OFG BANCORP - Quarter Report: 2023 September (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 September 30, 2023


☐			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:

47,057,806 common shares ($1.00 par value per share) outstanding as of October 31, 2023

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 (Loss)	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	19
	Note 5 – Allowance for Credit Losses	37
	Note 6 – Foreclosed Real Estate	40
	Note 7 – Servicing Assets	40
	Note 8 – Derivatives	41
	Note 9 – Goodwill and Other Intangible Assets	42
	Note 10 – Accrued Interest Receivable and Other Assets	43
	Note 11 – Deposits and Related Interest	44
	Note 12 – Borrowings and Related Interest	46
	Note 13 – Offsetting of Financial Assets and Liabilities	47
	Note 14 – Income Taxes	47
	Note 15 – Regulatory Capital Requirements	48
	Note 16 – Stockholders’ Equity	50
	Note 17 – Accumulated Other Comprehensive Loss	51
	Note 18 – Earnings per Common Share	53
	Note 19 – Guarantees	54
	Note 20 – Commitments and Contingencies	55
	Note 21 – Operating Leases	57
	Note 22 – Fair Value of Financial Instruments	58
	Note 23 – Banking and Financial Service Revenues	66
	Note 24 – Business Segments	67
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	70
	Critical Accounting Policies and Estimates	71
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	108
Item 4.	Controls and Procedures	113

PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	113
Item 1A.	Risk Factors	113
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities	113
Item 3.	Defaults upon Senior Securities	114
Item 4.	Mines Safety Disclosures	114
Item 5.	Other Information	114
Item 6.	Exhibits	115
Signatures		116

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 credit 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;

•a credit default by the U.S. government or a downgrade in the credit ratings of the U.S. government, including as a result of Congress and the President failing to reach agreement on federal budgetary matters or debt ceiling limitations, as well as on other matters of fiscal and economic policy;

•the impacts related to or resulting from recent bank failures and other volatility, including potential increased regulatory and compliance requirements and costs and potential impacts to macroeconomic conditions, which could affect the ability of depository institutions, including the Bank, to attract and retain depositors and to borrow or raise capital;

•the actual or perceived soundness of other financial institutions, including as a result of the financial or operational failure of a major financial institution, or concerns about the creditworthiness of such a financial institution or its ability to fulfill its obligations, which can cause substantial and cascading disruption within the financial markets;

•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 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 the effects of Hurricane Maria in 2017, earthquakes in 2020, and Hurricane Fiona in 2022;

•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; and

•factors beyond our control such as severe weather conditions, natural disasters, pandemics, power loss, disruptions in telecommunications, terrorism and other catastrophic events, any of which could significantly affect delinquency rates, loan and receivable balances and other aspects of our business and results of operations.

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 for credit losses 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 on Form 10-Q, 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.

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OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF SEPTEMBER 30, 2023 AND DECEMBER 31, 2022


	September 30,		December 31,
	2023		2022
	(In thousands)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	528,626	$	546,146
Money market investments	4,073		4,161
Total cash and cash equivalents	532,699		550,307
Restricted cash	—		157
Investments:
Trading securities, at fair value, with amortized cost of $163 (December 31, 2022 - $162)	14		9
Investment securities available-for-sale, at fair value, with amortized cost of $1,663,633 (December 31, 2022 - $1,522,812); no allowance for credit losses “ACL”	1,513,153		1,412,776
Investment securities held-to-maturity, at amortized cost, with fair value of $441,759 (December 31, 2022 - $469,186); no allowance for credit losses	519,145		535,070
Equity securities	42,162		23,667
Total investments	2,074,474		1,971,522
Loans:
Loans held-for-sale, at lower of cost or fair value	25,846		40,587
Loans held for investment, net of allowance for credit losses of $157,529 (December 31, 2022 - $152,673)	7,104,206		6,682,649
Total loans	7,130,052		6,723,236
Other assets:
Foreclosed real estate	9,555		11,214
Accrued interest receivable	67,868		62,402
Deferred tax asset, net	11,121		55,485
Premises and equipment, net	103,040		106,820
Customers' liability on acceptances	30,984		28,607
Servicing assets	50,601		50,921
Goodwill	84,241		84,241
Other intangible assets	22,419		27,593
Operating lease right-of-use assets	20,011		25,363
Other assets	120,073		120,912
Total assets	$	10,257,138	$	9,818,780

See notes to unaudited consolidated financial statements.

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OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF SEPTEMBER 30, 2023 AND DECEMBER 31, 2022 (CONTINUED)


	September 30,		December 31,
	2023		2022
	(In thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits	$	4,894,958	$	5,176,758
Savings accounts	2,216,162		2,227,965
Time deposits	1,430,433		1,163,641
Total deposits	8,541,553		8,568,364
Borrowings:
Securities sold under agreements to repurchase	150,701		—
Advances from the Federal Home Loan Bank of New York (the “FHLB”)	300,774		26,716

Other borrowings	—		318
Total borrowings	451,475		27,034
Other liabilities:


Acceptances executed and outstanding	30,984		28,607
Operating lease liabilities	22,269		27,370
Accrued expenses and other liabilities	115,394		124,999
Total liabilities	9,161,675		8,776,374
Commitments and contingencies (See Note 20)
Stockholders’ equity:

Common stock, $1 par value; 100,000,000 shares authorized; 59,885,234 shares issued: 47,057,806 shares outstanding (December 31, 2022 - 59,885,234 shares issued; 47,581,375 shares outstanding)	59,885		59,885
Additional paid-in capital	637,389		636,793
Legal surplus	146,774		133,901
Retained earnings	607,466		516,371
Treasury stock, at cost, 12,827,428 shares (December 31, 2022 - 12,303,859 shares)	(228,374)		(211,135)
Accumulated other comprehensive loss, net of tax of $22,803 (December 31, 2022 - $16,221)	(127,677)		(93,409)
Total stockholders’ equity	1,095,463		1,042,406
Total liabilities and stockholders’ equity	$	10,257,138	$	9,818,780

See notes to unaudited consolidated financial statements.

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OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS AND NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2023 AND 2022



	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2023		2022		2023		2022
	(In thousands, except per share data)
Interest income:
Loans	$	142,139	$	116,240	$	405,968	$	335,162
Mortgage-backed securities	12,556		9,665		33,223		21,424
Investment securities and other	11,013		8,770		33,490		13,260
Total interest income	165,708		134,675		472,681		369,846
Interest expense:
Deposits	20,819		7,987		49,232		21,972
Securities sold under agreements to repurchase	728		—		728		—
Advances from FHLB and other borrowings	2,374		178		5,393		555
Subordinated capital notes	—		—		—		521
Total interest expense	23,921		8,165		55,353		23,048
Net interest income	141,787		126,510		417,328		346,798
Provision for credit losses	16,430		7,120		40,919		15,362
Net interest income after provision for credit losses	125,357		119,390		376,409		331,436
Non-interest income:
Banking service revenue	17,303		17,234		52,256		52,937
Wealth management revenue	7,691		8,173		23,005		24,300
Mortgage banking activities	5,410		4,891		14,533		15,476
Total banking and financial service revenues	30,404		30,298		89,794		92,713

Net (loss) gain on:
Sale of securities	—		—		(1,149)		—
Early extinguishment of debt	—		—		—		42

Other non-interest income	295		322		1,028		5,681
Total non-interest income	30,699		30,620		89,673		98,436

See notes to unaudited consolidated financial statements.

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OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS AND NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2023 AND 2022 (CONTINUED)



	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2023		2022		2023		2022
	(In thousands, except per share data)
Non-interest expense:
Compensation and employee benefits	38,095		35,332		114,409		104,830
Occupancy, equipment and infrastructure costs	14,887		12,638		43,506		37,415
Electronic banking charges	10,662		9,965		31,260		29,473
Information technology expenses	7,106		5,270		20,712		15,602
Professional and service fees	4,810		6,441		15,193		19,224
Taxes, other than payroll and income taxes	3,407		3,324		9,944		9,897
Insurance	2,433		2,394		8,039		7,458
Loan servicing and clearing expenses	1,715		2,144		5,848		6,309
Advertising, business promotion, and strategic initiatives	2,206		1,926		6,304		5,815
Communication	1,040		982		3,229		3,230
Printing, postage, stationery and supplies	922		878		2,518		2,755
Director and investor relations	269		261		1,047		856


Foreclosed real estate and other repossessed assets (income) loss, net of expenses	(27)		573		(1,554)		(2,313)
Other	2,633		5,364		8,811		13,354
Total non-interest expense	90,158		87,492		269,266		253,905
Income before income taxes	65,898		62,518		196,816		175,967
Income tax expense	21,025		20,599		61,541		56,095


Net income available to common shareholders	$	44,873	$	41,919	$	135,275	$	119,872
Earnings per common share:
Basic	$	0.95	$	0.88	$	2.86	$	2.49
Diluted	$	0.95	$	0.87	$	2.84	$	2.47
Average common shares outstanding and equivalents	47,392		47,926		47,605		48,594
Cash dividends per share of common stock	$	0.22	$	0.20	$	0.66	$	0.50

See notes to unaudited consolidated financial statements.

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OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE QUARTERS AND NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2023 AND 2022


	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2023		2022		2023		2022
	(In thousands)
Net income	$	44,873	$	41,919	$	135,275	$	119,872
Other comprehensive income (loss) before tax:
Unrealized loss on securities available-for-sale	(45,176)		(63,929)		(41,593)		(129,534)
Realized loss on sale of securities available-for-sale	—		—		1,149		—
Unrealized (loss) gain on cash flow hedges	(120)		245		(406)		1,214
Other comprehensive loss before taxes	(45,296)		(63,684)		(40,850)		(128,320)
Income tax effect	7,183		9,297		6,582		19,271
Other comprehensive loss after taxes	(38,113)		(54,387)		(34,268)		(109,049)
Comprehensive income (loss)	$	6,760	$	(12,468)	$	101,007	$	10,823

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 NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2023 AND 2022


	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2023		2022		2023		2022
	(In thousands)




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	636,051		634,612		636,793		637,061
Stock-based compensation expense	1,354		911		3,723		2,915
Lapsed restricted stock units	(16)		—		(3,127)		(4,453)

Balance at end of period	637,389		635,523		637,389		635,523
Legal surplus:
Balance at beginning of period	142,567		125,365		133,901		117,677
Transfer from retained earnings	4,207		4,064		12,873		11,752
Balance at end of period	146,774		129,429		146,774		129,429
Retained earnings:
Balance at beginning of period	577,042		455,590		516,371		399,949



Net income	44,873		41,919		135,275		119,872
Cash dividends declared on common stock[1]	(10,242)		(9,388)		(31,307)		(24,012)

Transfer to legal surplus	(4,207)		(4,064)		(12,873)		(11,752)

Balance at end of period	607,466		484,057		607,466		484,057
Treasury stock:
Balance at beginning of period	(226,230)		(211,138)		(211,135)		(150,572)
Stocks repurchased	(2,186)		—		(18,653)		(64,110)
Lapsed restricted stock units and options	42		—		1,414		3,544
Balance at end of period	(228,374)		(211,138)		(228,374)		(211,138)
Accumulated other comprehensive loss, net of tax:
Balance at beginning of period	(89,564)		(49,502)		(93,409)		5,160
Other comprehensive loss, net of tax	(38,113)		(54,387)		(34,268)		(109,049)
Balance at end of period	(127,677)		(103,889)		(127,677)		(103,889)
Total stockholders’ equity	$	1,095,463	$	993,867	$	1,095,463	$	993,867

[1] Dividends declared per common share during the quarter ended September 30, 2023 - $0.22 (September 30, 2022 - $0.20). Dividends declared per common share during the nine-month period ended September 30, 2023 - $0.66 (September 30, 2022 - $0.50).

See notes to unaudited consolidated financial statements.

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OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2023 AND 2022


	Nine-Month Period Ended September 30,
	2023		2022
	(In thousands)
Cash flows from operating activities:
Net income	$	135,275	$	119,872
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred loan origination fees and fair value premiums on loans	1,182		827

Amortization of investment securities (discounts), net of accretion of premiums	(3,185)		254
Amortization of other intangible assets	5,174		6,431
Net change in operating leases	251		270
Depreciation and amortization of premises and equipment	15,290		10,593
Deferred income tax expense, net	50,947		52,229
Provision for credit losses	40,919		15,362
Stock-based compensation	3,723		2,915

(Gain) loss on:
Sale of securities	1,149		—
Sale of loans	(327)		(503)
Early extinguishment of debt	—		(42)
Foreclosed real estate and other repossessed assets	(5,820)		(11,077)
Sale of other assets	17		(4,761)

Originations and purchases of loans held-for-sale	(67,235)		(152,350)
Proceeds from sale of loans held-for-sale	8,012		93,756

Net decrease (increase) in:

Accrued interest receivable	(5,474)		(2,885)
Servicing assets	320		(1,088)
Other assets	287		13,154
Net increase (decrease) in:
Accrued interest on deposits and borrowings	1,373		(238)
Accrued expenses and other liabilities	6,255		(27,173)
Net cash provided by operating activities	188,133		115,546


See notes to unaudited consolidated financial statements.

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OFG BANCORP UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2023 AND 2022 (CONTINUED)
	Nine-Month Period Ended September 30,
	2023		2022
	(In thousands)
Cash flows from investing activities:
Purchases of:
Investment securities available-for-sale	(492,155)		(1,120,589)
Investment securities held-to-maturity	—		(196,742)
FHLB stock	(15,081)		(122)
Equity securities	(5,136)		(4,234)
Maturities and redemptions of:
Investment securities available-for-sale	219,907		102,045
Investment securities held-to-maturity	16,843		23,463
FHLB stock	2,098		62
Proceeds from sales of:
Investment securities available-for-sale	202,133		—
Foreclosed real estate and other repossessed assets, including write-offs	45,409		38,219


Premises and equipment	38		4,762

Origination and purchase of loans, excluding loans held-for-sale	(2,652,868)		(2,144,528)
Principal repayment of loans	2,141,933		1,831,475
Additions to premises and equipment	(11,609)		(24,828)


Net cash used in investing activities	$	(548,488)	$	(1,491,017)
Cash flows from financing activities:
Net (decrease) increase in:
Deposits	(30,281)		290,105
Securities sold under agreements to repurchase	150,632		—
Subordinated capital notes	—		(36,041)
FHLB advances and other borrowings	273,068		(1,280)
Exercise of stock options and restricted units lapsed, net	(1,713)		(909)
Purchase of treasury stock	(18,653)		(64,110)


Dividends paid on common stock	(30,463)		(20,511)
Net cash provided by financing activities	$	342,590	$	167,254
Net change in cash, cash equivalents and restricted cash	(17,765)		(1,208,217)
Cash, cash equivalents and restricted cash at beginning of period	550,464		2,023,650
Cash, cash equivalents and restricted cash at end of period	$	532,699	$	815,433

See notes to unaudited consolidated financial statements.

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OFG BANCORP UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2023 AND 2022 (CONTINUED)

	Nine-Month Period Ended September 30,
	2023		2022
	(In thousands)
Reconciliation of the Consolidated Statements of Cash Flows to the Consolidated Statements of Financial Condition:
Cash and due from banks	$	528,626	$	810,281
Money market investments	4,073		4,988
Restricted cash	—		164
Total cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	532,699	$	815,433

	Nine-Month Period Ended September 30,
	2023		2022
	(In thousands)
Supplemental Cash Flow Disclosure and Schedule of Non-cash Activities:
Interest paid	$	50,017	$	18,370
Income taxes paid	$	3,438	$	4,428
Operating lease liabilities paid	$	7,487	$	7,581
Mortgage loans held-for-sale securitized into mortgage-backed securities	$	69,964	$	80,428


Transfer from loans to foreclosed real estate and other repossessed assets	$	38,233	$	29,118
Reclassification of loans held-for-investment portfolio to held-for-sale portfolio	$	6,471	$	18,571
Reclassification of loans held-for-sale portfolio to held-for-investment portfolio	$	8,596	$	18,000
Financed sales of foreclosed real estate	$	488	$	1,092

Delinquent loans booked under the GNMA buy-back option	$	18,227	$	29,050
Conversion of debt security to equity security	$	376	$	1,500

See notes to unaudited consolidated financial statements.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – SUMMARY OF 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”), and OFG Ventures LLC (“OFG Ventures”), which holds 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. Effective December 31, 2022, OFG sold its retirement plan administration business, which was operated under a retirement plan administrator, Oriental Pension Consultants, Inc. (“OPC”), which thereafter ceased its operations. The results for the nine-month period ended September 30, 2022 included OPC operations.

Securities Sold Under Agreements to Repurchase

Oriental sells securities under agreements to repurchase the same or similar securities. Oriental retains effective control over the securities sold under these agreements. Accordingly, such agreements are treated as financing arrangements, and the obligations to repurchase the securities sold are reflected as liabilities. The securities underlying the financing agreements remain included in the asset accounts. The counterparty to repurchase agreements generally has the right to repledge the securities received as collateral.

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 (“SEC”). 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 OFG’s annual report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 Form 10-K”). Operating results for the nine-month period ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. OFG evaluated subsequent events through the filing date of this report with the SEC and has recorded or disclosed those material events or transactions as described within the accompanying consolidated financial statements and notes. Material estimates that are particularly susceptible to significant change in the near term relate mainly to the determination of the allowance for credit losses.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Recently Adopted Accounting Standards Updates

Financial Instruments—Credit Losses Troubled Debt Restructurings and Vintage Disclosures. In March 2022, the Financial Accounting Standards Board 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. OFG adopted the guidance related to the elimination of the recognition and measurement of TDRs and the enhancement of disclosures for loan restructurings for borrowers experiencing financial difficulty as of January 1, 2023, using the prospective transition method. As of our adoption date, all restructurings, including restructurings for borrowers experiencing financial difficulty, are evaluated to determine whether they result in a new loan or a continuation of an existing loan. Loan restructurings for borrowers experiencing financial difficulty are generally accounted for as a continuation of the existing loan as the terms of the restructured loans are typically not at market rates. When a loan is restructured under ASU 2022-02, we continue to measure impairment on the loan using a discounted cash flow approach that utilizes the loan’s restructured terms, including the post-restructuring interest rate, which does not result in any material changes to the allowance for credit losses. We also adopted the disclosure guidance related to the presentation of gross write-offs by year of origination in our vintage disclosures on January 1, 2023. At the adoption of this guidance on January 1, 2023, there was no material impact on our financial statements. Refer to Note 4 – Loans for new disclosures.

NOTE 2 – RESTRICTED CASH

OFG had a contract with the Federal National Mortgage Association (the “FNMA”) which required collateral to guarantee the repurchase, if necessary, of loans sold with recourse. At December 31, 2022, OFG had delivered as collateral cash amounting to approximately $157 thousand. On May 1, 2023, OFG and a third-party servicer terminated a subservicing agreement by mutual agreement. Pursuant to such termination, the third-party servicer became the direct servicer of the FNMA loans sold with recourse, thereby relieving OFG of its obligation to deliver collateral with respect to such loans. Therefore, no collateral was delivered at September 30, 2023.

The Bank is required by Puerto Rico law to maintain average weekly reserve balances to cover demand deposits, excluding government deposits that are secured with pledged collateral. The amount of those minimum average reserve balances for the week that covered September 30, 2023 was $480.5 million (December 31, 2022 - $482.9 million). At September 30, 2023 and December 31, 2022, 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 September 30, 2023 and December 31, 2022, money market instruments included as part of cash and cash equivalents amounted to $4.1 million and $4.2 million, respectively.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 September 30, 2023 and December 31, 2022 were as follows:


	September 30, 2023
	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	$	7,717	$	—	$	430	$	7,287	1.76	%
Due from 5 to 10 years	48,962		—		4,373		44,589		2.00	%
Due after 10 years	1,204,722		—		94,878		1,109,844		3.91	%
Total FNMA and FHLMC certificates	1,261,401		—		99,681		1,161,720		3.82	%
GNMA Securities

Due from 1 to 5 years	$	10,143	$	—	$	585	$	9,558	1.71	%
Due from 5 to 10 years	18,234		4		1,490		16,748		2.18	%
Due after 10 years	361,250		375		48,547		313,078		3.23	%
Total GNMA certificates	389,627		379		50,622		339,384		3.15	%
CMOs issued by US government-sponsored agencies

Due from 1 to 5 years	10,199		—		530		9,669		1.78	%
Due from 5 to 10 years	147		—		2		145		2.14	%
Due after 10 years	882		—		21		861		5.07	%
Total CMOs issued by US government-sponsored agencies	11,228		—		553		10,675		2.04	%
Total mortgage-backed securities	1,662,256		379		150,856		1,511,779		3.65	%
Investment securities
US Treasury securities
Due less than 1 year	739		—		—		739		5.45	%










Other debt securities

Due from 1 to 5 years	638		—		3		635		3.19	%



Total investment securities	1,377		—		3		1,374		4.40	%
Total securities available for sale	$	1,663,633	$	379	$	150,859	$	1,513,153	3.65	%

	September 30, 2023
	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	$	320,249	$	—	$	74,607	$	245,642	1.72	%

Investment securities
US Treasury securities
Due less than 1 year	$	198,896	$	—	$	2,779	$	196,117	3.34	%




Total securities held to maturity	$	519,145	$	—	$	77,386	$	441,759	2.34	%

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	December 31, 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	$	10,155	—		$	550	$	9,605	1.76	%
Due from 5 to 10 years	59,167		—		3,764		55,403		2.00	%
Due after 10 years	768,381		59		65,332		703,108		2.87	%
Total FNMA and FHLMC certificates	837,703		59		69,646		768,116		2.79	%
GNMA Securities

Due from 1 to 5 years	12,505		—		632		11,873		1.66	%
Due from 5 to 10 years	24,575		14		1,585		23,004		2.13	%
Due after 10 years	320,417		892		36,652		284,657		2.90	%
Total GNMA certificates	357,497		906		38,869		319,534		2.80	%
CMOs issued by US government-sponsored agencies

Due from 1 to 5 years	14,190		—		755		13,435		1.78	%
Due from 5 to 10 years	485		—		10		475		2.14	%
Due after 10 years	959		—		18		941		5.06	%
Total CMOs issued by US government-sponsored agencies	15,634		—		783		14,851		1.99	%
Total mortgage-backed securities	1,210,834		965		109,298		1,102,501		2.79	%
Investment securities
US Treasury securities
Due less than 1 year	310,862		—		1,729		309,133		3.34	%










Other debt securities

Due from 1 to 5 years	1,116		30		4		1,142		4.45	%



Total investment securities	311,978		30		1,733		310,275		3.35	%
Total securities available for sale	$	1,522,812	$	995	$	111,031	$	1,412,776	2.90	%


	December 31, 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	$	337,435	$	—	$	62,358	$	275,077	1.71	%

Investment securities
US Treasury securities

Due from 1 to 5 years	197,635		—		3,526		194,109		3.36	%



Total securities held to maturity	$	535,070	$	—	$	65,884	$	469,186	2.30	%

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

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.

At September 30, 2023 and December 31, 2022, most securities held by OFG are issued by U.S. government entities and government-sponsored agencies that have a zero-credit loss assumption.

Investment securities at September 30, 2023 include $671.8 million pledged to secure securities sold under agreements to repurchase, government deposits and regulatory collateral, of which $462.9 million serve as collateral for public funds. For regulatory collateral, the secured parties are not permitted to sell or repledge it. Investment securities as of December 31, 2022 include $294.2 million pledged to secure government deposits, derivatives, and regulatory collateral that the secured parties are not permitted to sell or repledge, of which $293.7 million serve as collateral for public funds.

At both September 30, 2023 and December 31, 2022, the Bank’s international banking entities held short-term US Treasury securities in the amount of $325 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 (the “OCFI”).

During the nine-month periods ended September 30, 2023 and 2022, OFG retained securitized GNMA pools totaling $52.8 million and $80.4 million amortized cost, respectively, at a yield of 5.20% and 3.53%, respectively, from its own originations. Also, during the nine-month period ended September 30, 2023, OFG retained FNMA pools totaling $17.2 million, at a yield of 5.37%, from its own originations. OFG did not retain FNMA pools during the nine-month period ended September 30, 2022.

During the nine-month periods ended September 30, 2023 and 2022, OFG purchased $1.5 million and $411.0 million, respectively, of available for sale US Treasury securities.

During the nine-month period ended September 30, 2023, OFG sold $203.3 million of available for sale US Treasury securities and recognized a $1.1 million loss in the sale. These losses are included in the consolidated statements of operations.


	Nine-Month Period Ended September 30, 2023
Description	Sale Price		Book Value at Sale		Gross Gains		Gross Losses
	(In thousands)
Sale of securities available-for-sale



Investment securities
US Treasury securities	$	202,133	$	203,282	$	—	$	1,149

There were no sales of securities during the nine-month period ended September 30, 2022.

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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 September 30, 2023 and December 31, 2022, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:


	September 30, 2023
	12 months or more
	Amortized Cost		Unrealized Loss		Fair Value
	(In thousands)
Securities available-for-sale
FNMA and FHLMC certificates	$	750,699	$	91,423	$	659,276
GNMA certificates	292,915		48,099		244,816

CMOs issued by US Government-sponsored agencies	11,228		553		10,675
Other debt securities	139		3		136
	$	1,054,981	$	140,078	$	914,903

Held-to-maturity
FNMA and FHLMC certificates	$	320,249	$	74,607	$	245,642
US Treasury securities	198,896		2,779		196,117
	$	519,145	$	77,386	$	441,759

	September 30, 2023
	Less than 12 months
	Amortized Cost		Unrealized Loss		Fair Value
	(In thousands)
Securities available-for-sale

FNMA and FHLMC certificates	$	510,701	$	8,257	$	502,444
GNMA certificates	84,757		2,523		82,234


	$	595,458	$	10,780	$	584,678





	September 30, 2023
	Total
	Amortized Cost		Unrealized Loss		Fair Value
	(In thousands)
Securities available-for-sale
FNMA and FHLMC certificates	$	1,261,401	$	99,681	$	1,161,720
GNMA certificates	377,672		50,622		327,050
CMOs issued by US Government-sponsored agencies	11,228		553		10,675

Other debt securities	139		3		136
	$	1,650,440	$	150,859	$	1,499,581
Held-to-maturity
FNMA and FHLMC certificates	$	320,249	$	74,607	$	245,642
US Treasury securities	198,896		2,779		196,117
	$	519,145	$	77,386	$	441,759

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	December 31, 2022
	12 months or more
	Amortized Cost		Unrealized Loss		Fair Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies	$	337	$	7	$	330
FNMA and FHLMC certificates	88,600		18,989		69,611
GNMA certificates	82,074		14,031		68,043

	$	171,011	$	33,027	$	137,984

Held-to-maturity
FNMA and FHLMC certificates	$	337,435	$	62,358	$	275,077


	December 31, 2022
	Less than 12 months
	Amortized Cost		Unrealized Loss		Fair Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies	$	15,297	$	776	$	14,521
FNMA and FHLMC certificates	745,566		50,657		694,909
GNMA certificates	251,835		24,838		226,997
US Treasury securities	310,862		1,729		309,133
Other debt securities	240		4		236
	$	1,323,800	$	78,004	$	1,245,796
Held-to-maturity

US Treasury securities	$	197,635	$	3,526	$	194,109


	December 31, 2022
	Total
	Amortized Cost		Unrealized Loss		Fair Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies	$	15,634	$	783	$	14,851
FNMA and FHLMC certificates	834,166		69,646		764,520
GNMA certificates	333,909		38,869		295,040
US Treasury securities	310,862		1,729		309,133
Other debt securities	240		4		236
	$	1,494,811	$	111,031	$	1,383,780
Held-to-maturity
FNMA and FHLMC certificates	$	337,435	$	62,358	$	275,077
US Treasury securities	197,635		3,526		194,109
	$	535,070	$	65,884	$	469,186

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 4 - LOANS

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

The composition of the amortized cost basis of OFG’s loan portfolio at September 30, 2023 and December 31, 2022 was as follows:


	September 30, 2023						December 31, 2022
	Non-PCD		PCD		Total		Non-PCD		PCD		Total
	(In thousands)
Commercial loans:
Commercial secured by real estate	$	1,001,062	$	125,635	$	1,126,697	$	974,202	$	138,678	$	1,112,880
Other commercial and industrial	984,473		14,222		998,695		854,442		20,474		874,916

US commercial loans	707,593		—		707,593		642,133		—		642,133
	2,693,128		139,857		2,832,985		2,470,777		159,152		2,629,929
Mortgage	648,414		955,596		1,604,010		675,793		1,028,428		1,704,221
Consumer:
Personal loans	561,185		284		561,469		480,620		338		480,958
Credit lines	11,169		288		11,457		12,826		300		13,126
Credit cards	40,030		—		40,030		42,872		—		42,872
Overdraft	239		—		239		301		—		301
	612,623		572		613,195		536,619		638		537,257
Auto	2,208,993		2,552		2,211,545		1,958,257		5,658		1,963,915
	6,163,158		1,098,577		7,261,735		5,641,446		1,193,876		6,835,322
Allowance for credit losses	(148,210)		(9,319)		(157,529)		(141,841)		(10,832)		(152,673)
Total loans held for investment, net	6,014,948		1,089,258		7,104,206		5,499,605		1,183,044		6,682,649
Mortgage loans held for sale	564		—		564		19,499		—		19,499
Other loans held for sale	25,282		—		25,282		21,088		—		21,088
Total loans held for sale	25,846		—		25,846		40,587		—		40,587
Total loans, net	$	6,040,794	$	1,089,258	$	7,130,052	$	5,540,192	$	1,183,044	$	6,723,236

During the quarter ended September 30, 2023, OFG transferred to held for sale a US commercial loan amounting to $2.0 million, net of $2.7 million charge-off, which was subsequently sold in October 2023. During the quarter ended September 30, 2023, OFG transferred to held for sale a small portfolio of non-performing small business commercial loans amounting to $4.4 million, net of a $906 thousand charge-off recognized during the quarter.

At September 30, 2023 and December 31, 2022, OFG had carrying balances of $68.3 million and $73.7 million, respectively, in loans held for investment granted to the Puerto Rico government or its instrumentalities as part of the commercial loan segment. The Bank’s loans to the Puerto Rico government are general obligations of municipalities secured by ad valorem taxation, without limitation as to rate or amount, on all taxable property within the issuing municipalities in current status. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The tables below present the aging of the amortized cost of loans held for investment at September 30, 2023 and December 31, 2022, by class of loans. Mortgage loans past due include $18.2 million and $32.6 million of delinquent loans in the Government National Mortgage Association (“GNMA”) buy-back option program at September 30, 2023 and December 31, 2022, 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.


	September 30, 2023
	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 loans:
Commercial secured by real estate	$	1,581	$	759	$	4,159	$	6,499	$	994,563	$	1,001,062	$	—
Other commercial and industrial	2,657		337		5,284		8,278		976,195		984,473		—
US commercial loans	332		—		—		332		707,261		707,593		—
	4,570		1,096		9,443		15,109		2,678,019		2,693,128		—
Mortgage	5,539		8,841		34,508		48,888		599,526		648,414		2,899
Consumer:
Personal loans	5,891		3,171		2,626		11,688		549,497		561,185		—
Credit lines	54		126		71		251		10,918		11,169		—
Credit cards	608		265		565		1,438		38,592		40,030		—
Overdraft	45		—		—		45		194		239		—
	6,598		3,562		3,262		13,422		599,201		612,623		—
Auto	97,901		41,377		16,301		155,579		2,053,414		2,208,993		—
Total loans	$	114,608	$	54,876	$	63,514	$	232,998	$	5,930,160	$	6,163,158	$	2,899

As of September 30, 2023, total past due loans exclude $8.1 million of past due commercial loans held for sale.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	December 31, 2022
	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 loans:
Commercial secured by real estate	$	923	$	164	$	6,147	$	7,234	$	966,968	$	974,202	$	—
Other commercial and industrial	943		720		3,225		4,888		849,554		854,442		—
US commercial loans	—		—		—		—		642,133		642,133		—
	1,866		884		9,372		12,122		2,458,655		2,470,777		—
Mortgage	9,267		5,848		56,714		71,829		603,964		675,793		3,856
Consumer:
Personal loans	4,263		2,669		2,314		9,246		471,374		480,620		—
Credit lines	500		154		117		771		12,055		12,826		—
Credit cards	730		486		682		1,898		40,974		42,872		—
Overdraft	91		2		—		93		208		301		—
	5,584		3,311		3,113		12,008		524,611		536,619		—
Auto	75,237		36,954		19,613		131,804		1,826,453		1,958,257		—
Total loans	$	91,954	$	46,997	$	88,812	$	227,763	$	5,413,683	$	5,641,446	$	3,856

As of December 31, 2022, total past due loans exclude $21.1 million of past due commercial loans held for sale.

Upon adoption of the 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, purchased credit deteriorated (“PCD”) loans are not included in the preceding two tables.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Non-accrual Loans

The following table presents the amortized cost basis of loans held for investment on nonaccrual status as of September 30, 2023 and December 31, 2022:


	September 30, 2023						December 31, 2022
	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)						(In thousands)
Non-PCD:
Commercial loans:
Commercial secured by real estate	$	3,150	$	7,971	$	11,121	$	4,091	$	17,098	$	21,189
Other commercial and industrial	4,790		859		5,649		2,769		885		3,654
US commercial loans	19,879		—		19,879		9,589		—		9,589
	27,819		8,830		36,649		16,449		17,983		34,432
Mortgage	12,013		5,379		17,392		11,719		11,522		23,241
Consumer:
Personal loans	2,718		4		2,722		1,950		379		2,329
Personal lines of credit	71		—		71		116		—		116
Credit cards	566		—		566		683		—		683
	3,355		4		3,359		2,749		379		3,128
Auto	16,296		5		16,301		19,612		1		19,613
Total	$	59,483	$	14,218	$	73,701	$	50,529	$	29,885	$	80,414

PCD:
Commercial loans:
Commercial secured by real estate	$	3,089	$	2,533	$	5,622	$	2,807	$	6,084	$	8,891
Other commercial and industrial	—		1,066		1,066		—		36		36
	3,089		3,599		6,688		2,807		6,120		8,927
Mortgage	253		—		253		259		—		259
Consumer:
Personal loans	7		—		7		—		—		—
	7		—		7		—		—		—
Total	$	3,349	$	3,599	$	6,948	$	3,066	$	6,120	$	9,186
Total non-accrual loans	$	62,832	$	17,817	$	80,649	$	53,595	$	36,005	$	89,600

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

As of September 30, 2023 and December 31, 2022, total commercial non-accrual loans exclude $8.5 million and $27.8 million of non-accrual commercial loans held for sale, respectively.

Delinquent residential mortgage loans insured or guaranteed under applicable FHA and Veterans Administration (“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 December 31, 2022, loans whose terms have been extended and which were classified as troubled-debt restructurings that were not included in non-accrual loans amounted to $145.2 million as they were performing under their modified terms.

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Modifications to Debtors Experiencing Financial Difficulty

OFG’s loss mitigation program was designed to ensure that borrowers experiencing financial difficulties have the opportunity to continue paying their obligations. The loss mitigation alternatives are divided depending on the borrower’s hardship and their ability to continue with regular payment or with a new modified payment plan. The loss mitigation program provides alternatives for home retention or disposition options avoiding foreclosure proceedings and collateral retention.

OFG offers various types of loan modifications to borrowers experiencing financial difficulty in the form of an interest rate reduction, an other-than-insignificant payment delay, a term extension, interest or principal forbearance or forgiveness, or any combination of these types of concessions.

On January 1, 2023, OFG adopted ASU 2022-02, which eliminated the recognition and measurement of TDRs and enhanced disclosures for loan restructurings for borrowers experiencing financial difficulty, using the prospective transition method.

At September 30, 2023, the amortized cost of modified loans excludes $110 thousand of accrued interest receivable. Accrued interest receivable on loans is included in the “accrued interest receivable” line in OFG’s consolidated statements of financial condition.

The following tables present the amortized cost basis as of September 30, 2023 of loans held for investment that were modified during the quarter and nine-month period ended September 30, 2023, disaggregated by class of financing receivable and type of concession granted.


	Interest Rate Reduction
	Quarter Ended September 30, 2023				Nine-Month Period Ended September 30, 2023

	Amortized Cost Basis (In thousands)		% of Total Class of Financing Receivable		Amortized Cost Basis (In thousands)		% of Total Class of Financing Receivable

Commercial loans:



US commercial loans	6,824		0.96	%	6,824		0.96	%


Consumer:
Personal loans	40		0.01	%	40		0.01	%




Auto	30		—	%	30		—	%
Total	$	6,894			$	6,894


	Term Extension
	Quarter Ended September 30, 2023				Nine-Month Period Ended September 30, 2023

	Amortized Cost Basis (In thousands)		% of Total Class of Financing Receivable		Amortized Cost Basis (In thousands)		% of Total Class of Financing Receivable

Commercial loans:
Commercial secured by real estate	$	629	0.06	%	$	6,328	0.56	%
Other commercial and industrial	36		0.00	%	80		0.01	%

	665		0.02	%	6,408		0.23	%
Mortgage	771		0.05	%	5,040		0.31	%







Total	$	1,436			$	11,448

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	Principal Forbearance/Forgiveness
	Quarter Ended September 30, 2023				Nine-Month Period Ended September 30, 2023

	Amortized Cost Basis (In thousands)		% of Total Class of Financing Receivable		Amortized Cost Basis (In thousands)		% of Total Class of Financing Receivable







Mortgage	$	—	—	%	$	98	0.01	%


	Combination - Term Extension and Interest Rate Reduction
	Quarter Ended September 30, 2023				Nine-Month Period Ended September 30, 2023

	Amortized Cost Basis (In thousands)		% of Total Class of Financing Receivable		Amortized Cost Basis (In thousands)		% of Total Class of Financing Receivable







Mortgage	117		0.01	%	$	723	0.05	%
Consumer:
Personal loans	—		—	%	82		0.01	%





Total	$	117			$	805


	Combination - Term Extension and Principal Forgiveness/Forbearance
	Quarter Ended September 30, 2023				Nine-Month Period Ended September 30, 2023

	Amortized Cost Basis (In thousands)		% of Total Class of Financing Receivable		Amortized Cost Basis (In thousands)		% of Total Class of Financing Receivable

Commercial loans:



US commercial loans	$	—	—	%	$	4,286	0.61	%

Mortgage	—		—	%	447		0.03	%







Total	$	—			$	4,733

Our credit loss estimation methodology incorporates a lifetime approach, utilizing modeled loan performance based on the historical experience of loans with similar risk characteristics, adjusted for current conditions, and reasonable and supportable forecasts. The model considers extensive historical loss experience, including the impact of loss mitigation programs offered to borrowers facing financial difficulty and projected loss severity from loan defaults, and is applied consistently across all portfolio segments. Additionally, our allowance for credit losses is recorded on each asset upon origination or acquisition and is based on historical loss information, including modifications made to borrowers facing financial difficulty. Changes to the allowance for credit losses are generally not recorded upon modification, as the effects of most modifications are already considered in the estimation methodology. Refer to Note 5 – Allowance for Credit Losses for additional information.

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents the financial effect of the modifications granted to borrowers experiencing financial difficulty during the quarter and nine-month period ended September 30, 2023. The financial effect of the combined modifications is presented separately by type of modification.


	Quarter Ended September 30, 2023
	Weighted-Average Interest Rate Reduction		Weighted-Average Term Extension (In months)	Weighted-Average Forgiveness/Forbearance of Principal Amount (In thousands)
Commercial loans:
Commercial loans secured by real estate	—	%	14	$	—
US Commercial loans	1.95	%	0	—
	—	%	14	$	—
Mortgage	1.25	%	349	$	—
Consumer:
Personal loans	4.00	%	0	$	—



Auto	3.00	%	0	$	—


	Nine-Month Period Ended September 30, 2023
	Weighted-Average Interest Rate Reduction		Weighted-Average Term Extension (In months)	Weighted-Average Forgiveness/Forbearance of Principal Amount (In thousands)
Commercial loans:
Commercial loans secured by real estate	—	%	23	$	—
US Commercial loans	1.95	%	31	2,973
	—	%	54	$	2,973
Mortgage	1.94	%	227	$	24
Consumer:
Personal loans	2.98	%	81	$	—



Auto	3.00	%	0	$	—

During the nine-month period ended September 30, 2023, OFG agreed to modify the terms of a US commercial loan with unpaid principal balance of $8.9 million by extending its term and forgiving $4.6 million of its principal balance in exchange for the company’s private stock with a fair value of $1.6 million. In addition, OFG agreed to modify the terms of another US commercial loan with unpaid principal balance of $4.4 million by forgiving all its unpaid principal balance in exchange for the company’s private stock with a fair value of $279 thousand.

The following table presents the amortized cost basis as of September 30, 2023 of loans held for investment that had a payment default subsequent to being granted a modification to borrowers experiencing financial difficulty in the prior nine-months.


	Nine-Month Period Ended September 30, 2023
	Amortized Cost Basis of Modified Financing Receivables that Subsequently Defaulted
	Interest Rate Reduction		Term Extension		Principal Forgiveness/Forbearance		Combination - Term Extension and Interest Rate Reduction		Total
	(In thousands)






Mortgage	$	—	$	415	$	—	$	—	$	415

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

A payment default for a financial difficulty modification loan is defined as reaching 90 days past due with respect to principal and/or interest payments or when the borrower missed three consecutive monthly payments since modification. Payment defaults is one of the factors considered when projecting future cash flows in the calculation of the allowance for credit losses of loans.

OFG closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents an aging of the loans held for investment that have been modified during the nine-month period ended September 30, 2023.


	September 30, 2023
	30-59 Day Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Current		Total
	(In thousands)
Commercial loans:
Commercial loans secured by real estate	$	—	$	—	$	—	$	—	$	6,328	$	6,328
Other commercial and industrial	—		—		—		—		80		80
US commercial loans	—		—		—		—		11,110		11,110
	—		—		—		—		17,518		17,518
Mortgage	566		133		415		1,114		5,194		6,308
Consumer:
Personal loans	—		—		—		—		122		122



	—		—		—		—		122		122
Auto	—		—		—		—		30		30
Total	$	566	$	133	$	415	$	1,114	$	22,864	$	23,978

At September 30, 2023, the total amortized cost of modified loans to borrowers experiencing financial difficulty includes $4.5 million of government-guaranteed loans (e.g., FHA/VA). There were no outstanding commitments to lend additional funds to debtors experiencing financial difficulties at September 30, 2023.

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Troubled Debt Restructurings (“TDRs”) Disclosures Prior to the Adoption of ASU 2022-02

Prior to the adoption of ASU 2022-02, OFG offered various types of concessions when modifying a loan. Concessions made to the original contractual terms of the loan typically consisted 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 restructuring. Loans that were restructured in a TDR prior to the adoption of ASU 2022-02 will continue to be accounted for under the historical TDR accounting until the relevant loans are paid off, liquidated or subsequently modified. Refer to “Note 1 – Summary of Significant Accounting Policies” in our 2022 Form 10-K for more information on TDR accounting and disclosure requirements, and “Note 1 – Summary of Significant Accounting Policies” in this report for more information on our adoption of ASU 2022-02.

The amount of outstanding commitments to lend additional funds to commercial borrowers whose terms were modified in TDRs amounted to $3.2 million at December 31, 2022.

The following table presents the troubled-debt restructurings in all loan portfolios as of December 31, 2022:


	December 31, 2022
		Accruing		Non-accruing		Total		Related Allowance
	(In thousands)
Commercial loans:
Commercial secured by real estate		$	31,437	$	13,187	$	44,624	$	181
Other commercial and industrial		2,272		354		2,626		42

US commercial loans		7,132		—		7,132		89
		40,841		13,541		54,382		312
Mortgage		102,387		6,773		109,160		2,495
Consumer:
Personal loans		1,850		15		1,865		73




Auto		77		—		77		3
Total loans		$	145,155	$	20,329	$	165,484	$	2,883

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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


	December 31, 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	$	7,746	$	29,454	$	7,424	$	—	$	44,624
Other commercial and industrial	785		1,367		474		—		2,626

US commercial loans	7,132		—		—		—		7,132
	15,663		30,821		7,898		—		54,382
Mortgage	31,709		8,020		35,194		34,237		109,160
Consumer:
Personal loans	825		176		793		71		1,865





Auto	39		—		20		18		77
Total loans	$	48,236	$	39,017	$	43,905	$	34,326	$	165,484

At December 31, 2022, TDR mortgage loans included $43.5 million 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 were not included in the TDR tables.

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Loan modifications that were considered TDR loans completed during the quarter and nine-month period ended September 30, 2022:


	Quarter Ended September 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	10	1,344		4.45	%	214	1,447		3.67	%	292
Commercial	1	170		5.75	%	66	169		5.75	%	114
Consumer	1	40		10.70	%	72	40		10.95	%	60



	Nine-Months Ended September 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	82	$	10,377	4.60	%	266	$	10,918	3.64	%	341
Commercial	5	38,873		3.57	%	131	38,729		3.64	%	184
Consumer	3	62		13.72	%	75	62		10.95	%	67

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

Twelve-month period ended September 30, 2022

Number of Contracts

Recorded Investment

(Dollars in thousands)

Mortgage

1,087

As of September 30, 2023 and December 31, 2022, the recorded investment on residential mortgage loans collateralized by residential real estate property that were in the process of foreclosure amounted to $24.1 million and $14.9 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 property title issues.

Collateral-dependent Loans

The table below presents the amortized cost of commercial collateral-dependent loans held for investment at September 30, 2023 and December 31, 2022, by class of loans.


	September 30,		December 31,
	2023		2022
	(In thousands)

Commercial loans secured by real estate	$	8,605	$	8,805

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

Table of Contents

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 process described above are considered to be pass loans.

On January 1, 2023, OFG adopted ASU 2022-02 which requires public companies to include current year-to-date period gross charge-offs by year of origination as described in the tables below.

As of September 30, 2023, and based on the most recent analysis performed, the risk category of loans held for investment 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
	2023		2022		2021		2020		2019		Prior
	(In thousands)
Commercial:
Commercial secured by real estate:
Loan grade:
Pass	$	106,717	$	220,049	$	171,767	$	122,158	$	82,940	$	156,508	$	70,693	$	930,832
Special Mention	—		1,806		6,642		17,542		15,754		10,785		172		52,701
Substandard	—		407		1,279		752		2,655		11,894		527		17,514
Doubtful	—		—		—		—		—		15		—		15
Loss	—		—		—		—		—		—		—		—
Total commercial secured by real estate	106,717		222,262		179,688		140,452		101,349		179,202		71,392		1,001,062

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Total
	2023		2022		2021		2020		2019		Prior
	(In thousands)
Commercial secured by real estate:
Current nine month period gross charge-offs	—		—		265		—		94		821		—		1,180
Other commercial and industrial:
Loan grade:
Pass	194,795		105,699		126,074		38,982		8,260		15,818		483,884		973,512
Special Mention	21		1,805		13		5,706		36		126		14		7,721
Substandard	10		144		833		617		942		126		568		3,240
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total other commercial and industrial:	194,826		107,648		126,920		45,305		9,238		16,070		484,466		984,473
Other commercial and industrial:
Current nine month period gross charge-offs	—		41		878		11		9		1,180		—		2,119
US commercial loans:
Loan grade:
Pass	119,438		68,167		75,965		45,371		29,698		8,089		320,863		667,591
Special Mention	—		7,841		6,566		—		—		—		—		14,407
Substandard	11,111		—		—		—		—		5,716		8,768		25,595
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total US commercial loans:	130,549		76,008		82,531		45,371		29,698		13,805		329,631		707,593
US commercial loans:
Current nine month period gross charge-offs	33		1,156		—		—		—		8,637		—		9,826
Total commercial loans	$	432,092	$	405,918	$	389,139	$	231,128	$	140,285	$	209,077	$	885,489	$	2,693,128
Total current nine month period gross charge-offs	$	33	$	1,197	$	1,143	$	11	$	103	$	10,638	$	—	$	13,125

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of December 31, 2022, and based on the most recent analysis performed, the risk category of loans held for investment 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	$	220,035	$	177,775	$	110,809	$	118,518	$	50,454	$	159,721	$	69,523	$	906,835
Special Mention	1,899		—		6,007		17,004		2,095		13,934		439		41,378
Substandard	103		8,410		345		405		473		14,722		1,185		25,643
Doubtful	—		—		—		—		—		15		331		346
Loss	—		—		—		—		—		—		—		—
Total commercial secured by real estate	222,037		186,185		117,161		135,927		53,022		188,392		71,478		974,202
Other commercial and industrial:
Loan grade:
Pass	123,659		198,776		67,147		35,678		13,807		7,863		397,944		844,874
Special Mention	3		60		31		654		1,819		21		3,823		6,411
Substandard	112		—		260		472		280		74		1,920		3,118
Doubtful	—		—		—		—		—		—		39		39
Loss	—		—		—		—		—		—		—		—
Total other commercial and industrial:	123,774		198,836		67,438		36,804		15,906		7,958		403,726		854,442
US commercial loans:
Loan grade:
Pass	81,155		92,688		43,965		33,827		49,356		—		308,183		609,174
Special Mention	6,346		—		—		—		—		—		1,122		7,468
Substandard	3,363		—		8,090		—		4,449		—		9,589		25,491
Doubtful	—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—
Total US commercial loans:	90,864		92,688		52,055		33,827		53,805		—		318,894		642,133
Total commercial loans	$	436,675	$	477,709	$	236,654	$	206,558	$	122,733	$	196,350	$	794,098	$	2,470,777

At September 30, 2023 and December 31, 2022, the balance of revolving commercial loans converted to term loans was $121.1 million and $78.0 million, respectively.

Table of Contents

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 held for investment based on payment activity as of September 30, 2023:


	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Total
	2023		2022		2021		2020		2019		Prior
	(In thousands)
Mortgage:
Payment performance:
Performing	$	27,314	$	19,752	$	23,745	$	16,065	$	14,722	$	521,462	$	—	$	623,060
Nonperforming	—		114		182		109		482		24,467		—		25,354
Total mortgage loans:	27,314		19,866		23,927		16,174		15,204		545,929		—		648,414
Mortgage:
Current nine month period gross charge-offs	—		—		—		—		—		610		—		610
Consumer:
Personal loans:
Payment performance:
Performing	224,566		208,788		77,158		21,839		18,006		8,106		—		558,463
Nonperforming	423		1,477		505		153		98		66		—		2,722
Total personal loans	224,989		210,265		77,663		21,992		18,104		8,172		—		561,185
Personal loans:
Current nine month period gross charge-offs	492		7,581		3,461		638		1,172		637		—		13,981
Credit lines:
Payment performance:
Performing	—		—		—		—		—		—		11,097		11,097
Nonperforming	—		—		—		—		—		—		72		72
Total credit lines	—		—		—		—		—		—		11,169		11,169
Credit lines:
Current nine month period gross charge-offs	—		—		—		—		—		—		313		313
Credit cards:
Payment performance:
Performing	—		—		—		—		—		—		39,464		39,464
Nonperforming	—		—		—		—		—		—		566		566
Total credit cards	—		—		—		—		—		—		40,030		40,030
Credit cards:
Current nine month period gross charge-offs	—		—		—		—		—		—		2,124		2,124
Overdrafts:
Payment performance:
Performing	—		—		—		—		—		—		239		239
Nonperforming	—		—		—		—		—		—		—		—
Total overdrafts	—		—		—		—		—		—		239		239
Overdrafts:
Current nine month period gross charge-offs	—		—		—		—		—		—		434		434

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Total
	2023		2022		2021		2020		2019		Prior
	(In thousands)
Total consumer loans	224,989		210,265		77,663		21,992		18,104		8,172		51,438		612,623
Total consumer current nine month period gross charge-offs	492		7,581		3,461		638		1,172		637		2,871		16,852
Total mortgage and consumer loans	$	252,303	$	230,131	$	101,590	$	38,166	$	33,308	$	554,101	$	51,438	$	1,261,037
Total mortgage and consumer current nine month period gross charge-offs	$	492	$	7,581	$	3,461	$	638	$	1,172	$	1,247	$	2,871	$	17,462

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents the amortized cost in mortgage and consumer loans held for investment based on payment activity as of December 31, 2022:


	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Total
	2022		2021		2020		2019		2018		Prior
	(In thousands)
Mortgage:
Payment performance:
Performing	$	18,700	$	25,274	$	16,175	$	15,457	$	16,790	$	549,885	$	—	$	642,281
Nonperforming	—		—		110		574		241		32,587		—		33,512
Total mortgage loans:	18,700		25,274		16,285		16,031		17,031		582,472		—		675,793
Consumer:
Personal loans:
Payment performance:
Performing	284,183		112,591		31,876		31,850		12,022		5,768		—		478,290
Nonperforming	831		661		111		300		81		346		—		2,330
Total personal loans	285,014		113,252		31,987		32,150		12,103		6,114		—		480,620
Credit lines:
Payment performance:
Performing	—		—		—		—		—		—		12,710		12,710
Nonperforming	—		—		—		—		—		—		116		116
Total credit lines	—		—		—		—		—		—		12,826		12,826
Credit cards:
Payment performance:
Performing	—		—		—		—		—		—		42,189		42,189
Nonperforming	—		—		—		—		—		—		683		683
Total credit cards	—		—		—		—		—		—		42,872		42,872
Overdrafts:
Payment performance:
Performing	—		—		—		—		—		—		301		301
Nonperforming	—		—		—		—		—		—		—		—
Total overdrafts	—		—		—		—		—		—		301		301
Total consumer loans	285,014		113,252		31,987		32,150		12,103		6,114		55,999		536,619
Total mortgage and consumer loans	$	303,714	$	138,526	$	48,272	$	48,181	$	29,134	$	588,586	$	55,999	$	1,212,412

At September 30, 2023 and December 31, 2022, there were no mortgage and consumer revolving loans that converted to term loans.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

OFG evaluates credit quality for auto loans based on FICO score. The following table presents the amortized cost in auto loans held for investment based on their most recent FICO score as of September 30, 2023:


	Term Loans Amortized Cost Basis by Origination Year												Total
	2023		2022		2021		2020		2019		Prior
	(In thousands)
Auto:
FICO score:
1-660	121,234		195,732		124,437		60,882		44,959		47,229		594,473
661-699	130,962		128,534		65,830		30,251		21,784		19,694		397,055
700+	367,239		339,488		197,162		113,239		99,649		75,429		1,192,206
No FICO	4,564		6,792		4,882		2,502		4,441		2,078		25,259
Total auto loans	$	623,999	$	670,546	$	392,311	$	206,874	$	170,833	$	144,430	$	2,208,993
Auto:
Current nine month period gross charge-offs	$	1,120	$	12,271	$	7,848	$	2,945	$	2,402	$	2,520	$	29,106

The following table presents the amortized cost in auto loans held for investment based on their most recent FICO score as of December 31, 2022:


	Term Loans Amortized Cost Basis by Origination Year												Total
	2022		2021		2020		2019		2018		Prior
	(In thousands)
Auto:
FICO score:
1-660	178,426		143,926		72,148		58,069		44,156		31,980		528,705
661-699	171,723		93,359		42,388		31,033		21,283		13,518		373,304
700+	375,845		235,743		144,783		135,517		88,597		47,499		1,027,984
No FICO	7,766		6,553		3,741		5,873		3,008		1,323		28,264
Total auto loans	$	733,760	$	479,581	$	263,060	$	230,492	$	157,044	$	94,320	$	1,958,257

As of September 30, 2023 and December 31, 2022, accrued interest receivable on loans totaled $59.9 million and $58.1 million, respectively, and is included in the accrued interest receivable line in OFG’s consolidated statements of financial condition. Refer to “Note 10 – Accrued Interest Receivable and Other Assets” for more information on accrued interest receivable on loans.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES

OFG measures its allowance for credit losses based on management’s best estimate of lifetime expected credit losses inherent in OFG’s relevant financial assets. The ACL is estimated using quantitative methods that consider a variety of factors such as historical loss experience, the current credit quality of the portfolio, and 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. For more information on OFG’s credit loss accounting policies, including the allowance for credit losses, see “Note 1 – Summary of Significant Accounting Policies” included in OFG’s 2022 Form 10-K.

At September 30, 2023, 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 uses a higher probability level in the moderate recessionary scenario. In addition, the ACL at September 30, 2023 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 auto loan portfolio credit trends and the evolution of risk ratings applied to the commercial loans and collateral changes in real estate portfolios. There are still many unknown variables, including the results of the government’s fiscal and monetary actions resulting from the effect of inflation and geopolitical tension.

As of September 30, 2023, the allowance for credit losses increased by $4.9 million when compared to December 31, 2022. The provision for credit losses for the nine-month period ended September 30, 2023 reflected a provision of $23.8 million related to the growth in loan balances, a provision of $14.7 million related to commercial-specific loan reserves, mainly in the US commercial loan portfolio, and $5.1 million associated with qualitative adjustments mostly to the auto loan and US commercial loan portfolios. The increases to the provision were partially offset by releases of $3.2 million for changes in the economic and loss rate models.

The net charge-offs for the nine-month period ended September 30, 2023, amounted to $35.6 million, an increase of $19.1 million when compared to the same period of 2022. The increase is mainly due to increases of $8.3 million in commercial loans, $5.7 million in consumer loans, $2.4 million in mortgage loans and $2.7 million in auto loans. During nine-month period ended September 30, 2023, OFG charged-off $9.8 million for three US commercial loans and $906 thousand for a small portfolio of non-performing small business commercial loans that were transferred to the held for sale category at the end of the period; partially offset by a recovery of $3.7 million from the sale of older, fully charged off auto and consumer loans.

Table of Contents

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 nine-month periods ended September 30, 2023 and 2022:


	Quarter Ended September 30, 2023
	Commercial		Mortgage		Consumer		Auto		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	48,604	$	8,670	$	25,666	$	67,227	$	150,167
Provision for (recapture of) credit losses	1,103		(273)		6,026		9,804		16,660
Charge-offs	(8,254)		(218)		(5,894)		(10,458)		(24,824)
Recoveries	174		185		655		5,193		6,207
Balance at end of period	$	41,627	$	8,364	$	26,453	$	71,766	$	148,210
PCD:
Balance at beginning of period	$	1,408	$	8,297	$	8	$	43	$	9,756
Provision for (recapture of) credit losses	60		(226)		15		(67)		(218)
Charge-offs	(690)		(148)		(39)		(37)		(914)
Recoveries	494		80		23		98		695
Balance at end of period	$	1,272	$	8,003	$	7	$	37	$	9,319
Total allowance for credit losses at end of period	$	42,899	$	16,367	$	26,460	$	71,803	$	157,529


	Nine-Month Period Ended September 30, 2023
	Commercial		Mortgage		Consumer		Auto		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	39,158	$	9,571	$	23,264	$	69,848	$	141,841
Provision for (recapture of) credit losses	14,857		(1,332)		16,517		10,900		40,942
Charge-offs	(13,125)		(610)		(16,852)		(29,106)		(59,693)
Recoveries	737		735		3,524		20,124		25,120
Balance at end of period	$	41,627	$	8,364	$	26,453	$	71,766	$	148,210
PCD:
Balance at beginning of period	$	1,388	$	9,359	$	14	$	71	$	10,832
Provision for (recapture of) credit losses	1,376		(1,719)		293		(475)		(525)
Charge-offs	(2,794)		(224)		(376)		(158)		(3,552)
Recoveries	1,302		587		76		599		2,564
Balance at end of period	$	1,272	$	8,003	$	7	$	37	$	9,319
Total allowance for credit losses at end of period	$	42,899	$	16,367	$	26,460	$	71,803	$	157,529

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	Quarter Ended September 30, 2022
	Commercial		Mortgage		Consumer		Auto		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	42,014	$	11,906	$	23,109	$	66,867	$	143,896

Provision for (recapture of) credit losses	3,108		(1,741)		4,555		4,325		10,247
Charge-offs	(6,485)		(14)		(4,163)		(7,964)		(18,626)
Recoveries	214		280		732		5,674		6,900
Balance at end of period	$	38,851	$	10,431	$	24,233	$	68,902	$	142,417
PCD:
Balance at beginning of period	$	2,427	$	12,541	$	20	$	155	$	15,143

Recapture of credit losses	(786)		(1,735)		(40)		(216)		(2,777)
Charge-offs	(23)		(270)		(9)		(56)		(358)
Recoveries	268		191		47		231		737
Balance at end of period	$	1,886	$	10,727	$	18	$	114	$	12,745
Total allowance for credit losses at end of period	$	40,737	$	21,158	$	24,251	$	69,016	$	155,162

	Nine-Month Period Ended September 30, 2022
	Commercial		Mortgage		Consumer		Auto		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	15,663		(7,281)		13,039		9,691		31,112
Charge-offs	(9,936)		(276)		(10,129)		(22,282)		(42,623)
Recoveries	862		2,689		2,182		16,130		21,863
Balance at end of period	$	38,851	$	10,431	$	24,233	$	68,902	$	142,417
PCD:
Balance at beginning of period	$	4,508	$	19,018	$	34	$	312	$	23,872

Recapture of credit losses	(6,105)		(8,766)		(43)		(506)		(15,420)
Charge-offs	(57)		(1,587)		(56)		(245)		(1,945)
Recoveries	3,540		2,062		83		553		6,238
Balance at end of period	$	1,886	$	10,727	$	18	$	114	$	12,745
Total allowance for credit losses at end of period	$	40,737	$	21,158	$	24,251	$	69,016	$	155,162

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 6 — FORECLOSED REAL ESTATE

The following table presents the activity related to foreclosed real estate for the quarters and nine-month periods ended September 30, 2023 and 2022:


	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2023		2022		2023		2022
	(In thousands)
Balance at beginning of period	$	10,639	$	15,061	$	11,214	$	15,039
Additions	1,879		1,454		6,513		7,183
Sales	(3,799)		(3,919)		(10,451)		(11,866)
Decline in value	(538)		(322)		(937)		(736)
Other adjustments	1,374		2,287		3,216		4,941
Balance at end of period	$	9,555	$	14,561	$	9,555	$	14,561

NOTE 7 - SERVICING ASSETS

OFG periodically sells or securitizes mortgage loans while retaining the obligation to perform the servicing of such loans. In addition, OFG may purchase or assume the right to service mortgage loans originated by others. Whenever OFG undertakes an obligation to service a loan, management assesses whether a servicing asset and/or liability should be recognized. A servicing asset is recognized whenever the compensation for servicing is expected to more than adequately compensate OFG for servicing the loans. Likewise, a servicing liability would be recognized in the event that servicing fees to be received are not expected to adequately compensate OFG for its expected cost.

At September 30, 2023, the fair value of mortgage servicing rights was $50.6 million ($50.9 million — December 31, 2022).

The following table presents the changes in servicing rights measured using the fair value method for the quarters and nine-month periods ended September 30, 2023 and 2022:


	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2023		2022		2023		2022
	(In thousands)
Fair value at beginning of period	$	49,966	$	49,280	$	50,921	$	48,973
Servicing from mortgage securitization or asset transfers	453		666		1,818		2,935
Changes due to payments on loans	(1,060)		(1,191)		(3,210)		(4,168)
Changes in fair value due to changes in valuation model inputs or assumptions	1,242		1,306		1,072		2,321
Fair value at end of period	$	50,601	$	50,061	$	50,601	$	50,061

The following table presents key economic assumption ranges used in measuring the mortgage-related servicing asset fair value as of September 30, 2023 and 2022:


	Nine-Month Period Ended September 30,
	2023	2022
Constant prepayment rate	3.33% - 20.40%	3.38% - 20.36%
Discount rate	10.00% - 15.50%	10.00% - 15.50%

Table of Contents

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:


	September 30,		December 31,
	2023		2022
	(In thousands)
Mortgage-related servicing asset
Carrying value of mortgage servicing asset	$	50,601	$	50,921
Weighted average life (in years)	7.7		7.8
Constant prepayment rate
Decrease in fair value due to 10% adverse change	$	(922)	$	(956)
Decrease in fair value due to 20% adverse change	$	(1,812)	$	(1,880)
Discount rate
Decrease in fair value due to 10% adverse change	$	(2,224)	$	(2,265)
Decrease in fair value due to 20% adverse change	$	(4,279)	$	(4,356)

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 and included in the mortgage banking activities section in the consolidated statement of operations. Servicing fees on mortgage loans for the quarters ended September 30, 2023 and 2022 totaled $4.6 million and $5.1 million, respectively. Servicing fees on mortgage loans for the nine-month periods ended September 30, 2023 and 2022 totaled $14.4 million and $15.3 million, respectively.

NOTE 8 — DERIVATIVES

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

As of December 31, 2022, the notional amount of derivative contracts outstanding was $26.6 million with a gross fair value of $406 thousand, which was included in other assets in the consolidated statement of financial condition. The gross fair value of derivatives liabilities was zero at December 31, 2022. The impact of master netting agreements was not material. As of September 30, 2023, there were no derivative contracts outstanding.

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 9 — GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill by reportable business segment is included in the table below. Refer to “Note 24 – Business Segments” for additional information on OFG’s reportable business segments.


	Banking		Wealth Management		Treasury		Total
	(In thousands)


September 30, 2023	$	84,063	$	178	$	—	$	84,241
December 31, 2022	$	84,063	$	178	$	—	$	84,241

There were no changes in the carrying amount of goodwill during the quarters and nine-month periods ended September 30, 2023 and 2022. There were no accumulated impairment losses at September 30, 2023 and December 31, 2022.

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 2022 using October 31, 2022 as the annual evaluation date and concluded that there was no impairment at December 31, 2022. During the nine-month period ended September 30, 2023, OFG performed an assessment of events or circumstances that could trigger reductions in the book value of the goodwill. Based on this assessment, no impairments were identified at September 30, 2023.

The following table reflects the components of other intangible assets subject to amortization at September 30, 2023 and December 31, 2022:


	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
	(In thousands)
September 30, 2023
Core deposit intangibles	$	41,507	$	24,338	$	17,169
Customer relationship intangibles	12,693		7,443		5,250

Total other intangible assets	$	54,200	$	31,781	$	22,419
December 31, 2022
Core deposit intangibles	$	41,507	$	20,376	$	21,131
Customer relationship intangibles	12,693		6,231		6,462

Total other intangible assets	$	54,200	$	26,607	$	27,593

In connection with previous acquisitions, OFG recorded core deposit intangibles representing the value of checking and savings deposits acquired. In addition, OFG recorded customer relationship intangibles representing the value of customer relationships acquired with the acquisitions of insurance agencies. During the nine-month period ended September 30, 2023, OFG performed an assessment of events or circumstances that could trigger reductions in the book value of other intangible assets. Based on this assessment, no impairments were identified at September 30, 2023.

Other intangible assets have a definite useful life. Amortization of other intangible assets for the quarters ended September 30, 2023 and 2022 was $1.7 million and $2.1 million, respectively. Amortization of other intangible assets for the nine-month periods ended September 30, 2023 and 2022, was $5.2 million and $6.4 million, respectively.

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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


Year Ending December 31,	(In thousands)
2023	$	6,898
2024	5,913
2025	4,927
2026	3,942
2027	2,956
Thereafter	2,957

NOTE 10 — ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS

Accrued interest receivable at September 30, 2023 and December 31, 2022 consists of the following:


	September 30,		December 31,
	2023		2022
	(In thousands)
Loans	$	59,909	$	58,144
Investments	7,959		4,258
	$	67,868	$	62,402

Accrued interest receivable on loans that participated in the Hurricane Fiona and Covid-19 deferral programs amounted to $20.5 million at September 30, 2023, of which $19.5 million corresponded to loans in current status. Accrued interest receivable on loans that participated in the Hurricane Fiona and Covid-19 deferral program amounted to $21.8 million at December 31, 2022, of which $20.7 million corresponded to loans in current status. OFG estimates expected credit losses on accrued interest receivable for loans that participated in moratorium programs. An allowance has been established for loans with delinquency status in 30 to 89 days past due and is calculated by applying the corresponding loan projected loss factors to the accrued interest receivable balance. At September 30, 2023 and December 31, 2022, the allowance for credit losses for accrued interest receivable for loans that participated in moratorium programs amounted to $153 thousand and $144 thousand, respectively, and is included in accrued interest receivable in the statement of financial condition.

Other assets at September 30, 2023 and December 31, 2022 consist of the following:


	September 30,		December 31,
	2023		2022
	(In thousands)
Prepaid expenses	$	67,545	$	54,875
Other repossessed assets	4,432		4,617
Accounts receivable and other assets	48,096		61,420
	$	120,073	$	120,912

Prepaid expenses amounting to $67.5 million at September 30, 2023, include prepaid municipal, property and income taxes aggregating to $56.8 million. At December 31, 2022 prepaid expenses amounted to $54.9 million, including prepaid municipal, property and income taxes aggregating to $47.2 million.

Other repossessed assets totaled $4.4 million and $4.6 million at September 30, 2023 and December 31, 2022, respectively, and consist 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 September 30, 2023 and December 31, 2022 consist of the following:


	September 30,		December 31,
	2023		2022
	(In thousands)
Non-interest-bearing demand deposits	$	2,571,068	$	2,630,458
Interest-bearing savings and demand deposits	4,540,052		4,774,265
Retail certificates of deposit	1,075,238		979,545
Institutional certificates of deposit	352,259		172,725
Total core deposits	8,538,617		8,556,993
Brokered deposits	2,936		11,371
Total deposits	$	8,541,553	$	8,568,364

At September 30, 2023 and December 31, 2022, the aggregate amount of uninsured deposits was $3.747 billion and $3.498 billion, respectively.

The weighted average interest rate of OFG’s deposits was 0.70% and 0.41%, respectively, at September 30, 2023 and December 31, 2022. Interest expense for the quarters and nine-month periods ended September 30, 2023 and 2022 was as follows:


	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2023		2022		2023		2022
					(In thousands)
Demand and savings deposits	$	13,772	$	6,299	$	32,864	$	16,376
Certificates of deposit	7,047		1,688		16,368		5,596
	$	20,819	$	7,987	$	49,232	$	21,972

At September 30, 2023 and December 31, 2022, time deposits in denominations of $250 thousand or higher, excluding accrued interest and unamortized discounts, amounted to $702.0 million and $384.4 million, respectively.

At September 30, 2023 and December 31, 2022, total public fund deposits from various Puerto Rico government municipalities, agencies and corporations amounted to $390.6 million and $284.2 million, respectively. These public funds were collateralized with commercial loans and securities amounting to $491.0 million and $367.3 million at September 30, 2023 and December 31, 2022, respectively.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Excluding accrued interest of approximately $1.3 million and $682 thousand, the scheduled maturities of certificates of deposit at September 30, 2023 and December 31, 2022 are as follows:


September 30, 2023
	Period-end amount		Uninsured amount
	(In thousands)
Within one year:
Three months or less	$	260,003	$	81,888
Over 3 months through 6 months	196,868		81,844
Over 6 months through 1 year	311,164		88,901
	768,035		252,633
Over 1 through 2 years	476,048		203,379
Over 2 through 3 years	107,977		12,130
Over 3 through 4 years	29,362		2,657
Over 4 through 5 years	46,117		2,939
Over 5 years	1,625		—
	$	1,429,164	$	473,738

December 31, 2022
	Period-end amount		Uninsured amount
	(In thousands)

Within one year:
Three months or less	$	238,776	$	29,503
Over 3 months through 6 months	152,940		18,238
Over 6 months through 1 year	262,976		59,093
	654,692		106,834
Over 1 through 2 years	279,034		64,109
Over 2 through 3 years	136,732		26,481
Over 3 through 4 years	51,505		8,276
Over 4 through 5 years	39,888		2,230
Over 5 years	1,108		—
	$	1,162,959	$	207,930

The tables of scheduled maturities of certificates of deposits above include individual retirement accounts and brokered deposits.

The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans amounted to $606 thousand and $495 thousand as of September 30, 2023 and December 31, 2022, respectively.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 12— BORROWINGS AND RELATED INTEREST

Securities Sold under Agreements to Repurchase

At September 30, 2023, securities underlying agreements to repurchase were delivered to, and are being held by, the counterparties with whom the repurchase agreements were transacted. The counterparties have agreed to resell to OFG the same or similar securities at the maturity of these agreements. The purpose of these transactions is to provide financing for OFG’s securities portfolio.

The following table shows OFG’s repurchase agreements, excluding accrued interest in the amount of $68 thousand at September 30, 2023:


	September 30,
	2023
	(In thousands)
Short-term fixed-rate repurchase agreements, with a weighted average interest rate of 5.47%	$	150,633

Repurchase agreements’ maturities were as follows:


	September 30,
	2023
	(In thousands)
Under 90 days	$	150,633

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

The following securities were sold under agreements to repurchase:


	September 30, 2023
Underlying Securities	Amortized Cost of Underlying Securities		Balance of Borrowing		Approximate Fair Value of Underlying Securities		Weighted Average Interest Rate of Security
	(In thousands)
FNMA and FHMLC Certificates	$	183,004	$	150,633	$	161,973	2.95	%

There were no repurchase agreements at December 31, 2022.

Advances from the Federal Home Loan Bank of New York

Advances are received from the 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 September 30, 2023 and December 31, 2022, these advances were secured by mortgage and commercial loans amounting to $954.9 million and $951.1 million, respectively. Also, at September 30, 2023 and December 31, 2022, OFG had an additional borrowing capacity with the FHLB of $346.4 million and $628.1 million, respectively. At September 30, 2023 and December 31, 2022, the weighted average remaining maturity of FHLB advances was 1.4 years and 3 days, respectively. The original terms of the outstanding short-term and long-term advances at September 30, 2023 are 3 days and 2 years, respectively.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table shows a summary of the advances and their terms, excluding accrued interest in the amount of $774 thousand and $103 thousand at September 30, 2023 and December 31, 2022, respectively:


	September 30,		December 31,
	2023		2022
	(In thousands)
Short-term fixed-rate advances from FHLB, with a weighted average interest rate of 5.59% (December 31, 2022 - 4.46%)	$	100,000	$	26,613
Long-term fixed-rate advance from FHLB, with a weighted average interest rate of 4.52%	200,000		—
	$	300,000	$	26,613

Advances from FHLB mature as follows:


	September 30,		December 31,
	2023		2022
	(In thousands)
Under 90 days	$	100,000	$	26,613
Over one to three years	200,000		—


	$	300,000	$	26,613

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

NOTE 13 – OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES

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

The following table presents the potential effect of rights of set-off associated with OFG’s recognized financial assets and liabilities at September 30, 2023:

September 30, 2023

Gross Amounts Not Offset in the Statement of
Financial Condition

Gross Amount
of Recognized
Liabilities

Gross Amounts
Offset in the
Statement of
Financial
Condition

Net Amount of
Liabilities
Presented
in Statement
of Financial
Condition

Financial
Instruments

Cash
Collateral
Provided

Net
Amount

(In thousands)

Securities sold under agreements to repurchase

150,633

—

150,633

161,973

—

(11,340)

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 14 — INCOME TAXES

OFG 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 (“OFG USA”), 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, OFG’s wholly owned subsidiary, OFG Reinsurance Ltd., is tax exempt in Grand Cayman. Effective December 30, 2022, OFG sold its pension plan administration operations in OPC and thereafter OPC ceased its operations.

As of September 30, 2023 and December 31, 2022, OFG’s net deferred tax asset, net of a valuation allowance of $8.3 million and $9.1 million, respectively, amounted to $11.1 million and $55.5 million, respectively. The decrease in valuation allowance of $883 thousand was mainly related to OFG’s operations at the holding company level. The decrease in net deferred tax asset of $44.4 million was mainly related with the utilization of $112.4 million charge-offs during the nine-month period ended September 30, 2023. 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 September 30, 2023. 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 nine-month periods ended September 30, 2023 and 2022 of 31.3% and 31.9%, respectively, the decrease is mainly related to an exempt income and a discrete tax windfall on stock options recognized during the period. The expected ETR for 2023 is 31.4%.

OFG classifies unrecognized tax benefits in other liabilities. These gross unrecognized tax benefits would affect the ETR if realized. At September 30, 2023, the amount of unrecognized tax benefits was $918 thousand (December 31, 2022 - $867 thousand).

Income tax expense for the quarters ended September 30, 2023 and 2022 was $21.0 million and $20.6 million, respectively. Income tax expense for the nine-month periods ended September 30, 2023 and 2022, was $61.5 million and $56.1 million, respectively.

NOTE 15 — REGULATORY CAPITAL REQUIREMENTS

Regulatory Capital Requirements

OFG (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and Puerto Rico banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on OFG’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, OFG and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. OFG and the Bank have elected to exclude accumulated comprehensive income related to both available for sale securities and derivative valuations from Common Equity Tier 1 Capital.

As of September 30, 2023 and December 31, 2022, OFG and the Bank met all capital adequacy requirements to which they are subject. As of September 30, 2023 and December 31, 2022, 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.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

OFG’s and the Bank’s actual capital amounts and ratios as of September 30, 2023 and December 31, 2022 were 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 September 30, 2023
Total capital to risk-weighted assets	$	1,224,963	15.31	%	$	840,075	10.50	%	$	800,071	10.00	%
Tier 1 capital to risk-weighted assets	$	1,124,599	14.06	%	$	680,060	8.50	%	$	640,057	8.00	%
Common equity tier 1 capital to risk-weighted assets	$	1,124,599	14.06	%	$	560,050	7.00	%	$	520,046	6.50	%
Tier 1 capital to average total assets	$	1,124,599	11.03	%	$	407,737	4.00	%	$	509,672	5.00	%
As of December 31, 2022
Total capital to risk-weighted assets	$	1,132,658	14.89	%	$	798,574	10.50	%	$	760,547	10.00	%
Tier 1 capital to risk-weighted assets	$	1,037,385	13.64	%	$	646,465	8.50	%	$	608,437	8.00	%
Common equity tier 1 capital to risk-weighted assets	$	1,037,385	13.64	%	$	532,383	7.00	%	$	494,355	6.50	%
Tier 1 capital to average total assets	$	1,037,385	10.36	%	$	400,445	4.00	%	$	500,557	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 September 30, 2023
Total capital to risk-weighted assets	$	1,120,234	14.09	%	$	834,814	10.50	%	$	795,061	10.00	%
Tier 1 capital to risk-weighted assets	$	1,020,488	12.84	%	$	675,802	8.50	%	$	636,049	8.00	%
Common equity tier 1 capital to risk-weighted assets	$	1,020,488	12.84	%	$	556,543	7.00	%	$	516,790	6.50	%
Tier 1 capital to average total assets	$	1,020,488	10.12	%	$	403,339	4.00	%	$	504,174	5.00	%
As of December 31, 2022
Total capital to risk-weighted assets	$	1,028,126	13.61	%	$	793,124	10.50	%	$	755,356	10.00	%
Tier 1 capital to risk-weighted assets	$	933,494	12.36	%	$	642,053	8.50	%	$	604,285	8.00	%
Common equity tier 1 capital to risk-weighted assets	$	933,494	12.36	%	$	528,749	7.00	%	$	490,981	6.50	%
Tier 1 capital to average total assets	$	933,494	9.42	%	$	396,525	4.00	%	$	495,656	5.00	%

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 16 – STOCKHOLDERS’ EQUITY

Common Stock

At both September 30, 2023 and December 31, 2022, 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 September 30, 2023 and December 31, 2022, 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 September 30, 2023 and December 31, 2022, the Bank’s legal surplus amounted to $146.8 million and $133.9 million, respectively. During the nine-month period ended September 30, 2023, OFG transferred $12.9 million to the legal surplus account. 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 for the purchase of up to $100 million of its outstanding shares of common stock. The shares of common stock repurchased are held by OFG as treasury shares. During the nine-month period ended September 30, 2023, OFG repurchased 743,699 shares for a total of $18.7 million at an average price of $25.08 per share. During the nine-month period ended September 30, 2022, OFG repurchased 2,351,868 shares for a total of $64.1 million, at an average price of $27.26 per share.

At September 30, 2023, the number of shares that may yet be purchased under the $100 million program is estimated at 577,260 and was calculated by dividing the remaining balance of $17.2 million by $29.86 (closing price of OFG’s common stock at September 30, 2023).

OFG did not repurchase any shares of its common stock during the nine-month periods ended September 30, 2023 and 2022, other than through its publicly announced stock repurchase program.

The activity in connection with common shares held in treasury by OFG for the nine-month periods ended September 30, 2023 and 2022 is set forth below:


	Nine-Month Period Ended September 30,
	2023			2022
	Shares	Dollar Amount		Shares	Dollar Amount
	(In thousands, except shares data)
Beginning of period	12,303,859	$	211,135	10,248,882	$	150,572
Common shares used upon lapse of restricted stock units and options	(220,130)	(1,414)		(278,788)	(3,544)
Common shares repurchased as part of the stock repurchase programs	743,699	18,653		2,351,868	64,110
End of period	12,827,428	$	228,374	12,321,962	$	211,138

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE LOSS

Accumulated other comprehensive loss, net of income taxes, as of September 30, 2023 and December 31, 2022 consisted of:


	September 30,		December 31,
	2023		2022
	(In thousands)
Unrealized loss on securities available-for-sale	$	(150,480)	$	(110,036)
Income tax effect of unrealized loss on securities available-for-sale	22,803		16,373
Net unrealized loss on securities available-for-sale	(127,677)		(93,663)
Unrealized gain on cash flow hedges	—		406
Income tax effect of unrealized gain on cash flow hedges	—		(152)
Net unrealized gain on cash flow hedges	—		254
Accumulated other comprehensive loss, net of income taxes	$	(127,677)	$	(93,409)

The following table presents changes in accumulated other comprehensive loss by component, net of taxes, for the quarters and nine-month periods ended September 30, 2023 and 2022:


	Quarter Ended September 30, 2023
	Net unrealized loss on securities available-for-sale		Net unrealized gain on cash flow hedges		Accumulated other comprehensive loss
	(In thousands)
Beginning balance	$	(89,639)	$	75	$	(89,564)
Other comprehensive loss before reclassifications	(38,040)		(2,449)		(40,489)
Amounts reclassified out of accumulated other comprehensive loss	2		2,374		2,376
Other comprehensive loss	(38,038)		(75)		(38,113)
Ending balance	$	(127,677)	$	—	$	(127,677)


	Nine-Month Period Ended September 30, 2023
	Net unrealized loss on securities available-for-sale		Net unrealized gain on cash flow hedges		Accumulated other comprehensive loss
	(In thousands)
Beginning balance	$	(93,663)	$	254	$	(93,409)
Other comprehensive loss before reclassifications	(32,871)		(5,647)		(38,518)
Amounts reclassified out of accumulated other comprehensive (loss) income	(1,143)		5,393		4,250
Other comprehensive loss	(34,014)		(254)		(34,268)
Ending balance	$	(127,677)	$	—	$	(127,677)

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	Quarter Ended September 30, 2022
	Net unrealized loss on securities available-for-sale		Net unrealized loss on cash flow hedges		Accumulated other comprehensive loss
	(In thousands)
Beginning balance	$	(49,606)	$	104	$	(49,502)
Other comprehensive loss before reclassifications	(54,541)		(26)		(54,567)
Amounts reclassified out of accumulated other comprehensive income	2		178		180
Other comprehensive (loss) income	(54,539)		152		(54,387)
Ending balance	$	(104,145)	$	256	$	(103,889)


	Nine-Month Period Ended September 30, 2022
	Net unrealized loss on securities available-for-sale		Net unrealized gain on cash flow hedges		Accumulated other comprehensive loss
	(In thousands)
Beginning balance	$	5,663	$	(503)	$	5,160

Other comprehensive (loss) income before reclassifications	(109,814)		204		(109,610)
Amounts reclassified out of accumulated other comprehensive income	6		555		561
Other comprehensive (loss) income	(109,808)		759		(109,049)
Ending balance	$	(104,145)	$	256	$	(103,889)

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents reclassifications out of accumulated other comprehensive loss for the quarters and nine-month periods ended September 30, 2023 and 2022:


	Amount reclassified out of accumulated other comprehensive loss Quarter Ended September 30,				Affected Line Item in Consolidated Statement of Operations

	2023		2022
	(In thousands)
Cash flow hedges:
Interest-rate contracts	$	2,374	$	178		Net interest expense
Available-for-sale securities:

Tax effect from changes in tax rates	2		2			Income tax expense
	$	2,376	$	180

					Affected Line Item in Consolidated Statement of Operations
	Amount reclassified out of accumulated other comprehensive loss nine-month period ended September 30,

	2023		2022
	(In thousands)
Cash flow hedges:
Interest-rate contracts	$	5,393	$	555		Net interest expense
Available-for-sale securities:
Loss on sale of investments	(1,149)		—			Net loss on sale of securities
Tax effect from changes in tax rates	6		6			Income tax expense
	$	4,250	$	561

NOTE 18 – EARNINGS PER COMMON SHARE

The calculation of earnings per common share for the quarters and nine-month periods ended September 30, 2023 and 2022 is as follows:


	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2023		2022		2023		2022
	(In thousands, except per share data)




Income available to common shareholders	$	44,873	$	41,919	$	135,275	$	119,872



Average common shares outstanding	47,114		47,558		47,325		48,188
Effect of dilutive securities:
Average potential common shares-options	278		368		280		406

Total weighted average common shares outstanding and equivalents	47,392		47,926		47,605		48,594
Earnings per common share - basic	$	0.95	$	0.88	$	2.86	$	2.49
Earnings per common share - diluted	$	0.95	$	0.87	$	2.84	$	2.47

Table of Contents

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

For the quarters ended September 30, 2023 and 2022, weighted-average restricted stock units with an anti-dilutive effect on earnings per share not included in the calculation amounted to 245 and zero, respectively. For the nine-month periods ended September 30, 2023 and 2022, weighted-average restricted stock units with an anti-dilutive effect on earnings per share not included in the calculation amounted to 1,791 and 1,070, respectively.

During the first quarter of 2023, OFG increased its quarterly common stock cash dividend to $0.22 per share from $0.20 per share in the quarter ended December 31, 2022.

NOTE 19 – GUARANTEES

At September 30, 2023 and December 31, 2022, the notional amount of the obligations undertaken in issuing the guarantees under standby letters of credit represented a liability of $28.1 million and $24.7 million, respectively.

OFG has a liability for residential mortgage loans sold subject to credit recourse pursuant to FHLMC's, GNMA's, and FNMA's residential mortgage loan sales and securitization programs. On May 1, 2023, OFG and a third-party servicer terminated a subservicing agreement by mutual agreement. Pursuant to such termination, the third-party servicer assumed the direct servicing of the mortgage loans sold subject to credit recourse, thereby relieving OFG of its recourse obligations under such programs.

At September 30, 2023 and December 31, 2022, the unpaid principal balance of residential mortgage loans sold subject to credit recourse under FHLMC's and FNMA's residential mortgage loan sales programs was $101.3 million and $110.9 million, respectively. 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. At September 30, 2023, OFG's liability for estimated credit losses related to loans sold with credit recourse amounted to $175 thousand (December 31, 2022– $147 thousand).

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 nine-month periods ended September 30, 2023 and 2022:


	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2023		2022		2023		2022
	(In thousands)
Balance at beginning of period	$	150	$	174	$	147	$	294
Net recoveries (charge-offs/terminations)	25		(6)		28		(126)
Balance at end of period	$	175	$	168	$	175	$	168

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 September 30, 2023 and 2022, OFG repurchased $251 thousand and $119 thousand, respectively, in mortgage loans. During the nine-month periods ended September 30, 2023 and 2022, OFG repurchased $861 thousand and $1.5 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.

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

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subsequent loss related to the loans. During the quarter ended September 30, 2023, OFG repurchased $2.5 million (September 30, 2022 – $5.0 million) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to the credit recourse provision. During the nine-month period ended September 30, 2023, OFG repurchased $8.9 million (September 30, 2022 –$20.3 million) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to such credit recourse provision. At September 30, 2023 and December 31, 2022, OFG had a $845 thousand and a $1.4 million liability, respectively, for the estimated credit losses related to these loans.

During the quarters ended September 30, 2023 and 2022, OFG recognized $25 thousand and $6 thousand in gains, net of reserves, respectively, from the repurchase of residential mortgage loans sold subject to credit recourse, and $199 thousand in gains and $210 thousand in losses, respectively, from the repurchase of residential mortgage loans as a result of breaches of customary representations and warranties. During the nine-month periods ended September 30, 2023 and 2022, OFG recognized $147 thousand and $127 thousand, respectively, in gains from the repurchase of residential mortgage loans sold subject to credit recourse, and $103 thousand in gains and $261 thousand in losses, respectively, from the repurchase of residential mortgage loans as a result of breaches of customary representations and warranties.

At September 30, 2023, OFG serviced $5.6 billion (December 31, 2022 - $5.8 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 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 guarantee 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 September 30, 2023, the outstanding balance of funds advanced by OFG under such mortgage loan servicing agreements was approximately $4.4 million (December 31, 2022 - $7.8 million). To the extent the mortgage loans underlying OFG’s servicing portfolio experience increased delinquencies, OFG would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

NOTE 20— COMMITMENTS AND CONTINGENCIES

Commitments

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

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

Credit-related financial instruments at September 30, 2023 and December 31, 2022 were as follows:


	September 30,		December 31,
	2023		2022
	(In thousands)
Commitments to extend credit	$	1,291,292	$	1,403,118
Commercial letters of credit	396		1,082

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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 September 30, 2023 and December 31, 2022, commitments to extend credit consisted mainly of undisbursed available amounts on commercial lines of credit, construction loans, and revolving credit card arrangements. Since many of the unused commitments are expected to expire unused or be only partially used, the total amount of these unused commitments does not necessarily represent future cash requirements.

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

The summary of instruments that are considered financial guarantees in accordance with the authoritative guidance related to guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others, at September 30, 2023 and December 31, 2022, is as follows:


	September 30,		December 31,
	2023		2022
	(In thousands)
Standby letters of credit and financial guarantees	$	28,116	$	24,749
Loans sold with recourse	101,343		110,891

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 September 30, 2023 and December 31, 2022, the allowance for credit losses for off-balance sheet credit exposures corresponding to commitments to extend credit and standby letters of credit amounted to $1.2 million and $734 thousand, respectively, and is included in other liabilities in the statement of financial condition.

At September 30, 2023 and December 31, 2022, OFG maintained other non-credit commitments amounting to $19.7 million and $21.5 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 require 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 September 30, 2023 and December 31, 2022, OFG had commitments for capital expenditures in technology amounting to $5.7 million and $8.6 million, respectively.

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

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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 September 30, 2023 and December 31, 2022, this accrued liability amounted to $1.2 million and $2.4 million, respectively. OFG continues to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established.

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

NOTE 21— OPERATING LEASES

Substantially all leases in which OFG is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2038. OFG’s leases do not contain residual value guarantees or 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 September 30,				Nine-Month Period Ended September 30,
	2023		2022		2023		2022		Statement of Operations Classification
	(In thousands)
Lease costs	$	5,130	$	5,188	$	7,738	$	7,851	Occupancy and equipment
Variable lease costs	674		873		1,021		1,157		Occupancy and equipment
Short-term lease cost	335		448		483		730		Occupancy and equipment
Lease income	(62)		(129)		(79)		(181)		Occupancy and equipment
Total lease cost	$	6,077	$	6,380	$	9,163	$	9,557

Operating Lease Assets and Liabilities


	September 30,		December 31,
	2023		2022		Statement of Financial Condition Classification
	(In thousands)
Right-of-use assets	$	20,011	$	25,363	Operating lease right-of-use assets
Lease Liabilities	$	22,269	$	27,370	Operating leases liabilities


	September 30,		December 31,
	2023		2022
	(In thousands)
Weighted-average remaining lease term	4.8 years		5.1 years
Weighted-average discount rate	7.0	%	6.8	%

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Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2023 were as follows:


	Minimum Rent
As of September 30, 2023	(In thousands)
2024	$	2,331
2025	7,512
2026	5,324
2027	3,227
2028	2,377
Thereafter	5,772
Total lease payments	$	26,543
Less imputed interest	4,274
Present value of lease liabilities	$	22,269

OFG, as lessor, leases and subleases real property to tenants under operating leases. As of September 30, 2023, no material lease concessions have been granted to tenants. As of September 30, 2023, OFG, as lessee, has not requested any lease concessions.

NOTE 22 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

Fair Value Measurement

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

Money market investments

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

Investment securities

The fair value of investment securities is based on valuations obtained from an independent pricing provider, ICE Data Pricing (formerly known as IDC) (“ICE”). 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. At December 31, 2022, OFG held one security categorized as other debt that was classified as Level 3. The estimated fair value of this security was determined by using an adjusted third-party model to calculate the present value of projected future cash flows. The assumptions were highly uncertain and included primarily market discount rates and current spread. The assumptions used were drawn from similar securities that were actively traded in the market and have similar risk characteristics. The valuation was performed on a quarterly basis. At September 30, 2023 there were no securities classified as Level 3.

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Derivative instruments

The fair value of the interest rate swaps was largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values were not necessarily indicative of the future impact of derivative instruments on earnings. This depended, 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 was based on observable market parameters, which included 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 accounted for the industry sector and the credit rating of the counterparty and/or OFG. Certain other derivative instruments with limited market activity were valued using externally developed models that considered unobservable market parameters. Based on their valuation methodology, derivative instruments were classified as Level 2. At September 30, 2023 there were no derivative instruments outstanding.

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.

Other repossessed assets

Other repossessed assets are mainly composed of 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:


	September 30, 2023
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
	(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale	$	739	$	1,512,414	$	—	$	1,513,153
Trading securities	—		14		—		14
Money market investments	4,073		—		—		4,073

Servicing assets	—		—		50,601		50,601

	$	4,812	$	1,512,428	$	50,601	$	1,567,841
Non-recurring fair value measurements:
Collateral dependent loans	$	—	$	—	$	8,605	$	8,605
Foreclosed real estate	—		—		9,555		9,555
Other repossessed assets	—		—		4,432		4,432
Mortgage loans held for sale	—		—		564		564
Other loans held for sale	$	—	$	—	25,282		25,282
	$	—	$	—	$	48,438	$	48,438

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	December 31, 2022
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
	(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale	$	309,133	$	1,103,237	$	406	$	1,412,776
Trading securities	—		9		—		9
Money market investments	4,161		—		—		4,161
Derivative assets	—		406		—		406
Servicing assets	—		—		50,921		50,921

	$	313,294	$	1,103,652	$	51,327	$	1,468,273
Non-recurring fair value measurements:
Collateral dependent loans	$	—	$	—	$	8,805	$	8,805
Foreclosed real estate	—		—		11,214		11,214
Other repossessed assets	—		—		4,617		4,617
Mortgage loans held for sale	—		—		19,499		19,499
Other loans held for sale	$	—	$	—	$	21,088	21,088
	$	—	$	—	$	65,223	$	65,223

The fair value information included in the tables above for non-recurring fair value measurements is not as of period-end, except for the mortgage loans held for sale. Instead, it is as of the date that the fair value measurement was recorded during the periods ended September 30, 2023 and December 31, 2022, and excludes nonrecurring fair value measurements of assets no longer outstanding as of the reporting date.

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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 ended September 30, 2023 and 2022:

Level 3 Instruments Only


	Quarter Ended September 30,
	2023						2022
	Other debt securities available for sale		Servicing Assets		Total		Other debt securities available for sale		Servicing Assets		Total
	(In thousands)
Balance at beginning period	$	413	$	49,966	$	50,379	$	1,581	$	49,280	$	50,861
New instruments acquired	—		453		453		376		666		1,042

Principal repayments and amortization	—		(1,060)		(1,060)		—		(1,191)		(1,191)
Instrument converted to equity security	(413)		—		(413)		(1,581)		—		(1,581)
Gains included in earnings	—		1,242		1,242		—		1,306		1,306
Gains included in other comprehensive income	—		—		—		23		—		23
Balance at end of period	$	—	$	50,601	$	50,601	$	399	$	50,061	$	50,460

	Nine-Month Period Ended September 30, 2023
	2023						2022
	Other debt securities available for sale		Servicing Assets		Total		Other debt securities available for sale		Servicing Assets		Total
	(In thousands)
Balance at beginning period	$	406	$	50,921	$	51,327	$	1,530	$	48,973	$	50,503
New instruments acquired	—		1,818		1,818		376		2,935		3,311

Principal repayments and amortization	—		(3,210)		(3,210)		—		(4,168)		(4,168)
Instrument converted to equity security	(406)		—		(406)		(1,581)		—		(1,581)
Gains included in earnings	—		1,072		1,072		—		2,321		2,321
Gains included in other comprehensive income	—		—		—		74		—		74
Balance at end of period	$	—	$	50,601	$	50,601	$	399	$	50,061	$	50,460

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There were no transfers in and/or out of Level 3 for financial instruments measured at fair value on a recurring basis during the quarters and nine-month periods ended September 30, 2023 and 2022.

Servicing assets gains included in earnings during the quarters and nine-month periods ended September 30, 2023 and 2022 were included as mortgage servicing activities in the consolidated statements of operations. For more information on the qualitative information about Level 3 fair value measurements, see Note 7 – Servicing Assets.

During the quarters and nine-month periods ended September 30, 2023 and 2022, there were purchases and sales of assets and liabilities measured at fair value on a recurring basis.

The table below presents quantitative information for all assets and liabilities measured at fair value on a recurring and non-recurring basis using significant unobservable inputs (Level 3) at September 30, 2023 and December 31, 2022:


	September 30, 2023
	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average
	(In thousands)





Servicing assets	$	50,601	Cash flow valuation	Constant prepayment rate	3.33% - 20.40%	5.70	%
				Discount rate	10.00% - 15.50%	11.45	%

Collateral dependent loans	$	8,605	Fair value of property or collateral	Appraised value less disposition costs	10.20% - 33.20%	17.01	%

Foreclosed real estate	$	9,555	Fair value of property or collateral	Appraised value less disposition costs	10.20% - 33.20%	11.62	%

Other repossessed assets	$	4,432	Fair value of property or collateral	Estimated net realizable value less disposition costs	29.00% - 77.00%	59.97	%

Mortgage loans held for sale	$	564	Market prices	Pricing and execution whole loan	94.66% - 97.92%	96.70	%

Other loans held for sale	$	25,282	Bids or sales contract prices	Estimated market value	52.00% - 103.20%	84.80	%

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	December 31, 2022
	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average
	(In thousands)

Other debt securities available-for-sale	$	406	Cash flow valuation	Credit Rating	Baa1 - Baa3	Baa2
				Probability of Default Rate	0.15% - 2.12%	0.15	%
				Recovery Rate	34.73%	34.73	%

Servicing assets	$	50,921	Cash flow valuation	Constant prepayment rate	3.43% - 21.20%	5.66	%
				Discount rate	10.00% - 15.50%	11.45	%

Collateral dependent loans	$	8,805	Fair value of property or collateral	Appraised value less disposition costs	10.20% - 51.20%	17.11	%

Foreclosed real estate	$	11,214	Fair value of property or collateral	Appraised value less disposition costs	10.20% - 33.20%	11.81	%

Other repossessed assets	$	4,617	Fair value of property or collateral	Estimated net realizable value less disposition costs	22.00% - 80.00%	58.49	%

Mortgage loans held for sale	$	19,499	Fair value of property	Estimated net realizable value	83.25% - 102.43%	71.86%

Other loans held for sale	$	21,088	Bids or sales contract prices	Estimated market value	100.00% - 103.20%	74.65%

Information about Sensitivity to Changes in Significant Unobservable Inputs

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

Fair Value of Financial Instruments

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

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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 include 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 September 30, 2023 and December 31, 2022 was as follows:


	September 30,				December 31,
	2023				2022
	Fair Value		Carrying Value		Fair Value		Carrying Value
	(In thousands)

Financial Assets:
Level 1
Cash and cash equivalents	$	532,699	$	532,699	$	550,307	$	550,307
Restricted cash	$	—	$	—	$	157	$	157
Investment securities available-for-sale	$	739	$	739	$	309,133	$	309,133
Level 2
Financial Assets:
Trading securities	$	14	$	14	$	9	$	9
Investment securities available-for-sale	$	1,512,414	$	1,512,414	$	1,103,237	$	1,103,237
Investment securities held-to-maturity	$	441,759	$	519,145	$	469,186	$	535,070

Federal Home Loan Bank (FHLB) stock	$	18,988	$	18,988	$	6,005	$	6,005
Equity securities	$	23,174	$	23,174	$	17,662	$	17,662
Derivative assets	$	—	$	—	$	406	$	406


Level 3
Financial Assets:
Investment securities available for sale	$	—	$	—	$	406	$	406

Total loans, net of allowance for credit losses	$	6,916,132	$	7,130,052	$	6,467,878	$	6,723,236
Accrued interest receivable	$	67,868	$	67,868	$	62,402	$	62,402
Servicing assets	$	50,601	$	50,601	$	50,921	$	50,921
Accounts receivable and other assets	$	48,096	$	48,096	$	61,014	$	61,014
Financial Liabilities:
Deposits	$	8,545,617	$	8,541,553	$	8,556,300	$	8,568,364
Securities sold under agreements to repurchase	$	150,658	$	150,701	$	—	$	—
Advances from FHLB	$	297,532	$	300,774	$	26,716	$	26,716
Other borrowings	$	—	$	—	$	318	$	318

Accrued expenses and other liabilities	$	115,394	$	115,394	$	124,999	$	124,999

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following methods and assumptions were used to estimate the fair values of significant financial instruments at September 30, 2023 and December 31, 2022:

•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 in other debt securities available for sale outstanding at December 31, 2022 was 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 were highly uncertain and required a high degree of judgment, included primarily market discount rates, current spreads, duration, leverage, default, and loss rates. The assumptions used were drawn from a wide array of data sources, including the performance of the collateral underlying each deal. The valuation, which was obtained at least on a quarterly basis, was analyzed and its assumptions were 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 outstanding at December 31, 2022, which included interest rate swaps and forward-settlement swaps, were 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 were based on the forward yield curve and discounted using current estimated market rates.

•The fair value of the loan portfolio (including non-performing loans) is based on the exit market price, which is estimated by segregating by type, such as mortgage, commercial, consumer, and auto loans. 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 other loans held for sale is based on bids or sales prices agreed with third parties.

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

•The fair value of long-term borrowings, which include securities sold under agreements to repurchase and advances from FHLB 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 23 – BANKING AND FINANCIAL SERVICE REVENUES

The following table presents the major categories of banking and financial service revenues for the quarters and nine-month periods ended September 30, 2023 and 2022:


	Quarter Ended September 30,				Nine-Month Period Ended September 30,
	2023		2022		2023		2022
	(In thousands)				(In thousands)
Banking service revenues:
Electronic banking fees	$	13,447	$	13,335	$	40,416	$	40,509
Checking accounts fees	2,233		2,332		6,638		6,702
Savings accounts fees	333		332		993		937
Credit life commissions	90		70		314		665
Branch service commissions	352		319		1,098		979
Servicing and other loan fees	668		621		2,251		2,427
International fees	174		217		536		702
Miscellaneous income	6		8		10		16
Total banking service revenues	17,303		17,234		52,256		52,937

Wealth management revenue:
Insurance income	3,607		3,906		11,146		10,758
Broker fees	1,945		1,601		5,525		5,204
Trust fees	2,139		2,489		6,298		7,796
Retirement plan and administration fees	—		177		36		542

Total wealth management revenue	7,691		8,173		23,005		24,300

Mortgage banking activities:
Net servicing fees	4,764		5,206		12,256		13,408
Net gains on sale of mortgage loans and valuation	450		(116)		2,009		2,192
Net gain (loss) on repurchased loans and other	196		(199)		268		(124)
Total mortgage banking activities	5,410		4,891		14,533		15,476
Total banking and financial service revenues	$	30,404	$	30,298	$	89,794	$	92,713

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

Banking Service Revenues

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

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

Wealth Management Revenue

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

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Brokers fees consist of two categories:

•Sales commissions generated by advisers 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 advisers’ 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. The 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. Effective December 31, 2022, OFG sold its retirement plan administration business which was operated under OPC, which thereafter ceased its operations.

Mortgage Banking Activities

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

NOTE 24 – BUSINESS SEGMENTS

OFG segregates its businesses into the following 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 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 loans, 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 up to December 31, 2022, when OPC sold its retirement plan administration business.

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.

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Following are the results of operations and the selected financial information by operating segment for the quarters and nine-month periods ended September 30, 2023 and 2022:


	Quarter Ended September 30, 2023
	Banking		Wealth Management		Treasury		Total Major Segments		Eliminations		Consolidated Total
	(In thousands)
Interest income	$	145,667	$	8	$	23,905	$	169,580	$	(3,872)	$	165,708
Interest expense	(20,662)		—		(7,131)		(27,793)		3,872		(23,921)
Net interest income	125,005		8		16,774		141,787		—		141,787
Provision for credit losses	16,371		—		59		16,430		—		16,430
Non-interest income	23,211		7,487		1		30,699		—		30,699
Non-interest expenses	(85,536)		(3,778)		(844)		(90,158)		—		(90,158)
Intersegment revenue	487		—		—		487		(487)		—
Intersegment expenses	—		(337)		(150)		(487)		487		—
Income before income taxes	46,796		3,380		15,722		65,898		—		65,898
Income tax expense (benefit)	20,994		(4)		35		21,025		—		21,025
Net income	$	25,802	$	3,384	$	15,687	$	44,873	$	—	$	44,873
Total assets	$	8,742,283	$	34,380	$	2,523,536	$	11,300,199	$	(1,043,061)	$	10,257,138


	Nine-Month Period Ended September 30, 2023
	Banking		Wealth Management		Treasury		Total		Eliminations		Consolidated Total
	(In thousands)
Interest income	$	418,091	$	19	$	67,872	$	485,982	$	(13,301)	$	472,681
Interest expense	(48,867)		—		(19,787)		(68,654)		13,301		(55,353)
Net interest income	369,224		19		48,085		417,328		—		417,328
Provision for credit losses	40,828		—		91		40,919		—		40,919
Non-interest income	68,190		22,631		(1,148)		89,673		—		89,673
Non-interest expenses	(254,777)		(11,871)		(2,618)		(269,266)		—		(269,266)
Intersegment revenue	1,610		—		—		1,610		(1,610)		—
Intersegment expenses	—		(1,096)		(514)		(1,610)		1,610		—
Income before income taxes	$	143,419	$	9,683	$	43,714	$	196,816	$	—	$	196,816
Income tax expense	61,463		16		62		61,541		—		61,541
Net income	$	81,956	$	9,667	$	43,652	$	135,275	$	—	$	135,275
Total assets	$	8,742,283	$	34,380	$	2,523,536	$	11,300,199	$	(1,043,061)	$	10,257,138

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OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

and are eliminated in the consolidation. Interest income is accrued on the unpaid principal balance. The increase in interest income and interest expense from the prior year period was mainly as a result of Federal Open Market Committee of the Board of Governors of the Federal Reserve System (“FRB”) federal funds rate increases and higher average balance.


	Quarter Ended September 30, 2022
	Banking		Wealth Management		Treasury		Total Major Segments		Eliminations		Consolidated Total
	(In thousands)
Interest income	$	117,939	$	6	$	18,829	$	136,774	$	(2,099)	$	134,675
Interest expense	(7,891)		—		(2,373)		(10,264)		2,099		(8,165)
Net interest income	110,048		6		16,456		126,510		—		126,510
Provision for credit losses	7,059		—		61		7,120		—		7,120
Non-interest income	22,310		8,310		—		30,620		—		30,620
Non-interest expenses	(82,026)		(4,635)		(831)		(87,492)		—		(87,492)
Intersegment revenue	588		—		—		588		(588)		—
Intersegment expenses	—		(412)		(176)		(588)		588		—
Income before income taxes	43,861		3,269		15,388		62,518		—		62,518
Income tax expense	20,589		1		9		20,599		—		20,599
Net income	$	23,272	$	3,268	$	15,379	$	41,919	$	—	$	41,919
Total assets	$	8,179,384	$	27,839	$	2,823,826	$	11,031,049	$	(972,870)	$	10,058,179


	Nine-Month Period Ended September 30, 2022
	Banking		Wealth Management		Treasury		Total		Eliminations		Consolidated Total
	(In thousands)
Interest income	$	337,017	$	16	$	35,787	$	372,820	$	(2,974)	$	369,846
Interest expense	(21,796)		—		(4,226)		(26,022)		2,974		(23,048)
Net interest income	315,221		16		31,561		346,798		—		346,798
Provision for (recapture of) credit losses	15,403		—		(41)		15,362		—		15,362
Non-interest income	73,662		24,724		50		98,436		—		98,436
Non-interest expenses	(237,477)		(14,015)		(2,413)		(253,905)		—		(253,905)
Intersegment revenue	1,645		—		—		1,645		(1,645)		—
Intersegment expenses	—		(1,131)		(514)		(1,645)		1,645		—
Income before income taxes	$	137,648	$	9,594	$	28,725	$	175,967	$	—	$	175,967
Income tax expense	56,067		1		27		56,095		—		56,095
Net income	$	81,581	$	9,593	$	28,698	$	119,872	$	—	$	119,872
Total assets	$	8,179,384	$	27,839	$	2,823,826	$	11,031,049	$	(972,870)	$	10,058,179

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 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 section 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 and set forth in our annual report for the year ended December 31, 2022 (the “2022 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 2021 results where it would be redundant to the discussion previously included in Item 2 of our Form 10-Q for the quarter ended September 30, 2022.

Other factors not identified above, including those described under the headings in our 2022 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, auto leasing and 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 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-two 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. On December 31, 2022, OFG sold its retirement plan administration business which was operated under the OPC subsidiary and OPC thereafter ceased its operations. Comparative results for the quarter and nine-month period ended September 30, 2022 include these operations. 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 and reinsurance). 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

Economic Conditions

We believe that Puerto Rico’s economy continues to demonstrate resiliency and growth and that Puerto Rico’s private sector is expanding. The Puerto Rico Economic Activity Index, as published by the Economic Development Bank for Puerto Rico, in July 2023 increased 3.5% year-over-year and retail sales in July increased 3.8% year-over-year and, according to the data published by Economic Development Bank for Puerto Rico, wages are rising and labor participation is increasing. Total non-farm payroll employment in August 2023 improved 3.5% year-over-year and total employment rose 2.5% from July 2022 to August 2023. The inflow of federal stimulus and reconstruction funds for rebuilding infrastructure has continued. Nevertheless, OFG continues to pay attention to the potential impact of interest rate changes, inflation, and a possible U.S. mainland recession.

Industry Developments

Recent events impacting the financial services industry, particularly the failures and regulatory takeovers of three high-profile banks during the first half of 2023, resulted at that time in decreased general confidence in banks among consumer and commercial depositors, other counterparties and investors, as well as significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets. Despite these negative industry developments, we believe that high levels of liquidity and capital place OFG in a strong position in today’s banking environment. OFG's customer deposits have remained stable at $8.5 billion. During the first half of 2023, OFG took a number of preemptive actions, which included pro-active outreach to clients and a review of its borrowing and liquidity positions with the goal of ensuring that OFG is adequately positioned to best serve its clients. Furthermore, we believe that OFG’s capital remains at high levels with CET1 and total capital ratios of 14.06% and 15.31%, respectively, as of September 30, 2023.

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 2022 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 2022 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. As part of OFG’s continuous enhancement to the allowance for credit losses methodology, during the nine-month period ended September 30, 2023, an assessment of the weight of probability scenarios for the US loan segment was performed and updated to use a higher probability level in the moderate recessionary scenario. This change in the allowance for credit losses is considered a change in accounting estimate as per ASC 250-10 provisions, where adjustments should be made prospectively. Apart from the foregoing change, there have been no material changes in the methods that we used to formulate these critical accounting estimates from those discussed in our 2022 Form 10-K.

FINANCIAL HIGHLIGHTS

The third quarter results reflected year-over-year increases of 10% in core revenues and 9% in earnings per share. The period was highlighted by continued loan growth, stable core deposits, low cumulative deposit beta of 19%, increased operating leverage and strong performance metrics. We believe that OFG continues to benefit from overall higher interest rates and benign credit as economic activity in Puerto Rico continues to do well.

OFG’s self-service portal, launched earlier this year as part of our “Digital First” strategy, has been expanded to include more features and is rapidly being adopted by our customers. We believe that this is resulting in a growing number of digital transactions, enabling us to better meet the needs of the customers and communities that we serve.

Earnings per share diluted of $0.95 compared to $0.93 in the second quarter of 2023 and $0.87 in the third quarter of 2022. Total core revenues of $172.2 million compared to $170.5 million in the second quarter of 2023 and $156.8 million in the third quarter of 2022.

Performance metrics: Net interest margin of 5.80%, return on average assets of 1.76%, return on average tangible common stockholders’ equity of 17.59%, and efficiency ratio of 52.36%.

Net interest income of $141.8 million compared to $139.6 million in the second quarter of 2023 and $126.5 million in the third quarter of 2022. The third quarter of 2023 reflected the full effect of the 25 basis point increase in the FRB federal funds rate in the second quarter and a partial effect of the 25 basis points increase in the third quarter.

Total interest income of $165.7 million compared to $158.0 million in the second quarter of 2023 and $134.7 million in the third quarter of 2022. Compared to the second quarter of 2023, the third quarter of 2023 primarily reflected higher yields (7.84% vs. 7.76%) on increased average balances of loans and higher yields on variable rate loans.

Total interest expense of $23.9 million compared to $18.3 million in the second quarter of 2023 and $8.2 million in the third quarter of 2022. Compared to the second quarter of 2023, the third quarter of 2023 reflected higher cost of funds (1.07% vs. 0.84%) on increased average balances of deposits and borrowings.

Total banking and financial service revenues of $30.4 million compared to $30.9 million in the second quarter of 2023 and $30.3 million in the third quarter of 2022.

Pre-provision net revenues of $82.3 million compared to $80.8 million in the second quarter of 2023 and $69.6 million in the third quarter of 2022.

Total provision for credit losses of $16.4 million compared to $15.0 million in the second quarter of 2023 and $7.1 million in the third quarter of 2022. The third quarter of 2023 included $11.4 million due to increased loan volume, $4.1 million in qualitative adjustment, and $0.7 million for a specific reserve for the sale of a small portfolio of non-performing Puerto Rico small business commercial loans.

Credit quality: Net charge-offs of $18.8 million compared to $6.6 million in the second quarter of 2023 and $11.3 million in the third quarter of 2022. The third quarter of 2023 included $6.9 million for two loans previously and substantially reserved. The second quarter of 2023 included a recovery of $3.7 million from the sale of older, fully charged off auto and consumer loans. Early and total delinquency rates of 2.75% and 3.78%, respectively, and the non-performing loan rate of 1.33% were in the lower ranges seen over the last five quarters.

Total non-interest expense of $90.2 million compared to $88.9 million in the second quarter of 2023 and $87.5 million in the third quarter of 2022. Compared to the second quarter of 2023, the third quarter of 2023 operating expense decreased $1.3 million, due to a lower gain on sale of foreclosed real estate partially offset by lower general and administrative expenses.

Loans held for investment of $7.26 billion compared to $7.12 billion in the second quarter of 2023 and $6.68 billion in the third quarter of 2022. Loans increased 2.0% from the previous quarter and 8.6% year-over-year, reflecting increases in Puerto Rico and US commercial loans and retail auto and consumer loans.This was partially offset by regular paydowns of residential mortgages.

New loan production of $562.5 million compared to $691.8 million in the second quarter of 2023 and $511.3 million in the third quarter of 2022. The third quarter of 2023 reflected continued strong levels of auto, commercial and consumer lending.

Total investments of $2.07 billion compared to $1.70 billion in the second quarter of 2023 and $2.04 billion in the third quarter of 2022. The third quarter of 2023 investments increased from the previous quarter reflecting the purchase of $450.0 million fixed-rate mortgage-backed securities partly offset by regular repayments.

Customer deposits of $8.54 billion compared to $8.54 billion in the second quarter of 2023 and $8.84 billion in the third quarter of 2022.

Total borrowings of $451.5 million compared to $226.5 million in the second quarter of 2023 and $27.3 million in the third quarter of 2022. The increase in total borrowings reflects a new two-year FHLB advance amounting to $200.0 million, increases in FHLB overnight advance to $100.0 million and new repurchase agreements amounting to $150.7 million.

Cash and cash equivalents of $532.7 million compared to $799.0 million in the second quarter of 2023 and $815.4 million in the third quarter of 2022. Compared to the second quarter of 2023, the third quarter of 2023 cash reflected new purchases of MBS.

Total assets of $10.26 billion at September 30, 2023 compared to $10.03 billion at June 30, 2023 and $10.06 billion at September 30, 2022.

Capital: CET1 ratio of 14.03% level with the second quarter of 2023 and 13.38% in the third quarter of 2022. The Tangible Common Equity ratio was 9.74% compared to 9.99% in the second quarter of 2023 and 8.83% in the third quarter of 2022. Tangible Book Value per share of $21.01 compared to $21.06 in the second quarter of 2023 and $18.46 in the third quarter of 2022.

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





	Quarter Ended September 30,							Nine-Month Period Ended September 30,
	2023			2022			Variance %	2023			2022			Variance %
EARNINGS DATA:	(In thousands, except per share data)
Interest income	$	165,708		$	134,675		23.0%	$	472,681		$	369,846		27.8%
Interest expense	23,921			8,165			193.0%	55,353			23,048			140.2%
Net interest income	141,787			126,510			12.1%	417,328			346,798			20.3%
Provision for credit losses	16,430			7,120			130.8%	40,919			15,362			166.4%
Net interest income after provision for credit losses	125,357			119,390			5.0%	376,409			331,436			13.6%
Non-interest income	30,699			30,620			0.3%	89,673			98,436			(8.9)%
Non-interest expenses	90,158			87,492			3.0%	269,266			253,905			6.0%
Income before taxes	65,898			62,518			5.4%	196,816			175,967			11.8%
Income tax expense	21,025			20,599			2.1%	61,541			56,095			9.7%


Income available to common shareholders	$	44,873		$	41,919		7.0%	$	135,275		$	119,872		12.8%
PER SHARE DATA:
Basic	$	0.95		$	0.88		8.0%	$	2.86		$	2.49		14.9%
Diluted	$	0.95		$	0.87		9.2%	$	2.84		$	2.47		15.0%
Average common shares outstanding	47,114			47,558			(0.9)%	47,325			48,188			(1.8)%
Average common shares outstanding and equivalents	47,392			47,926			(1.1)%	47,605			48,594			(2.0)%
Cash dividends declared per common share	$	0.22		0.20			10.0%	$	0.66		0.50			32.0%
Cash dividends declared on common shares	$	10,242		9,388			9.1%	$	31,307		24,012			30.4%

PERFORMANCE RATIOS:
Return on average assets (ROA)	1.76		%	1.65		%	6.7%	1.80		%	1.57		%	14.6%
Return on average tangible common stockholders’ equity	17.59		%	18.05		%	(2.5)%	18.11		%	17.20		%	5.3%
Return on average common equity (ROE)	15.92		%	16.03		%	(0.7)%	16.32		%	15.25		%	7.0%

Efficiency ratio	52.36		%	55.80		%	(6.2)%	53.10		%	57.77		%	(8.1)%
Interest rate spread	5.71		%	5.21		%	9.6%	5.78		%	4.82		%	19.9%
Interest rate margin	5.80		%	5.23		%	10.9%	5.85		%	4.84		%	20.9%


	September 30,			December 31,			Variance
	2023			2022			%
PERIOD END BALANCES AND CAPITAL RATIOS:	(In thousands, except per share data)
Investments and loans
Investment securities	$	2,074,474		$	1,971,522		5.2%
Loans, net	7,130,052			6,723,236			6.1%
Total investments and loans	$	9,204,526		$	8,694,758		5.9%
Deposits and borrowings
Deposits	$	8,541,553		$	8,568,364		(0.3)%
Securities sold under agreements to repurchase	150,701			—			100.0%
Other borrowings	300,774			27,034			1012.6%
Total deposits and borrowings	$	8,993,028		$	8,595,398		4.6%
Stockholders’ equity

Common stock	59,885			59,885			—%
Additional paid-in capital	637,389			636,793			0.1%
Legal surplus	146,774			133,901			9.6%
Retained earnings	607,466			516,371			17.6%
Treasury stock, at cost	(228,374)			(211,135)			8.2%
Accumulated other comprehensive loss	(127,677)			(93,409)			36.7%
Total stockholders’ equity	$	1,095,463		$	1,042,406		5.1%
Per share data
Book value per common share	$	23.28		$	21.91		6.3%
Tangible book value per common share	$	21.01		$	19.56		7.4%
Market price	$	29.86		$	27.56		8.3%
Capital ratios
Leverage capital	11.03		%	10.36		%	6.5%
Common equity Tier 1 capital	14.06		%	13.64		%	3.1%
Tier 1 risk-based capital	14.06		%	13.64		%	3.1%
Total risk-based capital	15.31		%	14.89		%	2.8%
Financial assets managed
Trust assets managed	$	2,351,823		$	2,334,672		0.7%
Broker-dealer assets managed	2,305,520			2,172,116			6.1%
Total assets managed	$	4,657,343		$	4,506,788		3.3%

ANALYSIS OF RESULTS OF OPERATIONS

The following tables show major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for the quarters and nine-month periods ended September 30, 2023 and 2022.

TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE FOR THE QUARTERS ENDED SEPTEMBER 30, 2023 AND 2022


	Interest				Average rate				Average balance
	September 2023		September 2022		September 2023		September 2022		September 2023		September 2022
	(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets	$	165,708	$	134,675	6.78	%	5.57	%	$	9,702,167	$	9,597,670
Tax equivalent adjustment	3,440		3,980		0.14	%	0.16	%	—		—
Interest-earning assets - tax equivalent	169,148		138,655		6.92	%	5.73	%	9,702,167		9,597,670
Interest-bearing liabilities	23,922		8,165		1.07	%	0.36	%	8,888,033		8,962,730
Tax equivalent net interest income / spread	145,226		130,490		5.85	%	5.37	%	814,134		634,940
Tax equivalent interest rate margin					5.99	%	5.53	%
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities	14,544		12,774		3.18	%	2.71	%	1,830,060		1,883,209
Interest bearing cash and money market investments	9,025		5,661		5.26	%	2.21	%	680,864		1,016,561
Total investments	23,569		18,435		3.72	%	2.52	%	2,510,924		2,899,770
Non-PCD loans
Mortgage	8,302		9,253		5.45	%	5.48	%	609,664		675,664
Commercial	52,783		35,695		7.88	%	5.94	%	2,657,344		2,382,724
Consumer	18,193		15,368		11.46	%	11.33	%	629,780		537,883
Auto	45,569		37,361		8.34	%	8.09	%	2,169,034		1,832,581
Total Non-PCD loans	124,847		97,677		8.17	%	7.14	%	6,065,822		5,428,852
PCD loans
Mortgage	14,563		15,828		6.02	%	5.85	%	966,973		1,082,233
Commercial	2,614		2,492		6.75	%	5.60	%	154,930		178,125
Consumer	24		34		13.25	%	13.44	%	712		1,015
Auto	91		209		12.97	%	10.90	%	2,806		7,675
Total PCD loans	17,292		18,563		6.15	%	5.85	%	1,125,421		1,269,048
Total loans (1)	142,139		116,240		7.84	%	6.89	%	7,191,243		6,697,900
Total interest-earning assets	165,708		134,675		6.78	%	5.57	%	9,702,167		9,597,670

Interest-bearing liabilities:
Deposits:
NOW Accounts	6,974		2,927		1.13	%	0.41	%	2,445,955		2,799,234
Savings and money market	5,478		1,733		0.96	%	0.29	%	2,260,678		2,388,072
Time deposits	7,015		1,679		2.09	%	0.61	%	1,333,132		1,097,470
Total core deposits	19,467		6,339		1.28	%	0.40	%	6,039,765		6,284,776
Brokered deposits	32		9		5.30	%	0.30	%	2,400		11,366
	19,499		6,348		1.28	%	0.40	%	6,042,165		6,296,142
Non-interest bearing deposits	—		—		—		—		2,581,887		2,639,313


	Interest				Average rate				Average balance
	September 2023		September 2022		September 2023		September 2022		September 2023			September 2022
	(Dollars in thousands)
Fair value premium and core deposit intangible amortizations	1,321		1,639		—	%	—	%	—			—
Total deposits	20,820		7,987		0.96	%	0.35	%	8,624,052			8,935,455
Borrowings:
Securities sold under agreements to repurchase	728		—		5.52	%	—	%	52,365			—
Advances from FHLB and other borrowings	2,374		178		4.45	%	2.59	%	211,616			27,726

Total borrowings	3,102		178		—	%	2.59	%	263,981			27,726
Total interest-bearing liabilities	23,922		8,165		1.07	%	0.36	%	8,888,033			8,963,181
Net interest income / spread	$	141,786	$	126,510	5.71	%	5.21	%
Interest rate margin					5.80	%	5.23	%
Excess of average interest-earning assets over average interest-bearing liabilities									$	814,134		$	634,489
Average interest-earning assets to average interest-bearing liabilities ratio									109.16		%	106.99		%

(1) Includes loans held for sale and excludes allowance for credit losses. Nonperforming loans are included in the respective average loan balances. Income on these nonperforming loans is generally recognized on a cost recovery basis

C - CHANGES IN NET INTEREST INCOME DUE TO:


	Volume		Rate		Total
	(In thousands)
Interest Income:
Investment securities	$	(554)	$	2,324	$	1,770
Interest bearing cash and money market investments	(2,496)		5,860		3,364
Loans	10,745		15,154		25,899
Total interest income	7,695		23,338		31,033
Interest Expense:
NOW Accounts	(417)		4,464		4,047
Savings and money market	(99)		3,844		3,745
Time deposits	574		4,762		5,336
Brokered deposits	(12)		35		23
Fair value premium and core deposit intangible amortizations	—		(318)		(318)
Securities sold under agreements to repurchase	364		364		728
Advances from FHLB and other borrowings	1,988		208		2,196

Total interest expense	2,398		13,359		15,757
Net Interest Income	$	5,297	$	9,979	$	15,276

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

FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2023 AND 2022


	Interest				Average rate				Average balance
	September 2023		September 2022		September 2023		September 2022		September 2023		September 2022
	(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets	$	472,681	$	369,846	6.62	%	5.16	%	$	9,539,389	$	9,583,964
Tax equivalent adjustment	12,013		9,446		0.17	%	0.13	%	—		—
Interest-earning assets - tax equivalent	484,694		379,292		6.79	%	5.29	%	9,539,389		9,583,964
Interest-bearing liabilities	55,352		23,048		0.84	%	0.34	%	8,772,357		8,937,864
Tax equivalent net interest income / spread	429,342		356,244		5.95	%	4.95	%	767,032		646,100
Tax equivalent interest rate margin					6.12	%	5.08	%
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities	42,214		25,110		3.03	%	2.35	%	1,855,120		1,423,120
Interest bearing cash and money market investments	24,499		9,574		4.94	%	0.83	%	662,813		1,541,036
Total investments	66,713		34,684		3.54	%	1.56	%	2,517,933		2,964,156
Non-PCD loans
Mortgage	25,528		28,192		5.47	%	5.45	%	622,102		690,224
Commercial	144,907		97,371		7.60	%	5.59	%	2,550,301		2,327,424
Consumer	51,645		42,282		11.41	%	11.27	%	605,043		501,574
Auto	128,796		108,251		8.27	%	8.19	%	2,083,216		1,767,922
Total Non-PCD loans	350,876		276,096		8.00	%	6.98	%	5,860,662		5,287,144
PCD loans
Mortgage	46,030		50,587		6.18	%	5.99	%	993,261		1,126,754
Commercial	8,670		7,595		5.32	%	5.19	%	162,999		195,182
Consumer	74		123		13.33	%	14.00	%	745		1,167
Auto	318		761		8.39	%	10.63	%	3,789		9,561
Total PCD loans	55,092		59,066		6.33	%	5.91	%	1,160,794		1,332,664
Total loans (1)	405,968		335,162		7.73	%	6.77	%	7,021,456		6,619,808
Total interest-earning assets	472,681		369,846		6.62	%	5.16	%	9,539,389		9,583,964


	Interest				Average rate				Average balance
	September 2023		September 2022		September 2023		September 2022		September 2023			September 2022
	(Dollars in thousands)
Interest-bearing liabilities:
Deposits:
NOW Accounts	16,159		7,241		0.88	%	0.36	%	2,466,113			2,807,838
Savings and money market	12,742		4,220		0.76	%	0.24	%	2,238,866			2,311,568
Time deposits	16,328		5,570		1.71	%	0.65	%	1,273,928			1,147,404
Total core deposits	45,229		17,031		1.01	%	0.36	%	5,978,907			6,266,810
Brokered deposits	40		26		1.27	%	0.30	%	4,181			11,366
	45,269		17,057		1.01	%	0.31	%	5,983,088			6,278,176
Non-interest bearing deposits	—		—		—	%	—	%	2,603,735			2,626,663
Fair value premium and core deposit intangible amortizations	3,962		4,915		—	%	—	%	—			—
Total deposits	49,231		21,972		0.77	%	0.33	%	8,586,823			8,904,839
Borrowings:
Securities sold under agreements to repurchase	728		—		5.52	%	—	%	17,647			—
Advances from FHLB and other borrowings	5,393		555		4.29	%	2.67	%	167,887			27,725
Subordinated capital notes	—		521		—	%	13.15	%	—			5,300
Total borrowings	6,121		1,076		4.41	%	4.35	%	185,534			33,025
Total interest-bearing liabilities	55,352		23,048		0.84	%	0.34	%	8,772,357			8,937,864
Net interest income / spread	$	417,329	$	346,798	5.78	%	4.82	%
Interest rate margin					5.85	%	4.84	%
Excess of average interest-earning assets over average interest-bearing liabilities									$	767,032		$	646,100
Average interest-earning assets to average interest-bearing liabilities ratio									108.74		%	107.30		%

(1) Includes loans held for sale and excludes allowance for credit losses. Nonperforming loans are included in the respective average loan balances. Income on these nonperforming loans is generally recognized on a cost recovery basis.

C - CHANGES IN NET INTEREST INCOME DUE TO:


	Volume		Rate		Total
	(In thousands)
Interest Income:
Investment securities	$	9,490	$	7,614	$	17,104
Interest-bearing cash and money market investments	(8,337)		23,262		14,925
Loans	26,814		43,992		70,806
Total interest income	27,967		74,868		102,835
Interest Expense:
NOW Accounts	(981)		9,899		8,918
Savings and money market	(138)		8,660		8,522
Time deposits	858		9,900		10,758
Brokered deposits	(25)		39		14
Fair value premium and core deposit intangible amortizations	—		(953)		(953)
Securities sold under agreements to repurchase	364		364		728
Advances from FHLB and other borrowings	4,320		518		4,838
Subordinated capital notes	(261)		(260)		(521)
Total interest expense	4,137		28,167		32,304
Net Interest Income	$	23,830	$	46,701	$	70,531

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 September 30, 2023 and 2022

Net interest income of $141.8 million increased $15.3 million from $126.5 million. Tax equivalent basis net interest income of $145.2 million increased $14.7 million, or 11.3%, from $130.5 million.

Interest rate spread increased 50 basis points to 5.71% from 5.21% and net interest margin increased 57 basis points to 5.80% from 5.23%. This increase reflects an increase of 121 and 71 basis points, respectively, in the total average yield of interest-earning assets and the average cost of interest-bearing liabilities.

Net interest income was positively impacted by:

•An increase of $25.9 million in interest income from loans, primarily driven by: (i) higher interest income from commercial loans by $17.2 million, reflecting the upward repricing of variable rate commercial loans and increased yields on new loans originated during 2023; (ii) higher interest income from auto loans by $8.1 million, mainly due to an increase in the average balance of this portfolio by approximately $331.6 million; and (iii) higher interest income from consumer loans by $2.8 million, mainly due to an increase in the average balance of this portfolio of approximately $91.6 million. These increases were partially offset by lower interest income from residential mortgage loans by $2.2 million, reflecting a decrease in the average balance of this portfolio by approximately $181.3 million;

•An increase of $3.4 million in interest income from a higher yield in lower balances of interest-bearing cash and money market investments related to increases in the FRB federal funds rate. The FRB federal funds target rates increased from a range of 3.00% to 3.25% in the third quarter of 2022 to a range of 5.25% to 5.50% in the third quarter of 2023; and

•An increase of $1.8 million in interest income from investments securities, primarily related to higher yield by 47 basis points, which contributed to an increase in interest income of approximately $2.3 million.

These increases were partially offset by higher interest expense by $15.8 million from (i) deposits of $12.8 million due to higher average cost of total deposits of 61 basis points, (ii) advances from the FHLB of $2.9 million and (iii) repurchase agreements of $728 thousand originated during the third quarter of 2023.

Comparison of the nine-month periods ended September 30, 2023 and 2022

Net interest income of $417.3 million increased by $70.5 million from $346.8 million. Tax equivalent basis net interest income of $429.3 million increased $73.1 million, or 20.5%, from $356.2 million.

Interest rate spread increased by 96 basis points to 5.78% from 4.82% and net interest margin increased 101 basis points to 5.85% from 4.84%. This increase reflects an increase of 146 and 50 basis points, respectively, in the total average yield of interest-earning assets and the average cost of interest-bearing liabilities.

Net interest income was positively impacted by:

•A $70.8 million increase in interest income from loans driven by: (i) higher interest income from commercial loans of $48.6 million, primarily related to the upward repricing of variable rate commercial loans and increased yields on new loans originated during 2023; (ii) higher interest income from consumer loans of $9.3 million mainly due to an increase of $103.0 million in the average balance of this portfolio; and (iii) higher interest income from auto loans of $20.1 million reflecting higher originations during 2023, partially offset by a decrease of $7.2 million in interest income from mortgage loans due to a reduction of $201.6 million in the average balance of this portfolio;

•A $17.1 million increase in interest income from investment securities, primarily related to a higher average volume of $432.0 million, which resulted in an increase in interest income of approximately $9.5 million, and higher yield by 68 basis points, which contributed to the increase in net interest income by approximately $7.6 million; and

•A $14.9 million increase in interest income from higher yield in lower balances of interest-bearing cash and money market related to the increase in the FRB federal funds rate during 2022 and 2023.

These increases were partially offset by higher interest expense of $32.3 million from (i) deposits of $27.3 million due to higher average cost of total deposits of 44 basis points, (ii) advances from the FHLB of $5.0 million and (iii) repurchase agreements of $728 thousand originated during the third quarter of 2023, partially offset by the early redemption of $36.1 million subordinated capital notes during the first quarter of 2022, which resulted in a decrease in interest expense of $521 thousand.

TABLE 2 - NON-INTEREST INCOME SUMMARY


	Quarter Ended September 30,						Nine-Month Period Ended September 30,
	2023		2022		Variance %		2023		2022		Variance %
	(In thousands)						(In thousands)
Banking service revenue	$	17,303	$	17,234	0.4	%	$	52,256	$	52,937	(1.3)	%
Wealth management revenue	7,691		8,173		(5.9)	%	23,005		24,300		(5.3)	%
Mortgage banking activities	5,410		4,891		10.6	%	14,533		15,476		(6.1)	%
Total banking and financial service revenue	30,404		30,298		0.3	%	89,794		92,713		(3.1)	%
Net (loss) gain on:
Sale of securities	—		—		—	%	(1,149)		—		(100.0)	%
Early extinguishment of debt	—		—		—	%	—		42		(100.0)	%

Other non-interest income	295		322		(8.4)	%	1,028		5,681		(81.9)	%
Total non-interest income	$	30,699	$	30,620	0.3	%	$	89,673	$	98,436	(8.9)	%

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 September 30, 2023 and 2022

OFG recorded non-interest income, net, in the amount of $30.7 million, compared to $30.6 million, an increase of 0.3%, or $79 thousand. The slight increase in non-interest income was mainly due to the net effect of:

•An increase of $519 thousand in mortgage banking activities mainly from a $832 thousand negative valuation adjustment to loans held for sale in the prior year quarter, partially offset by lower gains on sales in the current quarter driven by lower sales volume; and

•A decrease of $482 thousand in wealth management revenue primarily reflecting: (i) a $262 thousand decrease in trust division fees from the discontinuation of personal trust services in 2022 and (ii) the sale of the retirement plan administration business in December 31, 2022, which resulted in a decrease of approximately $184 thousand.

Comparison of the nine-month periods ended September 30, 2023 and 2022

OFG recorded non-interest income in the amount of $89.7 million, compared to $98.4 million, a decrease of 8.9%, or $8.8 million. The decrease in non-interest income was mainly due to:

•A decrease of $4.7 million in other non-interest income, primarily related to a $4.7 million gain recognized on the sale of a branch building during 2022;

•A $1.1 million loss associated with the sale of a $203.3 million short-term US treasury note available for sale during 2023;

•A decrease of $1.3 million in wealth management revenue, primarily reflecting: (i) a $1.5 million decrease in trust division fees from the discontinuation of personal trust services in 2022 and (ii) the sale of the retirement plan administration business in December 31, 2022, which resulted in a decrease of $507 thousand. This decrease was partially offset by higher insurance fees of $388 thousand from an increase in auto product commissions, institutional policies and reinsurance income, and higher broker-dealer fees of $321 thousand;

•A decrease of $943 thousand in mortgage banking activities due to: (i) a $292 thousand reduction in servicing fees as a result of the FNMA mortgage servicing transfer to a third party and a $359 thousand reduction in cash collections, (ii) an unfavorable impact of $295 thousand in mortgage servicing rights valuation and (iii) a $182 thousand net gain on sales driven by lower sales volume; and

•A decrease of $681 thousand in banking service revenues, primarily related to: (i) a $294 thousand reduction in prepayment loan fees, (ii) a $371 thousand reduction in credit life commissions, and (iii) a $205 thousand reduction in electronic banking charges of merchant-related income partially offset by higher debit card interchange fees.

TABLE 3 - NON-INTEREST EXPENSES SUMMARY


	Quarter Ended September 30,								Nine-Month Period Ended September 30,
	2023			2022			Variance %		2023			2022			Variance %
	(In thousands)								(In thousands)
Compensation and employee benefits	$	38,095		$	35,332		7.8	%	$	114,409		$	104,830		9.1	%
Occupancy, equipment and infrastructure costs	14,887			12,638			17.8	%	43,506			37,415			16.3	%
Electronic banking charges	10,662			9,965			7.0	%	31,260			29,473			6.1	%
Information technology expenses	7,106			5,270			34.8	%	20,712			15,602			32.8	%
Professional and service fees	4,810			6,441			-25.3	%	15,193			19,224			-21.0	%
Taxes, other than payroll and income taxes	3,407			3,324			2.5	%	9,944			9,897			0.5	%
Insurance	2,433			2,394			1.6	%	8,039			7,458			7.8	%
Loan servicing and clearing expenses	1,715			2,144			-20.0	%	5,848			6,309			-7.3	%
Advertising, business promotion, and strategic initiatives	2,206			1,926			14.5	%	6,304			5,815			8.4	%
Communication	1,040			982			5.9	%	3,229			3,230			—	%
Printing, postage, stationery and supplies	922			878			5.0	%	2,518			2,755			-8.6	%
Director and investor relations	269			261			3.1	%	1,047			856			22.3	%

Foreclosed real estate and other repossessed assets (income) loss, net of expenses	(27)			573			104.7	%	(1,554)			(2,313)			32.8	%

Other	2,633			5,364			-50.9	%	8,811			13,354			-34.0	%
Total non-interest expenses	$	90,158		$	87,492		3.0	%	$	269,266		$	253,905		6.0	%
Relevant ratios and data:
Efficiency ratio	52.36		%	55.80		%			53.10		%	57.77		%
Compensation and benefits to non-interest expense	42.25		%	40.38		%			42.49		%	41.29		%
Compensation to average total assets owned (annualized)	1.50		%	1.39		%			1.52		%	1.38		%

Average number of employees	2,267			2,247					2,260			2,246
Average compensation per employee (annualized, in thousands)	$	67.22		$	62.90				$	67.50		$	62.23
Average loans per average employee	$	3,172		$	2,981				$	3,107		$	2,947

Comparison of quarters ended September 30, 2023 and 2022

Non-interest expense was $90.2 million, representing an increase of 3.0%, or $2.7 million, compared to $87.5 million. The increase in non-interest expense was mainly due to:

•Increase in compensation and employee benefits of $2.8 million, as a result of higher salaries and benefits, including payroll taxes and connectivity expenses;

•Increase in occupancy, equipment and infrastructure costs of $2.2 million, primarily related to an increase of $1.8 million in depreciation and amortization expenses reflecting new digital projects placed in production since 2022; and

•Increase of $1.8 million in information technology expenses, primarily driven by higher design, development and operating support expenses incurred as part of OFG’s digital transformation strategy.

The increase in non-interest expense was partially offset by decreases of: (i) $1.6 million in professional and service fees mainly due to lower legal and compliance-related expenses and (ii) $1.4 million in climate event expenses, related to 2022 Hurricane Fiona.

The efficiency ratio was 52.36%, an improvement from 55.80%. 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, 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 were excluded from the adjusted efficiency ratio computation for the quarters ended September 30, 2023 and 2022 amounted to $295 thousand and $322 thousand, respectively.

Comparison of the nine-month periods ended September 30, 2023 and 2022

Non-interest expense was $269.3 million, representing an increase of 6.0%, or $15.4 million, compared to $253.9 million. The increase in non-interest expense was mainly due to:

•Increase in compensation and employee benefits of $9.6 million due to higher salaries and benefits, including payroll taxes and connectivity expenses;

•Increase of $6.1 million in occupancy, equipment and infrastructure costs primary related to: (i) higher balances of $4.4 million in depreciation and amortization expenses reflecting new digital projects placed in production since 2022 and (ii) a $1.3 million increase in software maintenance expenses;

•Increase of $5.1 million in information technology expenses driven by higher design, development and operating support expenses incurred as part of OFG’s digital transformation strategy;

•Decrease of $759 thousand in foreclosed real estate and other repossessed assets income reflecting lower gain on sales of such assets; and

•Increase of $1.8 million in electronic banking charges mainly due to increases of $1.5 million in point-of-sale and merchant-related fees and $790 thousand in debit card billing fees from more transactions year over year.

The increase in non-interest expense was partially offset by a decrease in professional and service fees by $4.0 million, reflecting lower balances in compliance-related expenses.

The efficiency ratio was 53.10%, an improvement from 57.77%. Amounts presented as part of non-interest income that were excluded from the efficiency ratio computation for nine-month periods ended September 30, 2023 and 2022 amounted to $121 thousand and $5.7 million, respectively.

Provision for Credit Losses

Comparison of quarters ended September 30, 2023 and 2022

Provision for credit losses increased by $9.3 million to $16.4 million from $7.1 million. The provision for credit losses for the third quarter of 2023 reflected a provision of $11.4 million related to the growth in loan balances, $4.1 million associated with qualitative adjustments, mostly to the auto portfolio, and $702 thousand related to a specific reserve for a small portfolio of non-performing Puerto Rico small business commercial loans transferred to held for sale at the end of the quarter.

The provision for credit losses for the third quarter of 2022 included a provision of $7.6 million due to the growth in loan balances and a provision of $1.0 million associated with qualitative adjustments, which included $6.9 million for anticipated Hurricane Fiona-related losses net of the improvement in the performance of the portfolios and in Puerto Rico’s labor market, partially offset by recaptures of $865 thousand for changes in the economic and loss rate models and other miscellaneous reserves and $639 thousand related to certain commercial-specific loan reserves due to certain commercial loans placed in non-accrual status.

Comparison of the nine-month periods ended September 30, 2023 and 2022

Provision for credit losses increased $25.6 million to $40.9 million from $15.4 million. The provision for credit losses for 2023 reflected a provision of $23.8 million related to the growth in loan balances, a provision of $14.7 million related to commercial specific loan reserves, mainly in the US commercial loan portfolio, and $5.1 million associated with qualitative adjustment, partially offset by releases of $3.2 million for changes in the economic and loss rate models.

The provision for credit losses for 2022 reflected a provision of $16.7 million related to the growth in loan balances and a provision of $8.9 million related to commercial-specific loan reserves due to certain commercial loans placed in non-accrual, offset by a $8.6 million release associated with qualitative adjustment due to improvement in the performance of the portfolios and in Puerto Rico’s labor market, net of the $6.9 million provision for anticipated Hurricane Fiona-related losses, and a $1.6 million release for changes in the economic and loss rate models and other miscellaneous reserves.

Income Tax Expense

Comparison of quarters ended September 30, 2023 and 2022

Income tax expense for the third quarter of 2023 increased $426 thousand to $21.0 million from $20.6 million. OFG’s ETR was 31.9% in 2023 compared to 32.9% in 2022. The increase in the income tax expense was mainly related to greater income before tax and lower income subject to a lower tax rate.

Comparison of the nine-month periods ended September 30, 2023 and 2022

Income tax expense increased by $5.4 million to $61.5 million from $56.1 million. OFG’s ETR was 31.3% in 2023 compared to 31.9% in 2022. The increase in the income tax expense was mainly due to less income in OIB, which is fully exempt, and in OFG USA, which has a lower tax rate. Also, year 2022 included a capital gain from the sale of a building that helped reduce the expense in that year.

Refer to “Note 14 – Income Taxes” to the consolidated financial statements for additional information on the income tax expense.

Business Segments

OFG segregates its businesses into the following 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 nine-month periods ended September 30, 2023 and 2022.


TABLE 4 - BUSINESS SEGMENTS
	Quarter Ended September 30, 2023
	Banking		Wealth Management		Treasury		Total Major Segments		Eliminations		Consolidated Total
	(In thousands)
Interest income	$	145,667	$	8	$	23,905	$	169,580	$	(3,872)	$	165,708
Interest expense	(20,662)		—		(7,131)		(27,793)		3,872		(23,921)
Net interest income	125,005		8		16,774		141,787		—		141,787
Provision for credit losses	16,371		—		59		16,430		—		16,430
Non-interest income	23,211		7,487		1		30,699		—		30,699
Non-interest expenses	(85,536)		(3,778)		(844)		(90,158)		—		(90,158)
Intersegment revenue	487		—		—		487		(487)		—
Intersegment expenses	—		(337)		(150)		(487)		487		—
Income before income taxes	46,796		3,380		15,722		65,898		—		65,898
Income tax expense	20,994		(4)		35		21,025		—		21,025
Net income	$	25,802	$	3,384	$	15,687	$	44,873	$	—	$	44,873
Total assets	$	8,742,283	$	34,380	$	2,523,536	$	11,300,199	$	(1,043,061)	$	10,257,138


	Nine-Month Period Ended September 30, 2023
	Banking		Wealth Management		Treasury		Total		Eliminations		Consolidated Total
	(In thousands)
Interest income	$	418,091	$	19	$	67,872	$	485,982	$	(13,301)	$	472,681
Interest expense	(48,867)		—		(19,787)		(68,654)		13,301		(55,353)
Net interest income	369,224		19		48,085		417,328		—		417,328
Provision for credit losses	40,828		—		91		40,919		—		40,919
Non-interest income (loss)	68,190		22,631		(1,148)		89,673		—		89,673
Non-interest expenses	(254,777)		(11,871)		(2,618)		(269,266)		—		(269,266)
Intersegment revenue	1,610		—		—		1,610		(1,610)		—
Intersegment expenses	—		(1,096)		(514)		(1,610)		1,610		—
Income before income taxes	$	143,419	$	9,683	$	43,714	$	196,816	$	—	$	196,816
Income tax expense	61,463		16		62		61,541		—		61,541
Net income	$	81,956	$	9,667	$	43,652	$	135,275	$	—	$	135,275
Total assets	$	8,742,283	$	34,380	$	2,523,536	$	11,300,199	$	(1,043,061)	$	10,257,138

Eliminations include interest income and expense for a time deposit opened by the Bank in Oriental Overseas, an international banking entity organized pursuant to the Puerto Rico International Banking Center Regulatory Act, as amended, which operates as a unit within the Bank. The time deposit with a balance of $308.9 million and $467.0 million at September 30, 2023 and 2022, respectively, is included in the Treasury Segment with its corresponding interest expense, to fund Oriental Overseas operations, which is included in the Banking Segment with its corresponding interest income, and are eliminated in the consolidation. Interest income is accrued on the unpaid principal balance. The increase in interest income and interest expense from the prior year period was mainly as a result of Federal Open Market Committee of the Board of Governors of the Federal Reserve System (“FRB”) federal funds rate increases and higher average balance.


	Quarter Ended September 30, 2022
	Banking		Wealth Management		Treasury		Total Major Segments		Eliminations		Consolidated Total
	(In thousands)
Interest income	$	117,939	$	6	$	18,829	$	136,774	$	(2,099)	$	134,675
Interest expense	(7,891)		—		(2,373)		(10,264)		2,099		(8,165)
Net interest income	110,048		6		16,456		126,510		—		126,510
Provision for credit losses	7,059		—		61		7,120		—		7,120
Non-interest income	22,310		8,310		—		30,620		—		30,620
Non-interest expenses	(82,026)		(4,635)		(831)		(87,492)		—		(87,492)
Intersegment revenue	588		—		—		588		(588)		—
Intersegment expenses	—		(412)		(176)		(588)		588		—
Income before income taxes	43,861		3,269		15,388		62,518		—		62,518
Income tax expense	20,589		1		9		20,599		—		20,599
Net income	$	23,272	$	3,268	$	15,379	$	41,919	$	—	$	41,919
Total assets	$	8,179,384	$	27,839	$	2,823,826	$	11,031,049	$	(972,870)	$	10,058,179


	Nine-Month Period Ended September 30, 2022
	Banking		Wealth Management		Treasury		Total		Eliminations		Consolidated Total
	(In thousands)
Interest income	$	337,017	$	16	$	35,787	$	372,820	$	(2,974)	$	369,846
Interest expense	(21,796)		—		(4,226)		(26,022)		2,974		(23,048)
Net interest income	315,221		16		31,561		346,798		—		346,798
Provision for (recapture of) credit losses	15,403		—		(41)		15,362		—		15,362
Non-interest income	73,662		24,724		50		98,436		—		98,436
Non-interest expenses	(237,477)		(14,015)		(2,413)		(253,905)		—		(253,905)
Intersegment revenue	1,645		—		—		1,645		(1,645)		—
Intersegment expenses	—		(1,131)		(514)		(1,645)		1,645		—
Income before income taxes	$	137,648	$	9,594	$	28,725	$	175,967	$	—	$	175,967
Income tax expense	56,067		1		27		56,095		—		56,095
Net income	$	81,581	$	9,593	$	28,698	$	119,872	$	—	$	119,872
Total assets	$	8,179,384	$	27,839	$	2,823,826	$	11,031,049	$	(972,870)	$	10,058,179

Comparison of quarters ended September 30, 2023 and 2022

Banking

OFG’s banking segment net income before taxes increased by $2.9 million from $43.9 million to $46.8 million, mainly reflecting:

•Increase of $25.9 million in interest income from loans, driven by increased yields on higher balances; and

•Increase of $1.8 million in interest income related to Oriental Overseas’ time deposit from the Bank to fund its operations, which is eliminated in the consolidation, mainly as a result of higher interest rates in the current period.

The increase in the banking segment’s income net income was partially offset by:

•Increase of $12.8 million in interest expense primarily related to an increase in the average cost of deposits and borrowings;

•Increase of $9.3 million in provision for credit losses. The third quarter of 2023 included $11.4 million related to the growth in loan balances and $4.1 million associated with qualitative adjustments; and

•Increase of $3.5 million in non-interest expenses, primarily reflecting higher compensation and employee benefits, occupancy and equipment, and information technology expenses by $3.1 million, $2.3 million and $1.8 million, respectively, partially offset by lower professional and service fees of $2.1 million and climate event expenses, related to 2022 Hurricane Fiona, by $1.4 million.

Wealth Management

Wealth management segment revenue consists of commissions and fees from fiduciary activities, securities brokerage, and insurance and reinsurance activities. Net income before taxes from this segment remained leveled at $3.4 million from $3.3 million. The sale of OFG’s retirement plan administration business during the fourth quarter of 2022 resulted in a decrease in non-interest income of $538 thousand and in non-interest expenses of $655 thousand.

Treasury

Treasury segment net income before taxes increased by $334 thousand, mainly reflecting an increase in interest income from the purchases of investment securities during the years 2022 and 2023 and higher yield in lower balances of interest bearing cash and money market investments related to the increase in the federal funds rate, partially offset by an increase in interest expense associated with more expenses in inter-segment borrowing as a result of higher average balance and federal funds rate increases and new borrowings during 2023.

Comparison of nine-month periods ended September 30, 2023 and 2022

Banking

OFG’s banking segment net income before taxes increased by $5.8 million from $137.6 million to $143.4 million, mainly reflecting:

•Increase of $70.8 million in interest income from loans, driven by increased yields on higher loan balances; and

•Increase of $10.3 million in interest income related to Oriental Overseas’ time deposit from the Bank to fund its operations, which is eliminated in the consolidation, mainly as a result of higher average unpaid principal balance and interest rates in the current period.

The increase in the banking segment’s net income was partially offset by:

•Increase of $25.4 million in provision for credit losses. The 2023 provision reflects $23.8 million related to the growth in loan balances, a provision of $14.7 million related to commercial-specific loan reserves, mainly in the US commercial loan portfolio, and $5.1 million associated with qualitative adjustments;

•Increase of $27.1 million in interest expense on deposits mainly related to higher costs of deposits and borrowings;

•Increase of $17.3 million in non-interest expenses, mainly due to increases of: (i) $10.5 million in compensation and employee benefits, (ii) $6.4 million in occupancy, equipment and infrastructure costs related to depreciation and amortization expenses reflecting new digital projects placed in production since 2022 and software maintenance expenses, and (iii) $5.1 million in information technology expenses related to digital transformation, partially offset by lower: (i) professional and service fees of $3.9 million, and (ii) climate event expenses of $1.4 million related to 2022 Hurricane Fiona; and

•Decrease of $5.5 million in non-interest income mainly due to the $4.7 million gain from the sale of a building in 2022.

Wealth Management

Net income before taxes from this segment remained leveled at $9.7 million compared to the prior year period. The sale of OFG’s retirement plan administration business during the fourth quarter of 2022 resulted in a decrease of $1.6 million in non-interest income and $2.0 million in non-interest expenses.

Treasury

Treasury segment net income before taxes increased by $15.0 million, mainly reflecting:

•Increase of $32.1 million in interest income, reflecting the purchase of agency mortgage-backed securities and U.S. Treasury securities during the current period and higher yield in lower balances of interest-bearing cash and money market investments related to the increase in the federal funds rate;

•Increase of $15.6 million in interest expense, reflecting higher expenses of: (i) $10.3 million in inter-segment borrowing as a result of higher average balance and federal funds rate increases, (ii) $5.0 million in advances from FHLB and (iii) $728 thousand in repurchase agreements; and

•A loss of $1.1 million related to the sale of a short-term US treasury note during 2023.

ANALYSIS OF FINANCIAL CONDITION

Assets Owned

At September 30, 2023, OFG’s total assets amounted to $10.257 billion, an increase of $438.4 million, when compared to $9.819 billion at December 31, 2022.

Cash and due from banks of $528.6 million decreased by $17.5 million, reflecting loan funding and the purchase of $492.2 million mortgage-backed securities, partially offset by new repurchase agreements amounting to $150.6 million, the effect of a two-year $200.0 million FHLB advance and the increase of the FHLB overnight advance by $73.4 million, and the sale and maturities of US Treasury notes during the nine-month period ended September 30, 2023.

The investment portfolio increased by $103.0 million or 5.2% primarily related to the purchase of $492.2 million in mortgage-backed securities, $70.0 million in mortgage loan securitizations, partially offset by the sale of a $203.3 million US treasury note available for sale, the maturity of $111.5 million US treasury notes, principal paydowns on mortgage-backed securities amounting to $94.0 million, and unfavorable market value adjustments of $40.4 million. OFG’s strategy is to invest its liquidity in highly liquid securities 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 commercial loans secured by real estate, other commercial and industrial loans, US commercial loans, residential mortgage loans, consumer loans, and auto loans. At September 30, 2023, OFG’s net loan portfolio increased by $406.8 million or 6.1% reflecting increases in commercial, auto and consumer loans, partially offset by a decrease in residential mortgage loans.

Financial Assets Managed

At September 30, 2023, OFG’s financial assets include those managed by OFG’s trust division, and its securities broker-dealer and insurance agency subsidiaries. OFG’s trust division offers various types of individual retirement accounts (“IRAs”) and manages Keogh retirement plans and custodian and corporate trust accounts. At September 30, 2023 and December 31, 2022, the total assets managed by OFG’s trust division amounted to $2.352 billion and $2.335 billion, respectively. 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 September 30, 2023, total assets managed by the securities broker-dealer and insurance agency subsidiaries from their customers’ investment accounts amounted to $2.306 billion, compared to $2.172 billion at December 31, 2022.

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. During the quarter ended September 30, 2023, OFG performed an assessment of events or circumstances that could trigger reductions in the book value of the goodwill. Based on this assessment, no impairments were identified at September 30, 2023.

As of both September 30, 2023 and December 31, 2022, OFG had $84.2 million of goodwill allocated as follows: $84.1 million to the banking segment and $100 thousand 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 5 - ASSETS SUMMARY AND COMPOSITION


	September 30,			December 31,			Variance %
	2023			2022
	(In thousands)
Investments:
FNMA and FHLMC certificates	$	1,481,969		$	1,105,551		34.0	%



US Treasury securities	199,635			506,768			-60.6	%


GNMA certificates	339,384			319,534			6.2	%
Equity securities	42,162			23,667			78.1	%
CMOs issued by US government-sponsored agencies	10,675			14,851			-28.1	%
Other debt securities	635			1,142			-44.4	%
Trading securities	14			9			55.6	%
Total investments	2,074,474			1,971,522			5.2	%
Loans, net	7,130,052			6,723,236			6.1	%
Total investments and loans	9,204,526			8,694,758			5.9	%
Other assets:


Cash and due from banks (including restricted cash)	528,626			546,303			-3.2	%
Money market investments	4,073			4,161			-2.1	%
Foreclosed real estate	9,555			11,214			-14.8	%
Accrued interest receivable	67,868			62,402			8.8	%
Deferred tax asset, net	11,121			55,485			-80.0	%
Premises and equipment, net	103,040			106,820			-3.5	%
Servicing assets	50,601			50,921			-0.6	%
Goodwill	84,241			84,241			0.0	%
Other intangible assets	22,419			27,593			-18.8	%
Operating lease right-of-use assets	20,011			25,363			-21.1	%


Other assets and customers' liability on acceptances	151,057			149,519			1.0	%
Total other assets	1,052,612			1,124,022			-6.4	%
Total assets	$	10,257,138		$	9,818,780		4.5	%
Investment portfolio composition:
FNMA and FHLMC certificates	71.5		%	56.0		%

US Treasury securities	9.6		%	25.7		%
GNMA certificates	16.4		%	16.2		%
Equity securities	2.0		%	1.2		%
CMOs issued by US government-sponsored agencies	0.5		%	0.8		%
Other debt securities and trading securities	0.0		%	0.1		%
	100.0		%	100.0		%

TABLE 6 - LOAN PORTFOLIO COMPOSITION


	September 30,		December 31,		Variance %
	2023		2022
	(In thousands)
Loans held for investment:
Commercial	$	2,832,985	$	2,629,929	7.7	%
Mortgage	1,604,010		1,704,221		(5.9)	%
Consumer	613,195		537,257		14.1	%
Auto	2,211,545		1,963,915		12.6	%
	7,261,735		6,835,322		6.2	%
Allowance for credit losses	(157,529)		(152,673)		3.2	%
Total loans held for investment	7,104,206		6,682,649		6.3	%
Mortgage loans held for sale	564		19,499		(97.1)	%
Other loans held for sale	25,282		21,088		19.9	%
Total loans held for sale	25,846		40,587		(36.3)	%
Total loans, net	$	7,130,052	$	6,723,236	6.1	%

OFG’s loan portfolio is composed of commercial, mortgage, consumer, and auto loans. As shown in Table 6 above, total loans, net, amounted to $7.130 billion at September 30, 2023, a 6.1% increase when compared to $6.723 billion at December 31, 2022. The composition and trends of OFG’s loans held-for-investment portfolio were as follows:

•Commercial loan portfolio amounted to $2.833 billion (39.0% of the gross loan portfolio) compared to $2.630 billion (38.5% of the gross loan portfolio) at December 31, 2022. Commercial loans secured by non-owner occupied commercial real estate amounted to $620.1 million and $605.5 million at September 30, 2023 and December 31, 2022, respectively, which represented 8.5% and 8.9% of our total loan portfolio held for investment. US commercial loans amounted to $707.6 million and $642.1 million at September 30, 2023 and December 31, 2022, respectively, which represented 9.7% and 9.4% of our total loan portfolio held for investment. Commercial loan production increased by 20% or $36.0 million to $215.4 million in the third quarter of 2023 from $179.4 million in the prior year quarter, and increased 10%, or $72.3 million, to $770.4 million in the nine-month period ended September 30, 2023 from $698.1 million for the same period of 2022.

•Mortgage loan portfolio amounted to $1.604 billion (22.1% of the gross loan portfolio) compared to $1.704 billion (24.9% of the gross originated loan portfolio) at December 31, 2022. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to $18.2 million and $32.6 million at September 30, 2023 and December 31, 2022, 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. Mortgage loan production totaled $33.3 million and $99.6 million in the quarter and nine-month period ended September 30, 2023, respectively, which represents a decrease of 14.4% and 40%, respectively, from $38.9 million and $165.7 million for the same periods in 2022. This decrease reflects the negative impact of the FRB federal funds rate increases during 2022 and 2023 in the Puerto Rico housing market. 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 US mortgage loan originators. Furthermore, OFG has never been active in negative amortization loans or offered adjustable-rate mortgage loans with teaser rates.

•Consumer loan portfolio amounted to $613.2 million (8.4% of the gross loan portfolio) compared to $537.3 million (7.9% of the gross loan portfolio) at December 31, 2022. Consumer loan production increased by 4.7% to $76.5 million in the third quarter of 2023 from $73.0 million in prior year quarter, and decreased by 6%, or $16.9 million to $249.8 million in the nine-month period ended September 30, 2023 from $266.7 million in the same period in 2022.

•Auto loans portfolio amounted to $2.212 billion (30.5% of the gross loan portfolio) compared to $1.964 billion (28.7% of the gross originated loan portfolio) at December 31, 2022. Auto loans production increased by 7.9% to $237.3 million in the third quarter of 2023 compared to $236.3 million in the prior year quarter, and increased by 18%, or $104.7 million to $695.9 million in the nine-month period ended September 30, 2023 from $591.2 million in the same period of 2022.

TABLE 7 - PUERTO RICO GOVERNMENT RELATED LOANS


September 30, 2023
			Maturity
	Carrying Value		Less than 1 Year		1 to 3 Years		More than 3 Years
Loans:	(In thousands)

Municipalities	$	68,297	$	—	$	1,982	$	66,315

At September 30, 2023, OFG has $68.3 million of direct credit exposure to the Puerto Rico government, a $5.4 million decrease from $73.7 million in December 31, 2022.

Allowance for Credit Losses

OFG measures its allowance for credit losses based on management’s best estimate of expected credit losses inherent in OFG’s relevant financial assets.

Tables 8 through 11 set forth an analysis of activity in the allowance for credit losses and present selected credit loss statistics for the quarters and nine month periods ended September 30, 2023 and 2022 and as of September 30, 2023 and December 31, 2022. In addition, Table 6 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 of this quarterly report on Form 10-Q and “Note 5 – Allowance for Credit Losses” of the accompanying consolidated financial statements 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 13 and 15). At September 30, 2023, OFG had $80.6 million of non-accrual loans held for investment, including $6.9 million PCD loans, compared to $89.6 million at December 31, 2022, reflecting decreases of $3.3 million and $5.9 million in auto and mortgage loan portfolios, respectively. At September 30, 2023 and December 31, 2022, total commercial non-accrual loans excluded $8.5 million and $27.8 million, respectively, of non-accrual commercial loans held for sale.

At December 31, 2022, loans whose terms have been extended and which were classified as TDRs that were not included in non-accrual loans amounted to $145.2 million as they were performing under their modified terms. On January 1, 2023, OFG adopted ASU 2022-02 related to the elimination of the recognition and measurement of TDRs and the enhancement of disclosures for loan restructurings for borrowers experiencing financial difficulty using the prospective transition method. Loans that were restructured in a TDR prior to the adoption of ASU 2022-02 will continue to be accounted for under the historical TDR accounting until the relevant loans are paid off, liquidated or subsequently modified.

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. As of September 30, 2023 and December 31, 2022, the outstanding balance of these residential mortgage loans was $8.0 million and $10.3 million, respectively.

At September 30, 2023, OFG’s non-performing assets decreased by 11.3% to $102.6 million (1.00% total assets) from $115.7 million (1.18% of total assets) at December 31, 2022.

Foreclosed real estate decreased from $11.2 million at December 31, 2022 to $9.6 million at September 30, 2023 and other repossessed assets decreased from $4.6 million at December 31, 2022 to $4.4 million at September 30, 2023, both recorded at fair value. OFG does not expect non-performing loans to result in significantly higher losses. At September 30, 2023, the allowance coverage ratio to non-performing loans was 177.8% (152.9% at December 31, 2022).

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.

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

Commercial loans - At September 30, 2023, OFG’s non-performing commercial loans amounted to $43.3 million (48.9% of OFG’s non-performing loans), a 0.1% decrease from $43.4 million at December 31, 2022 (43.4% 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 September 30, 2023, OFG’s non-performing mortgage loans totaled $25.6 million (28.9% of OFG’s non-performing loans), a 24.2% decrease from $33.8 million (33.8% of OFG’s non-performing loans) at December 31, 2022. 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 September 30, 2023, OFG’s non-performing consumer loans amounted to $3.4 million (3.8% of OFG’s non-performing loans), a 7.6% increase from $3.1 million at December 31, 2022 (3.1% 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 - At September 30, 2023, OFG’s non-performing auto loans amounted to $16.3 million (18.4% of OFG’s total non-performing loans), a decrease of 16.9% from $19.6 million at December 31, 2022 (19.7% of OFG’s total non-performing loans). Non-PCD auto loans 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, USDA Rural Development (RURAL), Puerto Rico Housing Finance Authority (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 the loan modification. Borrowers with discharged Chapter 7 bankruptcies may also apply. Loans in these programs are evaluated by designated credit underwriters for financial difficulty modification if OFG grants a concession for legal or economic reasons due to the debtor’s financial difficulties.

TABLE 8 - ALLOWANCE FOR CREDIT LOSSES BREAKDOWN


	September 30,			December 31,			Variance %
	2023			2022
	(In thousands)
Allowance for credit losses:
Non-PCD
Commercial	$	41,627		$	39,158		6.3	%
Mortgage	8,364			9,571			-12.6	%
Consumer	26,453			23,264			13.7	%
Auto	71,766			69,848			2.7	%
Total allowance for credit losses	$	148,210		$	141,841		4.5	%

PCD
Commercial	$	1,272		$	1,388		-8.4	%
Mortgage	8,003			9,359			-14.5	%
Consumer	7			14			-50.0	%
Auto	37			71			-47.9	%
Total allowance for credit losses	$	9,319		$	10,832		-14.0	%

Allowance for credit losses summary
Commercial	$	42,899		$	40,546		5.8	%
Mortgage	16,367			18,930			-13.5	%
Consumer	26,460			23,278			13.7	%
Auto	71,803			69,919			2.7	%
Total allowance for credit losses	$	157,529		$	152,673		3.2	%

Allowance composition:
Commercial	27.2		%	26.6		%
Mortgage	10.4		%	12.4		%
Consumer	16.8		%	15.2		%
Auto	45.6		%	45.8		%
	100.0		%	100.0		%

Allowance coverage ratio at end of period:
Commercial	1.5		%	1.5		%	(1.9)	%
Mortgage	1.0		%	1.1		%	(8.1)	%
Consumer	4.3		%	4.3		%	(0.2)	%
Auto	3.3		%	3.6		%	(8.7)	%
	2.2		%	2.2		%	(2.7)	%

Allowance coverage ratio to non-performing loans:
Commercial	99.0		%	93.5		%	5.9	%
Mortgage	63.9		%	56.1		%	14.0	%
Consumer	786.1		%	744.2		%	5.6	%
Auto	440.5		%	356.5		%	23.6	%
	177.8		%	152.9		%	16.3	%

TABLE 9 - ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES


	September 30,				December 31,
	2023				2022
	Amount of ACL		Percent of loans in each category of total loans [1]		Amount of ACL		Percent of loans in each category of total loans [1]
Commercial	$	42,899	39.0%		$	40,546	38.5%
Mortgage	16,367		22.1%		18,930		24.9%
Consumer	26,460		8.4%		23,278		7.9%
Auto	71,803		30.5%		69,919		28.7%
Total	$	157,529	100.0	%	$	152,673	100.0	%
[1] Total loans in this table refers to total loans held for investment.

TABLE 10 - ALLOWANCE FOR CREDIT LOSSES SUMMARY


	Quarter Ended September 30,						Nine-Month Period Ended September 30,
	2023		2022		Variance %		2023		2022		Variance %
	(Dollars in thousands)						(Dollars in thousands)
Allowance for credit losses:
Balance at beginning of period	$	159,923	$	159,039	0.6	%	$	152,673	$	155,937	-2.1	%
Provision for credit losses	16,442		7,470		120.1	%	40,417		15,692		157.6	%
Charge-offs	(25,738)		(18,984)		35.6	%	(63,245)		(44,568)		41.9	%
Recoveries	6,902		7,637		-9.6	%	27,684		28,101		-1.5	%
Balance at end of period	$	157,529	$	155,162	1.5	%	$	157,529	$	155,162	1.5	%

TABLE 11 — NET CREDIT LOSSES STATISTICS ON LOANS


	Quarter Ended September 30,						Nine-Month Period Ended September 30,
	2023		2022		Variance %		2023		2022		Variance %
	(Dollars in thousands)						(Dollars in thousands)
Non-PCD
Mortgage
Charge-offs	$	(218)	$	(14)	1,457.1	%	$	(610)	$	(276)	121.0	%
Recoveries	185		280		-33.9	%	735		2,689		-72.7	%
Total	(33)		266		-112.4	%	125		2,413		-94.8	%
Commercial
Charge-offs	(8,254)		(6,485)		27.3	%	(13,125)		(9,936)		32.1	%
Recoveries	174		214		-18.7	%	737		862		-14.5	%
Total	(8,080)		(6,271)		28.8	%	(12,388)		(9,074)		36.5	%
Consumer
Charge-offs	(5,894)		(4,163)		41.6	%	(16,852)		(10,129)		66.4	%
Recoveries	655		732		-10.5	%	3,524		2,182		61.5	%
Total	(5,239)		(3,431)		52.7	%	(13,328)		(7,947)		67.7	%
Auto
Charge-offs	(10,458)		(7,964)		31.3	%	(29,106)		(22,282)		30.6	%
Recoveries	5,193		5,674		-8.5	%	20,124		16,130		24.8	%
Total	(5,265)		(2,290)		129.9	%	(8,982)		(6,152)		46.0	%

PCD Loans:
Mortgage
Charge-offs	$	(148)	$	(270)	(45.2)	%	$	(224)	$	(1,587)	(85.9)	%
Recoveries	80		191		(58.1)	%	587		2,062		(71.5)	%
Total	(68)		(79)		(13.9)	%	363		475		(23.6)	%
Commercial
Charge-offs	(690)		(23)		—	%	(2,794)		(57)		4,801.8	%
Recoveries	494		268		84.3	%	1,302		3,540		(63.2)	%
Total	(196)		245		(180.0)	%	(1,492)		3,483		(142.8)	%
Consumer
Charge-offs	(39)		(9)		333.3	%	(376)		(56)		571.4	%
Recoveries	23		47		(51.1)	%	76		83		(8.4)	%
Total	(16)		38		(142.1)	%	(300)		27		(1,211.1)	%
Auto
Charge-offs	(37)		(56)		(33.9)	%	(158)		(245)		(35.5)	%
Recoveries	98		231		(57.6)	%	599		553		8.3	%
Total	61		175		(65.1)	%	441		308		43.2	%

Total charge-offs	(25,738)		(18,984)		35.6	%	(63,245)		(44,568)		41.9	%
Total recoveries	6,902		7,637		(9.6)	%	27,684		28,101		(1.5)	%
Net credit losses	$	(18,836)	$	(11,347)	66.0	%	$	(35,561)	$	(16,467)	116.0	%

TABLE 11 — NET CREDIT LOSSES STATISTICS ON LOANS (CONTINUED)


	Quarter Ended September 30,								Nine-Month Period Ended September 30,
	2023			2022			Variance %		2023			2022			Variance %
	(Dollars in thousands)								(Dollars in thousands)
Net credit losses to average loans outstanding (annualized):
Mortgage	0.03		%	(0.04)		%	160.22	%	(0.04)		%	(0.21)		%	80.99	%
Commercial	1.18		%	0.94		%	25.1	%	0.68		%	0.30		%	130.8	%
Consumer	3.33		%	2.52		%	32.4	%	3.00		%	2.10		%	42.8	%
Auto	0.96		%	0.46		%	108.5	%	0.55		%	0.44		%	24.5	%
Total	1.05		%	0.68		%	54.6	%	0.68		%	0.33		%	103.6	%
Recoveries to charge-offs	26.82		%	40.23		%	-33.3	%	43.77		%	63.05		%	-30.6	%
Average Loans Held for Investment
Mortgage	$	1,576,637		$	1,757,897		-10.3	%	$	1,615,363		$	1,816,978		-11.1	%
Commercial	2,812,274			2,560,849			9.8	%	2,713,300			2,522,606			7.6	%
Consumer	630,492			538,898			17.0	%	605,788			502,741			20.5	%
Auto	2,171,840			1,840,256			18.0	%	2,087,005			1,777,483			17.4	%
Total	$	7,191,243		$	6,697,900		7.4	%	$	7,021,456		$	6,619,808		6.1	%

Net charge-offs for the second quarter of 2023 amounted to $18.8 million, increasing by $7.5 million when compared to $11.3 million in the prior period quarter. Net charge-offs for the nine-month period ended September 30, 2023 amounted to $35.6 million, increasing by $19.1 million, when compared to $16.5 million in the prior year period. Net charge-offs variances were as follows:

Residential mortgage loans net charge-offs amounted to $101 thousand in the third quarter of 2023, increasing by $288 thousand when compared to net recoveries of $187 thousand in the third quarter of 2022. Residential mortgage loans net recoveries for the nine-month period ended September 30, 2023 amounted to $488 thousand, decreasing by $2.4 million when compared to net recoveries of $2.9 million for prior year period. The change reflects lower recoveries during the nine-month period ended September 30, 2022, including $1.1 million recoveries associated with the final settlement of the past due mortgage loans sold during that period.

Commercial loans net charge-offs amounted to $8.3 million in the third quarter of 2023, increasing by $2.3 million when compared to $6.0 million in the third quarter of 2022. Net charge-offs for nine-month period ended September 30, 2023 amounted to $13.9 million, increasing by $8.3 million, when compared to net charge-offs of $5.6 million in the prior year period. The charge-offs for the nine-month period ended September 30, 2023 included $11.5 million charge-offs recognized on three US commercial loan relationships, a $2.1 million charge-off recognized on a PCD commercial loan, and $906 thousand charge-offs for a small portfolio of non-performing small business commercial loans that were transferred to the held for sale category at the end of the period. The nine-month period ended September 30, 2022 included a $5.5 million charge-off for a US commercial loan subsequently sold in October 2022 and a $2.5 million charge-off from a commercial loan sold during the second quarter of 2022; partially offset by a $2.8 million recovery from a Puerto Rico government public corporation acquired PCD commercial loan repaid during that period.

Consumer loans net charge-offs amounted to $5.3 million in the third quarter of 2023, increasing by $1.9 million when compared to net charge-offs of $3.4 million in the third quarter of 2022. Net charge-offs for nine-month period ended September 30, 2023 amounted to $13.6 million, increasing by $5.7 million, when compared to $7.9 million in the prior year period. The increase in net charge-offs during the nine-month period ended September 30, 2023 was driven by an increase in business volumes and the gradual return to pre-Covid levels.

Auto loans net charge-offs amounted to $5.2 million in third quarter of 2023, increasing by $3.1 million when compared to $2.1 million in the third quarter of 2022. Net charge-offs for nine-month period ended September 30, 2023 amounted to $8.5 million, increasing by $2.7 million, when compared to $5.8 million in the prior year, which was driven by an increase in business volumes and the gradual return to pre-Covid levels.

TABLE 12 — NON-PERFORMING ASSETS


	September 30,			December 31,			Variance %
	2023			2022
	(Dollars in thousands)
Non-performing assets:
Non-PCD
Non-accruing loans	$	73,701		$	80,412		-8.3	%


Accruing loans	7,962			10,273			-22.5	%


Total	$	81,663		$	90,685		-9.9	%
PCD	6,948			9,186			-24.4	%
Total non-performing loans	$	88,611		$	99,871		-11.3	%
Foreclosed real estate	9,555			11,214			-14.8	%
Other repossessed assets	4,432			4,617			-4.0	%
	$	102,598		$	115,702		-11.3	%

Non-performing assets to total assets	1.00		%	1.18		%	-15.3	%
Non-performing assets to total capital	9.37		%	11.10		%	-15.6	%

At December 31, 2022, Non-PCD non-accruing loans and accruing loans include $20.3 million and $9.0 million, respectively, of TDR loans. As mentioned previously, on January 1, 2023, OFG adopted ASU 2022-02 related to the elimination of the recognition and measurement of TDRs and the enhancement of disclosures for loan restructurings for borrowers experiencing financial difficulty using the prospective transition method.

TABLE 13 — NON-ACCRUAL LOANS


	September 30,			December 31,			Variance %
	2023			2022
	(Dollars in thousands)
Non-accrual loans
Non-PCD
Commercial	$	36,649		$	34,432		6.4	%
Mortgage	17,392			23,241			-25.2	%
Consumer	3,359			3,128			7.4	%
Auto	16,301			19,613			-16.9	%
Total	$	73,701		$	80,414		-8.3	%
PCD
Commercial	$	6,688		$	8,927		-25.1	%
Mortgage	253			259			-2.3	%
Consumer	7			—			100.0	%
Total	$	6,948		$	9,186		-24.4	%
Total non-accrual loans	$	80,649		$	89,600		-10.0	%
Non-accruals loans composition percentages:
Commercial	53.7		%	48.4		%
Mortgage	21.9		%	26.2		%
Consumer	4.2		%	3.5		%
Auto	20.2		%	21.9		%
	100.0		%	100.0		%
Non-accrual loans ratios:
Non-accrual loans to total loans	1.11		%	1.31		%	-15.27	%
Allowance for credit losses to non-accrual loans	195.33		%	170.39		%	14.64	%


	Quarter Ended September 30,				Year Ended September 30,
	2023		2022		2023		2022
	(In thousands)
Interest that would have been recorded in the period if the loans had not been classified as non-accruing loans	$	415	$	578	$	793	$	1,190

100

TABLE 14 - NON-PERFORMING LOANS


	September 30,			December 31,			Variance %
	2023			2022
	(Dollars in thousands)
Non-performing loans
Non-PCD
Commercial	$	36,649		$	34,432		6.4	%
Mortgage	25,354			33,512			-24.3	%
Consumer	3,359			3,128			7.4	%
Auto	16,301			19,613			-16.9	%
Total	$	81,663		$	90,685		-9.9	%
PCD
Commercial	$	6,688		$	8,927		-25.1	%
Mortgage	253			259			-2.3	%
Consumer	7			—			100.0	%
Total	$	6,948		$	9,186		-24.4	%
Total non-performing loans	$	88,611		$	99,871		-11.3	%
Non-performing loans composition percentages:
Commercial	48.90		%	43.40		%
Mortgage	28.90		%	33.80		%
Consumer	3.80		%	3.10		%
Auto	18.40		%	19.70		%
	100.00		%	100.00		%
Non-performing loans to:
Total loans held for investment gross	1.22		%	1.46		%	-16.4	%
Total assets	0.86		%	1.02		%	-15.7	%
Total capital	8.09		%	9.58		%	-15.6	%
Non-performing loans with partial charge-offs to:
Total loans held for investment gross	0.33		%	0.40		%	-17.5	%
Non-performing loans	26.65		%	27.27		%	-2.3	%
Other non-performing loans ratios:
Charge-off rate on non-performing loans to non-performing loans on which charge-offs have been taken	70.63		%	99.57		%	-29.1	%
Allowance for credit losses to non-performing loans on which no charge-offs have been taken	242.36		%	210.18		%	15.3	%

101

TABLE 15 - LIABILITIES SUMMARY AND COMPOSITION



	September 30,			December 31,			Variance %
	2023			2022
	(Dollars in thousands)
Deposits:
Non-interest-bearing deposits	$	2,571,068		$	2,630,458		-2.3	%
NOW accounts	2,323,806			2,546,245			-8.7	%
Savings and money market accounts	2,216,144			2,227,963			-0.5	%
Time deposits	1,429,164			1,162,959			22.9	%
Total deposits	8,540,182			8,567,625			-0.32	%
Accrued interest payable	1,371			739			85.5	%
Total deposits and accrued interest payable	8,541,553			8,568,364			-0.31	%
Borrowings:
Securities sold under agreements to repurchase	150,701			—			100.00	%
Advances from FHLB	300,774			26,716			1,025.8	%

Other borrowings	—			318			-100.0	%
Total borrowings	451,475			27,034			1,570.0	%
Total deposits and borrowings	8,993,028			8,595,398			4.6	%
Other Liabilities:


Acceptances outstanding	30,984			28,607			8.3	%
Lease liability	22,269			27,370			-18.6	%
Other liabilities	115,394			124,999			-7.7	%
Total liabilities	$	9,161,675		$	8,776,374		4.4	%
Deposits portfolio composition percentages:
Non-interest-bearing deposits	30.1%			30.7%
NOW accounts	27.2%			29.7%
Savings and money market accounts	25.9%			26.0%
Time deposits	16.8%			13.6%
	100.0		%	100.0		%
Borrowings portfolio composition percentages:
Securities sold under agreements to repurchase	33.4		%	—		%
Advances from FHLB	66.6		%	98.8		%

Other borrowings	—		%	1.2		%
	100.0		%	100.0		%

Liabilities and Funding Sources

As shown in Table 15 above, at September 30, 2023, OFG’s total liabilities were $9.162 billion, 4.4% higher than the $8.776 billion reported at December 31, 2022. Deposits and borrowings, OFG’s funding sources, amounted to $8.993 billion at September 30, 2023 compared to $8.595 billion at December 31, 2022. Deposits, excluding accrued interest payable, decreased by $27.4 million reflecting a decrease in demand deposits of $293.6 million, brokered deposits of $8.4 million and savings and money market accounts of $11.8 million, offset by an increase of $275.2 million in time deposits.

As of September 30, 2023 borrowings consist of repurchase agreements and FHLB advances, which increased to $451.5 million, representing an increase of $424.5 million, when compared to $27.0 million at December 31, 2022. The increase in borrowings reflects a new two-year FHLB advance amounting to $200.0 million, increases in FHLB overnight advance to $100.0 million and new repurchase agreements amounting to $150.7 million during the current period as part of OFG’s asset liability management strategies.

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Stockholders’ Equity

At September 30, 2023, OFG’s total stockholders’ equity was $1.095 billion, a 5.1% increase when compared to $1.042 billion at December 31, 2022. This increase reflects an increase in retained earnings of $91.1 million, mainly due to $135.3 million in net income, partially offset by $31.3 million in common stock dividends and an increase in legal surplus of $12.9 million during 2023. These variances were partially offset by a decrease in accumulated other comprehensive loss, net of tax, of $34.3 million from market value adjustments on available-for-sale investment securities, and $17.2 million from treasury stock as a result of repurchases of common stock in the aggregate amount of $18.7 million in connection with the $100 million stock buyback program announced in 2022.

Regulatory Capital

OFG and the Bank are subject to regulatory capital requirements established by the FRB 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 September 30, 2023, 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 are being phased out of CET1 capital over a three-year period.

The risk-based capital ratios presented in Table 16 include common equity tier 1, tier 1 capital, total capital and leverage capital as of September 30, 2023 and December 31, 2022 and are calculated based on the Basel III capital rules related to the measurement of capital, risk-weighted assets and average assets.

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The following are OFG’s consolidated capital ratios under the Basel III capital rules at September 30, 2023 and December 31, 2022:

TABLE 16 — CAPITAL, DIVIDENDS AND STOCK DATA


	September 30,			December 31,			Variance
	2023			2022			%
	(Dollars in thousands, except per share data)
Capital data:
Stockholders’ equity	$	1,095,463		$	1,042,406		5.1	%
Regulatory Capital Ratios data:
Common equity tier 1 capital ratio	14.06		%	13.64		%	3.1	%
Minimum common equity tier 1 capital ratio required	4.50		%	4.50		%	0.0	%
Actual common equity tier 1 capital	$	1,124,599		1,037,385			8.4	%
Minimum common equity tier 1 capital required	$	360,032		342,246			5.2	%
Minimum capital conservation buffer required (2.5%)	$	200,018		190,137			5.2	%
Excess over regulatory requirement	$	564,549		505,002			11.8	%
Risk-weighted assets	$	8,000,711		7,605,466			5.2	%
Tier 1 risk-based capital ratio	14.06		%	13.64		%	3.1	%
Minimum tier 1 risk-based capital ratio required	6.00		%	6.00		%	0.0	%
Actual tier 1 risk-based capital	$	1,124,599		$	1,037,385		8.4	%
Minimum tier 1 risk-based capital required	$	480,043		$	456,328		5.2	%
Minimum capital conservation buffer required (2.5%)	$	200,018		190,137			5.2	%
Excess over regulatory requirement	$	444,538		$	390,920		13.7	%
Risk-weighted assets	$	8,000,711		$	7,605,466		5.2	%
Total risk-based capital ratio	15.31		%	14.89		%	2.8	%
Minimum total risk-based capital ratio required	8.00		%	8.00		%	0.0	%
Actual total risk-based capital	$	1,224,963		$	1,132,658		8.1	%
Minimum total risk-based capital required	$	640,057		$	608,437		5.2	%
Minimum capital conservation buffer required (2.5%)	$	200,018		190,137			5.2	%
Excess over regulatory requirement	$	384,888		$	334,084		15.2	%
Risk-weighted assets	$	8,000,711		$	7,605,466		5.2	%
Leverage capital ratio	11.03		%	10.36		%	6.5	%
Minimum leverage capital ratio required	4.00		%	4.00		%	0.0	%
Actual tier 1 capital	$	1,124,599		$	1,037,385		8.4	%
Minimum tier 1 capital required	$	407,737		$	400,445		1.8	%
Excess over regulatory requirement	$	716,862		$	636,940		12.5	%
Tangible common equity to total assets	9.64		%	9.48		%	1.7	%
Tangible common equity to risk-weighted assets	12.36		%	12.24		%	1.0	%
Total equity to total assets	10.68		%	10.62		%	0.6	%
Total equity to risk-weighted assets	13.69		%	13.71		%	(0.1)	%
Stock data:
Outstanding common shares	47,057,806			47,581,375			(1.1)	%
Book value per common share	$	23.28		$	21.91		6.3	%
Tangible book value per common share	$	21.01		$	19.56		7.4	%
Market price at end of period	$	29.86		$	27.56		8.3	%
Market capitalization at end of period	$	1,405,146		$	1,311,343		7.2	%

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From December 31, 2022 to September 30, 2023, leverage capital ratio increased from 10.36% to 11.03%, tier 1 risk-based capital ratio increased from 13.64% to 14.06%, total risk-based capital ratio increased from 14.89% to 15.31%, common equity tier 1 capital ratio increased from 13.64% to 14.06%, and tangible common equity to tangible total assets increased from 9.59% to 9.74%. The increases in capital ratios reflected an increase in retained earnings from net income, net of dividends and stock repurchases, partially offset by an increase in risk-weighted assets of $395.2 million. Risk-weighted assets increased mainly from an increase in loans.

The following table presents a reconciliation of OFG’s total stockholders’ equity to tangible common equity and total assets to tangible assets at September 30, 2023 and December 31, 2022:


	September 30,			December 31,
	2023			2022
	(In thousands, except share or per share information)
Total stockholders’ equity	$	1,095,463		$	1,042,406


Goodwill	(84,241)			(84,241)
Other intangible assets	(22,419)			(27,593)
Total tangible common equity (non-GAAP)	$	988,803		$	930,572
Total assets	$	10,257,138		9,818,780
Goodwill	(84,241)			(84,241)
Core deposit intangible	(17,169)			(21,131)
Customer relationship intangible	(5,250)			(6,462)

Total tangible assets	$	10,150,478		$	9,706,946
Tangible common equity to tangible assets	9.74		%	9.59		%
Common shares outstanding at end of period	47,057,806			47,581,375
Tangible book value per common share	$	21.01		$	19.56

The tangible common equity to tangible assets 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 to tangible assets ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations. Neither tangible common equity nor tangible assets or related measures should be considered in isolation or as a substitute for stockholders’ equity, total assets or any other measure calculated in accordance with GAAP. Moreover, the manner in which OFG calculates its tangible common equity, tangible assets and any other related measures may differ from that of other companies reporting measures with similar names.

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

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


	September 30,			December 31,			Variance
	2023			2022			%
	(Dollars in thousands)
Risk-based capital:
Common equity tier 1 capital	$	1,124,599		$	1,037,385		8.4	%

Tier 1 capital	1,124,599			1,037,385			8.4	%
Additional Tier 2 capital	100,364			95,273			5.3	%
Total risk-based capital	$	1,224,963		$	1,132,658		8.1	%
Risk-weighted assets:
Balance sheet items	$	7,421,827		$	6,976,335		6.4	%
Off-balance sheet items	578,884			629,131			(8.0)	%
Total risk-weighted assets	$	8,000,711		$	7,605,466		5.2	%
Ratios:
Common equity tier 1 capital (minimum required, including capital conservation buffer - 7%)	14.06		%	13.64		%	3.1	%
Tier 1 capital (minimum required, including capital conservation buffer - 8.5%)	14.06		%	13.64		%	3.1	%
Total capital (minimum required, including capital conservation buffer - 10.5%)	15.31		%	14.89		%	2.8	%
Leverage ratio (minimum required - 4%)	11.03		%	10.36		%	6.5	%
Equity to assets	10.68		%	10.62		%	0.6	%
Tangible common equity to assets	9.64		%	9.48		%	1.7	%

The Bank is considered “well capitalized” under the regulatory framework for prompt corrective action. The table below shows the Bank’s regulatory capital ratios at September 30, 2023 and December 31, 2022:


	September 30,		December 31,		Variance
	2023		2022		%
	(Dollars in thousands)
Oriental Bank Regulatory Capital Ratios:
Common Equity Tier 1 Capital to Risk-Weighted Assets	12.84%		12.36%		3.88	%
Actual common equity tier 1 capital	$	1,020,488	$	933,494	9.3	%
Minimum capital requirement (4.5%)	$	357,777	$	339,910	5.3	%
Minimum capital conservation buffer requirement (2.5%)	$	198,765	$	188,839	5.3	%
Minimum to be well capitalized (6.5%)	$	516,790	$	490,981	5.3	%
Tier 1 Capital to Risk-Weighted Assets	12.84%		12.36%		3.9	%
Actual tier 1 risk-based capital	$	1,020,488	$	933,494	9.3	%
Minimum capital requirement (6%)	$	477,037	$	453,214	5.3	%
Minimum capital conservation buffer requirement (2.5%)	$	198,765	$	188,839	5.3	%
Minimum to be well capitalized (8%)	$	636,049	$	604,285	5.3	%
Total Capital to Risk-Weighted Assets	14.09%		13.61%		3.5	%
Actual total risk-based capital	$	1,120,234	$	1,028,126	9.0	%
Minimum capital requirement (8%)	$	636,049	$	604,285	5.3	%
Minimum capital conservation buffer requirement (2.5%)	$	198,765	$	188,839	5.3	%
Minimum to be well capitalized (10%)	$	795,061	$	755,356	5.3	%
Total Tier 1 Capital to Average Total Assets	10.12%		9.42%		7.4	%
Actual tier 1 capital	$	1,020,488	$	933,494	9.3	%
Minimum capital requirement (4%)	$	403,339	$	396,525	1.7	%
Minimum to be well capitalized (5%)	$	504,174	$	495,656	1.7	%

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OFG’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG.” At September 30, 2023 and December 31, 2022, OFG’s market capitalization for its outstanding common stock was $1.405 billion ($29.86 per share) and $1.311 billion ($27.56 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
2023
September 30, 2023	$	33.82	$	26.14	$	0.22
June 30, 2023	$	27.80	$	22.80	$	0.22
March 31, 2023	$	30.42	$	24.37	$	0.22
2022
December 31, 2022	$	28.90	$	25.50	$	0.20
September 30, 2022	$	29.45	$	24.66	$	0.20
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

At September 30, 2023 the number of shares that may yet be purchased under the $100 million stock buyback program is estimated at 577,260 and was calculated by dividing the remaining balance of $17.2 million by $29.86 (closing price of OFG’s common stock at September 30, 2023).

OFG did not repurchase any shares of its common stock during the nine-month periods ended September 30, 2023 and 2022, other than through its publicly announced stock repurchase program.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Background

OFG’s risk management policies are established by its Board of Directors (the “Board”) and implemented by management through the adoption of a risk management program, which is overseen and monitored by the Chief Risk 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 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 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.

In March 2023, the market reacted with volatility as a result of the collapse of three large US regional banks, which became the biggest bank failures since 2008, after they experienced a run on deposits mainly driven by a significant decrease in the value of their investments. Market reactions to recession concerns and inflationary pressure, combined with aggressive interest rate increases as part of the FRB’s efforts to control inflation during 2022 and 2023, had a significant impact on bond prices, including those guaranteed by the US government or by a US government-sponsored entity. Nevertheless, we believe that OFG has strong capital and liquidity levels that facilitate holding securities until the recovery of their amortized cost basis. We also believe that our market risk management practices have allowed us to effectively manage the market volatility over time and remain strong under these challenging conditions. We do not have significant deposit client concentrations and further believe that our clients are confident in the resiliency of the Bank. As a result of the events triggered by such bank failures, we have not experienced significant changes in our customer deposits base. Total core deposits at September 30, 2023 amounted to $8.539 billion compared to $8.557 billion at December 31, 2022.

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 created 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 help manage OFG’s vulnerability to changes in interest rates.

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.

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The following table presents the results of the simulations for the most likely scenarios at September 30, 2023. 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	$	9,490	1.62	%	$	4,362	0.74	%
+ 100 Basis points	$	18,932	3.23	%	$	8,816	1.50	%
+ 200 Basis points	$	38,003	6.48	%	$	17,732	3.02	%
- 50 Basis points	$	(10,757)	-1.83	%	$	(4,950)	-0.84	%
'-100 Basis points	$	(21,681)	-3.70	%	$	(9,928)	-1.69	%

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 will 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 any structured repurchase agreements 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 included 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.

In the past, OFG has incorporated the use of derivative instruments to minimize significant unplanned fluctuations in earnings that were caused by interest rate volatility. OFG’s goal was 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 was 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 appreciated or depreciated in market value. Also, for some fixed-rate assets or liabilities, the effect of this variability in earnings was expected to be substantially offset by OFG’s gains and losses on the derivative instruments that were linked to the forecasted cash flows of these hedged assets and liabilities. OFG considered the strategic use of derivatives to be a prudent method of managing interest-rate sensitivity as it reduced the exposure of earnings and the market value of its equity to undue risk posed by changes in interest rates.

During the first quarter of 2023, OFG entered into a $200.0 million 2-year FHLB advance with a weighted average interest rate of 4.52%. In addition, as of September 30, 2023 OFG's FHLB overnight advance amounted to $100.0 million with a weighted average interest rate of 5.59%. As of September 30, 2023, OFG had $150.6 million in short-term fixed rate repurchase agreements with weighted average interest rate of 5.47%.

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LIBOR Transition

In July 2017, the Chief Executive of the Financial Conduct Authority (“FCA”) announced that the FCA intended to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. However, the administrator of LIBOR extended the publication of the most commonly used U.S. Dollar LIBOR settings until June 30, 2023 and ceased publishing other LIBOR settings since December 31, 2021. The U.S. federal banking agencies issued guidance strongly encouraging banking organizations to cease using U.S. Dollar LIBOR as a reference rate in new contracts as soon as practicable and in any event by December 31, 2021. On March 15, 2022, President Biden signed into law the “Adjustable Interest Rate (LIBOR) Act,” as part of the Consolidated Appropriations Act of 2022, which provided for a statutory transition to a replacement rate selected by the FRB based on the Secured Overnight Financing Rate (“SOFR”) for contracts referencing LIBOR that contain no fallback provisions or ineffective fallback provisions, unless a replacement rate is selected by a determining person as outlined in the statute. On December 16, 2022, the FRB adopted a final rule implementing the Adjustable Interest Rate (LIBOR) Act by identifying benchmark rates based on SOFR that will replace LIBOR in certain financial contracts after June 30, 2023. As of September 30, 2023, OFG has transitioned all of its financial instruments to an alternative benchmark rate by adopting the SOFR alternatives as well as other credit sensitive alternative reference rates.

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 Hurricane Fiona in September 2022, 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 and US Treasury 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 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.

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. Liquidity to support growth in loans held for investment has been fulfilled primarily through growth in customer deposits. OFG’s goal is to obtain as much of its funding for loans held for investment and other earning assets as possible from customer deposits, which are generated principally through development of long-term customer relationships. Deposit volumes as well as the customer deposit base have remained stable. 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 September 30, 2023, OFG had $150.6 million in short-term fixed rate repurchase agreements and $2.9 million in brokered deposits.

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In the ordinary course of the OFG’s operations, OFG has entered into certain contractual obligations and has made other commitments to make future payments. OFG believes that it will be able to meet its contractual obligations as they come due through the maintenance of adequate cash levels. Commitments to extend credit are agreements to lend to customers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates, bear variable interest rate and may require payment of a fee. Since the commitments may expire unexercised, the total commitment amounts do not necessarily represent future cash requirements. OFG evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by OFG upon extension of credit, is based on management’s credit evaluation of the customer. Loan commitments, which represent unused lines of credit, decreased to $1.291 billion at September 30, 2023 ($118.6 million with maturity of one year or less and $1.173 billion with maturity over one year) compared to $1.403 billion at December 31, 2022 ($214.7 million with maturity of one year or less and $1.188 billion with maturity over one year), and standby letters of credit provided to customers amounted to $28.1 million at both September 30, 2023 and December 31, 2022. Loans sold with recourse at September 30, 2023 and December 31, 2022 amounted to $101.3 million and $110.9 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 September 30, 2023 and December 31, 2022, OFG maintained other non-credit commitments amounting to $19.7 million and $21.5 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 September 30, 2023 and December 31, 2022, OFG had commitments for capital expenditures in technology amounting to $5.7 million and $8.6 million, respectively, which are expected to be satisfied with OFG’s unrestricted cash.

OFG expects to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. Our liquidity risk management practices have allowed us to effectively manage the market volatility in the past, as with the Covid-19 pandemic, and in the present, with the recent disruption in the banking industry with the high-profile bank failures during the first half of the year 2023. Liquidity grew from the federal stimulus programs Puerto Rico has received following Hurricane Maria in 2017, the January 2020 earthquakes, the Covid-19 pandemic and Hurricane Fiona in 2022. 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 inflation, recent geopolitical events, and increasing recessionary risk in the US, we continue monitoring our liquidity position, specifically cash on hand to meet customer demands.

In addition, as OFG is a holding company and is a separate operating entity from the Bank, OFG’s primary sources of liquidity are dividends received from the Bank and borrowings from outside sources. Banking regulations may limit the amount of dividends that may be paid by the Bank. Management believes that these limitations will not impact OFG’s ability to meet its ongoing short-term cash obligations.

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 or US 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.

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As of September 30, 2023, OFG had approximately $532.7 million in unrestricted cash and cash equivalents, $1.361 billion in investment securities that are not pledged as collateral, $346.4 million in borrowing capacity at the FHLB and a secured line of credit through the Federal Reserve Bank discount window with availability to borrow $1.3 million. Also starting in first quarter 2023, the Bank is eligible to borrow from the FRB's Bank Term Funding Program (“BTFP”), which provides additional contingent liquidity through the pledging of certain qualifying securities and other assets. The BTFP is a one-year program ending March 11, 2024 and OFG can borrow any time during the term and can repay the obligation at any time without penalty. The Bank pledged $51.0 million under the program even though it does not expect to use it. At September 30, 2023, the Bank had $834.5 million in securities not pledged that qualified for the BTFP.

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, 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 the General Counsel who reports to the Chief Executive Officer and supervises the BSA Officer and Regulatory Compliance Officer. The General Counsel 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.

In the aftermath of the recent bank failures, the regulatory agencies may propose certain actions, including reforms to existing regulatory and prudential frameworks that may impose different capital and liquidity requirements, including increased requirements to issue debt or raise capital. In addition, there may be special assessments imposed on insured depository institutions in order to mitigate the losses to the FDIC’s Deposit Insurance Fund as a result of recent bank failures. It is not yet possible to quantify the scope of any of these actions or the potential impact on our operations.

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 September 30, 2023, 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

There have been no material changes to the risk factors previously disclosed in our 2022 Form 10-K, except as set forth in our subsequent quarterly reports on Form 10-Q. In addition to other information set forth in this quarterly report, you should carefully consider the risk factors included in our 2022 Form 10-K, as updated by this report or other filings we make with the SEC under the Exchange Act. Additional risks and uncertainties not presently known to OFG at this time or OFG currently deems immaterial may also adversely affect OFG’s business, financial condition or results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

Issuer Purchases of Equity Securities

In January 2022, OFG announced the approval by its Board of Directors of a new stock repurchase program for the purchase of up to $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 September 30, 2023, OFG repurchased 73,600 shares for a total of $2.2 million at an average price of $29.70 per share.

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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 September 30, 2023, excluding the months of July and August 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)

9/1/23 - 9/30/23

73,600

$29.70

73,600

17,237

The number of shares that may yet be purchased under the current $100 million stock buyback program is estimated at 577,260 and was calculated by dividing the remaining balance of $17.2 million by $29.86 (closing price of OFG common stock at September 30, 2023). OFG did not repurchase any shares of its common stock during the quarter ended September 30, 2023 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

(a) None.

(b) 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 September 30, 2023, 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: November 6, 2023
José Rafael Fernández President and Chief Executive Officer

By:	/s/ Maritza Arizmendi Díaz	Dated: November 6, 2023
Maritza Arizmendi Díaz Chief Financial Officer

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