%	2.9%
Stock data:
Outstanding common shares		51,579,245		51,387,071	0.4%
Book value per common share	$	19.90	$	19.54	1.9%
Tangible book value per common share	$	17.39	$	16.97	2.5%
Market price at end of period	$	22.62	$	18.54	22.0%
Market capitalization at end of period	$	1,166,723	$	952,716	22.5%

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

	March 31,		December 31,
	2021		2020
	(In thousands, except share or per share information)
Total stockholders' equity	$	1,108,423	$	1,085,975
Preferred stock		(92,000)		(92,000)
Preferred stock issuance costs		10,130		10,130
Goodwill		(86,069)		(86,069)
Core deposit intangible		(33,144)		(34,983)
Customer relationship intangible		(10,064)		(10,629)
Other intangibles		(237)		(284)
Total tangible common equity (non-GAAP)	$	897,039	$	872,140
Total assets		10,153,342		9,826,011
Goodwill		(86,069)		(86,069)
Core deposit intangible		(33,144)		(34,983)
Customer relationship intangible		(10,064)		(10,629)
Other intangibles		(237)		(284)
Total tangible assets	$	10,023,828	$	9,694,046
Tangible common equity to tangible assets		8.95%		9.00%
Common shares outstanding at end of period		51,579,245		51,387,071
Tangible book value per common share	$	17.39	$	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.

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

	March 31,		December 31,		Variance
	2021		2020		%
	(Dollars in thousands)
Risk-based capital:
Common equity tier 1 capital	$	919,856	$	894,075	2.9%
Additional tier 1 capital		116,870		116,870	0.0%
Tier 1 capital		1,036,726		1,010,945	2.6%
Additional Tier 2 capital		85,104		85,820	-0.8%
Total risk-based capital	$	1,121,830	$	1,096,765	2.3%
Risk-weighted assets:
Balance sheet items	$	6,296,285	$	6,338,524	-0.7%
Off-balance sheet items		486,400		499,322	-2.6%
Total risk-weighted assets	$	6,782,685	$	6,837,846	-0.8%
Ratios:
Common equity tier 1 capital (minimum required, including capital conservation buffer - 7%)		13.56%		13.08%	3.7%
Tier 1 capital (minimum required, including capital conservation buffer - 8.5%)		15.28%		14.78%	3.4%
Total capital (minimum required, including capital conservation buffer - 10.5%)		16.54%		16.04%	3.1%
Leverage ratio (minimum required - 4%)		10.48%		10.30%	1.7%
Equity to assets		10.92%		11.05%	-1.2%
Tangible common equity to assets		8.83%		8.88%	-0.6%

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


	March 31,		December 31,		Variance
	2021		2020		%
	(Dollars in thousands)
Oriental Bank Regulatory Capital Ratios:
Common Equity Tier 1 Capital to Risk-Weighted Assets		13.07%		14.06%	-7.0%
Actual common equity tier 1 capital	$	879,176	$	956,845	-8.1%
Minimum capital requirement (4.5%)	$	302,815	$	306,206	-1.1%
Minimum capital conservation buffer requirement (2.5%)	$	168,231	$	170,114	-1.1%
Minimum to be well capitalized (6.5%)	$	437,400	$	442,297	-1.1%
Tier 1 Capital to Risk-Weighted Assets		13.07%		14.06%	-7.0%
Actual tier 1 risk-based capital	$	879,176	$	956,845	-8.1%
Minimum capital requirement (6%)	$	403,754	$	408,274	-1.1%
Minimum capital conservation buffer requirement (2.5%)	$	168,231	$	170,114	-1.1%
Minimum to be well capitalized (8%)	$	538,339	$	544,366	-1.1%
Total Capital to Risk-Weighted Assets		14.32%		15.32%	-6.5%
Actual total risk-based capital	$	963,619	$	1,042,255	-7.5%
Minimum capital requirement (8%)	$	538,339	$	544,366	-1.1%
Minimum capital conservation buffer requirement (2.5%)	$	168,231	$	170,114	-1.1%
Minimum to be well capitalized (10%)	$	672,923	$	680,457	-1.1%
Total Tier 1 Capital to Average Total Assets		8.95%		9.81%	-8.8%
Actual tier 1 capital	$	879,176	$	956,845	-8.1%
Minimum capital requirement (4%)	$	392,720	$	390,304	0.6%
Minimum to be well capitalized (5%)	$	490,900	$	487,879	0.6%

OFG’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG.” At March 31, 2021 and December 31, 2020, OFG’s market capitalization for its outstanding common stock was $1.167 billion ($22.62 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
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 current stock repurchase program, it is authorized to purchase in the open market up to $5.5 million of its outstanding shares of common stock. The shares of common stock repurchased are to be held by OFG as treasury shares. In the quarter ended March 31, 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 March 31, 2020, other than through its publicly announced stock repurchase program. There were no stock repurchases by OFG in the quarter ended on March 31, 2021.

At March 31, 2021, the number of shares that may yet be purchased under such program is estimated at 243,609 and was calculated by dividing the remaining balance of $5.5 million by $22.62 (closing price of OFG's common stock at March 31, 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.

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 and the executive Risk and Compliance Team. 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 Asset/Liability Management Committee (“ALCO”) which is composed of certain executive officers from the business, treasury and finance areas. One of ALCO’s primary goals is to ensure that the market risk assumed by 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. ALCO oversees interest rate risk, liquidity management and other related matters.

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

On a quarterly basis, 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 March 31, 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	$	35,418	9.09%	$	31,479	8.13%
+ 100 Basis points	$	17,867	4.58%	$	15,825	4.09%
- 50 Basis points	$	(5,735)	-1.47%	$	(5,584)	-1.44%

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 March 31, 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 March 31, 2021, OFG had $29.8 million in interest rate swaps at an average rate of 2.42% designated as cash flow hedges for $64.5 million in advances from the FHLB-NY that reprice or are being rolled over on a monthly basis. A derivative liability of $1.5 million was recognized at March 31, 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 are very challenging, as they have been for over a decade, due to a shrinking population, a protracted economic recession, a housing sector that remains under pressure, the Puerto Rico government’s fiscal and liquidity crisis, and the payment defaults on various Puerto Rico government bonds, with severe austerity measures expected for the Puerto Rico government to be able to restructure its debts under the supervision of the federally-created Fiscal Oversight and Management Board for Puerto Rico. In addition, as was demonstrated by the January 2020 earthquakes and hurricanes Irma and Maria in September 2017, Puerto Rico is susceptible to natural disasters, which can have a disproportionate impact because of the logistical difficulties of bringing relief to an island far from the United States mainland. 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 and during the quarter ended March 31, 2021, the Covid-19 pandemic has negatively impacted economic activity in Puerto Rico, the U.S. and around the world. Nevertheless, we did not see meaningful impacts to loan portfolio delinquencies, nonperforming loans or charge-offs in the quarter ended March 31, 2021 as a result of the pandemic. To provide relief to individuals and businesses in the U.S., in March and April 2020, the President signed into law four economic stimulus packages, including the CARES Act. Further, on December 27, 2020, the President signed into law the Coronavirus Response and Relief Supplemental Appropriations Act, a $900 billion coronavirus relief bill as part of a larger $1.4 trillion omnibus spending and appropriations bill. The federal banking regulatory agencies also issued interagency guidance to financial institutions that are working with borrowers affected by Covid-19. The American Rescue Plan Act of 2021 was signed into law by President Biden on March 11, 2021. The current eviction and foreclosure moratoriums, which end on March 31, 2021, will not be extended under the plan. However, additional funding will provide relief to those behind on mortgages, rent, and utility bills.

To support our customers, we have implemented various loan modification programs and other forms of support, including offering loan payment deferrals, waiver of certain fees and pausing foreclosure sales, evictions and repossessions. For a description of the loan modification programs that we have implemented, see 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 is dependent 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 March 31, 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 PR & USVI 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, decreased to $1.109 billion at March 31, 2021 as compared to $1.134 billion at December 31, 2020, while letters of credit provided to customers increased to $21.0 million as compared to $19.7 million at December 31, 2020. Loans sold with recourse at March 31, 2021 and December 31, 2020 amounted to $131.5 million and $135.3 million, respectively. In addition, at March 31, 2021 and December 31, 2020, OFG maintained other non-credit commitments amounting to $11.9 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 March 31, 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 March 31, 2021, OFG had approximately $2.4 billion in unrestricted cash and cash equivalents, $297.0 million in investment securities that are not pledged as collateral, and $785.5 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. 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 March 31, 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 March 31, 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: May 7, 2021
	José Rafael Fernández
	President and Chief Executive Officer

By:	/s/ Maritza Arizmendi	Date: May 7, 2021
	Maritza Arizmendi
	Executive Vice President, Chief Financial Officer and Chief Accounting Officer
By:	/s/ Krisen Aguirre Torres	Date: May 7, 2021
	Krisen Aguirre Torres
	Vice President Financial Reporting and Accounting Control

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