OFG BANCORP - Quarter Report: 2022 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022


☐			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

(Exact Name of registrant as specified in its charter)


Commonwealth of Puerto Rico						66-0538893
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)


254 Muñoz Rivera Avenue						00918
San Juan, Puerto Rico						(Zip code)
(Address of principal executive offices)


			(787) 771-6800
			(Registrant’s telephone number, including area code)
			N/A
			(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common shares, par value $1.00 per share	OFG	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þNo ¨

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 þNo ¨

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 the 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 ☑

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

47,553,723 common shares ($1.00 par value per share) outstanding as of July 31, 2022

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	13
	Note 3 – Investment Securities	13
	Note 4 – Loans	18
	Note 5 – Allowance for Credit Losses	32
	Note 6 – Foreclosed Real Estate	35
	Note 7 – Servicing Assets	35
	Note 8 – Derivatives	36
	Note 9 – Goodwill and Other Intangible Assets	37
	Note 10 – Accrued Interest Receivable and Other Assets	38
	Note 11 – Deposits and Related Interest	39
	Note 12 – Borrowings and Related Interest	41
	Note 13 – Income Taxes	41
	Note 14 – Regulatory Capital Requirements	42
	Note 15 – Stockholders’ Equity	44
	Note 16 – Accumulated Other Comprehensive (Loss) Income	45
	Note 17 – Earnings per Common Share	47
	Note 18 – Guarantees	48
	Note 19 – Commitments and Contingencies	49
	Note 20 – Operating Leases	52
	Note 21 – Fair Value of Financial Instruments	53
	Note 22 – Banking and Financial Service Revenues	59
	Note 23 – Business Segments	60
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	63
	Critical Accounting Policies and Estimates	64
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	100
Item 4.	Controls and Procedures	105

PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	105
Item 1A.	Risk Factors	105
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	105
Item 3.	Defaults upon Senior Securities	106
Item 4.	Mines S afety D isclosures	106
Item 5.	Other I nformation	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, inflationary pressures or recessionary conditions, 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, as well as the ability to successfully implement any court-approved plan of adjustment;

•unforeseen or catastrophic events, including extreme weather events, other natural disasters, man-made disasters, pandemics, war or other international conflicts (including the ongoing conflict between Russia and Ukraine) and acts of terrorism (including cyber-attacks), or utility disruptions, 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 financial assistance for the reconstruction of Puerto Rico’s infrastructure, which was impacted 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 with respect to 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 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 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, 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 Quarterly 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.

Table of Contents

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF JUNE 30, 2022 AND DECEMBER 31, 2021


	June 30,		December 31,
	2022		2021
	(In thousands)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	1,302,199	$	2,014,523
Money market investments	4,913		8,952
Total cash and cash equivalents	1,307,112		2,023,475
Restricted cash	169		175
Investments:
Trading securities, at fair value, with amortized cost of $163 (December 31, 2021 - $162)	13		20
Investment securities available-for-sale, at fair value, with amortized cost of $1,217,883 (December 31, 2021 - $503,421); no allowance for credit losses	1,159,570		510,713
Investment securities held-to-maturity, at amortized cost, with fair value of $501,747 (December 31, 2021 - $363,653); no allowance for credit losses	547,832		367,507
Equity securities	19,848		17,578
Total investments	1,727,263		895,818
Loans:
Loans held-for-sale, at lower of cost or fair value	41,588		82,662
Loans held for investment, net of allowance for credit losses of $159,039 (December 31, 2021 - $155,937)	6,543,622		6,246,649
Total loans	6,585,210		6,329,311
Other assets:
Foreclosed real estate	15,061		15,039
Accrued interest receivable	58,371		56,560
Deferred tax asset, net	76,101		99,063
Premises and equipment, net	101,848		92,124
Customers' liability on acceptances	27,150		35,329
Servicing assets	49,280		48,973
Goodwill	86,069		86,069
Other intangible assets	31,800		36,093
Operating lease right-of-use assets	27,699		28,846
Other assets	154,641		152,845
Total assets	$	10,247,774	$	9,899,720

See notes to unaudited consolidated financial statements

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OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF JUNE 30, 2022 AND DECEMBER 31, 2021 (CONTINUED)


	June 30,		December 31,
	2022		2021
	(In thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits	$	5,459,104	$	5,204,340
Savings accounts	2,433,819		2,177,780
Time deposits	1,136,647		1,220,998
Total deposits	9,029,570		8,603,118
Borrowings:

Advances from FHLB	27,586		28,488
Subordinated capital notes	—		36,083
Other borrowings	32		—
Total borrowings	27,618		64,571
Other liabilities:

Derivative liabilities	21		804
Acceptances executed and outstanding	27,150		35,329
Operating lease liabilities	29,538		30,498
Accrued expenses and other liabilities	119,065		96,240
Total liabilities	9,232,962		8,830,560
Commitments and contingencies (See Note 19)
Stockholders’ equity:

Common stock, $1 par value; 100,000,000 shares authorized; 59,885,234 shares issued: 47,553,723 shares outstanding (December 31, 2021 - 59,885,234 shares issued; 49,636,352 shares outstanding)	59,885		59,885
Additional paid-in capital	634,612		637,061
Legal surplus	125,365		117,677
Retained earnings	455,590		399,949
Treasury stock, at cost, 12,331,511 shares (December 31, 2021 - 10,248,882 shares)	(211,138)		(150,572)
Accumulated other comprehensive (loss) income, net of tax of $8,646 (December 31, 2021 - $1,328)	(49,502)		5,160
Total stockholders’ equity	1,014,812		1,069,160
Total liabilities and stockholders’ equity	$	10,247,774	$	9,899,720

See notes to unaudited consolidated financial statements

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OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2022 AND 2021


	Quarter Ended				Six-Month Period Ended
	June 30,				June 30,
	2022		2021		2022		2021
	(In thousands, except per share data)
Interest income:
Loans	$	111,357	$	110,055	$	218,922	$	218,260
Mortgage-backed securities	7,438		2,556		11,759		4,597
Investment securities and other	3,427		846		4,490		1,576
Total interest income	122,222		113,457		235,171		224,433
Interest expense:
Deposits	6,944		10,460		13,985		22,484

Advances from FHLB and other borrowings	184		452		377		911
Subordinated capital notes	—		294		521		589
Total interest expense	7,128		11,206		14,883		23,984
Net interest income	115,094		102,251		220,288		200,449
Provision for (recapture of) credit losses	6,691		(8,305)		8,242		(1,981)
Net interest income after provision for credit losses	108,403		110,556		212,046		202,430
Non-interest income:
Banking service revenue	18,141		18,251		35,703		34,748
Wealth management revenue	8,270		8,263		16,127		15,651
Mortgage banking activities	4,803		4,540		10,585		10,113
Total banking and financial service revenues	31,214		31,054		62,415		60,512

Net gain on:

Early extinguishment of debt	—		—		42		—

Other non-interest income	4,996		1,143		5,359		2,098
Total non-interest income, net	36,210		32,197		67,816		62,610

See notes to unaudited consolidated financial statements

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OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2022 AND 2021 (CONTINUED)


	Quarter Ended				Six-Month Period Ended
	June 30,				June 30,
	2022		2021		2022		2021
	(In thousands, except per share data)
Non-interest expense:
Compensation and employee benefits	34,730		32,919		69,498		65,537
Occupancy, equipment and infrastructure costs	12,861		12,528		24,777		25,656
Electronic banking charges	9,722		9,316		19,508		17,548
Information technology expenses	5,528		5,532		10,332		9,786
Professional and service fees	7,362		5,399		12,783		9,935
Taxes, other than payroll and income taxes	3,266		3,617		6,573		7,278
Insurance	2,429		2,673		5,064		5,129
Loan servicing and clearing expenses	2,243		1,942		4,165		3,782
Advertising, business promotion, and strategic initiatives	1,827		1,707		3,889		3,137
Communication	1,132		1,039		2,248		2,004
Printing, postage, stationery and supplies	785		941		1,877		2,159
Director and investor relations	346		324		595		623

Pandemic expenses	1,099		1,531		1,980		3,300
Foreclosed real estate and other repossessed assets (income) expenses, net	(1,404)		327		(2,886)		278
Other	3,332		2,881		6,010		4,190
Total non-interest expense	85,258		82,676		166,413		160,342
Income before income taxes	59,355		60,077		113,449		104,698
Income tax expense	18,923		19,250		35,496		33,498
Net income	40,432		40,827		77,953		71,200
Less: dividends on preferred stock	—		—		—		(1,255)
Income available to common shareholders	$	40,432	$	40,827	$	77,953	$	69,945
Earnings per common share:
Basic	$	0.84	$	0.79	$	1.61	$	1.36
Diluted	$	0.84	$	0.78	$	1.59	$	1.35
Average common shares outstanding and equivalents	48,389		52,048		48,933		51,885
Cash dividends per share of common stock	$	0.15	$	0.08	$	0.30	$	0.16

See notes to unaudited consolidated financial statements

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OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2022 AND 2021


	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2022		2021		2022		2021
	(In thousands)
Net income	$	40,432	$	40,827	$	77,953	$	71,200
Other comprehensive (loss) income before tax:
Unrealized (loss) gain on securities available-for-sale	(34,853)		1,404		(65,605)		(3,964)

Unrealized gain on cash flow hedges	350		172		969		419
Other comprehensive (loss) income before taxes	(34,503)		1,576		(64,636)		(3,545)
Income tax effect	5,639		(206)		9,974		123
Other comprehensive (loss) income after taxes	(28,864)		1,370		(54,662)		(3,422)
Comprehensive income	$	11,568	$	42,197	$	23,291	$	67,778

See notes to unaudited consolidated financial statements

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OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY

FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2022 AND 2021


	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2022		2021		2022		2021
	(In thousands)
Preferred stock:
Balance at beginning of period	$	—	$	92,000	$	—	$	92,000
Redemption of preferred stock	—		(68,000)		—		(68,000)
Balance at end of period	—		24,000		—		24,000
Common stock:
Balance at the beginning and end of period	59,885		59,885		59,885		59,885
Additional paid-in capital:
Balance at beginning of period	633,796		622,935		637,061		622,652
Stock-based compensation expense	1,031		1,405		2,004		3,614
Lapsed restricted stock units	(215)		(22)		(4,453)		(1,948)
Redemption of preferred stock, issuance costs	—		2,677		—		2,677
Balance at end of period	634,612		626,995		634,612		626,995
Legal surplus:
Balance at beginning of period	121,389		106,165		117,677		103,269
Transfer from retained earnings	3,976		4,070		7,688		6,966
Balance at end of period	125,365		110,235		125,365		110,235
Retained earnings:
Balance at beginning of period	426,320		322,202		399,949		300,096



Net income	40,432		40,827		77,953		71,200
Cash dividends declared on common stock[1]	(7,186)		(4,281)		(14,624)		(8,397)
Cash dividends declared on preferred stock	—		—		—		(1,255)
Transfer to legal surplus	(3,976)		(4,070)		(7,688)		(6,966)
Redemption of preferred stock, issuance costs	—		(2,677)		—		(2,677)
Balance at end of period	455,590		352,001		455,590		352,001
Treasury stock:
Balance at beginning of period	(180,717)		(100,994)		(150,572)		(102,949)
Stock repurchased	(30,632)		—		(64,110)		—
Lapsed restricted stock units and options	211		275		3,544		2,230
Balance at end of period	(211,138)		(100,719)		(211,138)		(100,719)
Accumulated other comprehensive (loss) income, net of tax:
Balance at beginning of period	(20,638)		6,230		5,160		11,022
Other comprehensive (loss) income, net of tax	(28,864)		1,370		(54,662)		(3,422)
Balance at end of period	(49,502)		7,600		(49,502)		7,600
Total stockholders’ equity	$	1,014,812	$	1,079,997	$	1,014,812	$	1,079,997

[1] Dividends declared per common share during the quarter ended June 30, 2022 - $0.15 (June 30, 2021 - $0.08). Dividends declared per common share during the six-month period ended June 30, 2022 - $0.30 (June 30, 2021 - $0.16).

See notes to unaudited consolidated financial statements

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OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2022 AND 2021


	Six-Month Period Ended June 30,
	2022		2021
	(In thousands)
Cash flows from operating activities:
Net income	$	77,953	$	71,200
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	(745)		997

Amortization of investment securities premiums, net of accretion of discounts	1,461		1,583
Amortization of other intangible assets	4,293		4,901
Net change in operating leases	187		248
Depreciation and amortization of premises and equipment	7,353		6,913
Deferred income tax expense, net	32,933		8,733
Provision for credit losses	8,241		(1,981)
Stock-based compensation	2,004		3,614

(Gain) loss on:

Sale of loans	(1,169)		(3,833)
Early extinguishment of debt	(42)		—
Foreclosed real estate and other repossessed assets	(8,012)		(2,757)
Sale of other assets	(4,747)		(570)
Originations and purchases of loans held-for-sale	(116,314)		(197,376)
Proceeds from sale of loans held-for-sale	86,596		127,053
Net decrease (increase) in:
Trading securities	7		(7)
Accrued interest receivable	(2,066)		5,947
Servicing assets	(307)		(417)
Other assets	(716)		(3,321)
Net (decrease) increase in:
Accrued interest on deposits and borrowings	(151)		(578)
Accrued expenses and other liabilities	2,924		48,085
Net cash provided by operating activities	89,683		68,434

See notes to unaudited consolidated financial statements

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OFG BANCORP UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2022 AND 2021 (CONTINUED)
	Six-Month Period Ended June 30,
	2022		2021
	(In thousands)
Cash flows from investing activities:
Purchases of:
Investment securities available-for-sale	(719,459)		(27,886)
Investment securities held-to-maturity	(196,742)		(126,777)
FHLB stock	(122)		—
Equity securities	(2,189)		(5,206)
Maturities and redemptions of:
Investment securities available-for-sale	57,288		51,129
Investment securities held-to-maturity	16,153		1,578
FHLB stock	41		737
Proceeds from sales of:

Foreclosed real estate and other repossessed assets, including write-offs	26,270		19,581


Premises and equipment	4,747		570
Origination and purchase of loans, excluding loans held-for-sale	(1,498,059)		(1,003,889)
Principal repayment of loans	1,212,135		1,093,923
Additions to premises and equipment	(17,380)		(9,633)


Net cash used in investing activities	$	(1,117,317)	$	(5,873)
Cash flows from financing activities:
Net increase (decrease) in:
Deposits	426,547		629,322

Subordinated capital notes	(36,041)		—
FHLB advances, federal funds purchased, and other borrowings	(889)		(2,397)
Exercise of stock options with treasury shares	(909)		282
Purchase of treasury stock	(64,110)		—
Redemption of preferred stock	—		(68,000)
Dividends paid on preferred stock	—		(1,255)
Dividends paid on common stock	(13,333)		(8,397)
Net cash provided by financing activities	$	311,265	$	549,555
Net change in cash, cash equivalents and restricted cash	(716,369)		612,116
Cash, cash equivalents and restricted cash at beginning of period	2,023,650		2,155,577
Cash, cash equivalents and restricted cash at end of period	$	1,307,281	$	2,767,693

	Six-Month Period Ended June 30,
	2022		2021
	(In thousands)
Reconciliation of the Consolidated Statements of Cash Flows to the Consolidated Statements of Financial Condition:
Cash and due from banks	$	1,302,199	$	2,756,288
Money market investments	4,913		11,206
Restricted cash	169		199
Total cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	1,307,281	$	2,767,693

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OFG BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2022 AND 2021 (CONTINUED)
	Six-Month Period Ended June 30,
	2022		2021
	(In thousands)
Supplemental Cash Flow Disclosure and Schedule of Non-cash Activities:
Interest paid	$	11,758	$	17,210
Income taxes paid	$	3,740	$	880
Operating lease liabilities paid	$	5,031	$	5,976
Mortgage loans held-for-sale securitized into mortgage-backed securities	$	53,488	$	83,909

Transfer from loans to foreclosed real estate and other repossessed assets	$	19,693	$	20,637
Reclassification of loans held-for-investment portfolio to held-for-sale portfolio	$	—	$	17,993
Reclassification of loans held-for-sale portfolio to held-for-investment portfolio	$	18,000	$	4,178
Financed sales of foreclosed real estate	$	825	$	407

Delinquent loans booked under the GNMA buy-back option	$	33,431	$	28,118

See notes to unaudited consolidated financial statements

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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 and investment adviser, Oriental Financial Services LLC (“Oriental Financial Services”), an insurance agency, Oriental Insurance LLC (“Oriental Insurance”), a captive reinsurance company, OFG Reinsurance Ltd (“OFG Reinsurance”), a retirement plan administrator, Oriental Pension Consultants, Inc. (“OPC”), and OFG Ventures LLC (“OFG Ventures”), which holds certain equity investments. Through these subsidiaries and their respective divisions, OFG provides a wide range of banking and financial services such as commercial, consumer and mortgage lending, auto leasing and lending, financial planning, insurance sales, money management, investment banking and securities brokerage services, as well as corporate and individual trust services.

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, 2021 (“2021 Form 10-K”). Operating results for six-month period ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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.

Recently Adopted Accounting Standards Updates

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. In August 2020, the FASB issued ASU 2020-06 to clarify the accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in this update reduce the number of accounting models for convertible debt instruments and convertible preferred stock by removing the cash conversion model and the beneficial conversion feature model. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. In addition, this ASU improves disclosure requirements for convertible instruments and earnings-per-share guidance. The ASU also revises the derivative scope exception guidance to reduce form-over-substance-based accounting conclusions driven by remote contingent events. The amendments in this update are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. OFG was not impacted by the adoption of this ASU since it does not hold these instruments.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Accounting Standards Updated Not Yet Adopted

Fair Value Measurements—Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions Disclosures. In June 2022, the FASB issued ASU 2022-03 to clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments also clarify that an entity cannot, as a separate unit of account, recognize and measure

a contractual sale restriction and requires certain disclosures for equity securities subject to contractual restrictions. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Entities are permitted to early adopt these amendments, including adoption in any interim period. The amendments should be applied prospectively with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption. Upon adoption of this ASU, OFG will consider this guidance for equity securities subject to contractual sale restrictions.

Financial Instruments—Credit Losses Troubled Debt Restructurings and Vintage Disclosures. In March 2022, the FASB issued ASU 2022-02 to address the accounting guidance on troubled debt restructurings (“TDRs”) for creditors in ASC 310-402 and amend the guidance on vintage disclosures to require disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements related to accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancing and restructurings for borrowers experiencing financial difficulty. The amendments in this update are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Entities are permitted to early adopt these amendments, including adoption in any interim period, provided that the amendments are adopted as of the beginning of the annual reporting period that includes the interim period of adoption. In addition, entities are permitted to elect to early adopt the amendments related to TDR accounting and related disclosure enhancements separately from the amendments related to the vintage disclosures. OFG is currently evaluating the impact on its presentation and disclosures upon adoption of this standard.

For other recently issued Accounting Standards Updates not yet effective, refer to Note 1 to the Consolidated Financial Statements included in the 2021 Form 10-K.

NOTE 2 – RESTRICTED CASH

OFG has a contract with FNMA which requires collateral to guarantee the repurchase, if necessary, of loans sold with recourse. At June 30, 2022 and December 31, 2021, OFG delivered as collateral cash amounting to approximately $169 thousand and $175 thousand, respectively.

The Bank is required by Puerto Rico law to maintain average weekly reserve balances to cover demand deposits. The amount of those minimum average reserve balances for the week that covered June 30, 2022 was $488.3 million (December 31, 2021 - $456.5 million). At June 30, 2022 and December 31, 2021, the Bank complied with this requirement. Cash and due from bank, as well as other short-term highly liquid securities, are used to cover the required average reserve balances.

NOTE 3 – INVESTMENT SECURITIES

Money Market Investments

OFG considers as cash equivalents all money market instruments that are not pledged and that have maturities of three months or less at the date of acquisition. At June 30, 2022 and December 31, 2021, money market instruments included as part of cash and cash equivalents amounted to $4.9 million and $9.0 million, respectively.

Investment Securities

The amortized cost, gross unrealized gains and losses, fair value, weighted average yield and contractual maturities of the securities owned by OFG at June 30, 2022 and December 31, 2021 were as follows:

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	June 30, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Weighted Average Yield
	(In thousands)
Available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates

Due from 1 to 5 years	$	1,759	$	—	$	31	$	1,728	2.12	%
Due from 5 to 10 years	76,908		—		2,005		74,903		1.95	%
Due after 10 years	795,150		948		33,267		762,831		2.82	%
Total FNMA and FHLMC certificates	873,817		948		35,303		839,462		2.74	%
GNMA Securities

Due from 1 to 5 years	15,130		—		431		14,699		1.63	%
Due from 5 to 10 years	28,190		38		997		27,231		2.03	%
Due after 10 years	268,591		616		22,780		246,427		2.52	%
Total GNMA certificates	311,911		654		24,208		288,357		2.44	%
CMOs issued by US government-sponsored agencies

Due from 1 to 5 years	14,809		—		391		14,418		1.79	%
Due from 5 to 10 years	3,223		—		79		3,144		1.82	%
Due after 10 years	1,091		—		13		1,078		4.88	%
Total CMOs issued by US government-sponsored agencies	19,123		—		483		18,640		1.97	%
Total mortgage-backed securities	1,204,851		1,602		59,994		1,146,459		2.64	%
Investment securities
US Treasury securities
Due less than 1 year	10,734		—		1		10,733		1.53	%










Other debt securities
Due less than 1 year	500		—		—		500		0.57	%
Due from 1 to 5 years	1,798		81		1		1,878		5.50	%


Total other debt securities	2,298		81		1		2,378		4.43	%
Total investment securities	13,032		81		2		13,111		2.04	%
Total securities available for sale	$	1,217,883	$	1,683	$	59,996	$	1,159,570	2.64	%

	June 30, 2022
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Weighted Average Yield
	(In thousands)
Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates



Due after 10 years	$	351,016	$	—	$	47,628	$	303,388	1.70	%

Investment securities
US Treasury securities

Due from 1 to 5 years	196,816		1,543		—		198,359		3.36	%



Total securities held-to-maturity	$	547,832	$	1,543	$	47,628	$	501,747	2.30	%

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Weighted Average Yield
	(In thousands)
Available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates


Due from 5 to 10 years	$	90,560	2,502		$	—	$	93,062	1.94	%
Due after 10 years	93,440		—		3,200		90,240		1.37	%
Total FNMA and FHLMC certificates	184,000		2,502		3,200		183,302		1.65	%
GNMA Securities

Due from 1 to 5 years	10,536		233		1		10,768		1.66	%
Due from 5 to 10 years	26,419		556		—		26,975		1.80	%
Due after 10 years	244,106		6,927		198		250,835		2.40	%
Total GNMA certificates	281,061		7,716		199		288,578		2.32	%
CMOs issued by US government-sponsored agencies

Due from 1 to 5 years	1,788		22		—		1,810		1.70	%
Due from 5 to 10 years	20,705		299		—		21,004		1.81	%
Due after 10 years	1,601		16		1		1,616		4.24	%
Total CMOs issued by US government-sponsored agencies	24,094		337		1		24,430		1.96	%
Total mortgage-backed securities	489,155		10,555		3,400		496,310		2.05	%
Investment securities
US Treasury securities
Due less than 1 year	10,737		88		—		10,825		1.48	%




Obligations of US government-sponsored agencies
Due less than 1 year	1,182		1		—		1,183		1.40	%




Other debt securities
Due less than 1 year	500		—		—		500		0.57	%
Due from 1 to 5 years	1,847		48		—		1,895		5.43	%


Total other debt securities	2,347		48		—		2,395		4.39	%
Total investment securities	14,266		137		—		14,403		1.95	%
Total securities available for sale	$	503,421	$	10,692	$	3,400	$	510,713	2.05	%


	December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Weighted Average Yield
	(In thousands)
Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates



Due after 10 years	$	367,507	$	—	$	3,854	$	363,653	1.71	%

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Investment securities as of June 30, 2022 include $231.8 million pledged to secure government deposits, derivatives and regulatory collateral that the secured parties are not permitted to sell or repledge, of which $231.3 million serve as collateral for public funds. Investment securities as of December 31, 2021 include $145.6 million pledged to secure government deposits, derivatives and regulatory collateral that the secured parties are not permitted to sell or repledge, of which $143.8 million serve as collateral for public funds.

The weighted average yield on debt securities available-for-sale is based on amortized cost and does not give effect to changes in fair value. Weighted average yields on tax-exempt obligations have been computed on a fully taxable equivalent basis.

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.

At June 30, 2022 and December 31, 2021, most securities held by OFG are issued by U.S. government entities and government-sponsored agencies that have a zero-credit loss assumption.

At both June 30, 2022 and December 31, 2021, the Bank’s international banking entities held short-term US Treasury securities in the amount of $305 thousand and $325 thousand, respectively, as the legal reserve required for international banking entities under Puerto Rico law. These instruments cannot be withdrawn or transferred without the prior written approval of the Office of the Commissioner of Financial Institutions of Puerto Rico (“OCFI”).

During the six-month periods ended June 30, 2022 and 2021, OFG retained securitized GNMA pools totaling $53.5 million and $84.0 million amortized cost, respectively, at a yield of 3.11% and 2.66%, respectively, from its own originations.

There were no sales of securities during the six-month periods ended June 30, 2022 and 2021.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table shows OFG’s gross unrealized losses and fair value of investment securities available-for-sale and held-to-maturity at June 30, 2022 and December 31, 2021, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:


	June 30, 2022
	12 months or more
	Amortized Cost		Unrealized Loss		Fair Value
	(In thousands)
Securities available-for-sale

FNMA and FHLMC certificates	$	89,333	$	15,279	$	74,054
GNMA certificates	499		73		426

	$	89,832	$	15,352	$	74,480




	June 30, 2022
	Less than 12 months
	Amortized Cost		Unrealized Loss		Fair Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies	$	19,123	$	483	$	18,640
FNMA and FHLMC certificates	664,722		20,024		644,698
GNMA certificates	282,987		24,135		258,852
US Treasury securities	734		1		733
Other debt securities	298		1		297
	967,864		44,644		923,220
Held-to-maturity
FNMA and FHLMC certificates	$	351,016	$	47,628	$	303,388

	June 30, 2022
	Total
	Amortized Cost		Unrealized Loss		Fair Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies	$	19,123	$	483	$	18,640
FNMA and FHLMC certificates	754,055		35,303		718,752
GNMA certificates	283,486		24,208		259,278
US Treasury Securities	734		1		733
Other debt securities	298		1		297
	1,057,696		59,996		997,700
Held-to-maturity
FNMA and FHLMC certificates	$	351,016	$	47,628	$	303,388

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	December 31, 2021
	Less than 12 months
	Amortized Cost		Unrealized Loss		Fair Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies	$	500	$	1	$	499
FNMA and FHLMC certificates	93,440		3,200		90,240
GNMA certificates	5,022		199		4,823

	98,962		3,400		95,562
Held-to-maturity
FNMA and FHLMC certificates	$	367,507	$	3,854	$	363,653

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

NOTE 4 - LOANS

OFG’s loan portfolio is composed of four segments: commercial, mortgage, consumer, and auto loans and leases. Loans are further segregated into classes which OFG uses when assessing and monitoring the risk and performance of the portfolio. The composition of the amortized cost basis of OFG’s loan portfolio at June 30, 2022 and December 31, 2021 was as follows:


	June 30, 2022						December 31, 2021
	Non-PCD		PCD		Total		Non-PCD		PCD		Total
	(In thousands)
Commercial loans:
Commercial secured by real estate	$	932,165	$	147,362	$	1,079,527	$	883,994	$	176,186	$	1,060,180
Other commercial and industrial	832,309		26,920		859,229		759,172		28,149		787,321
Other commercial and industrial - Paycheck Protection Program (PPP Loans)	33,304		—		33,304		86,889		—		86,889
US commercial loans	623,807		—		623,807		444,940		—		444,940
	2,421,585		174,282		2,595,867		2,174,995		204,335		2,379,330
Mortgage	708,755		1,099,097		1,807,852		718,848		1,188,423		1,907,271
Consumer:
Personal loans	440,419		402		440,821		346,859		546		347,405
Credit lines	13,597		296		13,893		14,775		370		15,145
Credit cards	44,074		—		44,074		46,795		—		46,795
Overdraft	314		—		314		330		—		330
	498,404		698		499,102		408,759		916		409,675
Auto and leasing	1,791,052		8,788		1,799,840		1,693,029		13,281		1,706,310
	5,419,796		1,282,865		6,702,661		4,995,631		1,406,955		6,402,586
Allowance for credit losses	(143,896)		(15,143)		(159,039)		(132,065)		(23,872)		(155,937)
Total loans held for investment, net	5,275,900		1,267,722		6,543,622		4,863,566		1,383,083		6,246,649
Mortgage loans held for sale	26,947		—		26,947		51,096		—		51,096
Other loans held for sale	14,641		—		14,641		31,566		—		31,566
Total loans held for sale	41,588		—		41,588		82,662		—		82,662
Total loans, net	$	5,317,488	$	1,267,722	$	6,585,210	$	4,946,228	$	1,383,083	$	6,329,311

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

During the six-month period ended June 30, 2022, OFG sold $21.9 million of past due mortgage loans held for sale. These mortgage loans were transferred to held for sale during the fourth quarter of 2021.

At June 30, 2022 and December 31, 2021, OFG had carrying balances of $86.3 million and $87.3 million, respectively, in loans held for investment granted to the Puerto Rico government, including its municipalities and public corporations, as part of the commercial loan segment. The Bank’s loans to the Puerto Rico government amounting to $86.3 million and $86.2 million at June 30, 2022 and December 31, 2021, 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. At December 31, 2021, total loan exposure to the Puerto Rico government included a $1.1 million purchased credit-deteriorated (“PCD”) loan granted to a public corporation classified as non-accrual, which was repaid during the six-month period ended June 30, 2022.

The tables below present the aging of the amortized cost of loans held for investment at June 30, 2022 and December 31, 2021, by class of loans. Mortgage loans past due include $33.4 million and $14.5 million of delinquent loans in the GNMA buy-back option program at June 30, 2022 and December 31, 2021, 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.


	June 30, 2022
	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans		Loans 90+ Days Past Due and Still Accruing
	(In thousands)
Commercial
Commercial secured by real estate	$	1,529	$	2,903	$	6,502	$	10,934	$	921,231	$	932,165	$	—
Other commercial and industrial	1,481		88		741		2,310		863,303		865,613		—
US commercial loans	—		—		—		—		623,807		623,807		—
	3,010		2,991		7,243		13,244		2,408,341		2,421,585		—
Mortgage	6,995		6,942		55,669		69,606		639,149		708,755		1,301
Consumer
Personal loans	4,279		1,951		1,207		7,437		432,982		440,419		—
Credit lines	261		150		164		575		13,022		13,597		—
Credit cards	702		362		604		1,668		42,406		44,074		—
Overdraft	57		—		—		57		257		314		—
	5,299		2,463		1,975		9,737		488,667		498,404		—
Auto and leasing	63,599		27,808		15,230		106,637		1,684,415		1,791,052		—
Total loans	$	78,903	$	40,204	$	80,117	$	199,224	$	5,220,572	$	5,419,796	$	1,301

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	December 31, 2021
	30-59 Day Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total Loans		Loans 90+ Days Past Due and Still Accruing
	(In thousands)
Commercial
Commercial secured by real estate	$	2,210	$	102	$	8,446	$	10,758	$	873,236	$	883,994	$	—
Other commercial and industrial	1,886		538		946		3,370		842,691		846,061		—
US commercial loans	—		—		—		—		444,940		444,940		—
	4,096		640		9,392		14,128		2,160,867		2,174,995		—
Mortgage	8,704		7,855		43,468		60,027		658,821		718,848		2,346
Consumer
Personal loans	2,382		1,131		1,116		4,629		342,230		346,859		—
Credit lines	531		141		227		899		13,876		14,775		—
Credit cards	610		336		631		1,577		45,218		46,795		—
Overdraft	130		14		—		144		186		330		—
	3,653		1,622		1,974		7,249		401,510		408,759		—
Auto and leasing	60,038		30,234		13,461		103,733		1,589,296		1,693,029		—
Total loans	$	76,491	$	40,351	$	68,295	$	185,137	$	4,810,494	$	4,995,631	$	2,346

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Non-accrual Loans

The following table presents the amortized cost basis of loans on nonaccrual status as of June 30, 2022 and December 31, 2021:


	June 30, 2022						December 31, 2021
	Non-accrual with Allowance for Credit Loss		Non-accrual with no Allowance for Credit Loss		Total		Non-accrual with Allowance for Credit Loss		Non-accrual with no Allowance for Credit Loss		Total
	(In thousands)
Non-PCD:
Commercial
Commercial secured by real estate	$	17,088	$	18,134	$	35,222	$	16,299	$	19,538	$	35,837
Other commercial and industrial	2,698		294		2,992		1,284		483		1,767
US commercial loans	8,992		—		8,992		—		—		—
	28,778		18,428		47,206		17,583		20,021		37,604
Mortgage	14,062		9,319		23,381		16,428		12,840		29,268
Consumer
Personal loans	882		338		1,220		1,143		302		1,445
Personal lines of credit	164		—		164		226		—		226
Credit cards	603		—		603		632		—		632
	1,649		338		1,987		2,001		302		2,303
Auto and leasing	15,328		1		15,329		19,827		2		19,829
Total	$	59,817	$	28,086	$	87,903	$	55,839	$	33,165	$	89,004

PCD:
Commercial
Commercial secured by real estate	$	3,406	$	6,611	$	10,017	$	5,205	$	6,198	$	11,403
Other commercial and industrial	—		40		40		1,102		40		1,142
	3,406		6,651		10,057		6,307		6,238		12,545
Mortgage	261		—		261		334		—		334



Total	$	3,667	$	6,651	$	10,318	$	6,641	$	6,238	$	12,879
Total non-accrual loans	$	63,484	$	34,737	$	98,221	$	62,480	$	39,403	$	101,883

The determination of nonaccrual or accrual status of PCD loans is made at the pool level, not the individual loan level.

Delinquent residential mortgage loans insured or guaranteed under applicable Federal Housing Administration (“FHA”) and United States Department of Veterans Affairs (“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 June 30, 2022 and December 31, 2021, loans whose terms have been extended and which were classified as troubled-debt restructurings that were not included in non-accrual loans amounted to $150.0 million and $125.9 million, respectively, as they were performing under their modified terms.

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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 $2.7 million and $3.7 million at June 30, 2022 and December 31, 2021, respectively.

The following table presents the troubled-debt restructurings in all loan portfolios as of June 30, 2022 and December 31, 2021.


	June 30, 2022								December 31, 2021
	Accruing		Non-accruing		Total		Related Allowance		Accruing		Non-accruing		Total		Related Allowance
	(In thousands)
Commercial loans:
Commercial secured by real estate	$	30,987	$	14,033	$	45,020	$	273	$	10,981	$	14,444	$	25,425	$	202
Other commercial and industrial	2,532		403		2,935		54		2,785		473		3,258		41

US commercial loans	7,203		—		7,203		197		7,156		—		7,156		126
	40,722		14,436		55,158		524		20,922		14,917		35,839		369
Mortgage	106,658		8,981		115,639		3,106		101,487		9,475		110,962		3,867
Consumer:
Personal loans	2,519		13		2,532		122		3,275		139		3,414		159




Auto and leasing	97		1		98		4		203		8		211		11
Total loans	$	149,996	$	23,431	$	173,427	$	3,756	$	125,887	$	24,539	$	150,426	$	4,406

The following tables present the troubled-debt restructurings by loan portfolios and modification type as of June 30, 2022 and December 31, 2021:


	June 30, 2022
	Reduction in interest rate		Maturity or term extension		Combination of reduction in interest rate and extension of maturity		Forbearance		Total
	(In thousands)
Commercial loans:
Commercial secured by real estate	$	8,093	$	25,777	$	7,947	$	3,203	$	45,020
Other commercial and industrial	818		1,600		493		24		2,935

US commercial loans	7,203		—		—		—		7,203
	16,114		27,377		8,440		3,227		55,158
Mortgage	36,793		7,747		37,519		33,580		115,639
Consumer:
Personal loans	1,088		204		1,126		114		2,532




Auto and leasing	44		—		25		29		98
Total loans	$	54,039	$	35,328	$	47,110	$	36,950	$	173,427

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	December 31, 2021
	Reduction in interest rate		Maturity or term extension		Combination of reduction in interest rate and extension of maturity		Forbearance		Total
	(In thousands)
Commercial loans:
Commercial secured by real estate	$	8,461	$	1,227	$	12,401	$	3,336	$	25,425
Other commercial and industrial	723		1,985		522		28		3,258

US commercial loans	7,156		—		—		—		7,156
	16,340		3,212		12,923		3,364		35,839
Mortgage	37,307		6,796		32,456		34,403		110,962
Consumer:
Personal loans	1,496		287		1,430		201		3,414





Auto and leasing	74		—		28		109		211
Total loans	$	55,217	$	10,295	$	46,837	$	38,077	$	150,426

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 implementation of the modification program, and the borrowers meet other applicable criteria. At June 30, 2022, there were $9.7 million (December 31, 2021 - $28.0 million) of loans deferred from the Covid-19 pandemic that were not classified as a TDR, which consists of FHA and VA insured mortgage loans.

At June 30, 2022 and December 31, 2021, TDR mortgage loans include $47.7 million and $40.8 million, respectively, of government-guaranteed loans (e.g. FHA/VA).

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, PCD loans are not included in the TDR tables.

Loan modifications that are considered TDR loans completed during the quarters and six-month periods ended June 30, 2022 and 2021 were as follows:


	Quarter Ended June 30, 2022
	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	36	$	4,333	4.58	%	267	$	4,608	3.68	%	344
Commercial	2	37,808		3.51	%	133	37,808		3.61	%	187
Consumer	1	9		20.95	%	72	9		10.95	%	72

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	Six-Month Period Ended June 30, 2022
	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	72	$	9,033	4.55	%	270	$	9,471	3.57	%	343
Commercial	4	38,703		3.56	%	131	38,560		3.63	%	184
Consumer	2	22		19.27	%	79	22		10.95	%	79


	Quarter Ended June 30, 2021
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate		Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate		Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Mortgage	44	5,104		4.24	%	303	4,880		3.59	%	349
Commercial	1	991		4.25	%	175	880		5.75	%	60
Consumer	7	139		12.76	%	72	139		9.47	%	76
Auto and leasing	3	44		13.15	%	78	44		10.15	%	73


	Six-Month Period Ended June 30, 2021
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate		Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate		Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Mortgage	70	$	8,661	4.14	%	302	$	8,460	3.60	%	342
Commercial	3	1,176		4.72	%	157	1,085		5.95	%	60
Consumer	9	155		12.65	%	70	156		9.52	%	75
Auto and leasing	8	126		9.04	%	70	126		9.93	%	49

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents troubled-debt restructurings for which there was a payment default during the twelve-month periods ended June 30, 2022 and 2021:


	Twelve-Month Period Ended June 30,
	2022			2021
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in thousands)
Mortgage	7	$	800	19	$	2,191

Consumer	3	$	47	1	$	14
Auto and leasing	—	$	—	11	$	64

As of June 30, 2022 and December 31, 2021, the recorded investment on residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure amounted to $14.9 million and $16.9 million, respectively. 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 respective territory’s courts. Foreclosure timelines vary according to local law and investor guidelines. Occasionally, foreclosures may be delayed due to, among other reasons, mandatory mediation, bankruptcy, court delays and title issues.

Collateral-dependent Loans

The table below presents the amortized cost of collateral-dependent loans held for investment at June 30, 2022 and December 31, 2021, by class of loans.


	June 30, 2022		December 31, 2021
	(In thousands)
Commercial loans:
Commercial secured by real estate	$	21,565	$	10,233

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

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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 debts, 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.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of June 30, 2022 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 Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Total
	2022		2021		2020		2019		2018		Prior
	(In thousands)
Commercial:
Commercial secured by real estate:
Loan grade:
Pass	$	136,168	$	181,469	$	121,765	$	111,269	$	67,813	$	186,450	$	42,048	$	846,982
Special Mention	—		—		608		31,749		4,353		7,463		685		44,858
Substandard	—		8,689		10,080		167		511		16,643		3,694		39,784
Doubtful	—		—		—		—		—		18		523		541
Loss	—		—		—		—		—		—		—		—
Total commercial secured by real estate	136,168		190,158		132,453		143,185		72,677		210,574		46,950		932,165
Other commercial and industrial:
Loan grade:
Pass	57,167		224,278		81,381		39,130		58,787		14,136		382,607		857,486
Special Mention	—		9		29		680		1,954		—		2,217		4,889
Substandard	126		57		175		196		503		120		2,015		3,192
Doubtful	—		—		—		—		—		—		46		46
Loss	—		—		—		—		—		—		—		—
Total other commercial and industrial:	57,293		224,344		81,585		40,006		61,244		14,256		386,885		865,613
US commercial loans:
Loan grade:
Pass	54,361		85,534		57,794		37,559		52,194		—		314,371		601,813
Special Mention	—		—		—		—		4,912		—		—		4,912
Substandard	887		—		7,203		1,538		2,958		—		—		12,586
Doubtful	—		—		—		—		4,496		—		—		4,496
Loss	—		—		—		—		—		—		—		—
Total US commercial loans:	55,248		85,534		64,997		39,097		64,560		—		314,371		623,807
Total commercial loans	$	248,709	$	500,036	$	279,035	$	222,288	$	198,481	$	224,830	$	748,206	$	2,421,585

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of December 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 Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Total
	2021		2020		2019		2018		2017		Prior
	(In thousands)
Commercial:
Commercial secured by real estate:
Loan grade:
Pass	$	183,820	$	120,855	$	114,208	$	94,864	$	52,439	$	183,026	$	45,178	$	794,390
Special Mention	654		628		32,578		4,581		4,053		5,102		643		48,239
Substandard	8,415		10,694		58		849		1,357		17,555		1,671		40,599
Doubtful	—		—		—		—		—		22		744		766
Loss	—		—		—		—		—		—		—		—
Total commercial secured by real estate	192,889		132,177		146,844		100,294		57,849		205,705		48,236		883,994
Other commercial and industrial:
Loan grade:
Pass	276,165		93,809		45,976		57,989		6,106		6,004		330,072		816,121
Special Mention	78		23		8,076		2,213		3,525		—		13,642		27,557
Substandard	112		48		155		394		81		28		1,513		2,331
Doubtful	—		—		—		—		—		—		52		52
Loss	—		—		—		—		—		—		—		—
Total other commercial and industrial:	276,355		93,880		54,207		60,596		9,712		6,032		345,279		846,061
US commercial loans:
Loan grade:
Pass	85,394		61,098		41,924		47,179		—		—		171,928		407,523
Special Mention	—		—		1,515		19,095		—		—		—		20,610
Substandard	—		7,156		—		9,651		—		—		—		16,807
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total US commercial loans:	85,394		68,254		43,439		75,925		—		—		171,928		444,940
Total commercial loans	$	554,638	$	294,311	$	244,490	$	236,815	$	67,561	$	211,737	$	565,443	$	2,174,995

At June 30, 2022 and December 31, 2021, the balance of revolving loans converted to term loans was $70.1 million and $37.5 million, respectively.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 table presents the amortized cost in mortgage and consumer loans based on payment activity as of June 30, 2022:


	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term Loans Amortized Cost Basis		Total
	2022		2021		2020		2019		2018		Prior
	(In thousands)
Mortgage:
Payment performance:
Performing	$	10,017	$	26,538	$	16,966	$	15,111	$	17,007	$	589,770	$	—	$	—	$	675,409
Nonperforming	—		—		123		858		462		31,903		—		—		33,346
Total mortgage loans:	10,017		26,538		17,089		15,969		17,469		621,673		—		—		708,755
Consumer:
Personal loans:
Payment performance:
Performing	180,716		142,304		40,917		45,414		19,418		10,430		—		—		439,199
Nonperforming	33		295		162		194		168		368		—		—		1,220
Total personal loans	180,749		142,599		41,079		45,608		19,586		10,798		—		—		440,419
Credit lines:
Payment performance:
Performing	—		—		—		—		—		—		13,433		—		13,433
Nonperforming	—		—		—		—		—		—		164		—		164
Total credit lines	—		—		—		—		—		—		13,597		—		13,597
Credit cards:
Payment performance:
Performing	—		—		—		—		—		—		43,471		—		43,471
Nonperforming	—		—		—		—		—		—		603		—		603
Total credit cards	—		—		—		—		—		—		44,074		—		44,074
Overdrafts:
Payment performance:
Performing	—		—		—		—		—		—		314		—		314
Nonperforming	—		—		—		—		—		—		—		—		—
Total overdrafts	—		—		—		—		—		—		314		—		314
Total consumer loans	180,749		142,599		41,079		45,608		19,586		10,798		57,985		—		498,404
Total mortgage and consumer loans	$	190,766	$	169,137	$	58,168	$	61,577	$	37,055	$	632,471	$	57,985	$	—	$	1,207,159

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents the amortized cost in mortgage and consumer loans based on payment activity as of December 31, 2021:


	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term Loans Amortized Cost Basis		Total
	2021		2020		2019		2018		2017		Prior
	(In thousands)
Mortgage:
Payment performance:
Performing	$	18,486	$	16,585	$	15,461	$	19,261	$	24,872	$	584,792	$	—	$	—	$	679,457
Nonperforming	—		126		129		510		1,830		36,796		—		—		39,391
Total mortgage loans:	18,486		16,711		15,590		19,771		26,702		621,588		—		—		718,848
Consumer:
Personal loans:
Payment performance:
Performing	175,273		55,960		65,425		29,808		12,287		6,661		—		—		345,414
Nonperforming	296		239		411		143		20		336		—		—		1,445
Total personal loans	175,569		56,199		65,836		29,951		12,307		6,997		—		—		346,859
Credit lines:
Payment performance:
Performing	—		—		—		—		—		—		14,549		—		14,549
Nonperforming	—		—		—		—		—		—		226		—		226
Total credit lines	—		—		—		—		—		—		14,775		—		14,775
Credit cards:
Payment performance:
Performing	—		—		—		—		—		—		46,163		—		46,163
Nonperforming	—		—		—		—		—		—		632		—		632
Total credit cards	—		—		—		—		—		—		46,795		—		46,795
Overdrafts:
Payment performance:
Performing	—		—		—		—		—		—		330		—		330
Nonperforming	—		—		—		—		—		—		—		—		—
Total overdrafts	—		—		—		—		—		—		330		—		330
Total consumer loans	175,569		56,199		65,836		29,951		12,307		6,997		61,900		—		408,759
Total mortgage and consumer loans	$	194,055	$	72,910	$	81,426	$	49,722	$	39,009	$	628,585	$	61,900	$	—	$	1,127,607

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

OFG evaluates credit quality for auto loans and leases based on FICO score. The following table presents the amortized cost in auto loans and leases based on their most recent FICO score as of June 30, 2022:


	Term Loans Amortized Cost Basis by Origination Year												Total
	2022		2021		2020		2019		2018		Prior
	(In thousands)
Auto and leasing:
FICO score:
1-660	78,283		149,018		76,504		66,065		52,072		43,198		465,140
661-699	76,782		124,169		53,105		36,849		27,029		19,624		337,558
700+	164,107		247,689		163,079		159,093		109,330		71,625		914,923
No FICO	13,379		20,182		11,555		14,032		8,201		6,082		73,431
Total auto and leasing:	$	332,551	$	541,058	$	304,243	$	276,039	$	196,632	$	140,529	$	1,791,052

The following table presents the amortized cost in auto loans and leases based on their most recent FICO score as of December 31, 2021:


	Term Loans Amortized Cost Basis by Origination Year												Total
	2021		2020		2019		2018		2017		Prior
	(In thousands)
Auto and leasing:
FICO score:
1-660	161,534		90,402		80,745		65,681		38,001		23,171		459,534
661-699	134,507		68,422		48,173		33,854		16,761		10,534		312,251
700+	245,148		180,737		184,307		133,098		63,229		38,474		844,993
No FICO	26,759		13,580		17,062		10,119		5,515		3,216		76,251
Total auto and leasing:	$	567,948	$	353,141	$	330,287	$	242,752	$	123,506	$	75,395	$	1,693,029

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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.

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

At June 30, 2022, OFG used an economic probability weighted scenario approach consisting of the baseline and moderate recession scenarios, giving more weight to the baseline scenario. Except for the US loan segment that was updated to the same level of probability in both economic scenarios. In addition, the ACL at June 30, 2022 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 and consumer retail portfolios. 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 resulting from the effect of inflation. Also, geopolitical tension resulted from the military conflict between Ukraine and Russia, which will put more pressure on inflation due to its disruption of oil, natural gas and other commodity markets.

As of June 30, 2022, the allowance for credit losses increased by $3.1 million when compared to December 31, 2021. The provision for credit losses for the six-month period ended June 30, 2022 reflected a provision of $9.1 million related to the growth in loan balances and a provision of $9.5 million related to commercial-specific loan reserves due to certain commercial loans placed in non-accrual status, offset by a $9.6 million release associated with qualitative adjustment due to improvement in the performance of the portfolios and in Puerto Rico’s labor market.

The net charge-offs for the six-month period ended June 30, 2022, amounted to $5.1 million, a decrease of $6.1 million compared to the same period of 2021. The decrease is mainly due to a reduction of $7.0 million in mortgage loans and $1.5 million in consumer loans, offset by an increase of $1.3 million in auto loans and leases, and $1.1 million in commercial loans.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables present the activity in OFG’s allowance for credit losses by segment for the quarters and six-month periods ended June 30, 2022 and 2021:


	Quarter Ended June 30, 2022
	Commercial		Mortgage		Consumer		Auto and Leasing		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	37,097	$	14,952	$	21,100	$	64,195	$	137,344
Provision for (recapture of) credit losses	7,368		(3,122)		4,521		3,535		12,302
Charge-offs	(2,907)		(259)		(3,307)		(6,428)		(12,901)
Recoveries	456		335		795		5,565		7,151
Balance at end of period	$	42,014	$	11,906	$	23,109	$	66,867	$	143,896
PCD:
Balance at beginning of period	$	3,622	$	15,881	$	31	$	197	$	19,731
Recapture of provision for credit losses	(1,444)		(4,183)		(16)		(152)		(5,795)
Charge-offs	—		(183)		(8)		(75)		(266)
Recoveries	249		1,026		13		185		1,473
Balance at end of period	$	2,427	$	12,541	$	20	$	155	$	15,143
Total allowance for credit losses at end of period	$	44,441	$	24,447	$	23,129	$	67,022	$	159,039


	Six-Month Period Ended June 30, 2022
	Commercial		Mortgage		Consumer		Auto and Leasing		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	32,262	$	15,299	$	19,141	$	65,363	$	132,065
Provision for (recapture of) credit losses	12,555		(5,540)		8,484		5,366		20,865
Charge-offs	(3,451)		(262)		(5,966)		(14,318)		(23,997)
Recoveries	648		2,409		1,450		10,456		14,963
Balance at end of period	$	42,014	$	11,906	$	23,109	$	66,867	$	143,896
PCD:
Balance at beginning of period	$	4,508	$	19,018	$	34	$	312	$	23,872
Recapture of provision for credit losses	(5,319)		(7,031)		(3)		(290)		(12,643)
Charge-offs	(34)		(1,317)		(47)		(189)		(1,587)
Recoveries	3,272		1,871		36		322		5,501
Balance at end of period	$	2,427	$	12,541	$	20	$	155	$	15,143
Total allowance for credit losses at end of period	$	44,441	$	24,447	$	23,129	$	67,022	$	159,039

Total commercial charge-offs for the quarter and six-month period ended June 30, 2022 includes a $2.5 million charge-off from a previously reserved commercial loan sold during the quarter ended June 30, 2022.

Total recoveries for the six-month period ended June 30, 2022 includes a $2.8 million recovery from a Puerto Rico government public corporation PCD commercial loan repaid during the first quarter of 2022 and $1.1 million recoveries associated with the final settlement of the past due mortgage loans transferred to held for sale during the fourth quarter of 2021 and subsequently sold during the first quarter of 2022.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	Quarter Ended June 30, 2021
	Commercial		Mortgage		Consumer		Auto and Leasing		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	47,683	$	17,035	$	21,191	$	71,069	$	156,978

(Recapture of) provision for credit losses	(4,503)		(592)		74		(2,538)		(7,559)
Charge-offs	(653)		(268)		(2,897)		(5,170)		(8,988)
Recoveries	996		193		697		5,997		7,883
Balance at end of period	$	43,523	$	16,368	$	19,065	$	69,358	$	148,314
PCD:
Balance at beginning of period	$	14,306	$	29,939	$	52	$	698	$	44,995

(Recapture of) provision for credit losses	(1,974)		1,727		(47)		(285)		(579)
Charge-offs	(6)		(1,742)		—		(226)		(1,974)
Recoveries	430		184		33		314		961
Balance at end of period	$	12,756	$	30,108	$	38	$	501	$	43,403
Total allowance for credit losses at end of period	$	56,279	$	46,476	$	19,103	$	69,859	$	191,717

	Six-Month Period Ended June 30, 2021
	Commercial		Mortgage		Consumer		Auto and Leasing		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	45,779	$	19,687	$	25,253	$	70,296	$	161,015

(Recapture of) provision for credit losses	(2,961)		(3,071)		(85)		1,501		(4,616)
Charge-offs	(720)		(1,056)		(7,366)		(14,253)		(23,395)
Recoveries	1,425		808		1,263		11,814		15,310
Balance at end of period	$	43,523	$	16,368	$	19,065	$	69,358	$	148,314
PCD:
Balance at beginning of period	$	16,405	$	26,389	$	57	$	943	$	43,794

(Recapture of) provision for credit losses	(4,466)		7,721		(52)		(457)		2,746
Charge-offs	(50)		(4,332)		(22)		(682)		(5,086)
Recoveries	867		330		55		697		1,949
Balance at end of period	$	12,756	$	30,108	$	38	$	501	$	43,403
Total allowance for credit losses at end of period	$	56,279	$	46,476	$	19,103	$	69,859	$	191,717

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 6 — FORECLOSED REAL ESTATE

The following tables present the activity related to foreclosed real estate for the quarters and six-month periods ended June 30, 2022 and 2021:


	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2022		2021		2022		2021
	(In thousands)
Balance at beginning of period	$	15,297	$	15,598	$	15,039	$	11,596
Additions	2,549		2,907		5,729		9,544
Sales	(4,140)		(3,098)		(7,947)		(5,521)
Decline in value	(219)		(671)		(414)		(760)
Other adjustments	1,574		357		2,654		234
Balance at end of period	$	15,061	$	15,093	$	15,061	$	15,093

NOTE 7 - SERVICING ASSETS

At June 30, 2022, the fair value of mortgage servicing rights was $49.3 million ($49.0 million — December 31, 2021).

The following table presents the changes in servicing rights measured using the fair value method for the quarters and six-month periods ended June 30, 2022 and 2021:


	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2022		2021		2022		2021
	(In thousands)
Fair value at beginning of period	$	49,446	$	47,911	$	48,973	$	47,295
Servicing from mortgage securitization or asset transfers	1,150		2,023		2,269		3,443
Changes due to payments on loans	(1,478)		(1,862)		(2,977)		(3,369)
Changes in fair value due to changes in valuation model inputs or assumptions	162		(360)		1,015		343
Fair value at end of period	$	49,280	$	47,712	$	49,280	$	47,712

The following table presents key economic assumption ranges used in measuring the mortgage-related servicing asset fair value for the six-month periods ended June 30, 2022 and 2021:


	Six-Month Period Ended June 30,
	2022	2021
Constant prepayment rate	3.60% - 22.71%	4.82% - 25.64%
Discount rate	10.00% - 15.50%	10.00% - 15.50%

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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


	June 30, 2022		December 31, 2021
	(In thousands)
Mortgage-related servicing asset
Carrying value of mortgage servicing asset	$	49,280	$	48,973
Constant prepayment rate
Decrease in fair value due to 10% adverse change	$	(951)	$	(1,020)
Decrease in fair value due to 20% adverse change	$	(1,872)	$	(2,004)
Discount rate
Decrease in fair value due to 10% adverse change	$	(2,221)	$	(2,175)
Decrease in fair value due to 20% adverse change	$	(4,270)	$	(4,183)

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

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

Servicing fee income is based on a contractual percentage of the outstanding principal balance and is recorded as income when earned. Servicing fees on mortgage loans for the quarters ended June 30, 2022 and 2021 totaled $5.2 million and $5.3 million, respectively. Servicing fees on mortgage loans for the six-month periods ended June 30, 2022 and 2021 totaled $10.2 million and $10.5 million, respectively.

NOTE 8 — DERIVATIVES

OFG’s overall interest rate risk-management strategy incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. Derivative instruments that are used as part of OFG’s interest rate risk-management strategy include interest rate swaps and caps.

As of June 30, 2022 and December 31, 2021, the notional amount of derivative contracts outstanding was $27.6 million and $28.5 million respectively. The gross fair value of derivative asset was $187 thousand and $1 thousand, respectively, and the gross fair value of derivatives liabilities was $21 thousand and $804 thousand, respectively. The impact of master netting agreements was not material. As of June 30, 2022 and December 31, 2021, derivative and hedging activities were not material.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 9 — GOODWILL AND OTHER INTANGIBLE ASSETS

As of June 30, 2022 and December 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 (refer to Note 23 – Business Segments for the definition of OFG’s reportable business segments). There were no changes in the carrying amount of goodwill as of June 30, 2022 and December 31, 2021.

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 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 quarter of 2021 using October 31, 2021 as the annual evaluation date and concluded that there was no impairment at December 31, 2021. There were no events that caused OFG to perform interim testing during the six-month period ended June 30, 2022.

The following table reflects the components of other intangible assets subject to amortization at June 30, 2022 and December 31, 2021:


	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
	(In thousands)
June 30, 2022
Core deposit intangibles	$	51,402	$	27,048	$	24,354
Customer relationship intangibles	17,753		10,354		7,399
Other intangibles	567		520		47
Total other intangible assets	$	69,722	$	37,922	$	31,800
December 31, 2021
Core deposit intangibles	$	51,402	$	23,772	$	27,630
Customer relationship intangibles	17,753		9,385		8,368
Other intangibles	567		472		95
Total other intangible assets	$	69,722	$	33,629	$	36,093

In connection with previous acquisitions, OFG recorded a core deposit intangible representing the value of checking and savings deposits acquired. In addition, OFG recorded a customer relationship intangible representing the value of customer relationships acquired with the acquisitions of a securities broker-dealer and insurance agencies.

Other intangible assets have a definite useful life. Amortization of other intangible assets for the quarters ended June 30, 2022 and 2021 was $2.2 million and $2.5 million, respectively. Amortization of other intangible assets for the six-month periods ended June 30, 2022 and 2021 was $4.3 million and $4.9 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)
2022	$	8,501
2023	6,898
2024	5,913
2025	4,927
2026	3,942
Thereafter	5,912

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 10 — ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS

Accrued interest receivable at June 30, 2022 and December 31, 2021 consists of the following:


	June 30,		December 31,
	2022		2021
	(In thousands)
Loans	$	54,279	$	54,794
Investments	4,092		1,766
	$	58,371	$	56,560

Accrued interest receivable on loans that participated in the Covid-19 deferral programs amounted to $22.8 million at June 30, 2022 (December 31, 2021 - $23.9 million), of which $21.7 million (December 31, 2021 - $21.5 million) corresponds to loans in current status. OFG estimates expected credit losses on accrued interest receivable for loans that participated in the Covid-19 deferral programs. An allowance has been established for loans with delinquency status in 30 to 89 days past due and is calculated by applying the corresponding loan projected loss factors to the accrued interest receivable balance. At June 30, 2022 and December 31, 2021, the allowance for credit losses for accrued interest receivable for loans that participated in the Covid-19 deferral programs amounted to $416 thousand and $161 thousand, respectively, and is included in accrued interest receivable in the statement of financial condition.

Other assets at June 30, 2022 and December 31, 2021 consist of the following:


	June 30,		December 31,
	2022		2021
	(In thousands)
Prepaid expenses	$	65,696	$	61,061
Other repossessed assets	2,533		1,945
Investment in Statutory Trust	—		1,083
Accounts receivable and other assets	86,412		88,756
	$	154,641	$	152,845

Prepaid expenses amounting to $65.7 million at June 30, 2022, include prepaid municipal, property and income taxes aggregating to $60.5 million. At December 31, 2021 prepaid expenses amounted to $61.1 million, including prepaid municipal, property and income taxes aggregating to $54.6 million.

Other repossessed assets totaled $2.5 million and $1.9 million at June 30, 2022 and December 31, 2021, respectively, and consist mainly of repossessed automobiles, which are recorded at their net realizable value.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 11— DEPOSITS AND RELATED INTEREST

Total deposits, including related accrued interest payable, as of June 30, 2022 and December 31, 2021 consist of the following:


	June 30,		December 31,
	2022		2021
	(In thousands)
Non-interest bearing demand deposits	$	2,707,504	$	2,501,644
Interest-bearing savings and demand deposits	5,185,419		4,880,476
Retail certificates of deposit	928,178		1,007,577
Institutional certificates of deposit	197,098		202,050
Total core deposits	9,018,199		8,591,747
Brokered deposits	11,371		11,371
Total deposits	$	9,029,570	$	8,603,118

At June 30, 2022 and December 31, 2021, the aggregate amount of uninsured deposits was $3.753 billion and $3.270 billion, respectively.

The weighted average interest rate of OFG’s deposits was 0.34% and 0.49%, respectively, at June 30, 2022 and December 31, 2021. Interest expense for the quarters and six-month periods ended June 30, 2022 and 2021 was as follows:


	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2022		2021		2022		2021
					(In thousands)
Demand and savings deposits	$	5,101	$	6,209	$	10,077	$	12,580
Certificates of deposit	1,843		4,251		3,908		9,904
	$	6,944	$	10,460	$	13,985	$	22,484

At June 30, 2022 and December 31, 2021, time deposits in denominations of $250 thousand or higher, excluding accrued interest and unamortized discounts, amounted to $329.5 million and $360.8 million, respectively.

At June 30, 2022 and December 31, 2021, total public fund deposits from various Puerto Rico government municipalities, agencies and corporations amounted to $239.9 million and $183.8 million, respectively. These public funds were collateralized with commercial loans and securities amounting to $316.4 million and $228.9 million at June 30, 2022 and December 31, 2021, respectively.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Excluding accrued interest of approximately $580 thousand and $736 thousand, the scheduled maturities of certificates of deposit at June 30, 2022 and December 31, 2021 are as follows:


June 30, 2022
	Period-end amount		Uninsured amount
	(In thousands)
Within one year:
Three months or less	$	242,135	$	34,571
Over 3 months through 6 months	110,671		19,968
Over 6 months through 1 year	310,192		47,591
	662,998		102,130
Over 1 through 2 years	239,730		36,483
Over 2 through 3 years	111,306		16,166
Over 3 through 4 years	79,182		23,596
Over 4 through 5 years	41,822		3,149
Over 5 years	1,029		—
	$	1,136,067	$	181,524

December 31, 2021
	Period-end amount		Uninsured amount
	(In thousands)

Within one year:
Three months or less	$	252,513	25,003
Over 3 months through 6 months	147,400		12,113
Over 6 months through 1 year	239,830		45,280
	639,743		82,396
Over 1 through 2 years	328,177		60,108
Over 2 through 3 years	114,403		18,578
Over 3 through 4 years	77,604		22,536
Over 4 through 5 years	58,918		8505
Over 5 years	1,417		—
	$	1,220,262	$	192,123

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 $605 thousand and $491 thousand as of June 30, 2022 and December 31, 2021, respectively.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 12— BORROWINGS AND RELATED INTEREST

Advances from the Federal Home Loan Bank of New York

Advances are received from the Federal Home Loan Bank of New York (“FHLB”) under an agreement whereby OFG is required to maintain a minimum amount of qualifying collateral with a fair value of at least 110% of the outstanding advances. At June 30, 2022 and December 31, 2021, these advances were secured by mortgage and commercial loans amounting to $879.8 million and $949.0 million, respectively. Also, at June 30, 2022 and December 31, 2021, OFG had an additional borrowing capacity with the FHLB of $605.6 million and $697.3 million, respectively. At June 30, 2022 and December 31, 2021, the weighted average remaining maturity of FHLB’s advances was 1 and 3 days, respectively. The original term of the outstanding advance at June 30, 2022 is 1 month.

The following table shows a summary of the advances and their terms, excluding accrued interest in the amount of $28 thousand and $8 thousand at June 30, 2022 and December 31, 2021, respectively:


	June 30,		December 31,
	2022		2021
	(In thousands)
Short-term fixed-rate advances from FHLB, with a weighted average interest rate of 1.21% (December 31, 2021 - 0.35%)	$	27,558	$	28,480

Advances from FHLB mature as follows:


	June 30,		December 31,
	2022		2021
	(In thousands)
Under 90 days	$	27,558	$	28,480

Subordinated Capital Notes

In August 2003, the Statutory Trust II, a special purpose entity of OFG, was formed for the purpose of issuing trust redeemable preferred securities. In September 2003, $35.0 million of trust redeemable preferred securities were issued by the Statutory Trust II as part of a pooled underwriting transaction.

The proceeds from this issuance were used by the Statutory Trust II to purchase a like amount of a floating rate junior subordinated deferrable interest debenture issued by OFG with a par value of $36.1 million.

During the quarter ended March 31, 2022, OFG redeemed of all outstanding $36.1 million subordinated capital notes before maturity, and as a result, it wrote off $405 thousand in unamortized issuance costs, included as interest expense in the consolidated statements of operations. OFG also recorded a gain on early debt extinguishment of $42 thousand included in other non-interest income in the consolidated statements of operations. Prior to redemption, such subordinated capital notes carried an interest rate of 3.23% based on 3-month LIBOR plus 295 basis points and were schedule to mature on September 17, 2033. Following the redemption of the subordinated capital notes, the Statutory Trust II was dissolved.

At December 31, 2021, the $35.0 million trust redeemable preferred securities were treated as Tier 1 capital for regulatory purposes. Under the Dodd-Frank Act and the Basel III capital rules issued by the federal banking regulatory agencies in July 2013, bank holding companies are prohibited from including in their tier 1 capital hybrid debt and equity securities, including trust preferred securities, issued on or after May 19, 2010. Any such instruments issued before May 19, 2010 by a bank holding company, such as OFG, with total consolidated assets of less than $15 billion as of December 31, 2009, could continue to be included as tier 1 capital.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 13 — INCOME TAXES

Oriental is subject to the provisions of the Puerto Rico Internal Revenue Code of 2011, as amended (the “PR Code”). The PR Code imposes a maximum statutory corporate tax rate of 37.5%. OFG has operations in the U.S. through its wholly owned subsidiaries OPC, OFG Ventures, and OFG USA LLC, which is a direct subsidiary of the Bank, and has two branches in the USVI. The United States subsidiaries are subject to federal income taxes at the corporate level, while the USVI branches are subject to 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. In addition, during 2021, OFG incorporated in Grand Cayman, as a foreign wholly owned subsidiary, OFG Reinsurance. OFG Reinsurance is tax exempt in Grand Cayman.

As of June 30, 2022 and December 31, 2021, OFG’s net deferred tax asset, net of a valuation allowance of $10.4 million and $9.6 million, respectively, amounted to $76.1 million and $99.1 million, respectively. The increase in valuation allowance of $731 thousand was mainly related to OFG’s operations at the holding company level. In assessing the realizability of the deferred tax asset, management considers whether it is more likely than not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future income, and tax planning strategies in making this assessment. Based upon the assessment of positive and negative evidence, the level of historical taxable income, projections for future taxable income over the periods in which the deferred tax asset are deductible, and provisions of certain closing agreements, management believes it is more likely than not that OFG will realize the benefits of these deductible differences, net of the existing valuation allowances, at June 30, 2022. 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 (“ETR”) lower than the statutory rate for the six-month periods ended June 30, 2022 and 2021 of 31.3% and 32.0%, respectively; mainly related to an increase in U.S. Treasury bills and other exempt investments and a discrete tax windfall on stock options recognized during the first six-months of 2022. The expected ETR for 2022 is 31.9%.

OFG classifies unrecognized tax benefits in other liabilities. These gross unrecognized tax benefits would affect the ETR if realized. At June 30, 2022, the amount of unrecognized tax benefits was $832 thousand (December 31, 2021 - $798 thousand).

Income tax expense for the quarters ended June 30, 2022 and 2021 was $18.9 million and $19.3 million, respectively. Income tax expense for the six-month periods ended June 30, 2022 and 2021, was $35.5 million and $33.5 million, respectively.

NOTE 14 — 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.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of June 30, 2022 and December 31, 2021, OFG and the Bank met all capital adequacy requirements to which they are subject. As of June 30, 2022 and December 31, 2021, 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’s and the Bank’s actual capital amounts and ratios as of June 30, 2022 and December 31, 2021 are as follows:


	Actual				Minimum Capital Requirement (including capital conservation buffer)				Minimum to be Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
OFG Bancorp Ratios
As of June 30, 2022
Total capital to risk-weighted assets	$	1,053,766	14.05	%	$	787,413	10.50	%	$	749,917	10.00	%
Tier 1 capital to risk-weighted assets	$	960,015	12.80	%	$	637,430	8.50	%	$	599,934	8.00	%
Common equity tier 1 capital to risk-weighted assets	$	960,015	12.80	%	$	524,942	7.00	%	$	487,446	6.50	%
Tier 1 capital to average total assets	$	960,015	9.46	%	$	405,805	4.00	%	$	507,257	5.00	%
As of December 31, 2021
Total capital to risk-weighted assets	$	1,086,897	15.52	%	$	735,512	10.50	%	$	700,488	10.00	%
Tier 1 capital to risk-weighted assets	$	999,284	14.27	%	$	595,414	8.50	%	$	560,390	8.00	%
Common equity tier 1 capital to risk-weighted assets	$	964,284	13.77	%	$	490,341	7.00	%	$	455,317	6.50	%
Tier 1 capital to average total assets	$	999,284	9.69	%	$	412,359	4.00	%	$	515,449	5.00	%


	Actual				Minimum Capital Requirement (including capital conservation buffer)				Minimum to be Well Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Bank Ratios
As of June 30, 2022
Total capital to risk-weighted assets	$	999,970	13.41	%	$	782,992	10.50	%	$	745,707	10.00	%
Tier 1 capital to risk-weighted assets	$	906,739	12.16	%	$	633,851	8.50	%	$	596,565	8.00	%
Common equity tier 1 capital to risk-weighted assets	$	906,739	12.16	%	$	521,995	7.00	%	$	484,709	6.50	%
Tier 1 capital to average total assets	$	906,739	8.98	%	$	403,697	4.00	%	$	504,621	5.00	%
As of December 31, 2021
Total capital to risk-weighted assets	$	995,549	14.34	%	$	728,867	10.50	%	$	694,159	10.00	%
Tier 1 capital to risk-weighted assets	$	908,717	13.09	%	$	590,035	8.50	%	$	555,327	8.00	%
Common equity tier 1 capital to risk-weighted assets	$	908,717	13.09	%	$	485,911	7.00	%	$	451,203	6.50	%
Tier 1 capital to average total assets	$	908,717	8.87	%	$	409,855	4.00	%	$	512,319	5.00	%

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 15 – STOCKHOLDERS’ EQUITY

Preferred Stock and Common Stock

During the six-month period ended June 30, 2021, OFG redeemed all of its outstanding $68.0 million (in the aggregate) Series A and Series B preferred stock at a redemption price of $25.00 per share. Subsequently, in July 2021, OFG redeemed all of its outstanding $24.0 million Series D preferred stock at a redemption price of $25.00 per share. As a result of such redemptions, OFG no longer has any outstanding preferred stock. At both June 30, 2022 and December 31, 2021, common stock amounted to $59.9 million.

Additional Paid-in Capital

Additional paid-in capital represents contributed capital in excess of par value of common stock, net of the costs of issuance. At both June 30, 2022 and December 31, 2021, accumulated common stock issuance costs charged against additional paid-in capital amounted to $13.6 million.

Legal Surplus

The Puerto Rico Banking Act requires that a minimum of 10% of the Bank’s net income for the year be transferred to a reserve fund until such fund (legal surplus) equals the total paid-in capital on common and preferred stock. At June 30, 2022 and December 31, 2021, the Bank’s legal surplus amounted to $125.4 million and $117.7 million, respectively. The amount transferred to the legal surplus account is not available for the payment of dividends to shareholders.

Treasury Stock

In January 2022, OFG announced the approval by the Board of Directors of a stock repurchase program to purchase $100 million of its outstanding shares of common stock. The shares of common stock repurchased are held by OFG as treasury shares. During the six-month period ended June 30, 2022, OFG repurchased 2,351,868 shares for a total of $64.1 million at an average price of $27.04 per share. OFG did not repurchase any shares of its common stock during the six-month period ended June 30, 2022, other than through its publicly announced stock repurchase program. During the six-month period ended June 30, 2021, OFG did not repurchase any shares.

At June 30, 2022 the number of shares that may yet be purchased under the $100 million program is estimated at 1,412,984 and was calculated by dividing the remaining balance of $35.9 million by $25.40 (closing price of OFG’s common stock at June 30, 2022).

The activity in connection with common shares held in treasury by OFG for the six-month periods ended June 30, 2022 and 2021 is set forth below:


	Six-Month Period Ended June 30,
	2022			2021
	Shares	Dollar Amount		Shares	Dollar Amount
	(In thousands, except shares data)
Beginning of period	10,248,882	$	150,572	8,498,163	$	102,949
Common shares used upon lapse of restricted stock units and options	(269,239)	(3,544)		(273,436)	(2,230)
Common shares repurchased as part of the stock repurchase programs	2,351,868	64,110		—	—
End of period	12,331,511	$	211,138	8,224,727	$	100,719

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 16 - ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

Accumulated other comprehensive (loss) income, net of income taxes, as of June 30, 2022 and December 31, 2021 consisted of:


	June 30,		December 31,
	2022		2021
	(In thousands)
Unrealized (loss) gain on securities available-for-sale which are not other-than-temporarily impaired	$	(58,313)	$	7,292
Income tax effect of unrealized loss (gain) on securities available-for-sale	8,707		(1,629)
Net unrealized (loss) gain on securities available-for-sale which are not other-than-temporarily impaired	(49,606)		5,663
Unrealized gain (loss) on cash flow hedges	165		(804)
Income tax effect of unrealized gain (loss) on cash flow hedges	(61)		301
Net unrealized gain (loss) on cash flow hedges	104		(503)
Accumulated other comprehensive (loss) income, net of income taxes	$	(49,502)	$	5,160

The following table presents changes in accumulated other comprehensive (loss) income by component, net of taxes, for the quarters and six-month periods ended June 30, 2022 and 2021:


	Quarter Ended June 30, 2022
	Net unrealized loss on securities available-for-sale		Net unrealized gain on cash flow hedges		Accumulated other comprehensive (loss) income
	(In thousands)
Beginning balance	$	(20,522)	$	(116)	$	(20,638)
Other comprehensive (loss) income before reclassifications	(29,086)		36		(29,050)
Amounts reclassified out of accumulated other comprehensive (loss) income	2		184		186
Other comprehensive (loss) income	(29,084)		220		(28,864)
Ending balance	$	(49,606)	$	104	$	(49,502)


	Six-Month Period Ended June 30, 2022
	Net unrealized loss on securities available-for-sale		Net unrealized gain on cash flow hedges		Accumulated other comprehensive (loss) income
	(In thousands)
Beginning balance	$	5,663	$	(503)	$	5,160
Other comprehensive (loss) income before reclassifications	(55,273)		230		(55,043)
Amounts reclassified out of accumulated other comprehensive (loss) income	4		377		381
Other comprehensive (loss) income	(55,269)		607		(54,662)
Ending balance	$	(49,606)	$	104	$	(49,502)

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	Quarter Ended June 30, 2021
	Net unrealized gains on securities available-for-sale		Net unrealized loss on cash flow hedges		Accumulated other comprehensive income
	(In thousands)
Beginning balance	$	7,145	$	(915)	$	6,230
Other comprehensive income (loss) before reclassifications	1,262		(345)		917
Amounts reclassified out of accumulated other comprehensive income	1		452		453
Other comprehensive income	1,263		107		1,370
Ending balance	$	8,408	$	(808)	$	7,600


	Six-Month Period Ended June 30, 2021
	Net unrealized gains on securities available-for-sale		Net unrealized loss on cash flow hedges		Accumulated other comprehensive (loss) income
	(In thousands)
Beginning balance	$	12,092	$	(1,070)	$	11,022

Other comprehensive (loss) income before reclassifications	(3,687)		(649)		(4,336)
Amounts reclassified out of accumulated other comprehensive income	3		911		914
Other comprehensive (loss) income	(3,684)		262		(3,422)
Ending balance	$	8,408	$	(808)	$	7,600

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents reclassifications out of accumulated other comprehensive (loss) income for the quarters and six-month periods ended June 30, 2022 and 2021:


	Amount reclassified out of accumulated other comprehensive (loss) income quarter ended June 30,				Affected Line Item in Consolidated Statement of Operations

	2022		2021
	(In thousands)
Cash flow hedges:
Interest-rate contracts	$	184	$	452		Net interest expense
Available-for-sale securities:

Tax effect from changes in tax rates	2		1			Income tax expense
	$	186	$	453

	Amount reclassified out of accumulated other comprehensive (loss) income six-month period ended June 30,				Affected Line Item in Consolidated Statement of Operations

	2022		2021
	(In thousands)
Cash flow hedges:
Interest-rate contracts	$	377	$	911		Net interest expense
Available-for-sale securities:

Tax effect from changes in tax rates	4		3			Income tax expense
	$	381	$	914

NOTE 17 – EARNINGS PER COMMON SHARE

The calculation of earnings per common share for the quarters and six-month periods ended June 30, 2022 and 2021 is as follows:


	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2022		2021		2022		2021
	(In thousands, except per share data)
Net income	$	40,432	$	40,827	$	77,953	$	71,200
Less: Dividends on preferred stock
Non-convertible preferred stock (Series A, B, and D)	—		—		—		(1,255)

Income available to common shareholders	$	40,432	$	40,827	$	77,953	$	69,945



Average common shares outstanding	48,053		51,636		48,508		51,517
Effect of dilutive securities:
Average potential common shares-options	336		412		425		368

Total weighted average common shares outstanding and equivalents	48,389		52,048		48,933		51,885
Earnings per common share - basic	$	0.84	$	0.79	$	1.61	$	1.36
Earnings per common share - diluted	$	0.84	$	0.78	$	1.59	$	1.35

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

For the quarters ended June 30, 2022 and 2021, OFG weighted-average stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to 1,292 and 1,514, respectively. For the six-month periods ended June 30, 2022 and 2021, weighted-average stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to 1,138 and zero, respectively.

During the first quarter of 2022, OFG increased its quarterly common stock cash dividend to $0.15 per share.

NOTE 18 – GUARANTEES

At June 30, 2022 and December 31, 2021, the notional amount of the obligations undertaken in issuing the guarantees under standby letters of credit represented a liability of $28.7 million and $25.2 million, respectively.

OFG has a liability for residential mortgage loans sold subject to credit recourse pursuant to GNMA’s and FNMA’s residential mortgage loan sales and securitization programs. At June 30, 2022 and December 31, 2021, the unpaid principal balance of residential mortgage loans sold subject to credit recourse was $115.6 million and $121.8 million, respectively.

The following table shows the changes in OFG’s liability for estimated losses from these credit recourse agreements, included in the consolidated statements of financial condition during the quarters and six-month periods ended June 30, 2022 and 2021:


	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2022		2021		2022		2021
	(In thousands)
Balance at beginning of period	$	294	$	195	$	205	$	218
Net recoveries (charge-offs/terminations)	(120)		10		(31)		(13)
Balance at end of period	$	174	$	205	$	174	$	205

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 June 30, 2022 and 2021, OFG repurchased $711 thousand and $887 thousand, respectively, in mortgage loans subject to the credit recourse provisions referred above. During the six-month periods ended June 30, 2022 and 2021, OFG repurchased $1.4 million and $1.9 million, respectively, in such mortgage loans. If a borrower defaults, OFG has rights to the underlying collateral securing the mortgage loan. OFG suffers losses on these mortgage loans when the proceeds from a foreclosure sale of the collateral property are less than the outstanding principal balance of the loan, any uncollected interest advanced, and the costs of holding and disposing the related property. At June 30, 2022, OFG’s liability for estimated credit losses related to loans sold with credit recourse amounted to $174 thousand (December 31, 2021– $294 thousand).

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

When OFG sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. OFG’s mortgage operations division groups conforming mortgage loans into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or are sold directly to FNMA or other private investors for cash. As required under such mortgage-backed securities programs, quality review procedures are performed by OFG to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, OFG may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the loans. During the quarter ended June 30, 2022, OFG repurchased $7.5 million (June 30, 2021 – $9.9 million) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to the credit recourse provisions referred above. During the six-month period ended June 30, 2022, Oriental repurchased $15.3 million (June 30, 2021 – $22.5 million) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to such credit recourse provision. At June 30, 2022 and December 31, 2021, OFG had a $1.9 million and a $3.4 million liability, respectively, for the estimated credit losses related to these loans.

During the quarters ended June 30, 2022 and 2021, OFG recognized $21 thousand in gains and $90 thousand in losses, net of reserves, respectively, from the repurchase of residential mortgage loans sold subject to credit recourse, and $53 thousand and $1.4 million in losses, respectively, from the repurchase of residential mortgage loans as a result of breaches of customary representations and warranties. During the six-month periods ended June 30, 2022 and 2021, Oriental recognized $121 thousand in gains and $68 thousand in losses, respectively, from the repurchase of residential mortgage loans sold subject to credit recourse, and $51 thousand and $2.8 million, respectively, in losses from the repurchase of residential mortgage loans as a result of breaches of customary representations and warranties.

At June 30, 2022, OFG serviced $5.7 billion (December 31, 2021 - $5.7 billion) in mortgage loans for third parties. 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. OFG generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, in the meantime, OFG must absorb the cost of the funds it advances during the time the advance is outstanding. OFG must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and OFG would not receive any future servicing income with respect to that loan. At June 30, 2022, the outstanding balance of funds advanced by OFG under such mortgage loan servicing agreements was approximately $11.5 million (December 31, 2021 - $12.9 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 19— COMMITMENTS AND CONTINGENCIES

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.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Credit-related financial instruments at June 30, 2022 and December 31, 2021 were as follows:


	June 30,		December 31,
	2022		2021
	(In thousands)
Commitments to extend credit	$	1,366,552	$	1,365,273
Commercial letters of credit	3,230		48,196

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

At June 30, 2022 and December 31, 2021, commitments to extend credit consisted mainly of undisbursed available amounts on commercial lines of credit, construction loans, and revolving credit card arrangements. Since many of the unused commitments are expected to expire unused or be only partially used, the total amount of these unused commitments does not necessarily represent future cash requirements.

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

The summary of instruments that are considered financial guarantees in accordance with the authoritative guidance related to guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others, at June 30, 2022 and December 31, 2021, is as follows:


	June 30,		December 31,
	2022		2021
	(In thousands)
Standby letters of credit and financial guarantees	$	28,728	$	25,203
Loans sold with recourse	115,638		121,778

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.

At June 30, 2022 and December 31, 2021, the allowance for credit losses for off-balance sheet credit exposures corresponding to commitments to extend credit and standby letters of credit amounted to $770 thousand and $1.0 million, respectively, and is included in other liabilities in the statement of financial condition.

At June 30, 2022 and December 31, 2021, OFG maintained other non-credit commitments amounting to $21.8 million and $8.9 million, respectively, primarily for the acquisition of equity securities. In addition, as we continue to transform OFG with a focus on simplification and building a culture of excellence and customer service, we continue to invest in technology. Some of our technology investments are table stakes and required to continuously upgrade our systems. Others require us to focus our technology on investments that drive our strategy, namely digital, data analytics, cloud migration, cyber security, and our sales and service capabilities. At June 30, 2022 and December 31, 2021, OFG had commitments for capital expenditures in technology amounting to $8.9 million and $15.4 million, respectively.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Contingencies

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

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

In accordance with applicable accounting guidance, OFG establishes an accrued liability when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a matter develops, OFG, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, OFG will establish an accrued liability and record a corresponding amount of expense. At June 30, 2022 and December 31, 2021, this accrued liability amounted to $3.9 million and $7.0 million, respectively. OFG continues to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established.

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

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 20— 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 2024; all are operating leases.

Operating Lease Cost


	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2022		2021		2022		2021		Statement of Operations Classification
	(In thousands)
Lease costs	$	2,663	$	2,851	$	5,218	$	6,224	Occupancy and equipment
Variable lease costs	285		495		832		988		Occupancy and equipment
Short-term lease cost	282		126		537		146		Occupancy and equipment
Lease income	(53)		(112)		(129)		(232)		Occupancy and equipment
Total lease cost	$	3,177	$	3,360	$	6,458	$	7,126

Operating Lease Assets and Liabilities


	June 30,		December 31,
	2022		2021		Statement of Financial Condition Classification
	(In thousands)
Right-of-use assets	$	27,699	$	28,846	Operating lease right-of-use assets
Lease Liabilities	$	29,538	$	30,498	Operating leases liabilities


	June 30, 2022
	(In thousands)
Weighted-average remaining lease term	5.3 years
Weighted-average discount rate	6.6	%

Future minimum payments for operating leases with initial or remaining terms of one year or more as of June 30, 2022 were as follows:


	Minimum Rent
As of June 30, 2022	(In thousands)
2022	$	4,733
2023	8,771
2024	6,441
2025	4,612
2026	3,033
Thereafter	7,923
Total lease payments	$	35,513
Less imputed interest	5,975
Present value of lease liabilities	$	29,538

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

OFG, as lessor, leases and subleases real property to lessee tenants under operating leases. As of June 30, 2022, no material lease concessions have been granted to lessees. As of June 30, 2022, OFG, as lessee, has not requested any lease concessions.

NOTE 21 - 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. OFG holds one security categorized as other debt that is classified as Level 3. The estimated fair value of the other debt security is determined by using an adjusted third-party model to calculate the present value of projected future cash flows. The assumptions are highly uncertain and include primarily market discount rates and current spread. The assumptions used are drawn from similar securities that are actively traded in the market and have similar risk characteristics. The valuation is performed on a quarterly basis.

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 (or its fallback benchmark when applicable), 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.

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 opinion or an internal valuation. These foreclosed assets are classified as Level 3 given certain internal adjustments that may be made to external appraisals.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Other repossessed assets

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

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


	June 30, 2022
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
	(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale	$	10,733	$	1,147,256	$	1,581	$	1,159,570
Trading securities	—		13		—		13
Money market investments	4,913		—		—		4,913
Derivative assets	—		187		—		187
Servicing assets	—		—		49,280		49,280
Derivative liabilities	—		(21)		—		(21)
	$	15,646	$	1,147,435	$	50,861	$	1,213,942
Non-recurring fair value measurements:
Collateral dependent loans	—		—		21,565		21,565
Foreclosed real estate	—		—		15,061		15,061
Other repossessed assets	—		—		2,533		2,533
	$	—	$	—	$	39,159	$	39,159


	December 31, 2021
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
	(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale	$	10,825	$	498,358	$	1,530	$	510,713
Trading securities	—		20		—		20
Money market investments	8,952		—		—		8,952
Derivative assets	—		1		—		1
Servicing assets	—		—		48,973		48,973
Derivative liabilities	—		(804)		—		(804)
	$	19,777	$	497,575	$	50,503	$	567,855
Non-recurring fair value measurements:
Collateral dependent loans	$	—	$	—	$	10,233	$	10,233
Foreclosed real estate	—		—		15,039		15,039
Other repossessed assets	—		—		1,945		1,945
	$	—	$	—	$	27,217	$	27,217

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The fair value information included in the tables above for non-recurring fair value measurements is not as of period end. Instead, it is as of the date that the fair value measurement was recorded during the periods ended June 30, 2022 and December 31, 2021, and excludes nonrecurring fair value measurements of assets no longer outstanding as of the reporting date.

The tables below present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarters and six-month periods ended June 30, 2022 and 2021:

Level 3 Instruments Only


	Quarter Ended June 30,
	2022						2021
	Other debt securities available for sale		Servicing Assets		Total		Servicing Assets
	(In thousands)
Balance at beginning period	$	1,554	$	49,446	$	51,000	$	47,911
New instruments acquired	—		1,150		1,150		2,023

Principal repayments and amortization	—		(1,478)		(1,478)		(1,862)
Gains (losses) included in earnings	—		162		162		(360)
Gains included in other comprehensive income	27		—		27		—
Balance at end of period	$	1,581	$	49,280	$	50,861	$	47,712

	Other debt securities available for sale		Servicing Assets		Total		Servicing Assets
	Six-Month Period Ended June 30,
	2022						2021
	(In thousands)
Balance at beginning year	$	1,530	$	48,973	$	50,503	$	47,295
New instruments acquired	—		2,269		2,269		3,443

Principal repayments and amortization	—		(2,977)		(2,977)		(3,369)
Gains included in earnings	—		1,015		1,015		343
Gains included in other comprehensive income	51		—		51		—
Balance at end of year	$	1,581	$	49,280	$	50,861	$	47,712

There were no transfers into or out of Level 3 during the quarters and six-month periods ended June 30, 2022 and 2021.

Servicing assets gains (losses) included in earnings during the quarters and six-month periods ended June 30, 2022 and 2021 were included as mortgage servicing activities in the consolidated statements of operations. There were no changes in unrealized gains and losses from recurring Level 3 fair value measurements held at June 30, 2021 during the quarter and six-month period then ended included in other comprehensive income. For more information on the qualitative information about Level 3 fair value measurements, see Note 7 – Servicing Assets.

During the quarters and six-month periods ended June 30, 2022 and 2021, there were purchases and sales of assets and liabilities measured at fair value on a recurring basis.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The table below presents quantitative information for all assets and liabilities measured at fair value on a recurring and non-recurring basis using significant unobservable inputs (Level 3) at June 30, 2022:


	June 30, 2022
	Fair Value		Valuation Technique	Unobservable Input	Range		Weighted Average
	(In thousands)

Other debt securities available-for-sale	$	1,581	Cash flow valuation	Credit Rating	Baa1 - Baa3		Baa2
				Probability of Default Rate	0.15% - 2.12%		0.15	%
				Recovery Rate	33.08	%	33.08	%

Servicing assets	$	49,280	Cash flow valuation	Constant prepayment rate	3.60% - 22.71%		5.90	%
				Discount rate	10.00% - 15.50%		11.45	%

Collateral dependent loans	$	21,565	Fair value of property or collateral	Appraised value less disposition costs	10.20% - 33.20%		17.16	%

Foreclosed real estate	$	15,061	Fair value of property or collateral	Appraised value less disposition costs	10.20% - 33.20%		11.69	%

Other repossessed assets	$	2,533	Fair value of property or collateral	Estimated net realizable value less disposition costs	20.00% - 90.00%		61.76	%

Information about Sensitivity to Changes in Significant Unobservable Inputs

Other debt security available for sale – The significant unobservable inputs used in the fair value measurement of one of OFG’s other debt securities is a discounted cash flow methodology (“DCF”). DCF is a valuation method that uses the concept of the time value of money. The methodology used the future cash flows discounted through a yield to obtain a net present value. Assumptions applied in the model are obtained from Moody’s Default Trends.

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.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

The estimated fair value and carrying value of OFG’s financial instruments at June 30, 2022 and December 31, 2021 is as follows:


	June 30,				December 31,
	2022				2021
	Fair Value		Carrying Value		Fair Value		Carrying Value
	(In thousands)
Level 1
Financial Assets:
Cash and cash equivalents	$	1,307,112	$	1,307,112	$	2,023,475	$	2,023,475
Restricted cash	$	169	$	169	$	175	$	175
Investment securities available-for-sale	$	10,733	$	10,733	$	10,825	$	10,825
Level 2
Financial Assets:
Trading securities	$	13	$	13	$	20	$	20
Investment securities available-for-sale	$	1,147,256	$	1,147,256	$	498,358	$	498,358
Investment securities held-to-maturity	$	501,747	$	547,832	$	363,653	$	367,507
Federal Home Loan Bank (FHLB) stock	$	6,047	$	6,047	$	5,966	$	5,966
Equity securities	$	13,801	$	13,801	$	11,612	$	11,612
Derivative assets	$	187	$	187	$	1	$	1
Financial Liabilities:
Derivative liabilities	$	21	$	21	$	804	$	804
Level 3
Financial Assets:
Investment securities available for sale	$	1,581	$	1,581	$	1,530	$	1,530
Total loans (including loans held-for-sale)	$	6,517,268	$	6,585,210	$	6,197,347	$	6,329,311
Accrued interest receivable	$	58,371	$	58,371	$	56,560	$	56,560
Servicing assets	$	49,280	$	49,280	$	48,973	$	48,973
Accounts receivable and other assets	$	86,225	$	86,225	$	88,756	$	88,756
Financial Liabilities:
Deposits	$	9,032,247	$	9,029,570	$	8,614,073	$	8,603,118

Advances from FHLB	$	27,557	$	27,586	$	28,480	$	28,488
Other borrowings	$	32	$	32	$	—	$	—
Subordinated capital notes	$	—	$	—	$	36,084	$	36,083
Accrued expenses and other liabilities	$	119,065	$	119,065	$	96,240	$	96,240

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following methods and assumptions were used to estimate the fair values of significant financial instruments at June 30, 2022 and December 31, 2021:

•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 stock are valued at their redemption value.

•The fair value of investment securities, including trading securities, 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. Equity securities do not have readily available fair values and are measured at cost, less any impairment. The estimated fair value of the convertible note is determined by using an adjusted third-party cash flow valuation model to calculate the present value of projected future cash flows. The assumptions used which are highly uncertain and require a high degree of judgment, include primarily market discount rates, current spreads, duration, leverage, default, and loss rates. The assumptions used are drawn from a wide array of data sources, including the performance of the collateral underlying each deal. The valuation, which is obtained at least on a quarterly basis, is analyzed and its assumptions are evaluated and incorporated in either an internal-based valuation model, when deemed necessary, or compared to counterparties’ prices and agreed by management.

•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 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.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 22 – BANKING AND FINANCIAL SERVICE REVENUES

The following table presents the major categories of banking and financial service revenues for the quarters and six-month periods ended June 30, 2022 and 2021:


	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2022		2021		2022		2021
	(In thousands)				(In thousands)
Banking service revenues:
Checking accounts fees	$	2,225	$	2,082	$	4,370	$	4,044
Savings accounts fees	326		297		605		549
Electronic banking fees	14,080		14,638		27,174		27,521
Credit life commissions	291		70		595		187
Branch service commissions	300		275		660		636
Servicing and other loan fees	669		720		1,806		1,485
International fees	246		154		485		305
Miscellaneous income	4		15		8		21
Total banking service revenues	18,141		18,251		35,703		34,748

Wealth management revenue:
Insurance income	3,818		2,995		6,852		5,226
Broker fees	1,714		2,328		3,603		4,452
Trust fees	2,566		2,717		5,307		5,499
Retirement plan and administration fees	172		223		365		474

Total wealth management revenue	8,270		8,263		16,127		15,651

Mortgage banking activities:
Net servicing fees	3,839		3,127		8,202		7,477
Net gains on sale of mortgage loans and valuation	993		2,931		2,308		5,423
Other	(29)		(1,518)		75		(2,787)
Total mortgage banking activities	4,803		4,540		10,585		10,113
Total banking and financial service revenues	$	31,214	$	31,054	$	62,415	$	60,512

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

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.

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.

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

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 OFG’s 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.

Trust fees are revenues related to fiduciary services provided to 401K retirement plans, an IRA trust, and retirement plans, which include investment management, payment of distributions, if any, safekeeping, custodial services of plan assets, servicing of Trust officers, on-going due diligence of the Trust, recordkeeping of transactions, and investment advisory services provided to a registered investment company. 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.

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.

Mortgage Banking Activities

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

NOTE 23 – 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, auto 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, OFG Reinsurance and OPC. The core operations of this segment are financial planning, money management and investment banking, securities brokerage services, investment advisory services, insurance, corporate and individual trust and retirement services, as well as retirement plan administration services.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

Following are the results of operations and the selected financial information by operating segment for the quarters and six-month periods ended June 30, 2022 and 2021:


	Quarter Ended June 30, 2022
	Banking		Wealth Management		Treasury		Total Major Segments		Eliminations		Consolidated Total
	(In thousands)
Interest income	$	109,292	$	5	$	12,925	$	122,222	$	—	$	122,222
Interest expense	(6,280)		—		(848)		(7,128)		—		(7,128)
Net interest income	103,012		5		12,077		115,094		—		115,094
Provision for credit losses	6,634		—		57		6,691		—		6,691
Non-interest income	27,802		8,408		—		36,210		—		36,210
Non-interest expenses	(79,656)		(4,795)		(807)		(85,258)		—		(85,258)
Intersegment revenue	543		—		—		543		(543)		—
Intersegment expenses	—		(376)		(167)		(543)		543		—
Income before income taxes	45,067		3,242		11,046		59,355		—		59,355
Income tax expense	18,580		—		343		18,923		—		18,923
Net income	$	26,487	$	3,242	$	10,703	$	40,432	$	—	$	40,432
Total assets	$	8,235,814	$	28,240	$	2,997,323	$	11,261,377	$	(1,013,603)	$	10,247,774


	Six-Month Period Ended June 30, 2022
	Banking		Wealth Management		Treasury		Total Major Segments		Eliminations		Consolidated Total
	(In thousands)
Interest income	$	216,115	$	10	$	19,046	$	235,171	$	—	$	235,171
Interest expense	(13,651)		—		(1,232)		(14,883)		—		(14,883)
Net interest income	202,464		10		17,814		220,288		—		220,288
Provision for (recapture of) credit losses	8,344		—		(102)		8,242		—		8,242
Non-interest income	51,352		16,414		50		67,816		—		67,816
Non-interest expenses	(155,447)		(9,380)		(1,586)		(166,413)		—		(166,413)
Intersegment revenue	1,057		—		—		1,057		(1,057)		—
Intersegment expenses	—		(719)		(338)		(1,057)		1,057		—
Income before income taxes	$	91,082	$	6,325	$	16,042	$	113,449	$	—	$	113,449
Income tax expense	35,062		—		434		35,496		—		35,496
Net income	$	56,020	$	6,325	$	15,608	$	77,953	$	—	$	77,953
Total assets	$	8,235,814	$	28,240	$	2,997,323	$	11,261,377	$	(1,013,603)	$	10,247,774

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	Quarter Ended June 30, 2021
	Banking		Wealth Management		Treasury		Total Major Segments		Eliminations		Consolidated Total
	(In thousands)
Interest income	$	110,446	$	6	$	3,005	$	113,457	$	—	$	113,457
Interest expense	(10,712)		—		(494)		(11,206)		—		(11,206)
Net interest income	99,734		6		2,511		102,251		—		102,251
Provision for (recapture of) credit losses	(7,737)		—		(568)		(8,305)		—		(8,305)
Non-interest income	24,215		7,974		8		32,197		—		32,197
Non-interest expenses	(76,623)		(5,015)		(1,038)		(82,676)		—		(82,676)
Intersegment revenue	545		—		—		545		(545)		—
Intersegment expenses	—		(302)		(243)		(545)		545		—
Income before income taxes	55,608		2,663		1,806		60,077		—		60,077
Income tax expense	19,239		—		11		19,250		—		19,250
Net income	$	36,369	$	2,663	$	1,795	$	40,827	$	—	$	40,827
Total assets	$	8,271,348	$	31,165	$	3,232,968	$	11,535,481	$	(1,073,668)	$	10,461,813


	Six-Month Period Ended June 30, 2021
	Banking		Wealth Management		Treasury		Total Major Segments		Eliminations		Consolidated Total
	(In thousands)
Interest income	$	218,676	$	18	$	5,739	$	224,433	$	—	$	224,433
Interest expense	(22,848)		—		(1,136)		(23,984)		—		(23,984)
Net interest income	195,828		18		4,603		200,449		—		200,449
Provision for credit losses	(1,149)		—		(832)		(1,981)		—		(1,981)
Non-interest income	47,088		15,505		17		62,610		—		62,610
Non-interest expenses	(150,497)		(7,844)		(2,001)		(160,342)		—		(160,342)
Intersegment revenue	1,098		—		—		1,098		(1,098)		—
Intersegment expenses	—		(593)		(505)		(1,098)		1,098		—
Income before income taxes	$	94,666	$	7,086	$	2,946	$	104,698	$	—	$	104,698
Income tax expense	33,475		—		23		33,498		—		33,498
Net income	$	61,191	$	7,086	$	2,923	$	71,200	$	—	$	71,200
Total assets	$	8,271,348	$	31,165	$	3,232,968	$	11,535,481	$	(1,073,668)	$	10,461,813

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

Please read the following discussion and analysis of our financial condition and results of operations together with the “Selected Financial Data” and our consolidated financial statements and related notes included under Item I, “Financial Statements” of this Quarterly Report on Form 10-Q. This discussion and analysis contains forward-looking statements. Please see “Forward-Looking Statements,” “Risk Factors,” and “Quantitative and Qualitative Disclosures about Market Risk” in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 and set forth in our Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”), as supplemented and amended by any subsequent Quarterly Reports on Form 10-Q, for a discussion of the uncertainties, risks and assumptions associated with these statements. We have omitted discussion of 2020 results where it would be redundant to the discussion previously included in Item 2 of our Form 10-Q for the quarter ended June 30, 2021.

Other factors not identified above, including those described under the headings in our 2021 Form 10-K and any subsequent Quarterly Reports on Form 10-Q may also cause actual results to differ materially from those described in our forward-looking statements.

INTRODUCTION

OFG is a publicly-owned financial holding company that provides wide range of banking and financial services such as commercial, consumer, auto, and mortgage lending, financial planning, insurance sales, money management, investment banking and securities brokerage services, as well as corporate and individual trust services. OFG operates through three major business segments: Banking, Wealth Management, and Treasury, and distinguishes itself based on quality service. OFG conducts its business through its main office in San Juan, Puerto Rico, forty-five branches in Puerto Rico and two branches in the U.S. Virgin Islands (the “USVI”). OFG has three subsidiaries with operations in Puerto Rico: the Bank, Oriental Financial Services and Oriental Insurance; three subsidiaries in the United States, OPC, OFG USA and OFG Ventures; and one subsidiary in the Cayman Islands, OFG Reinsurance. 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, continuously improving our already effective asset-liability management, growing non-interest revenue from banking and financial services, and achieving greater 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, reinsurance and retirement plan administration). Although all of these businesses, to varying degrees, are affected by interest rate and financial market fluctuations and other external factors, OFG’s commitment is to continue producing a balanced and growing revenue stream.

RECENT DEVELOPMENTS

Capital Actions

In January 2022, OFG announced that its Board of Directors approved the increase of its regular quarterly cash dividend by 25%, to $0.15 per common share from $0.12 per share, beginning on the quarter ended March 31, 2022. Subsequently, in July 2022, OFG announced that its Board of Directors approved a new increase of its regular quarterly cash dividend by 33%, to $0.20 per common share, beginning on the quarter ended September 30, 2022.

In January 2022, the Board of Directors also approved a new stock repurchase program to purchase $100 million of its common stock in the open market, which OFG expects to complete during the 2022 fiscal year. At June 30, 2022, OFG has repurchased 2.4 million shares of common stock for $64.1 million.

Covid-19 Pandemic and Economic Conditions

Since March 2020, the Covid-19 pandemic has adversely affected our communities and the way we do business, as well as economic activity globally, nationally and locally. Among other things, interest rates declined, unemployment increased, and economic output slowed dramatically during 2020.

Within the last year, as restrictions related to the pandemic eased in the United States, employment increased and pent-up demand was released, which together with Covid-19 lockdowns in foreign jurisdictions created global supply chain issues and shortages of goods, which in turn has triggered price inflation. In an effort to address inflation, the Federal Open Market Committee of the Board of Governors of the Federal Reserve System (“FRB”) has tightened monetary policy and has increased the federal funds rate four times during fiscal year 2022, with the latest increases of 75 basis points each made on June 15, 2022 and July 27, 2022. The current federal funds target rate range is 2.25% to 2.5% but FRB officials forecast the federal funds target rate will end 2022 at a range of 3.25% to 3.5%. The FRB has also scaled back its asset purchase program that provided liquidity to the bond markets.

Adding to economic uncertainty and increased inflationary pressures are military actions taken by Russia against Ukraine commencing in February 2022, which have added stress to existing supply chain concerns and placed upward pressure on commodities such as oil and natural gas prices, which have further exacerbated the global macroeconomic uncertainty and increased inflationary pressures. However, we believe that the macroeconomic outlook for Puerto Rico continues to show strength. Recent data show that the Puerto Rico Economic Activity Index, as published by the Economic Development Bank for Puerto Rico, has been increasing for over a year; therefore, signaling a stable upward trend as employment gains remain solid. Our commercial clients are experiencing a higher demand for their products and services. Consumer demand also remains strong and, following five years of bankruptcy proceedings under Title III of PROMESA, the Puerto Rico central government has begun to implement the plan of adjustment approved by the Title III bankruptcy court on January 18, 2022, setting the stage for its exit from bankruptcy. Nevertheless, there remain several public instrumentalities whose debt obligations have not been restructured under the mechanisms provided by PROMESA and any recovery of the Puerto Rico economy could be adversely impacted by macroeconomic developments within the United States and across the globe. The global macroeconomic outlook continues to remain uncertain and, at this time, OFG cannot reasonably estimate the scope, term or intensity of any possible adverse impact on our financial position, operations or liquidity, resulting from economic disruption and uncertainty related to Covid-19 variants, economic recessions, trade and supply chain disruption, continuing inflationary pressures, labor shortages, armed conflicts such as the ongoing military actions against Ukraine, and the uncertainty of the timing and extent of potential actions that might be taken by the FRB. However, we believe that the high levels of reconstruction and stimulus funds being channeled towards the Puerto Rico economy are mitigating the foregoing negative effects.

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 2021 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 2021 Form 10-K, we identified the Allowance for Credit Losses related to loans collectively evaluated for impairment as a critical accounting policy and estimate, because it involves significant estimation uncertainty that has or is reasonably likely to have a material impact on our financial condition or results of operations.

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 2021 Form 10-K.

FINANCIAL HIGHLIGHTS

During the quarter ended June 30, 2022, OFG had another strong quarterly performance in all its core businesses. Loans and deposits grew, net interest margin expanded, and banking and wealth management income rebounded. All this confirms an overall increase in business activity, driven by OFG’s solid strategic position and continuously improving customer experience. This quarter we increased our number of self-service banking kiosks and introduced digital commercial account opening. We also repurchased $30.6 million of shares, completing $64.1 million of our current $100 million stock buyback program. Capital metrics remain high. Further on a macroeconomic level, despite global headwinds, we believe that the Puerto Rico economic environment continues to trend positively.

Earnings per share diluted was $0.84 compared to $0.76 in the first quarter of 2022 and $0.78 in the second quarter of 2021.

Net interest income was $115.1 million compared to $105.2 million in the first quarter of 2022 and $102.3 million in the second quarter of 2021. Net interest margin expanded to 4.80% from 4.47% in the first quarter of 2022 due to increased volume of loans and investments and FRB federal funds rate hikes.

Interest income was $122.2 million compared to $112.9 million in the first quarter of 2022 and $113.5 million in the second quarter of 2021. Compared to the first quarter of 2022, the second quarter of 2022 interest income benefited from higher yields on higher average balances of loans and of investment securities, and higher average yields on cash.

Total interest expense was $7.1 million compared to $7.8 million in the first quarter of 2022 and $11.2 million in the second quarter of 2021. Compared to the first quarter of 2022, the second quarter of 2022 interest expense primarily reflected lower average balances and cost of borrowings.

Non-interest income was $36.2 million compared to $31.6 million in the first quarter of 2022 and $32.2 million in the second quarter of 2021. Compared to the first quarter of 2022, the second quarter of 2022 non-interest income primarily reflected higher banking service and wealth management revenues, lower mortgage banking revenues, and a $4.7 million gain on sale of a legacy branch building.

Provision for credit losses was $6.7 million compared to $1.6 million in the first quarter of 2022 and a recapture of $8.3 million in the second quarter of 2021. The second quarter of 2022 reflected a provision of $5.1 million due to the growth in loan balances and a provision of $4.8 million related to commercial-specific loan reserves as a result of two commercial loans placed in non-accrual, partly offset by a reduction of $4.9 million in qualitative adjustment and loss factors due to the improvement in the performance of loan portfolios and economic conditions in Puerto Rico.

Non-interest expenses were $85.3 million compared to $81.2 million in the first quarter of 2022 and $82.7 million in the second quarter of 2021. The $4.1 million increase from the first quarter of 2022 primarily reflected higher compliance related professional services expenses due to greater levels of business activity, as well as higher technology expenses related to digital transformation.

Loans held for investment were $6.70 billion compared to $6.55 billion at March 31, 2022 and $6.50 billion at June 30, 2021. Loans grew $154.7 million from March 31, 2022, primarily reflecting increases in commercial loans as well as increases in consumer and auto loans.

New loan origination was $587.2 million compared to $623.2 million in the first quarter of 2022 and $673.6 million in the second quarter of 2021, which included $32.7 million of PPP loans. The second quarter of 2022 reflected continued high levels of auto and consumer lending as well as commercial lending in Puerto Rico and the United States mainland.

Total investments were $1.73 billion compared to $1.26 billion at March 31, 2022 and $643.5 million at June 30, 2021. Investments grew $468.5 million from March 31, 2022, taking advantage of the higher yield environment.

Customer deposits were $9.02 billion compared to $8.97 billion at March 31, 2022 and $9.08 billion at June 30, 2021. Core deposits grew by $51.3 million from March 31, 2022, reflecting increases in commercial and retail accounts.

Total assets were $10.25 billion compared to $10.19 billion at March 31, 2022 and $10.46 billion at June 30, 2021.

Capital: CET1 ratio at June 30, 2022 was 12.80% compared to 13.24% at March 31, 2022 and 13.95% at June 30, 2021. The decline from March 31, 2022 reflected common stock repurchased during the quarter and an increase in risk weighted assets, partially offset by an increase in retained earnings. Tangible book value per share was $18.86 compared to $18.90 at March 31, 2022 and $18.13 at June 30, 2021. The slight decline from March 31, 2022 reflected the repurchase of common stock and a reduction in other comprehensive income, partially offset by the increase in retained earnings.

Selected income statement and balance sheet data and key performance indicators are presented in the tables below:


	Quarter Ended June 30,							Six-Month Period Ended June 30,
	2022			2021			Variance %	2022			2021			Variance %
EARNINGS DATA:	(In thousands, except per share data)
Interest income	$	122,222		$	113,457		7.7%	$	235,171		$	224,433		4.8%
Interest expense	7,128			11,206			(36.4)%	14,883			23,984			(37.9)%
Net interest income	115,094			102,251			12.6%	220,288			200,449			9.9%
Provision for (recapture of) credit losses	6,691			(8,305)			(180.6)%	8,242			(1,981)			(516.1)%
Net interest income after provision for credit losses	108,403			110,556			(1.9)%	212,046			202,430			4.8%
Non-interest income	36,210			32,197			12.5%	67,816			62,610			8.3%
Non-interest expenses	85,258			82,676			3.1%	166,413			160,342			3.8%
Income before taxes	59,355			60,077			(1.2)%	113,449			104,698			8.4%
Income tax expense	18,923			19,250			(1.7)%	35,496			33,498			6.0%
Net income	40,432			40,827			(1.0)%	77,953			71,200			9.5%
Less: dividends on preferred stock	—			—			—%	—			(1,255)			(100.0)%
Income available to common shareholders	$	40,432		$	40,827		(1.0)%	$	77,953		$	69,945		11.4%
PER SHARE DATA:
Basic	$	0.84		$	0.79		6.3%	$	1.61		$	1.36		18.4%
Diluted	$	0.84		$	0.78		7.7%	$	1.59		$	1.35		17.8%
Average common shares outstanding	48,053			51,636			(6.9)%	48,508			51,517			(5.8)%
Average common shares outstanding and equivalents	48,389			52,048			(7.0)%	48,933			51,885			(5.7)%
Cash dividends declared per common share	$	0.15		0.08			87.5%	$	0.30		0.16			87.5%
Cash dividends declared on common shares	$	7,186		4,281			67.9%	$	14,624		8,397			74.2%
PERFORMANCE RATIOS:
Return on average assets (ROA)	1.58		%	1.58		%	—%	1.53		%	1.40		%	9.3%
Return on average tangible common stockholders’ equity	17.70		%	17.78		%	(0.4)%	16.78		%	15.48		%	8.4%
Return on average common equity (ROE)	15.67		%	15.60		%	0.4%	14.86		%	13.54		%	9.7%

Efficiency ratio	58.27		%	62.02		%	(6.0)%	58.86		%	61.44		%	(4.2)%
Interest rate spread	4.78		%	4.19		%	14.1%	4.61		%	4.20		%	9.8%
Interest rate margin	4.80		%	4.22		%	13.7%	4.64		%	4.24		%	9.4%


	June 30,			December 31,			Variance
	2022			2021			%
PERIOD END BALANCES AND CAPITAL RATIOS:	(In thousands, except per share data)
Investments and loans
Investment securities	$	1,727,263		$	895,818		92.8%
Loans, net	6,585,210			6,329,311			4.0%
Total investments and loans	$	8,312,473		$	7,225,129		15.0%
Deposits and borrowings
Deposits	$	9,029,570		$	8,603,118		5.0%

Other borrowings	27,618			64,571			(57.2)%
Total deposits and borrowings	$	9,057,188		$	8,667,689		4.5%
Stockholders’ equity

Common stock	59,885			59,885			—%
Additional paid-in capital	634,612			637,061			(0.4)%
Legal surplus	125,365			117,677			6.5%
Retained earnings	455,590			399,949			13.9%
Treasury stock, at cost	(211,138)			(150,572)			40.2%
Accumulated other comprehensive (loss) income	(49,502)			5,160			(1059.3)%
Total stockholders’ equity	$	1,014,812		$	1,069,160		(5.1)%
Per share data
Book value per common share	$	21.34		$	21.54		(0.9)%
Tangible book value per common share	$	18.86		$	19.08		(1.2)%
Market price	$	25.40		$	26.56		(4.4)%
Capital ratios
Leverage capital	9.46		%	9.69		%	(2.4)%
Common equity Tier 1 capital	12.80		%	13.77		%	(7.0)%
Tier 1 risk-based capital	12.80		%	14.27		%	(10.3)%
Total risk-based capital	14.05		%	15.52		%	(9.5)%
Financial assets managed
Trust assets managed	$	3,365,222		$	3,758,895		(10.5)%
Broker-dealer assets gathered	2,078,342			2,466,004			(15.7)%
Total assets managed	$	5,443,564		$	6,224,899		(12.6)%

ANALYSIS OF RESULTS OF OPERATIONS

The following tables show major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for the quarters and six-month periods ended June 30, 2022 and 2021.

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

FOR THE QUARTERS ENDED JUNE 30, 2022 AND 2021


	Interest				Average rate				Average balance
	June 2022		June 2021		June 2022		June 2021		June 2022		June 2021
	(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets	$	122,222	$	113,457	5.10	%	4.68	%	$	9,613,327	$	9,726,905
Tax equivalent adjustment	2,990		2,195		0.12	%	0.09	%	—		—
Interest-earning assets - tax equivalent	125,212		115,652		5.22	%	4.77	%	9,613,327		9,726,905
Interest-bearing liabilities	7,128		11,206		0.32	%	0.49	%	8,985,609		9,097,792
Tax equivalent net interest income / spread	118,084		104,446		4.90	%	4.28	%	627,718		629,113
Tax equivalent interest rate margin					5.02	%	4.36	%
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities	7,881		2,696		2.21	%	1.77	%	1,426,851		608,930
Interest bearing cash and money market investments	2,984		706		0.77	%	0.11	%	1,546,036		2,519,406
Total investments	10,865		3,402		1.47	%	0.44	%	2,972,887		3,128,336
Non-PCD loans
Mortgage	9,586		10,012		5.57	%	5.17	%	688,634		775,303
Commercial	32,105		29,650		5.45	%	5.46	%	2,361,725		2,177,052
Consumer	14,198		11,212		11.27	%	11.28	%	505,418		398,852
Auto and leasing	35,899		34,301		8.18	%	8.67	%	1,759,624		1,586,395
Total Non-PCD loans	91,788		85,175		6.93	%	6.92	%	5,315,401		4,937,602
PCD loans
Mortgage	17,417		20,731		6.15	%	5.97	%	1,120,594		1,372,625
Commercial	1,853		3,521		3.83	%	5.30	%	193,850		266,355
Consumer	42		76		14.19	%	20.11	%	1,170		1,513
Auto and leasing	257		552		10.94	%	10.81	%	9,425		20,474
Total PCD loans	19,569		24,880		5.91	%	5.99	%	1,325,039		1,660,967
Total loans (1)	111,357		110,055		6.73	%	6.69	%	6,640,440		6,598,569
Total interest-earning assets	122,222		113,457		5.10	%	4.68	%	9,613,327		9,726,905

Interest-bearing liabilities:
Deposits:
NOW Accounts	2,174		2,259		0.31	%	0.36	%	2,811,396		2,542,018
Savings and money market	1,289		2,097		0.23	%	0.38	%	2,296,903		2,236,281
Time deposits	1,834		4,243		0.64	%	1.08	%	1,146,522		1,579,414
Total core deposits	5,297		8,599		0.34	%	0.54	%	6,254,821		6,357,713
Brokered deposits	9		24		0.30	%	0.28	%	11,366		34,506
	5,306		8,623		0.34	%	0.54	%	6,266,187		6,392,219
Non-interest bearing deposits	—		—		—		0.00	%	2,691,696		2,605,623


	Interest				Average rate				Average balance
	June 2022		June 2021		June 2022		June 2021		June 2022			June 2021
	(Dollars in thousands)
Fair value premium and core deposit intangible amortizations	1,638		1,837		—	%	—	%	—			—
Total deposits	6,944		10,460		0.31	%	0.47	%	8,957,883			8,997,842
Borrowings:

Advances from FHLB and other borrowings	184		452		2.66	%	2.84	%	27,726			63,867
Subordinated capital notes	—		294		—	%	3.27	%	—			36,083
Total borrowings	184		746		2.66	%	2.99	%	27,726			99,950
Total interest-bearing liabilities	7,128		11,206		0.32	%	0.49	%	8,985,609			9,097,792
Net interest income / spread	$	115,094	$	102,251	4.78	%	4.19	%
Interest rate margin					4.80	%	4.22	%
Excess of average interest-earning assets over average interest-bearing liabilities									$	627,718		$	629,113
Average interest-earning assets to average interest-bearing liabilities ratio									106.99		%	106.92		%

(1) Includes loans held for sale and excludes allowance for credit losses.

C - CHANGES IN NET INTEREST INCOME DUE TO:


	Volume		Rate		Total
	(In thousands)
Interest Income:
Investment securities	$	4,336	$	849	$	5,185
Interest bearing cash and money market investments	(369)		2,647		2,278
Loans	2,349		(1,047)		1,302
Total interest income	6,316		2,449		8,765
Interest Expense:
NOW Accounts	225		(310)		(85)
Savings and money market	55		(863)		(808)
Time deposits	(1,045)		(1,364)		(2,409)
Brokered deposits	(17)		2		(15)
Fair value premium and core deposit intangible amortizations	—		(199)		(199)

Advances from FHLB and other borrowings	(241)		(27)		(268)
Subordinated capital notes	(147)		(147)		(294)
Total interest expense	(1,170)		(2,908)		(4,078)
Net Interest Income	$	7,486	$	5,357	$	12,843

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

FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2022 AND 2021


	Interest				Average rate				Average balance
	June 2022		June 2021		June 2022		June 2021		June 2022		June 2021
	(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets	$	235,171	$	224,433	4.95	%	4.74	%	$	9,576,999	$	9,543,525
Tax equivalent adjustment	5,466		4,366		0.12	%	0.09	%	—		—
Interest-earning assets - tax equivalent	240,637		228,799		5.07	%	4.83	%	9,576,999		9,543,525
Interest-bearing liabilities	14,883		23,984		0.34	%	0.54	%	8,925,227		8,891,198
Tax equivalent net interest income / spread	225,754		204,815		4.73	%	4.29	%	651,772		652,327
Tax equivalent interest rate margin					4.85	%	4.38	%
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities	12,336		4,872		2.07	%	1.73	%	1,189,263		563,735
Interest bearing cash and money market investments	3,913		1,301		0.44	%	0.11	%	1,807,621		2,362,788
Total investments	16,249		6,173		1.09	%	0.43	%	2,996,884		2,926,523
Non-PCD loans
Mortgage	18,939		20,786		5.43	%	5.26	%	697,625		790,611
Commercial	61,676		57,376		5.41	%	5.38	%	2,299,316		2,151,963
Consumer	26,914		22,827		11.23	%	11.36	%	483,119		405,080
Auto and leasing	70,890		67,116		8.24	%	8.63	%	1,735,055		1,568,068
Total Non-PCD loans	178,419		168,105		6.90	%	6.90	%	5,215,115		4,915,722
PCD loans
Mortgage	34,759		40,763		6.05	%	5.80	%	1,149,376		1,404,929
Commercial	5,103		8,107		5.05	%	6.01	%	203,852		272,232
Consumer	89		113		14.22	%	13.54	%	1,244		1,663
Auto and leasing	552		1,172		10.57	%	10.52	%	10,528		22,456
Total PCD loans	40,503		50,155		5.93	%	5.90	%	1,365,000		1,701,280
Total loans (1)	218,922		218,260		6.71	%	6.65	%	6,580,115		6,617,002
Total interest-earning assets	235,171		224,433		4.95	%	4.74	%	9,576,999		9,543,525


	Interest				Average rate				Average balance
	June 2022		June 2021		June 2022		June 2021		June 2022			June 2021
	(Dollars in thousands)
Interest-bearing liabilities:
Deposits:
NOW Accounts	4,314		4,652		0.31	%	0.38	%	2,812,212			2,470,244
Savings and money market	2,487		4,220		0.22	%	0.40	%	2,272,683			2,120,764
Time deposits	3,891		9,748		0.67	%	1.17	%	1,172,785			1,677,079
Total core deposits	10,692		18,620		0.34	%	0.60	%	6,257,680			6,268,087
Brokered deposits	17		187		0.30	%	0.94	%	11,366			40,199
	10,709		18,807		0.34	%	0.60	%	6,269,046			6,308,286
Non-interest bearing deposits	—		—		—	%	—	%	2,620,233			2,482,464
Fair value premium and core deposit intangible amortizations	3,276		3,677		—	%	—	%	—			—
Total deposits	13,985		22,484		0.32	%	0.52	%	8,889,279			8,790,750
Borrowings:

Advances from FHLB and other borrowings	377		911		2.71	%	2.86	%	27,954			64,365
Subordinated capital notes	521		589		13.15	%	3.29	%	7,994			36,083
Total borrowings	898		1,500		5.04	%	3.01	%	35,948			100,448
Total interest bearing liabilities	14,883		23,984		0.34	%	0.54	%	8,925,227			8,891,198
Net interest income / spread	$	220,288	$	200,449	4.61	%	4.20	%
Interest rate margin					4.64	%	4.24	%
Excess of average interest-earning assets over average interest-bearing liabilities									$	651,772		$	652,327
Average interest-earning assets to average interest-bearing liabilities ratio									107.30		%	107.34		%

(1) Includes loans held for sale and excludes allowance for credit losses.

C - CHANGES IN NET INTEREST INCOME DUE TO:


	Volume		Rate		Total
	(In thousands)
Interest Income:
Investment securities	$	6,218	$	1,246	$	7,464
Interest bearing cash and money market investments	(368)		2,980		2,612
Loans	3,847		(3,185)		662
Total interest income	9,697		1,041		10,738
Interest Expense:
NOW Accounts	593		(931)		(338)
Savings and money market	284		(2,017)		(1,733)
Time deposits	(2,569)		(3,288)		(5,857)
Brokered deposits	(87)		(83)		(170)
Fair value premium and core deposit intangible amortizations	—		(401)		(401)

Advances from FHLB and other borrowings	(492)		(42)		(534)
Subordinated capital notes	(741)		673		(68)
Total interest expense	(3,012)		(6,089)		(9,101)
Net Interest Income	$	12,709	$	7,130	$	19,839

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 quarters ended June 30, 2022 and 2021

Net interest income of $115.1 million increased $12.8 million from $102.3 million. Tax equivalent basis net interest income of $118.1 million increased $13.7 million, or 13.1%, from $104.4 million.

Interest rate spread increased 59 basis points to 4.78% from 4.19% and net interest margin increased 58 basis points to 4.80% from 4.22%. This increase reflects an increase of 42 basis points in the total average yield of interest-earning assets and a reduction in the average cost of interest-bearing liabilities of 17 basis points. Net interest income was positively impacted by:

•An increase of $5.2 million in interest income from investments securities related to purchases of available-for-sale and held-to-maturity securities during 2022 and 2021;

•Lower interest expense by $4.1 million, driven by both a reduced cost and lower average balance of total deposits and borrowings, which resulted in an increase in net interest income of approximately $2.9 million and $1.2 million, respectively;

•An increase of $2.3 million in interest income from interest bearing cash and money market investments related to the increase in federal fund rates. The FRB target rates increased from a range of 0% to 0.25% in the second quarter of 2021 to a range of 1.50% to 1.75% for the second quarter of 2022; and

•An increase of $1.3 million in interest income from loans driven by increased yields on higher balances of loans.

Comparison of the six-month periods ended June 30, 2022 and 2021

Net interest income of $220.3 million increased $19.9 from $200.4 million. Tax equivalent basis net interest income of $225.8 million increased $21.0 million, or 10.25%, from $204.8 million.

Interest rate spread increased 41 basis points to 4.61% from 4.20% and net interest margin increased 40 basis points to 4.64% from 4.24%. This increase reflects an increase of 21 basis points in the total average yield of interest-earning assets and a reduction in the average cost of interest-bearing liabilities of 20 basis points.

Net interest income was positively impacted by:

•Lower interest expense by $9.1 million, reflecting both a reduced cost and lower average balances of total deposits and borrowings, which resulted in an increase in net interest income of approximately $6.1 million and $3.0 million, respectively;

•A $7.5 million increase in interest income from investment securities related to purchases of available-for-sale and held-to-maturity securities during 2022 and 2021;

•A $2.6 million increase in interest income from interest bearing cash and money market related to the increase in federal fund rates; and

•A $662 thousand increase in interest income from loans driven by increased yields on new loans originated during the period.

TABLE 2 - NON-INTEREST INCOME SUMMARY


	Quarter Ended June 30,						Six-Month Period Ended June 30,
	2022		2021		Variance %		2022		2021		Variance %
	(In thousands)						(In thousands)
Banking service revenue	$	18,141	$	18,251	(0.6)	%	$	35,703	$	34,748	2.7	%
Wealth management revenue	8,270		8,263		0.1	%	16,127		15,651		3.0	%
Mortgage banking activities	4,803		4,540		5.8	%	10,585		10,113		4.7	%
Total banking and financial service revenue	31,214		31,054		0.5	%	62,415		60,512		3.1	%




Other non-interest income	4,996		1,143		337.1	%	5,401		2,098		157.4	%
Total non-interest income, net	$	36,210	$	32,197	12.5	%	$	67,816	$	62,610	8.3	%

Non-Interest Income

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

Comparison of quarters ended June 30, 2022 and 2021

OFG recorded non-interest income, net, in the amount of $36.2 million, compared to $32.2 million, an increase of 12.5%, or $4.0 million. The increase in non-interest income was mainly due to:

•A $3.9 million increase in other non-interest income, primarily related to a $4.7 million gain recognized on the sale of a branch building during the second quarter of 2022.

Comparison of the six-month periods ended June 30, 2022 and 2021

OFG recorded non-interest income, net, in the amount of $67.8 million, compared to $62.6 million, an increase of 8.3%, or $5.2 million. The increase in non-interest income was mainly due to:

•An increase of $1.0 million in banking service revenues, primarily related to an increase of $404 thousand in credit life insurance commissions, $325 thousand in checking and saving account fees, $319 thousand in servicing and prepayment loan fees, and $180 thousand in international transaction fees. These variances were partially offset by a decrease of $344 thousand in electronic banking fees;

•An increase of $476 thousand in wealth management revenue, primarily related to the new reinsurance business income of $1.8 million, partially offset by decreases of $849 thousand in broker-dealer revenues, $192 thousand in trust division fees, $184 thousand in insurance income from annuities and other commissions, and $33 thousand in OPC revenues;

•An increase of $472 thousand in mortgage-banking activities, primarily related to lower losses on repurchase loans and other mortgage banking activities by $2.9 million and higher servicing fees of $725 thousand, offset by a $3.1 million decrease in gains on loans sold and securitization due to decrease in sales; and

•An increase of $3.3 million in other non-interest income, primarily related to a $4.7 million gain recognized on the sale of a branch building during the first six months of 2022.

TABLE 3 - NON-INTEREST EXPENSES SUMMARY


	Quarter Ended June 30,								Six-Month Period Ended June 30,
	2022			2021			Variance %		2022			2021			Variance %
	(In thousands)								(In thousands)
Compensation and employee benefits	$	34,730		$	32,919		5.5	%	$	69,498		$	65,537		6.0	%
Occupancy, equipment and infrastructure costs	12,861			12,528			2.7	%	24,777			25,656			-3.4	%
Electronic banking charges	9,722			9,316			4.4	%	19,508			17,548			11.2	%
Professional and service fees	7,362			5,399			36.4	%	12,783			9,935			28.7	%
Information technology expenses	5,528			5,532			-0.1	%	10,332			9,786			5.6	%
Taxes, other than payroll and income taxes	3,266			3,617			-9.7	%	6,573			7,278			-9.7	%
Insurance	2,429			2,673			-9.1	%	5,064			5,129			-1.3	%
Loan servicing and clearing expenses	2,243			1,942			15.5	%	4,165			3,782			10.1	%
Advertising, business promotion, and strategic initiatives	1,827			1,707			7.0	%	3,889			3,137			24.0	%
Pandemic expenses	1,099			1,531			-28.2	%	1,980			3,300			-40.0	%
Communication	1,132			1,039			9.0	%	2,248			2,004			12.2	%
Printing, postage, stationery and supplies	785			941			-16.6	%	1,877			2,159			-13.1	%
Director and investor relations	346			324			6.8	%	595			623			-4.5	%
Foreclosed real estate and other repossessed assets (income) expenses, net	(1,404)			327			-529.4	%	(2,886)			278			-1,138.1	%

Other	3,332			2,881			15.7	%	6,010			4,190			43.4	%
Total non-interest expenses	$	85,258		$	82,676		3.1	%	$	166,413		$	160,342		3.8	%
Relevant ratios and data:
Efficiency ratio	58.27		%	62.02		%			58.86		%	61.44		%
Compensation and benefits to non-interest expense	40.74		%	39.82		%			41.76		%	40.87		%
Compensation to average total assets owned (annualized)	1.36		%	1.27		%			1.37		%	1.29		%

Average number of employees	2,232			2,239					2,246			2,235
Average compensation per employee (annualized, in thousands)	$	62.24		$	58.81				$	61.89		$	58.65
Average loans per average employee	$	2,975		$	2,947				$	2,930		$	2,960

Non-Interest Expenses

Comparison of quarters ended June 30, 2022 and 2021

Non-interest expense was $85.3 million, representing an increase of 3.1%, or $2.6 million, compared to $82.7 million. The increase in non-interest expense was mainly due to:

•Increase in professional and service fees by $2.0 million, reflecting higher compliance related expenses due to greater levels of business activity;

•Increase in compensation and employee benefits by $1.8 million, mainly due to increases in minimum hourly wages and annual salaries; and

•Increase in electronic banking charges by $406 thousand driven by increase in debit and credit card billing fees, ATM-related expenses, and merchant fees due to higher transaction volumes during the quarter ended June 30, 2022.

The increase in non-interest expense was partially offset by improvements in foreclosed real estate and other repossessed assets income by $1.7 million reflecting an increase of $1.3 million in gains on sales of foreclosed real estate and a decrease of $652 thousand in credit-related expenses.

The efficiency ratio was 58.27% and improved from 62.02%. 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 adjusted efficiency ratio computation for the quarters ended June 30, 2022 and 2021 amounted to $5.0 million and $1.1 million, respectively.

Comparison of the six-month periods ended June 30, 2022 and 2021

Non-interest expense was $166.4 million, representing an increase of 3.8%, or $6.1 million, compared to $160.3 million.

Non-interest expenses were positively impacted by:

•Increase in compensation and employee benefits by $4.0 million, primarily related to a one-time $1.3 million pandemic employee tax credit in prior year period, and increases in minimum hourly wages and annual salaries in the current period;

•Increase in professional and service fees expenses by $2.8 million, reflecting higher compliance related expenses due to greater levels of business activity; and

•Increase in electronic banking charges by $2.0 million mainly due an increase in debit and credit card billing fees, ATM-related expenses and merchant fees due to higher transaction volumes.

The increase in non-interest expense was partially offset by:

•Improvements in foreclosed real estate and other repossessed assets income by $3.2 million reflecting $1.9 million increase in gains on sales of foreclosed real estate, $680 thousand increase in net gain on sale of other repossessed assets, and $605 thousand decrease in credit-related expenses;

•Decrease in pandemic-related expenses by $1.3 million due to lower security, supplies and sanitation services expenses compared to prior period; and

•Decrease in occupancy, equipment and infrastructure costs by $879 thousand reflecting lower rent, building maintenance, utilities and other expenses related to branch consolidations.

The efficiency ratio was 58.86% and improved from 61.44%. Amounts presented as part of non-interest income that are excluded from the efficiency ratio computation for the six-month periods ended June 30, 2022 and 2021 amounted to $5.4 million and $2.1 million, respectively.

Provision for Credit Losses

Comparison of quarters ended June 30, 2022 and 2021

Provision for credit losses increased by $15.0 million to $6.7 million from a recapture of $8.3 million. The provision for credit losses for the quarter ended June 30, 2022 includes a provision of $5.1 million due to the growth in loan balances and a provision of $4.8 million in commercial-specific loan reserves as a result of two commercial loans placed in non-accrual, partly offset by a $3.9 million recapture associated with qualitative adjustments due to the improvement in the performance of loan portfolios and economic conditions in Puerto Rico. The provision for credit losses for the prior-year quarter included $2.1 million net charge-offs and a $10.4 million recapture, which reflected continued improvement in asset quality trends.

Comparison of the six-month periods ended June 30, 2022 and 2021

Provision for credit losses decreased by $10.2 million to $8.2 million from a recapture of $2.0 million. The provision for credit losses for the six-month period ended June 30, 2022 reflected a provision of $9.1 million related to the growth in loan balances and a provision of $9.5 million related to commercial-specific loan reserves due to certain commercial loans

placed in non-accrual, offset by a $9.6 million recapture associated with qualitative adjustments due to the improvement in the performance of loan portfolios and economic conditions in Puerto Rico. Prior-year period recapture reflected continued improvement in asset quality trends.

Income Tax Expense

Comparison of quarters ended June 30, 2022 and 2021

OFG’s ETR was 31.9% in 2022 compared to 32.0% in 2021. The decrease in ETR is mainly related to an increase in US Treasury bills and other exempt investments during the quarter.

Comparison of the six-month periods ended June 30, 2022 and 2021

OFG’s ETR was 31.3% in 2022 compared to 32.0% in 2021. The decrease in ETR is related to an increase in US Treasury bills and other exempt investments and a discrete tax windfall on stock options during the six-month period ended June 30, 2022.

Business Segments

OFG segregates its businesses into the following major reportable segments: Banking, Wealth Management, and Treasury. Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as OFG’s organization, nature of its products, distribution channels and economic characteristics of its services were also considered in the determination of the reportable segments. OFG measures the performance of these reportable segments based on pre-established goals of different financial parameters such as net income, net interest income, loan production, and fees generated. OFG’s methodology for allocating non-interest expenses among segments is based on several factors such as revenue, employee headcount, occupied space, dedicated services or time, among others. Following are the results of operations and the selected financial information by operating segment for the quarters and six-month periods ended June 30, 2022 and 2021.


	Quarter Ended June 30, 2022
	Banking		Wealth Management		Treasury		Total Major Segments		Eliminations		Consolidated Total
	(In thousands)
Interest income	$	109,292	$	5	$	12,925	$	122,222	$	—	$	122,222
Interest expense	(6,280)		—		(848)		(7,128)		—		(7,128)
Net interest income	103,012		5		12,077		115,094		—		115,094
Provision for credit losses	6,634		—		57		6,691		—		6,691
Non-interest income	27,802		8,408		—		36,210		—		36,210
Non-interest expenses	(79,656)		(4,795)		(807)		(85,258)		—		(85,258)
Intersegment revenue	543		—		—		543		(543)		—
Intersegment expenses	—		(376)		(167)		(543)		543		—
Income before income taxes	45,067		3,242		11,046		59,355		—		59,355
Income tax expense	18,580		—		343		18,923		—		18,923
Net income	$	26,487	$	3,242	$	10,703	$	40,432	$	—	$	40,432
Total assets	$	8,235,814	$	28,240	$	2,997,323	$	11,261,377	$	(1,013,603)	$	10,247,774

	Six-Month Period Ended June 30, 2022
	Banking		Wealth Management		Treasury		Total Major Segments		Eliminations		Consolidated Total
	(In thousands)
Interest income	$	216,115	$	10	$	19,046	$	235,171	$	—	$	235,171
Interest expense	(13,651)		—		(1,232)		(14,883)		—		(14,883)
Net interest income	202,464		10		17,814		220,288		—		220,288
Provision for (recapture of) credit losses	8,344		—		(102)		8,242		—		8,242
Non-interest income	51,352		16,414		50		67,816		—		67,816
Non-interest expenses	(155,447)		(9,380)		(1,586)		(166,413)		—		(166,413)
Intersegment revenue	1,057		—		—		1,057		(1,057)		—
Intersegment expenses	—		(719)		(338)		(1,057)		1,057		—
Income before income taxes	$	91,082	$	6,325	$	16,042	$	113,449	$	—	$	113,449
Income tax expense	35,062		—		434		35,496		—		35,496
Net income	$	56,020	$	6,325	$	15,608	$	77,953	$	—	$	77,953
Total assets	$	8,235,814	$	28,240	$	2,997,323	$	11,261,377	$	(1,013,603)	$	10,247,774


	Quarter Ended June 30, 2021
	Banking		Wealth Management		Treasury		Total Major Segments		Eliminations		Consolidated Total
	(In thousands)
Interest income	$	110,446	$	6	$	3,005	$	113,457	$	—	$	113,457
Interest expense	(10,712)		—		(494)		(11,206)		—		(11,206)
Net interest income	99,734		6		2,511		102,251		—		102,251
Recapture of provision for credit losses	(7,737)		—		(568)		(8,305)		—		(8,305)
Non-interest income	24,215		7,974		8		32,197		—		32,197
Non-interest expenses	(76,623)		(5,015)		(1,038)		(82,676)		—		(82,676)
Intersegment revenue	545		—		—		545		(545)		—
Intersegment expenses	—		(302)		(243)		(545)		545		—
Income before income taxes	55,608		2,663		1,806		60,077		—		60,077
Income tax expense	19,239		—		11		19,250		—		19,250
Net income	$	36,369	$	2,663	$	1,795	$	40,827	$	—	$	40,827
Total assets	$	8,271,348	$	31,165	$	3,232,968	$	11,535,481	$	(1,073,668)	$	10,461,813


	June 30, 2021
	Banking		Wealth Management		Treasury		Total Major Segments		Eliminations		Consolidated Total
	(In thousands)
Interest income	$	218,676	$	18	$	5,739	$	224,433	$	—	$	224,433
Interest expense	(22,848)		—		(1,136)		(23,984)		—		(23,984)
Net interest income	195,828		18		4,603		200,449		—		200,449
Recapture of provision for credit losses	(1,149)		—		(832)		(1,981)		—		(1,981)
Non-interest income	47,088		15,505		17		62,610		—		62,610
Non-interest expenses	(150,497)		(7,844)		(2,001)		(160,342)		—		(160,342)
Intersegment revenue	1,098		—		—		1,098		(1,098)		—
Intersegment expenses	—		(593)		(505)		(1,098)		1,098		—
Income before income taxes	$	94,666	$	7,086	$	2,946	$	104,698	$	—	$	104,698
Income tax expense	33,475		—		23		33,498		—		33,498
Net income	$	61,191	$	7,086	$	2,923	$	71,200	$	—	$	71,200
Total assets	$	8,271,348	$	31,165	$	3,232,968	$	11,535,481	$	(1,073,668)	$	10,461,813

Comparison of quarters ended June 30, 2022 and 2021

Banking

OFG’s banking segment net income before taxes decreased by $10.5 million from $55.6 million to $45.1 million, mainly reflecting:

•An increase in provision for credit losses of $14.4 million. The provision for the current quarter reflected increases due to growth of loan balances and commercial-specific loan reserves from commercial loans placed in non-accrual, partly offset by a reduction in qualitative adjustment due to the improvement in the performance of loan portfolios and economic conditions in Puerto Rico. The provision for the prior-year quarter included a release related to improvements in asset quality; and

•An increase in non-interest expenses of $3.0 million, mainly due to: (i) higher compensation and employee benefits by $2.5 million due to increases in minimum hourly wages and annual salaries, (ii) higher compliance related professional expenses by $1.8 million due to greater levels of business activity, and (iii) higher electronic banking charges by $406 thousand due to higher transaction volume; partially offset by improvements in foreclosed real estate and other repossessed assets income by $1.7 million reflecting an increase of $1.3 million in gains on sales of foreclosed real estate.

These variances were partially offset by:

•Lower interest expense by $4.4 million from both, reduced costs and lower average balances of core deposits; and

•An increase of $3.6 million in non-interest income, primarily related to a $4.7 million gain recognized on the sale of a legacy branch building during the quarter ended June 30, 2022.

Wealth Management

Wealth management segment revenue consists of commissions and fees from fiduciary activities, securities brokerage and insurance activities. Net income before taxes from this segment increased by $0.6 million reflecting higher non-interest income of $434 thousand mainly due to $1.0 million in income from a new reinsurance business which began operations during the last quarter of 2021, partially offset by a $644 thousand decrease in revenues subject to commissions from the broker-dealer subsidiary.

Treasury

Treasury segment net income before taxes increased by $9.2 million, mainly reflecting an increase in interest income from the purchases of available-for-sale and held-to-maturity securities during the current period.

Comparison of six-month periods ended June 30, 2022 and 2021

Banking

OFG’s banking segment net income before taxes decreased by $3.6 million from $94.7 million to $91.1 million, mainly reflecting:

•An increase in provision for credit losses of $9.5 million. The provision for the current period reflected increases due to growth in loan balances and commercial-specific loan reserves from commercial loans placed in non-accrual, partly offset by a reduction in qualitative adjustment due to the improvement in the performance of loan portfolios and economic conditions in Puerto Rico. The provision for the prior-year period included releases related to improvements in asset quality;

•An increase in non-interest expenses of $5.0 million, mainly due to: (i) a $4.4 million increase in compensation and employee benefits reflecting a one-time $1.3 million pandemic employee tax credit in the prior-year period and increases in minimum hourly wages and annual salaries; (ii) a $2.4 million increase in compliance related professional expenses due to greater levels of business activity; a $2.0 million increase in electronic banking charges due to higher transaction volume; and (iii) a $721 thousand increase in advertising and marketing; partially offset by improvements in foreclosed real estate and other repossessed assets income by $3.2 million reflecting: (i) a $1.9 million increase in gains on sales of foreclosed real estate, (ii) a $680 thousand increase in net gain on sale of other repossessed assets, and (iii) a $605 thousand decrease in credit-related expenses.

The increases in the banking segment’s net income were partially offset by:

•Lower interest expense by $9.2 million, mainly related to both, reduced costs and lower average balances of core deposits; and

•An increase of $4.3 million in non-interest income primarily related to a $4.7 million gain recognized on the sale of a legacy branch building during the quarter ended June 30, 2022.

Wealth Management

Wealth management segment revenue consists of commissions and fees from fiduciary activities, securities brokerage and insurance activities. Net income before taxes from this segment decreased by $0.8 million reflecting an increase in non-interest expenses by $1.5 million, primarily related to higher claims expenses as a result of a $1.2 million reversal from a case settled during the prior year period. The decrease in net income before taxes was partially offset by a $909 thousand increase in non-interest income related to $1.8 million in income from the new reinsurance business, partially offset by decreases of $849 thousand in broker-dealer revenues.

Treasury

Treasury segment net income before taxes increased by $13.1 million, mainly reflecting:

•Increase in interest income by $13.3 million, reflecting the purchase of agency MBS and US Treasury securities during the current period; and

•Decrease in interest expense by $96 thousand reflecting the cancellation of $33.1 million of FHLB advances during 2021 and the early redemption of $36.1 million subordinated capital notes during the six-month period ended June 30, 2022.

ANALYSIS OF FINANCIAL CONDITION

Assets Owned

At June 30, 2022, OFG’s total assets amounted to $10.248 billion, for an increase of $348.1 million, when compared to $9.900 billion at December 31, 2021.

The investment portfolio increased by $831.4 million, or 92.8%, primarily related to the purchase of available for sale agency mortgage-backed securities and held-to-maturity US Treasury securities amounting to $719.0 million and $196.7 million, respectively, during the six-month period ended June 30, 2022. OFG’s strategy is to invest its liquidity in highly liquid securities and designate them as available for sale or held-to-maturity after taking into account the investment’s characteristics with respect to yield and term and the current market environment.

OFG’s loan portfolio is comprised of residential mortgage loans, commercial loans secured by real estate, other commercial and industrial loans, consumer loans, and auto loans and leases. At June 30, 2022, OFG’s net loan portfolio increased by $255.9 million, or 4.0%, reflecting increases in commercial, consumer and auto loans, partially offset by $54.0 million PPP loans forgiven by the Small Business Administration and the sale of $21.9 million of past due mortgage loans sold during the six-month period ended June 30, 2022.

Cash and due from banks of $1.302 billion decreased by $712.3 million, reflecting cash used to purchase available for sale agency mortgage-backed securities and held-to-maturity US Treasury securities, disbursements for loans originated during the six-month period ended June 30, 2022, and the redemption of $36.1 million in 3.23% variable rate subordinated notes, partially offset by an increase in commercial and government-related deposits.

Financial Assets Managed

OFG’s financial assets include those managed by OFG’s trust division, retirement plan administration subsidiary, and assets gathered by its securities broker-dealer and insurance agency 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 June 30, 2022, the total assets managed by OFG’s trust division and retirement plan administration subsidiary amounted to $3.365 billion, compared to $3.759 billion at December 31, 2021. 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 June 30, 2022, total assets gathered by the securities broker-dealer and insurance agency subsidiaries from their customers’ investment accounts amounted to $2.078 billion, compared to $2.466 billion at December 31, 2021. Changes in trust and broker-dealer related assets primarily reflect changes in portfolio balances and differences in market value.

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. If the fair values are less than the book values, an additional valuation procedure is necessary to assess the proper carrying value of the goodwill.

As of June 30, 2022 and December 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 to our consolidated financial statements for more information on the annual goodwill impairment test.

TABLE 4 - ASSETS SUMMARY AND COMPOSITION


	June 30,			December 31,			Variance %
	2022			2021
	(In thousands)
Investments:
FNMA and FHLMC certificates	$	1,190,478		$	550,809		116.1	%


Obligations of US government-sponsored agencies	—			1,183			-100.0	%
US Treasury securities	207,549			10,825			1,817.3	%


CMOs issued by US government-sponsored agencies	18,640			24,430			-23.7	%
GNMA certificates	288,357			288,578			-0.1	%
Equity securities	19,848			17,578			12.9	%
Other debt securities	2,378			2,395			-0.7	%
Trading securities	13			20			-35.0	%
Total investments	1,727,263			895,818			92.8	%
Loans, net	6,585,210			6,329,311			4.0	%
Total investments and loans	8,312,473			7,225,129			15.0	%
Other assets:


Cash and due from banks (including restricted cash)	1,302,368			2,014,698			-35.4	%
Money market investments	4,913			8,952			-45.1	%
Foreclosed real estate	15,061			15,039			0.1	%
Accrued interest receivable	58,371			56,560			3.2	%
Deferred tax asset, net	76,101			99,063			-23.2	%
Premises and equipment, net	101,848			92,124			10.6	%
Servicing assets	49,280			48,973			0.6	%
Goodwill	86,069			86,069			0.0	%
Right of use assets	27,699			28,846			-4.0	%
Core deposit, customer relationship and other intangibles	31,800			36,093			-11.9	%


Other assets and customers' liability on acceptances	181,791			188,174			-3.4	%
Total other assets	1,935,301			2,674,591			-27.6	%
Total assets	$	10,247,774		$	9,899,720		3.5	%
Investment portfolio composition:
FNMA and FHLMC certificates	68.9		%	61.5		%
Obligations of US government-sponsored agencies	0.0		%	0.1		%
US Treasury securities	12.0		%	1.2		%
CMOs issued by US government-sponsored agencies	1.1		%	2.7		%
GNMA certificates	16.7		%	32.2		%
Equity securities	1.1		%	2.0		%
Other debt securities and trading securities	0.2		%	0.3		%
	100.0		%	100.0		%

TABLE 5 - LOAN PORTFOLIO COMPOSITION


	June 30,		December 31,		Variance %
	2022		2021
	(In thousands)
Loans held for investment:
Commercial	$	2,595,867	$	2,379,330	9.1	%
Mortgage	1,807,852		1,907,271		(5.2)	%
Consumer	499,102		409,675		21.8	%
Auto and leasing	1,799,840		1,706,310		5.5	%
	6,702,661		6,402,586		4.7	%
Allowance for credit losses	(159,039)		(155,937)		2.0	%
Total loans held for investment	6,543,622		6,246,649		4.8	%
Mortgage loans held for sale	26,947		51,096		(47.3)	%
Other loans held for sale	14,641		31,566		(53.6)	%
Total loans, net	$	6,585,210	$	6,329,311	4.0	%

OFG’s loan portfolio is composed of mortgage, commercial, consumer, and auto loans. As shown in Table 5 above, total loans, net, amounted to $6.585 billion at June 30, 2022 and $6.329 billion at December 31, 2021. OFG’s loans held-for-investment portfolio composition and trends were as follows:

•Commercial loan portfolio amounted to $2.596 billion (38.7% of the gross loan portfolio) compared to $2.379 billion (37.2% of the gross loan portfolio) at December 31, 2021.

Commercial loan production, excluding PPP loans, decreased 28.4%, or $93.2 million, to $234.7 million in the quarter ended June 30, 2022 from $327.9 million for the same period in 2021, and increased 13.6%, or $62.1 million, to $518.7 million in the six-month period ended June 30, 2022 from $456.6 million for the same period in 2021.

During the second quarter and six-month period ended June 30, 2021, OFG originated $32.7 million and $159.0 million, respectively, of PPP loans. There were no originations of PPP loans during the quarter and six-month period ended June 30, 2022, as the program concluded in 2021.

•Mortgage loan portfolio amounted to $1.808 billion (27.0% of the gross loan portfolio) compared to $1.907 billion (29.8% of the gross originated loan portfolio) at December 31, 2021.

Mortgage loan production totaled $62.8 million and $126.7 million for the quarter and six-month period ended June 30, 2022, respectively, which represents a decrease of 39.5% and 36.5% from $103.8 million and $199.7 million for the same periods in 2021. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to $33.4 million and $14.5 million at June 30, 2022 and December 31, 2021, respectively. Under the GNMA program, issuers such as OFG have the option but not the obligation to repurchase loans that are 90 days or more past due. For accounting purposes, these loans subject to the repurchase option are required to be reflected (rebooked) on our financial statements with an offsetting liability.

•Consumer loan portfolio amounted to $499.1 million (7.4% of the gross loan portfolio) compared to $409.7 million (6.4% of the gross loan portfolio) at December 31, 2021. Consumer loan production increased 153.9% and 195.6% to $96.6 million and $193.7 million in the quarter and six-month period ended June 30, 2022, respectively, from $38.0 million and $65.5 million for the same periods in 2021.

•Auto and leasing portfolio amounted to $1.800 billion (26.9% of the gross loan portfolio) compared to $1.706 billion (26.7% of the gross originated loan portfolio) at December 31, 2021. Auto loans production increased 12.8% and 15.9% to $193.0 million and $371.3 million in the quarter and six-month period ended June 30, 2022, respectively, compared to $171.1 million and $320.5 million for the same periods in 2021.

TABLE 6 - PUERTO RICO GOVERNMENT RELATED LOANS


June 30, 2022
			Maturity
	Carrying Value			1 to 3 Years		More than 3 Years
Loans:	(In thousands)

Municipalities	$	86,272		$	35,143	$	51,129

At June 30, 2022, OFG has $86.3 million of direct credit exposure to the Puerto Rico government, a $1.0 million decrease from December 31, 2021. At December 31, 2021, total loan exposure to the Puerto Rico government included a $1.1 million PCD loan granted to a public corporation classified as non-accrual, which was repaid during the six-month period ended June 30, 2022.

Credit Risk Management

Allowance for Credit Losses

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

Tables 7 through 9 set forth an analysis of activity in the allowance for credit losses and present selected credit loss statistics for the quarters and six-month periods ended June 30, 2022 and 2021 and as of June 30, 2022 and December 31, 2021. In addition, Table 5 sets forth the composition of the loan portfolio.

Please refer to the “Provision for Credit Losses” and “Critical Accounting Policies and Estimates” sections in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section and Note 7 – Allowance for Credit Losses of this Quarterly Report for a more detailed analysis of provisions and allowance for credit losses.

Non-performing Assets

OFG’s non-performing assets include non-performing loans, foreclosed real estate, and other repossessed assets (see Tables 10 and 12). At June 30, 2022, OFG had $98.2 million of non-accrual loans, including $10.3 million PCD loans, compared to $101.9 million at December 31, 2021.

At June 30, 2022, OFG’s non-performing assets decreased by 2.5% to $125.8 million (1.23% of total assets) from $129.0 million (1.30% of total assets) at December 31, 2021. Foreclosed real estate and other repossessed assets amounting to $15.1 million and $2.5 million, respectively, at June 30, 2022, increased from $15.0 million and $1.9 million, respectively, at December 31, 2021, recorded at fair value. OFG does not expect non-performing loans to result in significantly higher losses. At June 30, 2022, the allowance coverage ratio to non-performing loans was 147.0% (139.2% at December 31, 2021).

Upon adoption of the current expected credit losses (“CECL”) methodology, 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 offered adjustable rate mortgage loans with teaser rates.

The following items comprise non-performing loans held for investment, including Non-PCD and PCDs:

Commercial loans - At June 30, 2022, OFG’s non-performing commercial loans amounted to $57.3 million (52.9% of OFG’s non-performing loans), an 14.2% increase from $50.1 million at December 31, 2021 (44.8% 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.

Mortgage loans - At June 30, 2022, OFG’s non-performing mortgage loans totaled $33.6 million (31.1% of OFG’s non-performing loans), a 15.4% decrease from $39.7 million (35.5% of OFG’s non-performing loans) at December 31, 2021. Non-PCD mortgage loans are placed on non-accrual status when they become 90 days or more past due and are written-down, if necessary, based on the specific evaluation of the collateral underlying the loan, except for FHA and VA insured mortgage loans which are placed in non-accrual when they become 12 months or more past due.

Consumer loans - At June 30, 2022, OFG’s non-performing consumer loans amounted to $2.0 million (1.8% of OFG’s non-performing loans), a 13.7% decrease from $2.3 million at December 31, 2021 (2.1% 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 leasing - At June 30, 2022, OFG’s non-performing auto loans and leases amounted to $15.3 million (14.2% of OFG’s total non-performing loans), a decrease of 22.7% from $19.8 million at December 31, 2021 (17.6% 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 credit underwriters for troubled-debt restructuring classification if OFG grants a concession for legal or economic reasons due to the debtor’s financial difficulties.

TABLE 7 - ALLOWANCE FOR CREDIT LOSSES BREAKDOWN


	June 30,			December 31,			Variance %
	2022			2021
	(In thousands)
Allowance for credit losses:
Non-PCD
Commercial	$	42,014		$	32,262		30.2	%
Mortgage	11,906			15,299			-22.2	%
Consumer	23,109			19,141			20.7	%
Auto and leasing	66,867			65,363			2.3	%
Total allowance for credit losses	$	143,896		$	132,065		9.0	%

PCD
Commercial	$	2,427		$	4,508		-46.2	%
Mortgage	12,541			19,018			-34.1	%
Consumer	20			34			-41.2	%
Auto and leasing	155			312			-50.3	%
Total allowance for credit losses	$	15,143		$	23,872		-36.6	%

Allowance for credit losses summary
Commercial	$	44,441		$	36,770		20.9	%
Mortgage	24,447			34,317			-28.8	%
Consumer	23,129			19,175			20.6	%
Auto and leasing	67,022			65,675			2.1	%
Total allowance for credit losses	$	159,039		$	155,937		2.0	%

Allowance composition:
Commercial	27.9		%	23.6		%
Mortgage	15.4		%	22.0		%
Consumer	14.5		%	12.3		%
Auto and leasing	42.2		%	42.1		%
	100.0		%	100.0		%

Allowance coverage ratio at end of year:
Commercial	1.7		%	1.6		%	10.3	%
Mortgage	1.4		%	1.8		%	-25.0	%
Consumer	4.6		%	4.7		%	-1.1	%
Auto and leasing	3.7		%	3.9		%	-3.4	%
	2.4		%	2.4		%	-2.9	%

Allowance coverage ratio to non-performing loans:
Commercial	77.6		%	73.3		%	5.9	%
Mortgage	72.8		%	86.4		%	-15.8	%
Consumer	1164.0		%	832.6		%	39.8	%
Auto and leasing	437.2		%	331.2		%	32.0	%
	147.0		%	139.2		%	5.6	%

TABLE 8 - ALLOWANCE FOR CREDIT LOSSES SUMMARY


	Quarter Ended June 30,							Six-Month Period Ended June 30,
		2022		2021		Variance %		2022		2021		Variance %
		(Dollars in thousands)						(Dollars in thousands)
Allowance for credit losses:
Balance at beginning of period		$	157,075	$	201,973	-22.2	%	$	155,937	$	204,809	-23.9	%

Provision for (recapture of) credit losses		6,507		(8,138)		-180.0	%	8,222		(1,870)		-539.7	%
Charge-offs		(13,167)		(10,962)		20.1	%	(25,584)		(28,481)		-10.2	%
Recoveries		8,624		8,844		-2.5	%	20,464		17,259		18.6	%
Balance at end of period		$	159,039	$	191,717	-17.0	%	$	159,039	$	191,717	-17.0	%

TABLE 9 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES


	Quarter Ended June 30,						Six-Month Period Ended June 30,
	2022		2021		Variance %		2022		2021		Variance %
	(Dollars in thousands)						(Dollars in thousands)
Non-PCD
Mortgage
Charge-offs	$	(259)	$	(268)	-3.4	%	$	(262)	$	(1,056)	-75.2	%
Recoveries	335		193		73.6	%	2,409		808		198.1	%
Total	76		(75)		-201.3	%	2,147		(248)		-965.7	%
Commercial
Charge-offs	(2,907)		(653)		345.2	%	(3,451)		(720)		379.3	%
Recoveries	456		996		-54.2	%	648		1,425		-54.5	%
Total	(2,451)		343		-814.6	%	(2,803)		705		-497.6	%
Consumer
Charge-offs	(3,307)		(2,897)		14.2	%	(5,966)		(7,366)		-19.0	%
Recoveries	795		697		14.1	%	1,450		1,263		14.8	%
Total	(2,512)		(2,200)		14.2	%	(4,516)		(6,103)		-26.0	%
Auto and leasing
Charge-offs	(6,428)		(5,170)		24.3	%	(14,318)		(14,253)		0.5	%
Recoveries	5,565		5,997		-7.2	%	10,456		11,814		-11.5	%
Total	(863)		827		-204.4	%	(3,862)		(2,439)		58.3	%

PCD Loans:
Mortgage
Charge-offs	$	(183)	$	(1,742)	(89.5)	%	$	(1,317)	$	(4,332)	(69.6)	%
Recoveries	1,026		184		457.6	%	1,871		330		467.0	%
Total	843		(1,558)		(154.1)	%	554		(4,002)		(113.8)	%
Commercial
Charge-offs	—		(6)		(100.0)	%	(34)		(50)		(32.0)	%
Recoveries	249		430		(42.1)	%	3,272		867		277.4	%
Total	249		424		(41.3)	%	3,238		817		296.3	%
Consumer
Charge-offs	(8)		—		—	%	(47)		(22)		113.6	%
Recoveries	13		33		(60.6)	%	36		55		(34.5)	%
Total	5		33		(84.8)	%	(11)		33		(133.3)	%
Auto and leasing
Charge-offs	(75)		(226)		(66.8)	%	(189)		(682)		(72.3)	%
Recoveries	185		314		(41.1)	%	322		697		(53.8)	%
Total	110		88		25.0	%	133		15		786.7	%

Total charge-offs	(13,167)		(10,962)		20.1	%	(25,584)		(28,481)		(10.2)	%
Total recoveries	8,624		8,844		(2.5)	%	20,464		17,259		18.6	%
Net credit losses	$	(4,543)	$	(2,118)	114.5	%	$	(5,120)	$	(11,222)	(54.4)	%

TABLE 9 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES (CONTINUED)


	Quarter Ended June 30,								Six-Month Period Ended June 30,
	2022			2021			Variance %		2022			2021			Variance %
	(Dollars in thousands)								(Dollars in thousands)
Net credit losses to average loans outstanding:
Mortgage	(0.20)		%	0.30		%	-166.81	%	(0.29)		%	0.39		%	-175.55	%
Commercial	0.34		%	(0.13)		%	-374.5	%	(0.03)		%	(0.13)		%	-72.3	%
Consumer	1.98		%	2.17		%	-8.6	%	1.87		%	2.98		%	-37.4	%
Auto and leasing	0.17		%	(0.23)		%	-174.8	%	0.43		%	0.30		%	40.2	%
Total	0.27		%	0.13		%	113.1	%	0.16		%	0.34		%	-54.1	%
Recoveries to charge-offs	65.50		%	80.68		%	-18.8	%	79.99		%	60.60		%	32.0	%
Average Loans Held for Investment
Mortgage	$	1,809,228		$	2,147,928		-15.8	%	$	1,847,001		$	2,195,540		-15.9	%
Commercial	2,555,575			2,443,407			4.6	%	2,503,168			2,424,195			3.3	%
Consumer	506,588			400,365			26.5	%	484,363			406,743			19.1	%
Auto and leasing	1,769,049			1,606,869			10.1	%	1,745,583			1,590,524			9.7	%
Total	$	6,640,440		$	6,598,569		0.6	%	$	6,580,115		$	6,617,002		-0.6	%

TABLE 10 — NON-PERFORMING ASSETS


	June 30,			December 31,			Variance %
	2022			2021
	(Dollars in thousands)
Non-performing assets:
Non-PCD
Non-accruing loans
Troubled-Debt Restructuring loans	$	23,431		$	24,539		-4.5	%
Other loans	64,469			64,465			—	%
Accruing loans
Troubled-Debt Restructuring loans	9,832			9,087			8.2	%
Other loans	134			1,038			-87.1	%
Total	$	97,866		$	99,129		-1.3	%
PCD	10,318			12,879			-19.9	%
Total non-performing loans	$	108,184		$	112,008		-3.4	%
Foreclosed real estate	15,061			15,039			0.1	%
Other repossessed assets	2,533			1,945			30.2	%
	$	125,778		$	128,992		-2.5	%

Non-performing assets to total assets	1.23		%	1.30		%	-5.4	%
Non-performing assets to total capital	12.39		%	12.06		%	2.7	%


	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2022		2021		2022		2021
	(In thousands)				(In thousands)
Interest that would have been recorded in the period if the loans had not been classified as non-accruing loans	$	495	$	694	$	811	$	1,274

TABLE 11 - NON-ACCRUAL LOANS


	June 30,			December 31,			Variance %
	2022			2021
	(Dollars in thousands)
Non-accrual loans
Non-PCD
Commercial	$	47,206		$	37,604		25.5	%
Mortgage	23,381			29,268			-20.1	%
Consumer	1,987			2,303			-13.7	%
Auto and leasing	15,329			19,829			-22.7	%
Total	$	87,903		$	89,004		-1.2	%
PCD
Commercial	$	10,057		$	12,545		-19.8	%
Mortgage	261			334			-21.9	%

Total	$	10,318		$	12,879		-19.9	%
Total non-accrual loans	$	98,221		$	101,883		-3.6	%
Non-accruals loans composition percentages:
Commercial	58.3		%	49.2		%
Mortgage	24.1		%	29.1		%
Consumer	2.0		%	2.3		%
Auto and leasing	15.6		%	19.4		%
	100.0		%	100.0		%
Non-accrual loans ratios:
Non-accrual loans to total loans	1.47		%	1.59		%	-7.55	%
Allowance for credit losses to non-accrual loans	161.92		%	153.05		%	5.80	%

TABLE 12 - NON-PERFORMING LOANS


	June 30,			December 31,			Variance %
	2022			2021
	(Dollars in thousands)
Non-performing loans
Non-PCD
Commercial	$	47,206		$	37,603		25.5	%
Mortgage	33,344			39,394			-15.4	%
Consumer	1,987			2,303			-13.7	%
Auto and leasing	15,329			19,829			-22.7	%
Total	$	97,866		$	99,129		-1.3	%
PCD
Commercial	$	10,057		$	12,545		-19.8	%
Mortgage	261			334			-21.9	%

Total	$	10,318		$	12,879		-19.9	%
Total non-performing loans	$	108,184		$	112,008		-3.4	%
Non-performing loans composition percentages:
Commercial	52.9		%	44.8		%
Mortgage	31.1		%	35.5		%
Consumer	1.8		%	2.1		%
Auto and leasing	14.2		%	17.6		%
	100.0		%	100.0		%
Non-performing loans to:
Total loans	1.61		%	1.75		%	-8.00	%
Total assets	1.06		%	1.13		%	-6.2	%
Total capital	10.66		%	10.48		%	1.7	%
Non-performing loans with partial charge-offs to:
Total loans	0.44		%	0.46		%	-4.3	%
Non-performing loans	27.25		%	26.53		%	2.7	%
Other non-performing loans ratios:
Charge-off rate on non-performing loans to non-performing loans on which charge-offs have been taken	97.72		%	170.31		%	-42.6	%
Allowance for credit losses to non-performing loans on which no charge-offs have been taken	202.08		%	189.49		%	6.6	%

TABLE 13 - LIABILITIES SUMMARY AND COMPOSITION



	June 30,			December 31,			Variance %
	2022			2021
	(Dollars in thousands)
Deposits:
Non-interest bearing deposits	$	2,707,504		$	2,501,644		8.2	%
NOW accounts	2,751,556			2,702,636			1.8	%
Savings and money market accounts	2,433,816			2,177,779			11.8	%
Time deposits	1,136,066			1,220,262			-6.9	%
Total deposits	9,028,942			8,602,321			5.0	%
Accrued interest payable	628			797			-21.2	%
Total deposits and accrued interest payable	9,029,570			8,603,118			5.0	%
Borrowings:

Advances from FHLB	27,586			28,488			-3.2	%
Subordinated capital notes	—			36,083			-100.0	%
Other borrowings	32			—			—	%
Total borrowings	27,618			64,571			-57.2	%
Total deposits and borrowings	9,057,188			8,667,689			4.5	%
Other Liabilities:

Derivative liabilities	21			804			-97.4	%
Acceptances outstanding	27,150			35,329			-23.2	%
Lease liability	29,538			30,498			-3.1	%
Other liabilities	119,065			96,240			23.7	%
Total liabilities	$	9,232,962		$	8,830,560		4.6	%
Deposits portfolio composition percentages:
Non-interest bearing deposits	30.0		%	29.1		%
NOW accounts	30.5		%	31.4		%
Savings and money market accounts	27.0		%	25.3		%
Time deposits	12.5		%	14.2		%
	100.0		%	100.0		%
Borrowings portfolio composition percentages:

Advances from FHLB	99.9		%	44.1		%
Subordinated capital notes	0.0		%	55.9		%
Other borrowings	0.1		%	—		%
	100.0		%	100.0		%

Liabilities and Funding Sources

As shown in Table 13 above, at June 30, 2022, OFG’s total liabilities were $9.233 billion, 4.6% higher than the $8.831 billion reported at December 31, 2021. Deposits and borrowings, OFG’s funding sources, amounted to $9.057 billion at June 30, 2022 compared to $8.668 billion at December 31, 2021. Deposits, excluding accrued interest payable, increased 5.0% mainly from higher commercial and retail deposits by $510.8 million, offset by a decrease of $84.4 million in time deposits from maturities, with the majority of them transferred into demand deposit and savings accounts.

As of June 30, 2022 borrowings consist of FHLB advances amounting to $27.6 million. Borrowings decreased by $37.0 million, when compared to $64.6 million at December 31, 2021, reflecting the redemption of all $36.1 million variable rate subordinated capital notes before maturity during the six-month period ended June 30, 2022.

Stockholders’ Equity

At June 30, 2022, OFG’s total stockholders’ equity was $1.015 billion, a 5% decrease when compared to $1.069 billion at December 31, 2021. This reduction in stockholders’ equity reflects a decrease of $60.6 million from additional treasury stock and a decrease in additional paid-in capital of $2.4 million, as a result of repurchases of common stock in the aggregate amount of $64.1 million in connection with the $100 million stock buyback program adopted during the first quarter of 2022. It also reflects a decrease in accumulated other comprehensive income, net of tax, of $54.7 million from changes in the market value of available-for-sale securities. The decrease was offset by an increase in retained earnings of $55.6 million and legal surplus of $7.7 million, mainly due to $78.0 million in net income, partially offset by $14.6 million common stock dividends issued during the six-month period ended June 30, 2022.

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”) are based on the final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision. As of June 30, 2022, 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, OFG implemented CECL using the modified retrospective approach, with an impact to capital of $25.5 million, net of its corresponding deferred tax effect. 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 added 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.

During the six-month period ended June 30, 2022, OFG redeemed all of its $36.1 million subordinated capital notes and, as a result, OFG’s tier 1 capital was reduced by the corresponding $35.0 million qualified trust preferred securities, which were previously included in tier 1 capital.

The risk-based capital ratios presented in Table 14, which include common equity tier 1, tier 1 capital, total capital and leverage capital as of June 30, 2022 and December 31, 2021, 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 June 30, 2022 and December 31, 2021:

TABLE 14 — CAPITAL, DIVIDENDS AND STOCK DATA


	June 30,			December 31,			Variance
	2022			2021			%
	(Dollars in thousands, except per share data)
Capital data:
Stockholders’ equity	$	1,014,812		$	1,069,160		(5.1)	%
Regulatory Capital Ratios data:
Common equity tier 1 capital ratio	12.80		%	13.77		%	(7.0)	%
Minimum common equity tier 1 capital ratio required	4.50		%	4.50		%	0.0	%
Actual common equity tier 1 capital	$	960,015		964,284			(0.4)	%
Minimum common equity tier 1 capital required	$	337,463		315,219			7.1	%
Minimum capital conservation buffer required (2.5%)	$	187,479		175,122			7.1	%
Excess over regulatory requirement	$	435,073		473,943			(8.2)	%
Risk-weighted assets	$	7,499,171		7,004,876			7.1	%
Tier 1 risk-based capital ratio	12.80		%	14.27		%	(10.3)	%
Minimum tier 1 risk-based capital ratio required	6.00		%	6.00		%	0.0	%
Actual tier 1 risk-based capital	$	960,015		$	999,284		(3.9)	%
Minimum tier 1 risk-based capital required	$	449,950		$	420,293		7.1	%
Minimum capital conservation buffer required (2.5%)	$	187,479		175,122			7.1	%
Excess over regulatory requirement	$	322,585		$	403,869		(20.1)	%
Risk-weighted assets	$	7,499,171		$	7,004,876		7.1	%
Total risk-based capital ratio	14.05		%	15.52		%	(9.5)	%
Minimum total risk-based capital ratio required	8.00		%	8.00		%	0.0	%
Actual total risk-based capital	$	1,053,766		$	1,086,897		(3.0)	%
Minimum total risk-based capital required	$	599,934		$	560,390		7.1	%
Minimum capital conservation buffer required (2.5%)	$	187,479		175,122			7.1	%
Excess over regulatory requirement	$	266,353		$	351,385		(24.2)	%
Risk-weighted assets	$	7,499,171		$	7,004,876		7.1	%
Leverage capital ratio	9.46		%	9.69		%	(2.4)	%
Minimum leverage capital ratio required	4.00		%	4.00		%	0.0	%
Actual tier 1 capital	$	960,015		$	999,284		(3.9)	%
Minimum tier 1 capital required	$	405,805		$	412,359		(1.6)	%
Excess over regulatory requirement	$	554,209		$	586,925		(5.6)	%
Tangible common equity to total assets	8.75		%	9.57		%	(8.6)	%
Tangible common equity to risk-weighted assets	11.96		%	13.52		%	(11.5)	%
Total equity to total assets	9.90		%	10.80		%	-8.3	%
Total equity to risk-weighted assets	13.53		%	15.26		%	(11.3)	%
Stock data:
Outstanding common shares	47,553,723			49,636,352			(4.2)	%
Book value per common share	$	21.34		$	21.54		(0.9)	%
Tangible book value per common share	$	18.86		$	19.08		(1.2)	%
Market price at end of year	$	25.40		$	26.56		-4.4	%
Market capitalization at end of year	$	1,207,865		$	1,318,342		-8.4	%

From December 31, 2021 to June 30, 2022, leverage capital ratio decreased from 9.69% to 9.46%, tier 1 risk-based capital ratio decreased from 14.27% to 12.80%, total risk-based capital ratio decreased from 15.52% to 14.05%, common equity tier 1 capital ratio decreased from 13.77% to 12.80%, and tangible common equity to tangible total assets decreased from 9.69% to 8.85%. The decreases in capital ratios reflected common stock repurchases of $64.1 million during the six-month period ended June 30, 2022 and an increase in risk-weighted assets, partially offset by increase in retained earnings. Risk-weighted assets increased, mainly from the increase in loan and investment portfolios during the six-month period ended June 30, 2022. Also, during the six-month period ended June 30, 2022, OFG completed the redemption and cancellation of subordinated capital notes, further reducing tier 1 risk-based capital and total risk-based capital by $35.0 million. Tangible common equity was also affected by a $54.7 million other comprehensive loss during the six-month period ended June 30, 2022 from available for sale securities as a result of changes in market interest rates from recent developments in the U.S. economy.

The following table presents a reconciliation of OFG’s total stockholders’ equity to tangible common equity and total assets to tangible assets at June 30, 2022 and December 31, 2021:


	June 30,			December 31,
	2022			2021
	(In thousands, except share or per share information)
Total stockholders’ equity	$	1,014,812		$	1,069,160


Goodwill	(86,069)			$	(86,069)
Core deposit intangible	(24,354)			$	(27,630)
Customer relationship intangible	(7,399)			$	(8,368)
Other intangibles	(47)			$	(95)
Total tangible common equity (non-GAAP)	$	896,943		$	946,998
Total assets	$	10,247,774		9,899,720
Goodwill	(86,069)			(86,069)
Core deposit intangible	(24,354)			(27,630)
Customer relationship intangible	(7,399)			(8,368)
Other intangibles	(47)			(95)
Total tangible assets	$	10,129,905		$	9,777,558
Tangible common equity to tangible assets	8.85		%	9.69		%
Common shares outstanding at end of period	47,553,723			49,636,352
Tangible book value per common share	$	18.86		$	19.08

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:


	June 30,			December 31,			Variance
	2022			2021			%
	(Dollars in thousands)
Risk-based capital:
Common equity tier 1 capital	$	960,015		$	964,284		(0.4)	%
Additional tier 1 capital	—			35,000			(100.0)	%
Tier 1 capital	960,015			999,284			(3.9)	%
Additional Tier 2 capital	93,751			87,613			7.0	%
Total risk-based capital	$	1,053,766		$	1,086,897		(3.0)	%
Risk-weighted assets:
Balance sheet items	$	6,893,863		$	6,406,115		7.6	%
Off-balance sheet items	605,308			598,761			1.1	%
Total risk-weighted assets	$	7,499,171		$	7,004,876		7.1	%
Ratios:
Common equity tier 1 capital (minimum required, including capital conservation buffer - 7%)	12.80		%	13.77		%	(7.0)	%
Tier 1 capital (minimum required, including capital conservation buffer - 8.5%)	12.80		%	14.27		%	(10.3)	%
Total capital (minimum required, including capital conservation buffer - 10.5%)	14.05		%	15.52		%	(9.5)	%
Leverage ratio (minimum required - 4%)	9.46		%	9.69		%	(2.4)	%
Equity to assets	9.90		%	10.80		%	-8.3	%
Tangible common equity to assets	8.75		%	9.57		%	(8.6)	%

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 June 30, 2022 and December 31, 2021:


	June 30,		December 31,		Variance
	2022		2021		%
	(Dollars in thousands)
Oriental Bank Regulatory Capital Ratios:
Common Equity Tier 1 Capital to Risk-Weighted Assets	12.16%		13.09%		(7.10)	%
Actual common equity tier 1 capital	$	906,739	$	908,717	(0.2)	%
Minimum capital requirement (4.5%)	$	335,568	$	312,371	7.4	%
Minimum capital conservation buffer requirement (2.5%)	$	186,427	$	173,540	7.4	%
Minimum to be well capitalized (6.5%)	$	484,709	$	451,203	7.4	%
Tier 1 Capital to Risk-Weighted Assets	12.16%		13.09%		(7.1)	%
Actual tier 1 risk-based capital	$	906,739	$	908,717	(0.2)	%
Minimum capital requirement (6%)	$	447,424	$	416,495	7.4	%
Minimum capital conservation buffer requirement (2.5%)	$	186,427	$	173,540	7.4	%
Minimum to be well capitalized (8%)	$	596,565	$	555,327	7.4	%
Total Capital to Risk-Weighted Assets	13.41%		14.34%		(6.5)	%
Actual total risk-based capital	$	999,970	$	995,549	0.4	%
Minimum capital requirement (8%)	$	596,565	$	555,327	7.4	%
Minimum capital conservation buffer requirement (2.5%)	$	186,427	$	173,540	7.4	%
Minimum to be well capitalized (10%)	$	745,707	$	694,159	7.4	%
Total Tier 1 Capital to Average Total Assets	8.98%		8.87%		1.2	%
Actual tier 1 capital	$	906,739	$	908,717	(0.2)	%
Minimum capital requirement (4%)	$	403,697	$	409,855	(1.5)	%
Minimum to be well capitalized (5%)	$	504,621	$	512,319	(1.5)	%

OFG’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG.” At June 30, 2022 and December 31, 2021, OFG’s market capitalization for its outstanding common stock was $1.208 billion ($25.40 per share) and $1.318 billion ($26.56 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
2022


June 30, 2022	$	29.22	$	25.40	$	0.15
March 31, 2022	$	30.54	$	26.21	$	0.15
2021
December 31, 2021	$	27.33	$	23.84	$	0.12
September 30, 2021	$	25.66	$	20.04	$	0.12
June 30, 2021	$	25.14	$	21.61	$	0.08
March 31, 2021	$	22.93	$	16.48	$	0.08
2020
December 31, 2020	$	18.54	$	12.59	$	0.07
September 30, 2020	$	14.35	$	12.12	$	0.07
June 30, 2020	$	15.10	$	9.38	$	0.07
March 31, 2020	$	23.50	$	9.32	$	0.07

At June 30, 2022 the number of shares that may yet be purchased under the $100 million stock buyback program is estimated at 1,412,984 and was calculated by dividing the remaining balance of $35.9 million by $25.40 (closing price of OFG’s common stock at June 30, 2022).

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, the executive Risk and Compliance Team, the executive Credit Risk Team, and the executive Asset/Liability Team (“ALT”). OFG has continued to refine and enhance its risk management program by strengthening policies, processes and procedures necessary to maintain effective risk management.

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

Market Risk

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

Interest Rate Risk

Interest rate risk is the exposure to decline in earnings or capital due to changes in interest rates. To actively monitor the interest rate risk, the Board of Directors has created the ALT whose principal responsibilities consist in overseeing the management of the Bank’s assets and liabilities to balance its risk exposures. In executing its responsibilities, ALT considers different methods to enhance profitability while maintaining acceptable levels of interest rate risks by implementing investment, pricing and financial strategies that helps managing OFG vulnerability to changes in interest rates.

100

On a quarterly basis, OFG performs 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 upward and downward interest rate movements, achieved during a twelve-month period. Market scenarios that include instantaneous and parallel interest rate movements as well as other scenarios with gradual interest rate ramps, speed of interest rate changes, and changes in the slope of the yield curve are also modeled. In addition to the change in interest rates, the results of the analysis could be affected by prepayments, caps, and floors. Management exercises its best judgment in formulating assumptions regarding events that management can influence such as non-maturity deposits repricing, as well as events outside management’s control such as customer behavior on loans and deposits activity and the effects that competition has on both lending and deposits pricing. These assumptions are subjective and, as a result, net interest income simulation results will differ from actual results due to the timing, magnitude and frequency of interest rate changes, changes in market conditions, customer behavior and management strategies, among other factors.

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.

The following table presents the results of the simulations for the most likely scenarios at June 30, 2022. The left of the table presents an analysis of our interest rate risk as measured by the estimated changes in net interest income resulting from an instantaneous and parallel shift in the yield curve over a 12-month horizon. The base case scenario assumes that the current interest rate environment is held constant throughout the forecast period for a static balance sheet and the instantaneous shocks are performed against that yield curve. The right side of the table, presents an analysis of our interest rate risk as measured by the estimated changes in net interest income resulting from parallel gradual interest rates ramps over a 12-month horizon.


	Net Interest Income Risk (one-year projection)
	Instantaneous Changes in Interest Rates				Gradual Changes in Interest Rates
	Amount Change		Percent Change		Amount Change		Percent Change
Change in interest rate	(Dollars in thousands)
+ 50 Basis points	$	13,575	2.72	%	$	6,401	1.28	%
+ 100 Basis points	$	27,228	5.47	%	$	12,790	2.57	%
+ 200 Basis points	$	54,667	10.97	%	$	25,597	5.14	%
- 50 Basis points	$	(12,671)	-2.54	%	$	(5,861)	-1.18	%

The scenarios above are both instantaneous shocks and gradual interest rate ramps that assume balance sheet management will mirror the base case. Even if interest rates change in the designated amounts, there can be no assurance that our assets and liabilities would perform as anticipated. Additionally, a change in the U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the U.S. Treasury yield curve would cause significantly different changes to net interest income than indicated above. OFG strategic management of the balance sheet would be adjusted to accommodate these movements. As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analysis presented above. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag changes in market rates. Also, the ability of many borrowers to service their debts may decrease in the event of an interest rate increase. ALT strategies consider all these factors as part of the monitoring of the exposure to interest rate risk.

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 advances from the FHLB 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, in the past, certain transactions which include extending the maturity and the re-pricing frequency of the liabilities to longer terms and using hedge-designated swaps to hedge the variability of future interest cash flows of forecasted wholesale borrowings that only consist of advances from the FHLB still outstanding as of June 30, 2022.

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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 rate 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.

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

Interest rate swaps and borrowings — OFG uses interest rate swaps to hedge the variability of interest cash flows of certain advances from the FHLB that are tied to a variable rate index. The interest rate swaps effectively fix OFG’s interest payments on these borrowings. As of June 30, 2022, OFG had $27.6 million in interest rate swaps at an average rate of 2.42% designated as cash flow hedges for $27.6 million in advances from the FHLB that reprice or are being rolled over on a monthly basis. A derivative liability of $21 thousand was recognized at June 30, 2022 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, we believe that recent macroeconomic conditions continue to show strength, however, as was demonstrated by the January 2020 earthquakes and hurricanes Irma and Maria in 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. The effects of climate change may further increase the risk of natural disasters in the future and the correlative risk that the physical impact of such events could adversely affect our customers, operations, and business. 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 we believe 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 mostly 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.

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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 and other alternative sources, OFG’s business may at times need to rely upon other external wholesale funding sources. OFG has selectively reduced its use of certain wholesale funding sources, such as repurchase agreements, subordinated notes and brokered deposits. As of June 30, 2022, OFG had $11.4 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, OFG has been limiting the offering of brokered deposits.

Commitments to extend credit are agreements to lend to customers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates, bear variable interest rate and may require payment of a fee. Since the commitments may expire unexercised, the total commitment amounts do not necessarily represent future cash requirements. OFG evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by OFG upon extension of credit, is based on management’s credit evaluation of the customer. Loan commitments, which represent unused lines of credit, increased to $1.367 billion at June 30, 2022 ($248.0 million with maturity of one year or less and $1.119 billion with maturity over one year) compared to $1.365 billion at December 31, 2021 ($280.6 million with maturity of one year or less and $1.085 billion with maturity over one year), while letters of credit provided to customers increased to $28.7 million compared to $25.2 million at December 31, 2021. Loans sold with recourse at June 30, 2022 and December 31, 2021 amounted to $115.6 million and $121.8 million, respectively.

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).

At June 30, 2022 and December 31, 2021, OFG maintained other non-credit commitments amounting to $21.8 million and $8.9 million, respectively, primarily for the acquisition of other investments. These cash requirements are expected to be satisfied with OFG’s unrestricted cash. In addition, as we continue to transform OFG with a focus on simplification and building a culture of excellence and customer service, we continue to invest in technology. Some of our technology investments are table stakes and required to continuously upgrade our systems. Others require us to focus our technology on investments that drive our strategy, namely digital, data analytics, cloud migration, cyber security, and our sales and service capabilities. At June 30, 2022 and December 31, 2021, OFG had commitments for capital expenditures in technology amounting to $8.9 million and $15.4 million, respectively, which are expected to be satisfied with OFG’s unrestricted cash.

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. Even though OFG’s liquidity was impacted by loan principal and interest payment deferrals that were granted for certain customers due to Covid-19, liquidity has been growing from the federal stimulus programs Puerto Rico is receiving following Hurricane Maria in 2017, the early 2020 earthquakes, and the Covid-19 pandemic. However, liquidity can be further affected by a number of factors such as, counterparty willingness or ability to extend credit, regulatory actions and customer preferences, some of which are beyond our control. With the current economic uncertainty resulting from the Covid-19 pandemic, inflation and the war in Ukraine, we continue monitoring our liquidity position, specifically cash on hand to meet customer demands.

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

As of June 30, 2022, OFG had approximately $1.307 billion in unrestricted cash and cash equivalents, $1.476 billion in investment securities that are not pledged as collateral, and $605.6 million in borrowing capacity at the FHLB.

Operational Risk

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

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

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

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.

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ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

OFG’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. 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. Based upon such evaluation, the CEO and CFO have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, 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 Securities Exchange Act of 1934. 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.

Internal Control over Financial Reporting

There have not been any changes in OFG’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2022, that has materially affected, or is reasonably likely to materially affect, OFG’s internal control over financial reporting.

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

Our 2021 Form 10-K and any subsequent Quarterly Reports on Form 10-Q describe market, credit, and business operations risk factors that could affect our businesses, results of operations or financial condition. On February 24, 2022, Russian forces launched significant military action against Ukraine, and sustained conflict and disruption in the region is ongoing. As these conditions and circumstances have evolved subsequent to our 2021 Form 10-K filing, the following supplements the risk factors described in our 2021 Form 10-K.

Terrorist attacks and armed conflicts of war may impact all aspects of our operations, revenues, costs and stock price.

The recent military actions taken by the Russian Federation against Ukraine, and the resulting geopolitical and macroeconomic uncertainty, are likely to have a significant negative impact on the European Union, the United Kingdom and other countries, including the United States. The expansion of this armed conflict beyond the borders of Ukraine and the escalation of tensions in Europe and elsewhere abroad may further exacerbate this negative impact, as well. The conflict between the Russian Federation and Ukraine has resulted in considerable volatility in the commodity markets, including through significant increases in the price of oil, natural gas and food, which have already occurred and are likely to continue putting additional inflationary pressures on central banks, including the FRB. We also expect that incremental interest rate hikes announced by the FRB will continue to occur throughout 2022, but the amount, timing, and frequency of such increases are not fully known at this time and could be impacted by the conflict between Russia and Ukraine. The risk of retaliatory actions by the Russian Federation, including through cyberattacks against financial institutions in the United States, is significant and could adversely affect the Bank and its customers. Additionally, the United States and European nations have imposed very significant financial sanctions on the Russian Republic, including targeted sanctions on Russian banks, state-owned enterprises and wealthy individuals, as well as taken measures to isolate the Russian economy, including through the halting of the certification of the Nord Stream 2 gas pipeline and the ban imposed on certain Russian banks from accessing the Society for Worldwide Interbank Financial Telecommunications system, or SWIFT. In response to the Russian military actions, many businesses headquartered in the Eurozone and the United States have altogether stopped doing business with Russia, which may negatively affect the profitability of those companies. The resulting international turmoil has already had and may continue to have a negative impact on the stock market generally and, in turn, on our stock price. The full impact of the recent actions by the Russian Federation regarding Ukraine are not known at this time, but they could result in economic disruption, heightened volatility in financial and commodity markets, and

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diminished consumer, business and investor confidence, among others, adversely impacting the financial services industry generally and our business, financial condition, results of operation, and stock price.

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

Issuer Purchases of Equity Securities

In January 2022, OFG announced the approval by its Board of Directors of a new stock repurchase program to purchase $100 million of our common stock in the open market. Any shares of common stock repurchased are held by OFG as treasury shares. OFG records treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. During the quarter ended June 30, 2022, OFG purchased 1,132,736 shares under this program for a total of $30.6 million, at an average price of $27.04 per share.

The table below sets forth the information with respect to purchases of our common stock made by or on behalf of OFG during the quarter ended June 30, 2022, excluding the month of June during which no shares were repurchased as part of the stock repurchase program:


Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced programs	Maximum approximate dollar value of shares that may yet be purchased under the programs
	(In thousands, except per share data)
4/1/2022 - 4/30/2022	79,991	$	27.05	79,991	$	64,358
5/1/2022 - 5/31/2022	1,052,745	27.04		1,052,745	35,890

Total	1,132,736	$	27.04	1,132,736	$	35,890

The number of shares that may yet be purchased under the current $100 million stock buyback program is estimated at 1,412,984 and was calculated by dividing the remaining balance of $35.9 million by $25.40 (closing price of OFG common stock at June 30, 2022). OFG did not repurchase any shares of its common stock during the quarter ended June 30, 2022 other than through its publicly announced stock repurchase program.

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 June 30, 2022, 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.
104						Cover Page Interactive Data File (embedded within the Inline XBRL document)

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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


By:	/s/ José Rafael Fernández	Dated: August 5, 2022
José Rafael Fernández President and Chief Executive Officer

By:	/s/ Maritza Arizmendi Díaz	Dated: August 5, 2022
Maritza Arizmendi Díaz Chief Financial Officer

By:	/s/ Krisen Aguirre Torres	Dated: August 5, 2022
Krisen Aguirre Torres Director, Reporting and Accounting Control

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