0001030469 us-gaap:ConsumerPortfolioSegmentMember ofg:UnsecuredPersonalLinesOfCreditMember ofg:AcquiredScotiabankPrUsviAccountedForUnderAsc31020Member 2019-12-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington,, D.C. 20549

FORM 10-Q

(Mark One)

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

EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2019~~March 31, 2020

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number 001-12647

OFG Bancorp

Incorporated in the Commonwealth of Puerto Rico,, IRS Employer Identification No. 66-0538893

Principal Executive Offices:

254 Muñoz Rivera Avenue

San Juan, Puerto Rico 00918

Telephone Number: (787) 771-6800

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

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

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

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

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

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

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

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

~~51,347,056~~51,340,582 common shares ($1.00 par value per share) outstanding as of ~~October 31, 2019~~

~~OFG BANCORP~~

~~UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION~~

~~AS OF SEPTEMBER~~April 30, ~~2019 AND DECEMBER 31, 2018~~2020

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION			Page
Item 1.	Financial Statements
	Unaudited Consolidated Statements of Financial Condition		1
	Unaudited Consolidated Statements of Operations		3
	Unaudited Consolidated Statements of Comprehensive Income		5
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity		6
	Unaudited Consolidated Statements of Cash Flows		7
	Notes to Unaudited Consolidated Financial Statements

		Note 1 – ~~Organization, Consolidation and Basis of Presentation~~Significant Accounting Policies	9
		Note 2 – ~~Significant Events~~Business Combinations	1216
		Note 3 – Restricted Cash	1519
		Note 4 – Investment Securities	1719
		Note 5 – Loans	2223
		Note 6 – Allowance for ~~Loan and Lease~~Credit Losses	5043
		Note 7 – Foreclosed Real Estate	6046
		Note 8 – ~~Derivatives~~Servicing Assets	6146
		Note 9 – Derivatives	48
		Note 10 – Core Deposit, customer relationship intangible and other intangibles	49
		Note 11 – Accrued Interest Receivable and Other Assets	6249
		Note 1012 – Deposits and Related Interest	6350
		Note 1113 – Borrowings and Related Interest	6551
		Note 1214 – Offsetting of Financial Assets and Liabilities	6754
		Note 1315 – Income Taxes	6956
		Note 1416 – Regulatory Capital Requirements	7057
		Note 1517 – Stockholders’ Equity	7259
		Note 1618 – Accumulated Other Comprehensive Income	7460
		Note 1719 – Earnings per Common Share	7762
		Note 1820 – Guarantees	7862
		Note 1921 – Commitments and Contingencies	7963
		Note 2022 – Operating Leases	8065
		Note 2123 – Fair Value of Financial Instruments	8367
		Note 2224 – Banking and Financial Service Revenues	8973
		Note 2325 – Business Segments	9175

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9477
		Critical Accounting Policies and Estimates	9477
		Selected Financial Data	9581
		Financial Highlights of the ~~Third~~First Quarter of ~~2019~~2020	9783
		Analysis of Results of Operations	~~101~~83
		Analysis of Financial Condition	~~114~~90
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		~~138~~111
Item 4.	Controls and Procedures		~~142~~115
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings		~~143~~116
Item 1A.	Risk Factors		~~143~~116
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		~~144~~117
Item 3.	Default upon Senior Securities		~~144~~117
Item 4.	Mine Safety Disclosures		~~144~~117
Item 5.	Other Information		~~144~~117
Item 6.	Exhibits		~~145~~118
Signatures			~~146~~119

~~FORWARD-LOOKING STATEMENTS~~

The information included in this quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to the financial condition, results of operations, plans, objectives, future performance and business of OFG Bancorp (“we,” “our,” “us” or “Oriental”), including, but not limited to, statements with respect to the adequacy of the allowance for loan losses, delinquency trends, market risk and the impact of interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal proceedings and new accounting standards on Oriental’s financial condition and results of operations. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions are generally intended to identify forward-looking statements.

These statements are not guarantees of future performance and involve certain risks, uncertainties, estimates and assumptions by management that are difficult to predict. Various factors, some of which by their nature are beyond Oriental’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause such a difference include, but are not limited to:

·~~the rate of growth in the economy and employment levels, as well as general business and economic conditions;~~

·~~changes in interest rates, as well as the magnitude of such changes;~~

·~~a credit default by municipalities of the government of Puerto Rico;~~

·~~amendments to the fiscal plan approved by the Financial Oversight and Management Board for Puerto Rico;~~

·~~determinations in the court-supervised debt-restructuring process under Title III of PROMESA for the Puerto Rico government and all of its agencies, including some of its public corporations;~~

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

·the amount of government, private and philanthropic financial assistance for the reconstruction of Puerto Rico’s critical infrastructure, which suffered catastrophic damages caused by hurricane Maria;

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

·~~the fiscal and monetary policies of the federal government and its agencies;~~

·~~changes in federal bank regulatory and supervisory policies, including required levels of capital;~~

·~~the relative strength or weakness of the commercial and consumer credit sectors and the real estate market in Puerto Rico;~~

·~~the performance of the stock and bond markets;~~

·~~competition in the financial services industry;~~

·~~possible legislative, tax or regulatory changes;~~

·the receipt and timing of regulatory approvals required to consummate the acquisition of Scotiabank de Puerto Rico (“SBPR”) and certain branch assets and liabilities of The Bank of Nova Scotia (“BNS”) in Puerto Rico and its U.S. Virgin Islands operations (the “Scotiabank Transaction”); and

·~~difficulties in integrating the operations expected to be acquired in the Scotiabank Transaction.~~

Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-looking statements include the following: negative economic conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense; changes in interest rates and market liquidity which may reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets; adverse movements and volatility in debt and equity capital markets; changes in market rates and prices which may adversely impact the value of financial assets and liabilities; liabilities resulting from litigation and regulatory investigations; changes in accounting standards, rules and interpretations; increased competition; Oriental’s ability to grow its core businesses; decisions to downsize, sell or close units or otherwise change Oriental’s business mix; and management’s ability to identify and manage these and other risks.

All forward-looking statements included in this quarterly report on Form 10-Q are based upon information available to Oriental as of the date of this report, and other than as required by law, including the requirements of applicable securities laws, Oriental assumes no obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF ~~SEPTEMBER 30, 2019~~MARCH 31, 2020 AND DECEMBER 31, ~~2018~~2019

		September 30,		December 31,			March 31,		December 31,
		2019		2018			2020		2019
		(In thousands)					(In thousands)
ASSETS
Cash and cash equivalents:
Cash and due from banks		$	953,802	$	442,103		$	1,314,688	$	844,532
Money market investments			8,035		4,930			10,203		6,775
Total cash and cash equivalents			961,837		447,033			1,324,891		851,307
Restricted cash			1,050		3,030			1,050		1,450
Investments:
Trading securities, at fair value, with amortized cost of $182 (December 31, 2018 - $647)			41		360
Investment securities available-for-sale, at fair value, with amortized cost of $520,960 (December 31, 2018 - $854,511)			519,095		841,857
Investment securities held-to-maturity, at amortized cost, with fair value of $410,353 at December 31, 2018			-		424,740
Trading securities, at fair value, with amortized cost of $182 (December 31, 2019 - $182)								29		37
Investment securities available-for-sale, at fair value, with amortized cost of $648,565
and allowance for credit losses of $0 (December 31, 2019, amortized cost $1,074,475)								657,460		1,074,169
Federal Home Loan Bank (FHLB) stock, at cost			10,525		12,644			10,301		13,048
Other investments			57		3			973		560
Total investments			529,718		1,279,604			668,763		1,087,814
Loans:
Loans held-for-sale, at lower of cost or fair value			35,546		10,368			5,815		19,591
Loans held for investment, net of allowance for loan losses of $154,343 (December 31, 2018 - $164,231)			4,371,644		4,421,226
Loans held for investment, net of allowance for credit losses of $230,755 (December 31, 2019 - $116,539)								6,535,359		6,622,256
Total loans			4,407,190		4,431,594			6,541,174		6,641,847
Other assets:
Foreclosed real estate			26,952		33,768			27,292		29,909
Accrued interest receivable			30,470		34,254			40,181		37,120
Deferred tax asset, net			112,602		113,763			196,129		176,740
Premises and equipment, net			69,754		68,892			81,834		81,105
Customers' liability on acceptances			21,796		16,937			11,763		21,599
Core deposit, customer relationship and other intangibles								54,174		56,965
Servicing assets			10,125		10,716			49,287		50,779
Derivative assets			13		347
Goodwill			86,069		86,069			86,069		86,069
Operating lease right-of-use assets			19,318		-			36,844		39,112
Other assets			56,611		57,345			119,120		135,845
Total assets		$	6,333,505	$	6,583,352		$	9,238,571	$	9,297,661

See notes to unaudited consolidated financial statements	See notes to unaudited consolidated financial statements					See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF ~~SEPTEMBER 30, 2019~~MARCH 31, 2020 AND DECEMBER 31, ~~2018 (CONTINUED)~~2019

		September 30,		December 31,			March 31,		December 31,
		2019		2018			2020		2019
		(In thousands)					(In thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits		$	2,228,256	$	2,191,802		$	3,711,492	$	3,579,115
Savings accounts			1,225,654		1,212,259			1,871,719		1,836,480
Time deposits			1,424,148		1,504,054			2,236,060		2,283,015
Total deposits			4,878,058		4,908,115			7,819,271		7,698,610
Borrowings:
Securities sold under agreements to repurchase			190,261		455,508			50,103		190,274
Advances from FHLB			79,052		77,620			76,961		78,009
Subordinated capital notes			36,083		36,083			36,083		36,083
Other borrowings			551		1,214			640		1,195
Total borrowings			305,947		570,425			163,787		305,561
Other liabilities:
Derivative liabilities			1,159		333			2,059		913
Acceptances executed and outstanding			21,796		16,937			11,763		21,599
Operating lease liabilities			21,081		-			37,702		39,840
Accrued expenses and other liabilities			56,388		87,665			181,395		185,660
Total liabilities			5,284,429		5,583,475			8,215,977		8,252,183
Commitments and contingencies (See Note 18)								nil		nil
Stockholders’ equity:
Preferred stock; 10,000,000 shares authorized;
1,340,000 shares of Series A, 1,380,000 shares of Series B, and 960,000 shares of Series D issued and outstanding
(December 31, 2018 - 1,340,000 shares; 1,380,000 shares; and 960,000 shares) $25 liquidation value			92,000		92,000
Common stock, $1 par value; 100,000,000 shares authorized; 59,885,234 shares issued: 51,347,056 shares outstanding (December 31, 2018 - $59,885,234;
51,293,924)			59,885		59,885
(December 31, 2019 - 1,340,000 shares; 1,380,000 shares; and 960,000 shares) $25 liquidation value								92,000		92,000
Common stock, $1 par value; 100,000,000 shares authorized; 59,885,234 shares issued: 51,326,998 shares outstanding (December 31, 2019 - $59,885,234;
51,398,956 )								59,885		59,885
Additional paid-in capital			620,948		619,381			621,206		621,515
Legal surplus			95,783		90,167			95,945		95,779
Retained earnings			285,854		253,040			250,557		279,646
Treasury stock, at cost, 8,538,178 shares (December 31, 2018 - 8,591,310 shares)			(102,936)		(103,633)
Accumulated other comprehensive loss, net of tax of $552 (December 31, 2018 - $1,677)			(2,458)		(10,963)
Treasury stock, at cost, 8,558,236 shares (December 31, 2019 - 8,486,278 shares)								(103,289)		(102,339)
Accumulated other comprehensive income (loss), net of tax of $548 (December 31, 2019 - $206)								6,290		(1,008)
Total stockholders’ equity			1,049,076		999,877			1,022,594		1,045,478
Total liabilities and stockholders’ equity		$	6,333,505	$	6,583,352		$	9,238,571	$	9,297,661

See notes to unaudited consolidated financial statements	See notes to unaudited consolidated financial statements					See notes to unaudited consolidated financial statements

OFG BANCORP

~~UNADUTIED CONSOLIDATED STATEMENTS OF OPERATIONS~~

~~FOR THE QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2019 AND 2018~~

Quarter Ended September 30,

Nine-Month Period Ended September 30,

2019

2018

2019

2018

(In thousands, except per share data)
Interest income:

        Loans
$
85,772

$
84,016

$
254,971

$
237,057
        Mortgage-backed securities

3,553

8,173

17,465

23,258
        Investment securities and other

4,330

1,948

10,184

4,998
                    Total interest income

93,655

94,137

282,620

265,313
Interest expense:

        Deposits

10,554

8,605

29,594

23,554
        Securities sold under agreements to repurchase

1,342

2,242

6,234

5,159
        Advances from FHLB and other borrowings

550

517

1,671

1,339
        Subordinated capital notes

499

496

1,537

1,402
                    Total interest expense

12,945

11,860

39,036

31,454
Net interest income

80,710

82,277

243,584

233,859
Provision for loan losses, net

43,770

14,601

73,724

44,808
Net interest income after provision for loan and lease losses

36,940

67,676

169,860

189,051
Non-interest income:

        Banking service revenue

10,813

10,797

32,054

32,404
        Wealth management revenue

6,611

6,407

19,162

18,688
        Mortgage banking activities

1,118

1,242

2,953

3,987
                    Total banking and financial service revenues

18,542

18,446

54,169

55,079

            Sale of securities

3,498

-

8,274

-
            Early extinguishment of debt

-

-

(7)

-
        Other non-interest income

138

174

346

758
                    Total non-interest income, net

22,178

18,620

62,782

55,837
See notes to unaudited consolidated financial statements

~~OFG BANCORP~~

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS ENDED MARCH 31, 2020 AND ~~NINE-MONTH PERIODS ENDED SEPTEMBER 30,~~ 2019 ~~AND 2018 (CONTINUED)~~

Quarter Ended September 30,

Nine-Month Period Ended September 30,

2019

2018

2019

2018

(In thousands, except per share data)
Non-interest expense:

        Compensation and employee benefits

20,500

18,495

60,716

57,202
        Occupancy, equipment and infrastructure costs

7,307

8,388

22,564

25,322
        Electronic banking charges

5,505

5,586

15,698

15,968
        Professional and service fees

3,662

3,077

10,297

8,917
        Loss on sale of foreclosed real estate, other repossessed assets and credit related expenses

2,889

3,946

8,839

9,880
        Information technology expenses

2,247

2,056

6,953

6,064
        Taxes, other than payroll and income taxes

2,235

2,175

6,530

6,820
        Advertising, business promotion, and strategic initiatives

1,333

1,329

3,859

3,700
        Loan servicing and clearing expenses

1,194

1,251

3,562

3,639
        Merger and restructuring charges

1,556

-

2,556

-
        Communication

956

927

2,556

2,627
        Printing, postage, stationary and supplies

672

499

1,885

1,748
        Insurance

(366)

1,620

2,057

4,580
        Director and investor relations

374

223

934

800
        Other

663

1,369

5,325

8,095
                    Total non-interest expense

50,727

50,941

154,331

155,362
Income before income taxes

8,391

35,355

78,311

89,526
        Income tax expense

1,008

12,255

23,479

29,860
Net income

7,383

23,100

54,832

59,666
        Less: dividends on preferred stock

(1,628)

(3,466)

(4,884)

(10,396)
Income available to common shareholders
$
5,755

$
19,634

$
49,948

$
49,270
Earnings per common share:

        Basic
$
0.11

$
0.45

$
0.97

$
1.12
        Diluted
$
0.11

$
0.42

$
0.97

$
1.07
Average common shares outstanding and equivalents

51,772

51,464

51,695

51,344
Cash dividends per share of common stock
$
0.07

$
0.06

$
0.21

$
0.18

See notes to unaudited consolidated financial statements

	Quarter Ended March 31,
	2020		2019
	(In thousands, except per share data)
Interest income:
Loans	$	116,502	$	84,119
Mortgage-backed securities		2,773		7,925
Investment securities and other		4,489		2,666
Total interest income		123,764		94,710
Interest expense:
Deposits		16,620		9,049
Securities sold under agreements to repurchase		1,002		2,785
Advances from FHLB and other borrowings		539		563
Subordinated capital notes		435		524
Total interest expense		18,596		12,921
Net interest income		105,168		81,789
Provision for credit losses		47,131		12,249
Net interest income after provision for credit losses		58,037		69,540
Non-interest income:
Banking service revenue		15,646		10,465
Wealth management revenue		7,286		5,882
Mortgage banking activities		3,234		1,206
Total banking and financial service revenues		26,166		17,553

Net gain on:
Sale of securities		4,728		-
Bargain purchase from Scotiabank PR & USVI acquisition		409		-
Other non-interest income		80		103
Total non-interest income, net		31,383		17,656

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS ENDED MARCH 31, 2020 AND 2019 (CONTINUED)

Quarter Ended March 31,

2020

2019

(In thousands, except per share data)
Non-interest expense:

Compensation and employee benefits

35,544

20,341
Occupancy, equipment and infrastructure costs

11,439

7,746
Electronic banking charges

9,588

5,065
Information technology expenses

6,934

2,507
Professional and service fees

5,789

3,208
Insurance

3,478

1,146
Taxes, other than payroll and income taxes

3,177

2,154
Loss on sale of foreclosed real estate, other repossessed assets and credit related expenses

2,522

3,366
Advertising, business promotion, and strategic initiatives

1,629

1,211
Loan servicing and clearing expenses

1,343

1,209
Communication

971

741
Printing, postage, stationary and supplies

722

578
Director and investor relations

310

230
Merger and restructuring charges

304

-
Other

3,572

2,650
Total non-interest expense

87,322

52,152
Income before income taxes

2,098

35,044
Income tax expense

297

11,574
Net income

1,801

23,470
Less: dividends on preferred stock

(1,628)

(1,628)
Income available to common shareholders
$
173

$
21,842
Earnings per common share:

Basic
$
-

$
0.43
Diluted
$
-

$
0.42
Average common shares outstanding and equivalents

51,713

51,626
Cash dividends per share of common stock
$
0.07

$
0.07

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE QUARTERS ENDED MARCH 31, 2020 AND ~~NINE-MONTH PERIODS ENDED SEPTEMBER 30,~~ 2019 ~~AND 2018~~


	Quarter Ended September 30,				Nine-Month Period Ended September 30,				Quarter Ended March 31,
	2019		2018		2019		2018		2020		2019
	(In thousands)								(In thousands)

Net income	$	7,383	$	23,100	$	54,832	$	59,666	$	1,801	$	23,470
Other comprehensive income (loss) before tax:
Unrealized gain (loss) on securities available-for-sale		5,111		(6,375)		19,063		(21,340)		13,929		3,374
Realized gain on sale of securities available-for-sale		(3,498)		-		(8,274)		-		(4,728)		-
Unrealized (loss) gain on cash flow hedges		(188)		223		(1,160)		1,153		(1,150)		(343)
Other comprehensive income (loss) before taxes		1,425		(6,152)		9,629		(20,187)
Other comprehensive income before taxes										8,051		3,031
Income tax effect		(197)		619		(1,124)		2,341		(753)		(115)
Other comprehensive income (loss) after taxes		1,228		(5,533)		8,505		(17,846)
Other comprehensive income after taxes										7,298		2,916
Comprehensive income	$	8,611	$	17,567	$	63,337	$	41,820	$	9,099	$	26,386

See notes to unaudited consolidated financial statements	See notes to unaudited consolidated financial statements								See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY

FOR THE QUARTERS ENDED MARCH 31, 2020 AND ~~NINE-MONTH PERIODS ENDED SEPTEMBER 30,~~ 2019 ~~AND 2018~~


	Quarter Ended September 30,				Nine-Month Period Ended September 30,				Quarter Ended March 31,
	2019		2018		2019		2018		2020		2019
	(In thousands)								(In thousands)
Preferred stock:
Balance at beginning of period	$	92,000	$	176,000	$	92,000	$	176,000	$	92,000	$	92,000
Balance at end of period		92,000		176,000		92,000		176,000		92,000		92,000
Common stock:
Balance at beginning of period		59,885		52,626		59,885		52,626		59,885		59,885
Balance at end of period		59,885		52,626		59,885		52,626		59,885		59,885
Additional paid-in capital:
Balance at beginning of period		620,368		541,734		619,381		541,600		621,515		619,381
Stock-based compensation expense		580		344		1,567		978		501		447
Stock-based compensation excess tax benefit recognized in income		-		-		-		(140)
Lapsed restricted stock units		-		-		-		(360)		(810)		-
Balance at end of period		620,948		542,078		620,948		542,078		621,206		619,828
Legal surplus:
Balance at beginning of period		95,019		85,249		90,167		81,454		95,779		90,167
Transfer from retained earnings		764		2,314		5,616		6,109		166		2,454
Balance at end of period		95,783		87,563		95,783		87,563		95,945		92,621
Retained earnings:
Balance at beginning of period		284,459		221,441		253,040		200,878		279,646		253,040
Lease standard initial adoption		-		-		(736)		-
Topic 326 adoption										(25,494)		-
Topic 842 adoption										-		(736)
Balance at beginning of period (as adjusted for change in accounting principle)										254,152		252,304
Net income		7,383		23,100		54,832		59,666		1,801		23,470
Cash dividends declared on common stock		(3,596)		(2,642)		(10,782)		(7,919)		(3,602)		(3,591)
Cash dividends declared on preferred stock		(1,628)		(3,465)		(4,884)		(10,396)		(1,628)		(1,628)
Transfer to legal surplus		(764)		(2,314)		(5,616)		(6,109)		(166)		(2,454)
Balance at end of period		285,854		236,120		285,854		236,120		250,557		268,101
Treasury stock:
Balance at beginning of period		(103,171)		(103,969)		(103,633)		(104,502)		(102,339)		(103,633)
Stock repurchased										(2,226)		-
Lapsed restricted stock units and options		235		263		697		796		1,276		437
Balance at end of period		(102,936)		(103,706)		(102,936)		(103,706)		(103,289)		(103,196)
Accumulated other comprehensive loss, net of tax:
Accumulated other comprehensive income (loss), net of tax:
Balance at beginning of period		(3,686)		(15,262)		(10,963)		(2,949)		(1,008)		(10,963)
Other comprehensive income (loss), net of tax:		1,228		(5,533)		8,505		(17,846)
Other comprehensive income, net of tax:										7,298		2,916
Balance at end of period		(2,458)		(20,795)		(2,458)		(20,795)		6,290		(8,047)
Total stockholders’ equity	$	1,049,076	$	969,886	$	1,049,076	$	969,886	$	1,022,594	$	1,021,192

See notes to unaudited consolidated financial statements	See notes to unaudited consolidated financial statements								See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE ~~NINE-MONTH PERIODS~~QUARTERS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2020 AND 2019 ~~AND 2018~~


	Nine-Month Period Ended September 30,				Quarter Ended March 31,
	2019		2018		2020		2019
	(In thousands)				(In thousands)
Cash flows from operating activities:
Net income	$	54,832	$	59,666	$	1,801	$	23,470
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred loan origination fees and fair value premiums on acquired loans		3,250		3,433
Amortization of deferred loan origination fees and fair value (discounts) premiums on acquired loans						(2,239)		809
Amortization of investment securities premiums, net of accretion of discounts		3,905		4,426		1,906		1,113
Amortization of core deposit and customer relationship intangibles		877		989
Amortization of core deposit, customer relationships and other intangibles						2,791		292
Net change in operating leases		(95)		-		130		10
Depreciation and amortization of premises and equipment		6,265		6,642		3,001		2,095
Deferred income tax expense, net		476		6,827
Provision for loan losses, net		73,724		44,808
Deferred income tax (benefit) expense, net						(6,226)		1,344
Provision for credit losses						47,131		12,249
Stock-based compensation		1,567		978		501		447
Stock-based compensation excess tax benefit recognized in income		-		(140)
(Gain) loss on:
Sale of securities		(8,274)		-		(4,728)		-
Sale of loans		(380)		(275)		(565)		(167)
Derivatives		-		1
Early extinguishment of repurchase agreements		7		-
Foreclosed real estate and other repossessed assets		2,666		2,828		554		1,176
Sale of other assets		(80)		(107)		(7)		-
Originations of loans held-for-sale		(59,879)		(72,512)		(31,401)		(18,282)
Proceeds from sale of loans held-for-sale		15,208		21,593		19,133		5,923
Net (increase) decrease in:
Trading securities		319		(214)		8		(21)
Other investments		(54)		-
Accrued interest receivable		3,784		16,517		(3,067)		1,102
Servicing assets		591		(1,045)		1,492		93
Other assets		463		2,405		18,791		6,703
Net (decrease) increase in:
Net increase (decrease) in:
Accrued interest on deposits and borrowings		(1,875)		643		(1,136)		(991)
Accrued expenses and other liabilities		(56,288)		(23,836)		(28,815)		(16,687)
Net cash provided by operating activities		41,009		73,627		19,055		20,678

See notes to unaudited consolidated financial statements	See notes to unaudited consolidated financial statements				See notes to unaudited consolidated financial statements

Nine-Month Period Ended September 30,

2019

2018

(In thousands)
Cash flows from investing activities:

Purchases of:

   Investment securities available-for-sale

(1,117)

(271,062)
   FHLB stock

(1,167)

(113,506)
Maturities and redemptions of:

   Investment securities available-for-sale

129,027

89,753
   Investment securities held-to-maturity

-

58,477
   FHLB stock

3,286

115,040
Proceeds from sales of:

   Investment securities available-for-sale

680,466

14,746
   Foreclosed real estate and other repossessed assets, including write-offs

37,115

38,816
   Loans held-for-investment

14,668

-
   Fully charged-off loans

2,382

-
   Premises and equipment

2,113

1,670
Origination and purchase of loans, excluding loans held-for-sale

(834,486)

(1,015,960)
Principal repayment of loans

722,367

632,333
Additions to premises and equipment

(9,160)

(8,107)
Net cash provided by (used in) investing activities
$
745,494

$
(457,800)

Cash flows from financing activities:

Net increase (decrease) in:

   Deposits

5,242

301,195
   Securities sold under agreements to repurchase

(264,730)

185,308
   FHLB advances, federal funds purchased, and other borrowings

775

(25,904)
Restricted units lapsed

697

436
Dividends paid on preferred stock

(4,881)

(10,396)
Dividends paid on common stock

(10,782)

(7,919)
Net cash (used in) provided by financing activities
$
(273,679)

$
442,720
Net change in cash, cash equivalents and restricted cash

512,824

58,547
Cash, cash equivalents and restricted cash at beginning of period

450,063

488,233
Cash, cash equivalents and restricted cash at end of period
$
962,887

$
546,780
Reconciliation of the Consolidated Statements of Cash Flows to the Consolidated Balance Sheets:

   Cash and due from banks
$
953,802

$
537,945
   Money market investments

8,035

5,805
   Restricted cash

1,050

3,030
Total cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
$
962,887

$
546,780
Supplemental Cash Flow Disclosure and Schedule of Non-cash Activities:

Interest paid
$
39,710

$
29,523
Income taxes paid
$
36,924

$
13,446
Operating lease liabilities paid
$
5,174

$
-
Mortgage loans securitized into mortgage-backed securities
$
45,716

$
59,050
Transfer from held-to-maturity securities to available-for-sale securities
$
424,740

$
-
Transfer from loans to foreclosed real estate and other repossessed assets
$
34,532

$
36,848
Reclassification of loans held-for-investment portfolio to held-for-sale portfolio
$
25,933

$
5,795
Reclassification of loans held-for-sale portfolio to held-for-investment portfolio
$
49

$
1,247
Financed sales of foreclosed real estate
$
1,016

$
912
Loans booked under the GNMA buy-back option
$
11,403

$
13,325
Initial recognition of operating lease right-of-use assets
$
21,930

$
-
Initial recognition of operating lease liabilities
$
23,689

$
-
See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE QUARTERS ENDED MARCH 31, 2020 AND 2019 (CONTINUED)

Quarter Ended March 31,

2020

2019

(In thousands)
Cash flows from investing activities:

Purchases of:

Investment securities available-for-sale

(618)

(207)
FHLB stock

-

(1,101)
Other investments

(413)

-
Maturities and redemptions of:

Investment securities available-for-sale

135,149

44,758
FHLB stock

2,747

945
Proceeds from sales of:

Investment securities available-for-sale

320,984

-
Foreclosed real estate and other repossessed assets, including write-offs

11,010

11,948
Premises and equipment

7

-
Origination and purchase of loans, excluding loans held-for-sale

(249,157)

(258,082)
Principal repayment of loans

241,638

254,992
Additions to premises and equipment

(3,730)

(2,220)
Net cash provided by investing activities
$
457,617

$
51,033
Cash flows from financing activities:

Net increase (decrease) in:

Deposits

145,096

12,850
Securities sold under agreements to repurchase

(140,000)

(23,766)
FHLB advances, federal funds purchased, and other borrowings

(1,598)

2,547
Exercise of stock options with treasury shares

466

437
Purchase of treasury stock

(2,226)

-
Dividends paid on preferred stock

(1,628)

(1,229)
Dividends paid on common stock

(3,598)

(3,590)
Net cash (used in) financing activities
$
(3,488)

$
(12,751)
Net change in cash, cash equivalents and restricted cash

473,184

58,960
Cash, cash equivalents and restricted cash at beginning of period

852,757

450,063
Cash, cash equivalents and restricted cash at end of period
$
1,325,941

$
509,023
Reconciliation of the Consolidated Statements of Cash Flows to the Consolidated Balance Sheets:

Cash and due from banks
$
1,314,688

$
498,328
Money market investments

10,203

7,665
Restricted cash

1,050

3,030
Total cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
$
1,325,941

$
509,023
Supplemental Cash Flow Disclosure and Schedule of Non-cash Activities:

Interest paid
$
15,584

$
13,513
Income taxes paid
$
5,000

$
-
Operating lease liabilities paid
$
3,208

$
1,519
Mortgage loans securitized into mortgage-backed securities
$
26,783

$
15,163
Transfer from held-to-maturity securities to available-for-sale securities
$
-

$
424,740
Transfer from loans to foreclosed real estate and other repossessed assets
$
8,716

$
10,995
Reclassification of loans held-for-investment portfolio to held-for-sale portfolio
$
261

$
-
Reclassification of loans held-for-sale portfolio to held-for-investment portfolio
$
-

$
49
Financed sales of foreclosed real estate
$
-

$
186
Loans booked under the GNMA buy-back option
$
75,314

$
12,942
Initial recognition of operating lease right-of-use assets
$
-

$
21,930
Initial recognition of operating lease liabilities
$
-

$
23,689
See notes to unaudited consolidated financial statements

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 –~~ORGANIZATION, CONSOLIDATION AND BASIS OF PRESENTATION~~ SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

~~OFG Bancorp (“Oriental”)~~Oriental is a publicly-owned financial holding company incorporated under the laws of the Commonwealth of Puerto Rico. Oriental operates through various subsidiaries including, a commercial bank, Oriental Bank (the “Bank”), a securities broker-dealer, Oriental Financial Services Corp. (“Oriental Financial Services”), an insurance agency, Oriental Insurance, ~~LLC.~~LLC (“Oriental Insurance”), and a retirement plan administrator, Oriental Pension Consultants, Inc. (“OPC”). Oriental also has a special purpose entity, Oriental Financial (PR) Statutory Trust II (the “Statutory Trust II”). OFG Ventures LLC (“OFG Ventures”), ~~and two operating subsidiaries~~a limited liability corporation, is also a subsidiary of ~~the Bank, OFG USA LLC ("OFG USA") and Oriental International Bank Inc. (“OIB”).~~Oriental. Through these subsidiaries and their respective divisions, Oriental provides a wide range of banking and financial services such as commercial, consumer and mortgage lending, leasing, auto loans, financial planning, insurance sales, money management and investment banking and brokerage services, as well as corporate and individual trust services.

On April 30, 2010, the Bank acquired certain assets and assumed certain deposits and other liabilities of Eurobank, a Puerto Rico commercial bank, in an FDIC-assisted acquisition. On February 6, 2017, the Bank and the FDIC agreed to terminate the shared-loss agreements related to the Eurobank Acquisition. On December 18, 2012, Oriental acquired a group of Puerto Rico-based entities that included Banco Bilbao Vizcaya Argentaria Puerto Rico (“BBVAPR”), a Puerto Rico commercial bank, as well as a securities broker-dealer and an insurance agency, which is referred to herein as the “BBVAPR Acquisition.” On December 31, 2019, Oriental purchased from the BNS all outstanding common stock of Scotiabank de Puerto Rico (“SBPR”). Immediately following the closing of the Scotiabank Acquisition, Oriental merged Scotiabank de Puerto Rico with and into Oriental Bank, with Oriental Bank continuing as the surviving entity. As part of this transaction, Oriental Bank also acquired the U.S. Virgin Islands banking operations of BNS through an acquisition of certain assets and an assumption of certain liabilities, and certain loans and assumed certain liabilities from BNS’s Puerto Rico branch. This transaction is referred to as the “Scotiabank PR & USVI Acquisition.” These acquired businesses have been integrated for financial reporting purposes.

During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of Coronavirus (COVID-19). The pandemic has significantly impacted the economic conditions in P.R. and the U.S., creating significant uncertainties. After recent disruptions in economic conditions caused by COVID-19, Oriental made available several deferral programs for the payment of principal and interest for auto, personal, credit cards and mortgage, and commercial loans, for customers whose payments were not over 29 days past due at March 12, 2020. Refer to footnotes for further disclosure associated to this event.

Basis of Presentation

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

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

Significant Accounting Policies

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

OFG BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

New Accounting Updates Not Yet Adopted ~~in 2019~~

~~Leases.~~Reference Rate Reform

In ~~February 2016,~~March 2020, the ~~FASB~~Financial Accounting Standards Board ("FASB") issued ASU No. ~~2016-02~~2020-04, Reference Rate Reform (Topic ~~842),~~848): Facilitation of the ~~FASB issued~~Effects of Reference Rate Reform on Financial Reporting. The ASU addresses operational challenges resulting from the discontinuation of the London Interbank Offered Rate (“LIBOR”) and other reference rates at the end of 2021. By providing optional practical expedients and exceptions to applying certain GAAP requirements, ASU No. ~~2016-02, under~~2020-04 provides temporary relief designed to ease the ~~new guidance, lessees~~operational cost and burden of accounting for contract modifications, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued as a result of reference rate reform. In general, the optional expedients and exceptions allow eligible contracts that are ~~required~~modified due to ~~recognize the following~~reference rate reform to be accounted for ~~all leases (with~~prospectively as a continuation of those contracts, permit companies to preserve hedge accounting for hedging relationships affected by reference rate reform and enable companies to make a one-time election to transfer or sell certain held-to-maturity debt securities indexed to LIBOR or another reference rate that is expected to be discontinued. The temporary expedients and exceptions are elective and do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, with the exception of ~~short-term leases): 1) a lease liability,~~hedging relationships existing as of that date for which iscertain optional expedients have been elected and are expected to be retained through the ~~present value~~end of ~~a lessee’s obligation to make lease payments,~~the hedging relationships. We did not enter into any contract modifications between March 12, 2020 and ~~2) a right-of-use asset, which is an asset~~March 31, 2020 that ~~represents the lessee’s right to use, or control the use of, a specified asset~~would be eligible for the ~~lease term. Lessor~~ accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors canrelief provided by ASU 2020-04. We will continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leasesevaluate ASU 2020-04 to determine ~~how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures are required by lessees and lessors to meet~~ the ~~objective of enabling users of financial statements to assess the amount,~~ timing and ~~uncertainty of cash flows arising from leases. The intention is~~extent to ~~require enough information to supplement~~which we will apply the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. As Oriental elected the transition option provided in ASU No. 2018-11 (see below), the modified retrospective approach was applied on January 1, 2019 (as opposed to January 1, 2017). Oriental also elected certain relief options offered in ASU 2016-02 including the package of practical expedients and the option not to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less). Oriental also elected the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of right-of-use assets. Oriental has several lease agreements, mainly branch locations, which are considered operating leases, and therefore, were not previously recognized on Oriental’s consolidated statements of financial condition. The new guidance requires these lease agreements to be recognized on the consolidated statements of financial condition as a right-of-use asset and a corresponding lease liability. The new guidance did not have a material impact on the consolidated statements of operations or the consolidated statements of cash flows. See Note 19 Leases for more information.accounting relief.

~~Leases - Targeted Improvements~~. In July 2018, the FASB issued ASU No. 2018-11 to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for Oriental). Oriental adopted ASU 2018-11 on its required effective date of January 1, 2019 and elected both transition options mentioned above. ASU 2018-11 did not have a material impact on Oriental’s consolidated financial statements.Income Taxes

~~Narrow-Scope Improvements for Lessors.~~ In December 2018, the FASB issued ASU No. 2018-20 which allows lessors to make an accounting policy election of presenting sales taxes and other similar taxes collected from lessees on a net basis, (2) requires a lessor to exclude lessor costs paid directly by a lessee to third parties on the lessor’s behalf and include lessor costs that are paid by the lessor and reimbursed by the lessee in the measurement of variable lease revenue and the associated expense, and (3) clarifies that when lessors allocate variable payments to lease and non-lease components they are required to follow the recognition guidance in the new leases standard for the lease component and other applicable guidance, such as the new revenue standard, for the non-lease component. Oriental adopted ASU 2018-20 on its required effective date of January 1, 2019 and elected to present sales taxes and other similar taxes collected from lessees on a net basis as described in (1) above. ASU 2018-20 did not have a material impact on Oriental’s consolidated financial statements.

~~Leases: Codification Improvements.~~ ~~In March~~ 2019, the FASB issued ASU No. ~~2019-01 which states that~~2019-12, Income Taxes (Topic 740): Simplifying The Accounting For Income Taxes. The ASU intended to simplify and improve the accounting for ~~lessors that are not manufacturers or dealers, the fair value~~income taxes. The updated guidance eliminates certain exceptions and clarifies and amends certain areas of the underlying asset is its cost, less any volume or trade discounts, as long as there isn’t a significant amount of time between acquisition of the asset and lease commencement; (2) clarifies that lessors in the scope of ASC 942 (such as Oriental) must classify principal payments received from sales-type and direct financing leases in investing activities in the statement of cash flows; and (3) clarifies the transitionguidance. The updated guidance related to certain interim disclosures provided in the year of adoption. To coincide with the adoption of ASU No. 2016-02, Oriental elected to early adopt ASU 2019-01 on January 1, 2019. The adoption of this ASU did not have a material impact on Oriental’s consolidated financial statements.

~~Targeted Improvements to Accounting for Hedging Activities.~~ In August 2017, the FASB issued ASU No. 2017-12 with the objectives to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities; and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. This guideline allows the entity to elect whether to perform quantitative or qualitative assessments for their hedge accounting transactions. In addition, the guideline provides that “an entity may reclassify a debt security from held-to-maturity (HTM) to available-for-sale (AFS) if the debt security is eligible to be hedged under the last-of-layer method in accordance with paragraph 815-20-25-12A. Any unrealized gain or loss at the date of the transfer shall be recorded in accumulated other comprehensive income in accordance with paragraph 320-10-35-10(c).” Transition elections must be adopted within the timeframe outlined in paragraphs 815-20-65-3(f) to 65-3(g). This includes the transition election available for the transfer of eligible securities from the HTM to the AFS category. ASU No. 2017-12 is effective for interim and annual reporting periods beginning after December 15, ~~2018.~~2020, with early adoption permitted. Oriental ~~elected~~does not expect the adoption of this guidance to maintain its current quantitative assessment for the existing hedge accounting transaction. In addition, Oriental elected to reclassify all of the securities in its held-to-maturity portfolio amounting to $424.7 million to its available-for-sale portfolio, as they were debt securities that qualified as eligible to be hedged under the last-of-layer method. The new guidance did not have a material impact on its condensed consolidated financial statements.

New Accounting Updates Adopted in 2020

Accounting for Financial Instruments -- Credit Losses

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

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

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

Management has made the accounting policy election to exclude accrued interest receivable on available-for-sale securities from the estimate of credit losses. Accrued interest receivable on available-for-sale debt securities totaled $2.7 million and $4.1 million on March 31, 2020 and December 31, 2019, respectively, reported in accrued interest receivable on the consolidated statement of financial condition.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs. Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses. Accrued interest receivable totaled $37.4 million and $32.7 million on March 31, 2020 and December 31, 2019, respectively, reported in accrued interest receivable on the consolidated statement of financial condition. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income through the life of the loan.

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

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

~~New Accounting Updates Not Yet Adopted~~

~~Intangibles—Goodwill~~Purchased Credit Deteriorated (PCD) Loans: Oriental has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. Oriental considered the following factors as indicators that an acquired loan had evidence of deterioration in credit quality: loans that were 90 days or more past due; loans that had an internal loan grade of substandard or worse - substandard loans have a well-defined weakness that jeopardizes collection of the loan; loans that were classified as nonaccrual by the acquired bank at the time of acquisition; and ~~Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred~~loans that had been previously modified in a ~~Cloud Computing Arrangement That Is~~troubled debt restructuring. As such, our PCD asset are recorded at the purchase price plus the allowance for credit losses expected at the time of acquisition or implementation of standard. An allowance for credit losses is determined using an undiscounted cashflow methodology.

OFG BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Upon adoption of CECL, Oriental elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a ~~Service Contract (a consensus~~unit of account. As such, for these loans the determination of nonaccrual or accrual status is made at the pool level, not the individual loan level. Upon adoption of CECL, the allowance for credit losses was determined for each pool and added to the pool’s carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the ~~FASB Emerging Issues Task Force)~~pool and the new amortized cost basis is the non-credit premium or discount which will be amortized interest income over the remaining life of the pool. On a quarterly basis, management will monitor the composition and behavior of the pools to assess the ability for cash flow estimation and timing. If based on the analysis performed, the pool is classified as non-accrual the accretion/amortization of the non-credit (discount) premium will cease. Changes to the allowance for credit losses after adoption are recorded through provision expense.
Allowance for Credit Losses (“ACL”) – Loans: The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Determining the amount of the ACL is complex and requires extensive judgment by management about matters that are inherently uncertain. Reevaluation of the ACL estimate in future periods, in light of changes in composition and characteristics of the loan portfolio, changes in the reasonable and supportable forecast and other factors then prevailing may result in material changes in the amount of the ACL and credit loss expense in those future periods. Loans are charged off against the allowance when management believes the uncollectability of a loan balance is confirmed.
Our methodology for estimating lifetime expected credit losses for our loan portfolios include the following key components:
Expected credit losses are estimated on a collective basis for groups of loans that share similar risk characteristics. Factors that may be considered in aggregating loans for this purpose include but are not necessarily limited to, product or collateral type, internal risk rating, credit characteristics such as credit scores or collateral values, and historical or expected credit loss patterns.
Credit losses for loans that do not share similar risk characteristics are estimated on an individual basis. Individual evaluations are typically performed for nonaccrual loans and modified loans classified as troubled debt restructurings. The lifetime losses for individually measured loans are estimated based on one of several methods, including the estimated fair value of the underlying collateral, observable market value of similar debt or the present value of expected cash flows.
ACL reserves are estimated over the contractual term of the financial asset, which is generally adjusted for expected prepayments, expected extensions are generally not considered unless the option to extend the loan cannot be canceled unilaterally by Oriental, modifications are also not considered, unless Oriental has a reasonable expectation that it will execute a troubled debt restructuring (TDR), for unconditionally cancelable accounts such as credit cards, reserves are based on the expected life of the balance as of the evaluation date (assuming no further charges) and do not include any undrawn commitments that are unconditionally cancelable.
Discounted cash flow (DCF) method to measure credit losses on most of our Non- PCD portfolios and undiscounted cash flow (UDCF) method for PCD portfolios.
For the ACL, Oriental had to make assumptions regarding the likelihood and severity of credit loss events and their impact on expected cash flows, which drive the probability of default (PD), loss given default (LGD) and exposure at default (EAD) models.
An economic forecast period based on the relation of losses with key economic variables for each portfolio segment; Oriental has elected a 2-year reasonable and supportable forecast period, with mean straight-line reversion occurring within the credit loss models based on the economic inputs. The length of the reasonable and supportable forecast is evaluated at each reporting period and adjusted if deemed necessary.
Inclusion of qualitative adjustments to consider factors that have not been accounted for; For example, factors that Oriental considers include changes in lending policies and procedures, business conditions, the nature and size of the portfolio, portfolio concentrations, the volume and severity of past due loans and nonaccrual loans, the effect of external factors such as competition, and legal and regulatory requirements, among others.

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

The ACL excludes accrued interest since all our products are subject to a non-accrual and timely write-off policy.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

Oriental has identified the following portfolio segments and measures the allowance for credit losses using the following methods:

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

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

Commercial loans are placed on non-accrual status when they become 90 days or more past due and are written-down, if necessary, based on the specific evaluation of the underlying collateral, if any.

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

Mortgage loans are placed on non-accrual status when they become 90 days or more past due and are written-down, if necessary, based on the specific evaluation of the collateral underlying the loan, except for FHA and VA insured mortgage loans which are placed in non-accrual when they become 12 months or more past due. For loans that are more than 180 days past due, with the exception of Oriental’s fully insured portfolio, the outstanding balance of loans that is in excess of the estimated property value after adjusting for costs to sell is charged off. If the estimated property value decreases in periods subsequent to the initial charge-off, Oriental will record additional charge-offs.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

Consumer loans are placed on non-accrual status when they become 90 days past due and written-off when payments are delinquent 120 days in personal loans and 180 days in credit cards and personal lines of credit.

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

Auto loans and leases are placed on non-accrual status when they become 90 days past due, partially written-off to collateral value when payments are delinquent 120 days, and fully written-off when payments are delinquent 180 days.

Off-Balance Sheet Credit Exposures

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

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

Other Financial Assets with Zero Expected Credit Losses

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

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Troubled Debt Restructurings

Oriental has implemented various consumer and commercial loan modification programs to provide its borrowers relief from the economic impacts of COVID-19. In accordance with the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Oriental has elected to not apply troubled debt restructuring classification to any COVID-19 related loan modifications that were provided after March 1, 2020 to borrowers who were current as of December 31, 2019. Accordingly, these modifications are not classified as TDRs. In addition, for loans modified in response to the COVID-19 pandemic that do not meet the above criteria (e.g., current payment status at December 31, 2019), Oriental is applying the guidance included in an interagency statement issued by the bank regulatory agencies. This guidance states that loan modifications performed in light of the COVID-19 pandemic, including loan payment deferrals that are up to six months in duration, that were granted to borrowers who were current as of the implementation date of a loan modification program or modifications granted under government mandated modification programs, are not TDRs. For loan modifications that include a payment deferral and are not TDRs, the borrower’s past due and nonaccrual status will not be impacted during the deferral period. Interest income will continue to be recognized over the contractual life of the loan. For more information on Oriental's TDR accounting, see Note 1 – Summary of Significant Accounting Policies to the Consolidated Financial Statements of Oriental’s 2019 Annual Report on Form 10-K.

Cloud computing arrangements

In August 2018, the ~~FASB issued~~ Financial Accounting Standards ~~Update~~Board (“~~ASU”~~FASB”) ~~2018-15, which~~issued updated guidance that is intended to reduce potential diversity in practice in accounting for the costs of implementing cloud computing arrangements (i.e., hosting arrangements) that are service contracts. The updated guidance aligns the requirements for capitalizing implementation costs ~~incurred in a hosting arrangement that is a service contract~~for these arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software ~~(and~~and hosting arrangements that include an internal-use software ~~license). Accordingly, ASU 2018-15 requires an entity (customer) in a hosting arrangement that~~license. The updated guidance is ~~a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract~~effective for interim and which costs to expense. The ASU also requires the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement, which includes reasonably certain renewals. This ASU is the final version of Proposed Accounting Standards Update 2018–230—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which has been deleted. ~~This ASU will be applied prospectively for~~ annual ~~and interim~~reporting periods ~~in fiscal years~~ beginning after December 15, 2019. ~~Early~~The adoption ~~is permitted.~~ ~~The effects~~ of this ~~standard~~guidance, effective January 1, 2020, did not have a material impact on ~~our~~Oriental’s consolidated ~~statement of~~ financial ~~position, results of operations or cash flows are not expected to be material~~.statements.

Fair ~~Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.~~ value measurements

In August 2018, the FASB issued ~~ASU 2018-13, which~~ updated guidance as part of its disclosure framework project intended to improve the effectiveness of disclosures in the notes to the financial statements. The updated guidance eliminates, adds and modifies certain disclosure requirements related to fair value ~~measurement.~~measurements. The ~~amendments in this ASU are~~updated guidance is effective for ~~fiscal years,~~interim and ~~interim~~annual reporting periods ~~within those fiscal years,~~ beginning after

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

December 15, 2019. ~~Implementation on a prospective or retrospective basis varies by specific disclosure requirement. Early adoption is permitted.~~ The ~~standard also allows for early~~ adoption of ~~any removed or modified disclosures upon issuance of~~ this ~~ASU while delaying adoption of~~guidance, effective January 1, 2020, did not have a material impact on the ~~additional disclosures until their effective date~~.Company’s consolidated financial statements.

~~Simplifying the Test for~~ Goodwill ~~Impairment.~~

In January 2017, the FASB issued ~~ASU No. 2017-04, which simplifies~~updated guidance intended to simplify how an entity tests goodwill for impairment by eliminating Step 2 from the ~~measurement of~~ goodwill ~~impairment. An~~impairment test. Under the updated guidance, an entity will ~~no longer~~ perform ~~a hypothetical purchase price allocation to measure~~its goodwill ~~impairment. Instead,~~ impairment ~~will be measured using the difference between the carrying amount and~~test by comparing the fair value of a reporting unit with its carrying amount and will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the loss recognized limited to the total amount of goodwill allocated to that reporting unit. ~~This ASU will be applied prospectively for annual and interim periods in fiscal years beginning after December 15, 2019.~~ The ~~effects of this standard on our consolidated statement of financial position, results of operations or cash flows are not expected to be material~~.

~~Measurement of Credit Losses on Financial Instruments~~~~. In June 2016, the FASB issued ASU No. 2016-13 for the recognition of credit losses on financial instruments. The~~updated guidance introduces a new credit reserving methodology known as the Current Expected Credit Loss (“CECL”) methodology, which differs significantly from the incurred loss approach used today and will alter the estimation process, inputs and assumptions used in estimating the allowance for credit losses (“ACL”). The CECL methodology requires measurement of expected credit losses for the estimated life of the financial instrument, not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information. At the date of adoption, the change in reserves will be recorded in retained earnings as a cumulative-effect adjustment under the modified retrospective method. CECL eliminates the existing guidance for purchase credit-impaired loans, but requires an allowance for purchased financial assets with more than insignificant deterioration since origination. In addition, it modifies the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on improvements in credit. ASU No. 2016-13 is effective for ~~fiscal years,~~interim and ~~interim~~annual reporting periods beginning after December 15, 2019. Oriental will implement ASU No. 2016-13 on January 1, 2020. We continue to evaluate the impact the new guidance will have on our financial position, results of operations and regulatory risk-based capital. Our current planned approach for estimating lifetime credit losses for our loan portfolio includes the following key components:

·~~An initial forecast period of one year for all portfolio segments based on historical loss experience, or economic forecast in case of limited historical loss experience;~~

·~~An economic forecast period of two years based on the relation of losses with key economic variables for each portfolio segment;~~

·~~Segmentation of loans into pools that share common risk characteristics;~~

·~~Reversion to the mean period using straight-line method;~~

·~~Used the discounted cash flow (DCF) method to measure credit impairment on most of our loan portfolios and estimate lifetime credit losses using the conceptual components described above; and~~

·~~A most likely macroeconomic scenario in estimating expected credit losses.~~

~~As part of our evaluation of the estimated impacts of CECL, we have run simulations based on our portfolio composition and current expectations of future economic conditions.~~ The ~~results of those preliminary simulations indicate that our total reserves for credit losses related to our originated book, which accounts for 84% of total gross loans, could have a net increase between 16~~ ~~% and 23~~ % as compared to the incurred loss model applied as of balance sheet date, mostly driven by the retail loan portfolios. At adoption, we expect to have a cumulative-effect adjustment to retained earnings for this change in the ACL, which would impact our capital. Oriental expects to continue to be well capitalized under the Basel III regulatory framework after the adoption of this ~~standard. The Company will avail itself of the option to phase-in over~~guidance, effective January 1, 2020, did not have a ~~period of three years the day one effects on regulatory capital from the adoption of CECL. For the acquired book, which represents 16% of total gross loans, we expect its allowance will be enough to cover CECL implementation. Any adjustment will be made through the allowance and loan balances with no~~material impact ~~in capital. The ultimate effect of CECL on our ACL will depend~~ on the size and composition of our portfolio, the portfolio’s credit quality and economic conditions at the time of adoption, as well as any refinements to our models, methodology and other key assumptions. We are continuing our cross-functional implementation efforts and have substantially completed development of our CECL models. Model validation, user acceptance testing, and parallel runs will continue through the remainder of 2019. In addition, we continue to develop the business processes, policies and controls that satisfy the requirements of the new guidance.Company’s consolidated financial statements.

For available-for-sale debt securities, the new guidance prospectively replaces the other-than-temporary impairment model and requires the recognition of an allowance for reductions in a security’s fair value attributable to declines in credit quality, instead of a direct write-down of the security, when a valuation decline is determined to be other-than-temporary. Our available-for-sale debt securities only consist of U.S. Treasury or U.S. government-sponsored agencies securities; therefore, we do not currently expect the impact of the new guidance on available-for-sale securities to be material at adoption.

NOTE 2 – ~~SIGNIFICANT EVENTS~~BUSINESS COMBINATIONS

On ~~June 26,~~December 31, 2019, ~~OFG Bancorp (the “Company”) and~~ Oriental ~~Bank, a wholly-owned subsidiary of~~purchased from the ~~Company (“Oriental Bank”), entered into (i) a definitive Stock Purchase Agreement (the “Stock Purchase Agreement”) with The~~ Bank of Nova Scotia (“BNS”), (ii) a definitive Sale and Purchase Agreement (USVI) (the “USVI Purchase Agreement”) with BNS and (iii) a definitive Sale and Purchase Agreement (PR) (the “PR Purchase Agreement” and, together with the Stock Purchase Agreement and the USVI Purchase Agreement, the “Purchase Agreements”) with BNS.

The transactions contemplated by the Purchase Agreements (the “Scotiabank Transaction”), which are expected to close before year end of 2019, are subject to receipt of the requisite regulatory approvals, as well as the satisfaction of other customary closing conditions.

~~The Stock Purchase Agreement~~

~~On the terms and subject to the conditions set forth in the Stock Purchase Agreement, Oriental Bank will acquire (i)~~ all ~~of the issued and~~ outstanding ~~shares of~~ common stock ~~par value $10.00~~ ~~per share,~~ of Scotiabank de Puerto Rico ~~a bank chartered under the laws~~for an aggregate purchase price of ~~Puerto Rico (“SBPR”), and (ii) all of the issued and outstanding shares of second preferred non-cumulative redeemable stock, par value $10.00~~ ~~per share, of SBPR (the “Preferred Stock”) (excluding any shares of Preferred Stock redeemed by SBPR prior~~$550.0 million, subject to ~~the SBPR Closing (as defined below) ((i) and (ii), the “Stock Purchase”). In addition, the Stock Purchase Agreement contemplates that, immediately~~settlement amounts as described herein. Immediately following the ~~consummation of the Stock Purchase, SBPR will merge~~closing, Oriental merged Scotiabank de Puerto Rico with and into Oriental Bank, with Oriental Bank continuing as the surviving ~~bank (the “Bank Merger”).~~

~~The consideration payable by~~entity. As part of this transaction, Oriental Bank ~~to BNS at the closing of the Stock Purchase (the “SBPR Closing” and the date on which the SBPR Closing occurs, the “Closing Date”) will be $550,000,000~~ in cash minus the amount of any Pre-Closing Secondary Dividend (as defined below) actually paid to BNS after the execution of the Stock Purchase Agreement but on or prior to the Closing Date. In addition, the Stock Purchase Agreement contemplates that, prior to the SBPR Closing, SBPR will pay BNS (a) one or more dividends in an aggregate amount equal to $200,000,000 (subject to certain adjustments set forth in the schedules to the Stock Purchase Agreement) (the “Pre-Closing Primary Dividend”) and (b) secondarily to the Pre-Closing Primary Dividend, one or more additional dividends in an aggregate amount not to exceed $125,000,000 ~~(the “Pre-Closing Secondary Dividend”).~~

The obligations of Oriental Bank and BNS to consummate the Stock Purchase are subject to the satisfaction or waiver of certain customary closing conditions, including (a) the receipt of the requisite regulatory approvals, including the requisite regulatory approvals of the Puerto Rico Office of the Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System (and, in the case of Oriental Bank’s obligations to consummate the Stock Purchase, without the imposition of a Burdensome Condition (as defined below)), (b) the accuracy of the other party’s representations and warranties, subject to certain timing and materiality standards, (c) compliance in all material respects by the other party with its pre-closing covenants and agreements contained in the Stock Purchase Agreement and (d) the absence of any injunction or order prohibiting the consummation of the Stock Purchase, the Bank Merger or the other transactions contemplated by the Stock Purchase Agreement. The obligations of BNS to consummate the Stock Purchase are also subject to receiving the requisite regulatory approval for the payment of the Pre-Closing Primary Dividend. The Stock Purchase is not conditioned on the consummation of the transactions contemplated by the USVI Purchase Agreement or the PR Purchase Agreement.

Under the Stock Purchase Agreement, Oriental Bank and BNS agreed to use reasonable best efforts to obtain the requisite regulatory approvals. In addition, the Company and Oriental Bank agreed to take all actions necessary (including Remedial Actions and Capital Actions (each as defined in the Stock Purchase Agreement)) to obtain the applicable requisite regulatory approvals and consummate the Scotiabank Transaction as promptly as practicable, subject to an exception that provides that neither the Company nor Oriental Bank is required to take, or agree to take, any action that would constitute a Burdensome Condition. Under the Stock Purchase Agreement, the term “Remedial Action” is defined to include, among other things, divestitures, licenses or other dispositions of, or the holding separate of, deposits, loans, branches or operations of SBPR, the Company, Oriental Bank or their affiliates, and the term “Capital Acton” is defined to include, among other things, capital level and capital ratio maintenance commitments, capital plan creation and capital raising transactions. The Stock Purchase Agreement defines “Burdensome Condition” as any action, restriction or condition that would reasonably be expected to be materially burdensome to the Company, Oriental Bank and their affiliates, taken as a whole, following the consummation of the Stock Purchase, the Bank Merger or the transactions contemplated by the USVI Purchase Agreement or the PR Purchase Agreement. However, the Stock Purchase Agreement provides that a Capital Action will not constitute or be considered in determining whether any required action constitutes, a Burdensome Condition.

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

The Stock Purchase Agreement provides that, for three years after the Closing Date, BNS will not operate an FDIC-insured depository institution in Puerto Rico, offer retail banking or retail consumer finance products or services in Puerto Rico (excluding certain wealth management services) or accept deposits insured by the FDIC in Puerto Rico, in each case, subject to certain exceptions set forth in the Stock Purchase Agreement. In addition, from the date of the Stock Purchase Agreement and continuing for two years following the Closing Date, BNS agreed to certain restrictions on soliciting and hiring SBPR employees and soliciting SBPR customers, and Oriental Bank agreed to certain restrictions on soliciting and hiring certain BNS employees and soliciting certain BNS customers, in each case, subject to certain exceptions set forth in the Stock Purchase Agreement.

The Stock Purchase Agreement contains certain customary representations and warranties made by each party, which are qualified by confidential disclosures provided to each party by the other party in connection with the Stock Purchase Agreement. Each of Oriental Bank and BNS has agreed to various customary covenants, including, in the case of BNS, covenants regarding the conduct of SBPR’s business prior to the SBPR Closing. The Stock Purchase Agreement provides for post-Closing indemnification obligations with respect to breaches of the representations, warranties and covenants of each party in the Purchase Agreements, as well as indemnification obligations with respect to certain other matters. Each party’s indemnification obligations with respect to breaches of its representations and warranties generally are subject to a de minimis “per loss” requirement of $100,000 ~~, a deductible basket equal to 1% of the aggregate purchase price under the Purchase Agreements and a cap equal to 10~~% of the aggregate purchase price under the Purchase Agreements, except for breaches of certain fundamental representations and warranties. Following the SBPR Closing, during any period in which the USVI Transaction (as defined below) or the PR Transaction (as defined below) has not been consummated, the indemnification deductible basket will be reduced by 1 ~~% of the purchase price under the USVI Purchase Agreement and 1% of the purchase price under the PR Purchase Agreement, as applicable, and the indemnification cap will be reduced by 10% of the purchase price under the USVI Purchase Agreement and 10% of the purchase price under the PR Purchase Agreement, as applicable.~~

Each party has the right to terminate the Stock Purchase Agreement under certain circumstances, including if the Stock Purchase has not occurred on or prior to March 26, 2020, subject to an extension by either party until June 26, 2020 if the requisite regulatory approvals have not been obtained. Upon the termination of the Stock Purchase Agreement as a result of the failure to obtain the requisite regulatory approvals as of the outside date referenced above (as extended), Oriental Bank will be required to reimburse BNS for its reasonable and documented out-of-pocket transaction expenses. The Stock Purchase Agreement also provides that the aggregate amount of reimbursable expenses under the Stock Purchase Agreement, the USVI Purchase Agreement and the PR Purchase Agreement will not exceed $2,000,000.

~~USVI Purchase Agreement~~

On the terms and subject to the conditions set forth in the USVI Purchase Agreement, at the closing of the transactions contemplated by the USVI Purchase Agreement (the “USVI Closing” and the date on which the USVI Closing occurs the “USVI Closing Date”), Oriental Bank will acquireacquired the U.S. Virgin Islands ~~(the “USVIs”)~~ banking operations of BNS through an acquisition of certain assets (including loans, ATMs and physical branch locations) and an assumption of certain liabilities (including deposits) (the “USVI Transaction”). The consideration payable in the USVI Transaction will be equal to the difference between (a) the sum of (i) cash on hand at the purchased branches and cash located in the purchased ATMs, (ii) thefor their net book value plus a $10.0 million premium on deposits which were settled as part of the ~~purchased assets (which, in~~final consideration from the ~~case of the purchased loans, will be equal to the gross book value of the purchased loans minus $6,700,000~~ ~~(or, if greater, the actual amount of reserves associated with the purchase loans as of the close of business on the day immediately preceding the USVI Closing Date)), (iii) a $10,000,000~~ deposit premium and (iv) the fair market value of Other Assets (as defined in the USVI Purchase Agreement) that Oriental Bank elects to include as a purchased asset and (b) the net book value of the assumed liabilities, in each case, as of the close of business on the day immediately preceding the USVI Closing Date. If the foregoing calculation produces a positive number, that amount will be payable by Oriental Bank to BNS at the USVI Closing and if the foregoing calculation produces a negative number, the absolute value of that amount will be payable by BNS to Oriental Bank at the USVI Closing.

The obligations of Oriental Bank and BNS to consummate the USVI Transaction are subject to the satisfaction or waiver of certain customary closing conditions, including (a) the receipt of the requisite regulatory approvals, including the requisite regulatory approvals of the Puerto Rico Office of the Commissioner of Financial Institutions, the Federal Deposit Insurance Corporation, the Virgin Islands Banking Board and the Lieutenant Governor of the Virgin Islands, Division of Banking, Insurance and Financial Regulation (and, in the case of Oriental Bank’s obligations to consummate the USVI Transaction, without the imposition of a Burdensome Condition), (b) the accuracy of the other party’s representations and warranties, subject to certain timing and materiality standards, (c) compliance in all material respects by the other party with its pre-closing covenants and agreements contained in the USVI Purchase Agreement and (d) the absence of any injunction or order prohibiting the consummation of the transactions

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

contemplated by the USVI Purchase Agreement. The consummation of the USVI Transaction is also subject to the consummation of the Stock Purchase either substantially contemporaneously with or prior to the USVI Closing.

The covenants and agreements in the Stock Purchase Agreement that address the obligations of the parties to obtain the requisite regulatory approvals, including those provisions addressing Remedial Actions, Capital Actions and Burdensome Conditions, also apply under the USVI Purchase Agreement with respect to the requisite regulatory approvals for the USVI Transactions.

The USVI Purchase Agreement provides that, for three years after the USVI Closing Date, BNS will not (a) open or operate a branch, subsidiary or depository institution that accepts deposits in the USVIs or (b) offer retail banking or retail consumer finance products or services in the USVIs (excluding certain wealth management services), in each case, subject to certain exceptions set forth in the USVI Purchase Agreement.acquisition. In addition, from the date of the USVI Purchase Agreement and continuing for two years following the USVI Closing Date, BNS agreed to certain restrictions on soliciting and hiring USVI branch employees and soliciting USVI branch customers, in each case, subject to certain exceptions set forth in the USVI Purchase Agreement.

The USVI Purchase Agreement contains certain customary representations and warranties made by each party, which are qualified by confidential disclosures provided to each party by the other party in connection with the USVI Purchase Agreement. Each of Oriental ~~Bank and BNS has agreed to various customary covenants, including, in the case of BNS, covenants regarding the conduct of the USVI branch business prior to the USVI Closing.~~

Each party has the right to terminate the USVI Purchase Agreement under certain circumstances, including if (i) the Stock Purchase Agreement has been terminated or (ii) the USVI Transactions have not occurred on or prior to March 26, 2020, subject to an extension by either party until June 26, 2020 if the requisite regulatory approvals have not been obtained. If the Stock Purchase has not been consummated and the USVI Purchase Agreement is terminated as a result of the failure to obtain the requisite regulatory approvals as of the outside date referenced above (as extended), Oriental Bank will be required to reimburse BNS for its reasonable and documented out-of-pocket transaction expenses. The USVI Purchase Agreement also provides that the aggregate amount of reimbursable expenses under the Stock Purchase Agreement, the USVI Purchase Agreement and the PR Purchase Agreement will not exceed $2,000,000.

~~PR Purchase Agreement~~

On the terms and subject to the conditions set forth in the PR Purchase Agreement, at the closing of the transactions contemplated by the PR Purchase Agreement (the “PR Closing” and the date on which the PR Closing occurs, the “PR Closing Date”), Oriental Bank will acquireacquired certain loans and ~~other assets, and assume~~assumed certain ~~deposits and other~~ liabilities, from BNS’s Puerto Rico branch ~~(the “PR Transaction”). The consideration payable in the PR Transaction will be equal to the difference between (a) the~~for their net book value which were settled as part of the ~~purchased~~final consideration from the acquisition.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

Cash and cash equivalents	$	492,512	$	-	$	492,512	$	-	$	492,512
Investments		576,319		(102)		576,217		-		576,217
Loans		2,237,337		(21,134)		2,216,203		-		2,216,203
Accrued interest receivable		7,722		(2,952)		4,770		-		4,770
Foreclosed real estate		8,636		(352)		8,284		-		8,284
Deferred tax asset, net		37,606		22,335		59,941		-		59,941
Premises and equipment		10,866		(1,068)		9,798		-		9,798
Servicing asset		40,258		206		40,464		-		40,464
Core deposit intangible		-		41,507		41,507		-		41,507
Customer relationship intangible		-		12,693		12,693		-		12,693
Other intangible		-		567		567		-		567
Operating lease right-of-use assets		15,452		4,011		19,463		-		19,463
Other assets		86,016		(6,507)		79,509		409		79,918
Total identifiable assets acquired		3,512,724		49,204		3,561,928		409		3,562,337

Deposits		3,028,066		(2,607)		3,025,459		-		3,025,459
Operating lease liability		16,317		2,091		18,408		-		18,408
Accrued expenses and other liabilities		87,309		-		87,309		-		87,309
Total liabilities assumed		3,131,692		(516)		3,131,176		-		3,131,176
Total identifiable net assets					$	430,752	$	409	$	431,161
Bargain purchase gain						315		409		724
Total consideration					$	430,437	$	-	$	430,437

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Merger and Restructuring Charges

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

The following table presents severance and employee charges, systems integrations charges, and other merger and restructuring charges, related to the ~~gross book value of~~Scotiabank PR & USVI Acquisition, for the ~~purchased loans minus $27,700,000~~ ~~(or, if greater,~~quarter ended March 31, 2020:

	Quarter ended March 31,
	2020
	(In thousands)
Severance and employee-related charges	$	138
Systems integrations and related charges		86
Other		80
Total merger and restructuring charges	$	304

Restructuring Reserve

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

The following table presents the changes in restructuring reserves for the quarter ended March 31, 2020:

	Quarter ended March 31,
	2020
	(In thousands)
Balance at the beginning of the period	$	17,491
Merger and restructuring charges		304
Cash payments and other		(2,847)
Balance at the end of the period	$	14,948

Payments under merger and restructuring reserves associated with the ~~purchase loans as of the~~Scotiabank PR ~~Effective Time (as defined in the PR Purchase Agreement)))~~& USVI Acquisition are expected to continue into 2020 and ~~(b) the net book value of the assumed liabilities, in each case, as of PR Effective Time. If the foregoing calculation produces a positive number, that amount~~ will be payable by Oriental Bank to BNS at the PR Closing and if the foregoing calculation produces a negative number, the absolute value of that amount will be payable by BNS to Oriental Bank at the PR Closing.

~~The obligations of Oriental Bank and BNS to consummate the PR Transaction are subject~~under applicable accounting guidance to the satisfaction or waiver of certain customary closing conditions, including (a) the receipt of required regulatory approvals of the Federal Deposit Insurance Corporation (and, in the case of Oriental Bank’s obligations to consummate the PR Transaction, without the imposition of a Burdensome Condition), (b) the accuracy of the other party’s representations and warranties, subject to certain timing and materiality standards, (c) compliance in all material respects by the other party with its pre-closing covenants and agreements contained in the PR Purchase Agreement and (d) the absence of any injunction or order prohibiting the consummation of the transactions contemplated by the PR Purchase Agreement. The consummation of the PR Transaction is also subject to the consummation of the Stock Purchase either substantially contemporaneously with or prior to the PR Closing.cost being incurred.

The covenants and agreements in the Stock Purchase Agreement that address the obligations of the parties to obtain the requisite regulatory approvals, including those provisions addressing Remedial Actions, Capital Actions and Burdensome Conditions, also apply under the PR Purchase Agreement with respect to the requisite regulatory approvals for the PR Transaction.

1418

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

Under the PR Purchase Agreement, from the date of the PR Purchase Agreement and continuing for two years following the PR Closing Date, BNS agreed to certain restrictions on soliciting PR branch customers, subject to certain exceptions set forth in the PR Purchase Agreement.

The PR Purchase Agreement contains certain customary representations and warranties made by each party, which are qualified by confidential disclosures provided to each party by the other party in connection with the PR Purchase Agreement. Each of Oriental Bank and BNS has agreed to various customary covenants, including, in the case of BNS, covenants regarding the administration of the purchased assets and assumed liabilities of PR branch prior to the PR Closing.

Each party has the right to terminate the PR Purchase Agreement under certain circumstances, including if (i) the Stock Purchase Agreement has been terminated or (ii) the PR Transactions have not occurred on or prior to March 26, 2020, subject to an extension by either party until June 26, 2020 if the requisite regulatory approvals have not been obtained. If the Stock Purchase has not been consummated and the PR Purchase Agreement is terminated as a result of the failure to obtain the requisite regulatory approvals as of the outside date referenced above (as extended), Oriental Bank will be required to reimburse BNS for its reasonable and documented out-of-pocket transaction expenses. The PR Purchase Agreement also provides that the aggregate amount of reimbursable expenses under the Stock Purchase Agreement, the USVI Purchase Agreement and the PR Purchase Agreement will not exceed $2,000,000.

The foregoing description of the Purchase Agreements and related transactions does not purport to be complete and is qualified in its entirety by reference to the Purchase Agreements, which were filed as Exhibit 2.1, Exhibit 2.2 and Exhibit 2.3 to the Current Report on Form 8-K on July 2, 2019, and are incorporated therein by reference. The Purchase Agreements establish and govern the legal relations between the parties with respect to the transactions contemplated thereby and are not intended to be a source of factual, business or operational information about the parties or their respective businesses. The representations and warranties set forth in the Purchase Agreements may not be accurate or complete as of any specified date, may be subject to a contractual standard of materiality different from those generally applicable to shareholders or different from what a shareholder might view as material, may have been used for purposes of allocating risk between the parties to the Purchase Agreements rather than establishing matters as facts, may have been qualified by certain disclosures not reflected in the Purchase Agreements that were made to the other party in connection with the negotiation of the Purchase Agreements and generally were solely for the benefit of the parties to the Purchase Agreements.

Accordingly, investors and security holders should not rely on such representations and warranties as characterizations of the actual state of facts or circumstances because they were only made as of the date of the Purchase Agreements and are modified by confidential disclosure schedules delivered in connection with the Purchase Agreements. Moreover, information concerning the subject matter of such representations and warranties may change after the date of the Purchase Agreements, which subsequent information may or may not be fully reflected in the Company’s public disclosures.

NOTE 3 – RESTRICTED CASH

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

	September 30,		December 31,		March 31,		December 31,
	2019		2018		2020		2019
	(In thousands)				(In thousands)
Cash pledged as collateral to other financial institutions to secure:
Derivatives	$	-	$	1,980
Regulatory requirements					$	-	$	400
Obligations under agreement of loans sold with recourse		1,050	��	1,050		1,050		1,050
	$	1,050	$	3,030	$	1,050	$	1,450

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Bank’s international banking entities, OIB and Oriental Overseas, a division of the Bank, held short-term highly liquid securities in the amount of ~~$305~~$305 thousand and $325 thousand, respectively, as the legal reserve required for international banking entities under Puerto Rico law. In addition, as part of the Scotiabank PR & USVI acquisition on December 31, 2019, a certificate of deposit of $300 thousand was held for the international banking entity that was retained as part of the integration, which was replaced during the quarter for $325 thousand short term high liquidity securities, amount held at March 31, 2020. These instruments cannot be withdrawn or transferred ~~by OIB or Oriental Overseas~~ without the prior written approval of the Office of the Commissioner of Financial Institutions of Puerto Rico (the "~~OCFI"~~"OCFI").

As part of ~~its derivative activities, Oriental enters into collateral agreements with certain financial counterparties. At September 30, 2019 collateral agreements have expired. At~~regulatory requirements for the administration of Individual Retirement Accounts (IRAs), Scotiabank maintained $100 thousand on a certificate of deposit that was registered as part of the integration on December 31, ~~2018, Oriental had delivered approximately $2.0 million of cash as collateral for such derivatives activities.~~2019. These matured during the quarter and were not renewed.

Oriental has a contract with FNMA which requires collateral to guarantee the repurchase, if necessary, of loans sold with recourse. At ~~September 30, 2019~~both, March 31, 2020 and December 31, ~~2018,~~2019, Oriental delivered as collateral cash amounting to approximately $1.1 ~~million, for both periods.~~million.

The Bank is required by Puerto Rico law to maintain average weekly reserve balances to cover demand deposits. The amount of those minimum average reserve balances for the week that covered ~~September 30, 2019~~March 31, 2020 was ~~$210.4~~$311.9 million (December 31, ~~2018~~2019 - ~~$211.6~~ $289.3 million). At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Bank complied with this requirement. Cash and due from bank as well as other short-term, highly liquid securities, are used to cover the required average reserve balances.

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

NOTE 4 – INVESTMENT SECURITIES

Money Market Investments

Oriental considers as cash equivalents all money market instruments that are not pledged and that have maturities of three months or less at the date of acquisition. At ~~September 30,~~March 31, 2020 and 2019, ~~and December 31, 2018,~~ money market instruments included as part of cash and cash equivalents amounted to ~~$8.0~~$10.2 million and ~~$4.9~~$6.8 million, respectively.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Investment Securities

The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the securities owned by Oriental at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 were as follows:

	September 30, 2019									March 31, 2020
			Gross		Gross				Weighted			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield	Cost		Gains		Losses		Value		Yield
	(In thousands)									(In thousands)
Available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates	$	426,192	$	563	$	2,586	$	424,169	2.01%	$	155,303	$	2,916	$	-	$	158,219	1.98%
GNMA certificates		25,329		502		-		25,831	2.87%		142,294		2,994		-		145,288	2.29%
CMOs issued by US government-sponsored agencies		55,457		17		371		55,103	1.90%		51,214		917		-		52,131	1.97%
Total mortgage-backed securities		506,978		1,082		2,957		505,103	2.04%		348,811		6,827		-		355,638	2.10%
Investment securities
US Treasury securities		10,947		-		10		10,937	1.33%		296,992		1,995		-		298,987	1.63%
Obligations of US government-sponsored agencies		2,040		-		10		2,030	1.38%		1,884		33		-		1,917	1.39%
Other debt securities		995		30		-		1,025	2.99%		878		40		-		918	2.98%
Total investment securities		13,982		30		20		13,992	1.45%		299,754		2,068		-		301,822	1.64%
Total securities available for sale	$	520,960	$	1,112	$	2,977	$	519,095	2.02%	$	648,565	$	8,895	$	-	$	657,460	1.89%

	December 31, 2019
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
	(In thousands)
Available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates	$	403,227	$	846	$	1,417	$	402,656	2.00%
GNMA certificates		215,755		718		4		216,469	2.33%
CMOs issued by US government-sponsored agencies		55,235		16		490		54,761	1.97%
Total mortgage-backed securities		674,217		1,580		1,911		673,886	2.11%
Investment securities
US Treasury securities		397,183		-		-		397,183	1.60%
Obligations of US government-sponsored agencies		1,967		-		6		1,961	1.38%
Other debt securities		1,108		31		-		1,139	3.00%
Total investment securities		400,258		31		6		400,283	1.60%
Total securities available-for-sale	$	1,074,475	$	1,611	$	1,917	$	1,074,169	1.92%

December 31, 2018

Gross

Gross

Weighted

Amortized

Unrealized

Unrealized

Fair

Average

Cost

Gains

Losses

Value

Yield

(In thousands)
Available-for-sale

    Mortgage-backed securities

        FNMA and FHLMC certificates
$
561,878

$
404

$
8,951

$
553,331

2.59%
        GNMA certificates

211,947

1,050

2,827

210,170

3.10%
        CMOs issued by US government-sponsored agencies

66,230

-

2,166

64,064

1.90%
            Total mortgage-backed securities

840,055

1,454

13,944

827,565

2.66%
    Investment securities

        US Treasury securities

10,924

-

119

10,805

1.36%
        Obligations of US government-sponsored agencies

2,325

-

60

2,265

1.38%
        Other debt securities

1,207

15

-

1,222

2.99%
            Total investment securities

14,456

15

179

14,292

1.50%
                Total securities available-for-sale
$
854,511

$
1,469

$
14,123

$
841,857

2.64%

Held-to-maturity

    Mortgage-backed securities

        FNMA and FHLMC certificates
$
424,740

$
-

$
14,387

$
410,353

2.07%

OFG BANCORP

On January 1, 2019, Oriental adopted the ASU No. 2017-12 and reclassified all of its mortgage backed securities with a carrying value of $424.7 million and unrealized losses of $14.4 million from the held-to-maturity portfolio into the available-for-sale portfolio.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The amortized cost and fair value of Oriental’s investment securities at ~~September 30, 2019,~~March 31, 2020, by contractual maturity, are shown in the next table. Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the period of final contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2019				March 31, 2020
	Available-for-sale				Available-for-sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)				(In thousands)
Mortgage-backed securities
Due from 1 to 5 years
FNMA and FHLMC certificates	$	2,041	$	2,070	$	1,242	$	1,292
GNMA certificates						694		704
Total due from 1 to 5 years		2,041		2,070		1,936		1,996
Due after 5 to 10 years
CMOs issued by US government-sponsored agencies	$	48,756	$	48,401	$	42,053	$	42,718
FNMA and FHLMC certificates		108,573		108,256		104,324		106,488
GNMA certificates						61,219		62,188
Total due after 5 to 10 years		157,329		156,657		207,596		211,394
Due after 10 years
FNMA and FHLMC certificates	$	315,578	$	313,843	$	49,737	$	50,439
GNMA certificates		25,329		25,831		80,381		82,396
CMOs issued by US government-sponsored agencies		6,701		6,702		9,161		9,413
Total due after 10 years		347,608		346,376		139,279		142,248
Total mortgage-backed securities		506,978		505,103		348,811		355,638
Investment securities
Due less than one year
US Treasury securities	$	10,947	$	10,937	$	286,985	$	288,658
Other debt securities						100		100
Total due in less than one year		10,947		10,937		287,085		288,758
Due from 1 to 5 years
Obligations of US government-sponsored agencies	$	2,040	$	2,030	$	1,884	$	1,917
Other debt securities		100		100
US Treasury securities						10,007		10,329
Total due from 1 to 5 years		2,140		2,130		11,891		12,246
Due from 5 to 10 years
Other debt securities		895		925		778		818
Total due after 5 to 10 years		895		925		778		818
Total investment securities		13,982		13,992		299,754		301,822
Total	$	520,960	$	519,095	$	648,565	$	657,460

1821

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

The following tables show Oriental’s gross unrealized losses and fair value of investment securities available-for-sale and held-to-maturity at September 30, 2019 and December 31, 2018, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:

September 30, 2019

12 months or more

Amortized

Unrealized

Fair

Cost

Loss

Value

(In thousands)
Securities available-for-sale

    CMOs issued by US Government-sponsored agencies
$
38,170

$
336

$
37,834
    FNMA and FHLMC certificates

343,004

2,582

340,422
    Obligations of US Government and sponsored agencies

2,040

10

2,030
    GNMA certificates

19

-

19
    US Treasury Securities

9,997

10

9,987

$
393,230

$
2,938

$
390,292


Less than 12 months

Amortized

Unrealized

Fair

Cost

Loss

Value

(In thousands)
Securities available-for-sale

    CMOs issued by US Government-sponsored agencies

12,081

35

12,046
    FNMA and FHLMC certificates

3,578

4

3,574
    US Treasury Securities

322

-

322

$
15,981

$
39

$
15,942


Total

Amortized

Unrealized

Fair

Cost

Loss

Value

(In thousands)
Securities available-for-sale

    CMOs issued by US government-sponsored agencies
$
50,251

$
371

$
49,880
    FNMA and FHLMC certificates

346,582

2,586

343,996
    Obligations of US government and sponsored agencies

2,040

10

2,030
    GNMA certificates

19

-

19
    US Treasury Securities

10,319

10

10,309

$
409,211

$
2,977

$
406,234

December 31, 2018

12 months or more

Amortized

Unrealized

Fair

Cost

Loss

Value

(In thousands)
Securities available-for-sale

    CMOs issued by US Government-sponsored agencies
$
66,230

$
2,166

$
64,064
    FNMA and FHLMC certificates

357,955

8,603

349,352
    Obligations of US Government and sponsored agencies

2,325

60

2,265
    GNMA certificates

131,044

2,739

128,305
    US Treasury Securities

9,977

119

9,858

$
567,531

$
13,687

$
553,844
Securities held-to-maturity

    FNMA and FHLMC certificates
$
424,740

$
14,387

$
410,353


Less than 12 months

Amortized

Unrealized

Fair

Cost

Loss

Value

(In thousands)
Securities available-for-sale

    FNMA and FHLMC certificates

109,772

348

109,424
    GNMA certificates

17,126

88

17,038
    US Treasury Securities

323

-

323

$
127,221

$
436

$
126,785


Total

Amortized

Unrealized

Fair

Cost

Loss

Value

(In thousands)
Securities available-for-sale

    CMOs issued by US Government-sponsored agencies

66,230

2,166

64,064
    FNMA and FHLMC certificates

467,727

8,951

458,776
    Obligations of US government and sponsored agencies

2,325

60

2,265
    GNMA certificates

148,170

2,827

145,343
    US Treasury Securities

10,300

119

10,181

$
694,752

$
14,123

$
680,629
Securities held-to-maturity

    FNMA and FHLMC certificates
$
424,740

$
14,387

$
410,353

Oriental performs valuations of its investment securities on a monthly basis. Moreover, Oriental conducts quarterly reviews to identify and evaluate each investment in an unrealized loss position for other-than-temporary impairment. Any portion of a decline in value associated with credit loss is recognized in the statements of operations with the remaining noncredit-related component recognized in other comprehensive income. A credit loss is determined by assessing whether the amortized cost basis of the security will be recovered by comparing the present value of cash flows expected to be collected from the security, discounted at the rate equal to the yield used to accrete current and prospective beneficial interest for the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered to be the “credit loss.” Other-than-temporary impairment analysis is based on estimates that depend on market conditions and are subject to further change over time. In addition, while Oriental believes that the methodology used to value these exposures is reasonable, the methodology is subject to continuing improvement, including those made as a result of market developments. Consequently, it is reasonably possible that changes in estimates or conditions could result in the need to recognize additional other-than-temporary impairment charges in the future.

~~All~~ ~~of the investments ($409.2~~ ~~million, amortized cost) with an unrealized loss position at September 30, 2019 consist of securities issued or guaranteed by the U.S. Treasury or U.S. government-sponsored~~ agencies ~~all of which are highly liquid securities~~ that have a large and efficient secondary market. Their aggregate losses and their variability from period to period are the result of changes in market conditions, and not due to the repayment capacity or creditworthiness of the issuers or guarantors of such securities. zero credit loss assumption.

~~The composition~~basis of Oriental’s loan portfolio at ~~September 30, 2019~~ March 31, 2020 was as follows:

	March 31, 2020
	Non-PCD		PCD		Total
	(In thousands)
Commercial loans:
Commercial secured by real estate	$	854,187	$	261,066	$	1,115,253
Other commercial and industrial		743,975		130,092		874,067
US Loan Program		312,031		-		312,031
		1,910,193		391,158		2,301,351
Mortgage		887,982		1,561,558		2,449,540
Consumer
Personal loans		358,253		2,807		361,060
Credit lines		51,379		539		51,918
Credit cards		71,875		-		71,875
Overdraft		203		-		203
Auto		1,487,701		42,466		1,530,167
		1,969,411		45,812		2,015,223
		4,767,586		1,998,528		6,766,114
Allowance for credit losses		(149,961)		(80,794)		(230,755)
Total loans held for investment		4,617,625		1,917,734		6,535,359
Mortgage loans held for sale		5,815		-		5,815
Total loans, net	$	4,623,440	$	1,917,734	$	6,541,174

At March 31, 2020, and December 31, ~~2018~~ ~~was as follows:~~

September 30,

December 31,

2019

2018

(In thousands)
Originated and other loans and leases held for investment:

        Mortgage
$
589,383

$
668,809
        Commercial

1,573,629

1,597,588
        Consumer

362,358

348,980
        Auto and leasing

1,266,066

1,129,695

3,791,436

3,745,072
        Allowance for loan and lease losses on originated and other loans and leases

(79,089)

(95,188)

3,712,347

3,649,884
        Deferred loan costs, net

9,608

7,740
    Total originated and other loans held for investment, net

3,721,955

3,657,624
Acquired loans:

    Acquired BBVAPR loans:

     Accounted for under ASC 310-20 (Loans with revolving feature and/or

        acquired at a premium)

        Commercial

2,217

2,546
        Consumer

21,461

23,988
        Auto

237

4,435

23,915

30,969
        Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-20

(1,490)

(2,062)

22,425

28,907
     Accounted for under ASC 310-30 (Loans acquired with deteriorated

         credit quality, including those by analogy)

        Mortgage

439,675

492,890
        Commercial

155,653

182,319
        Auto

3,883

14,403

599,211

689,612
         Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-30

(51,394)

(42,010)

547,817

647,602
    Total acquired BBVAPR loans, net

570,242

676,509
Acquired Eurobank loans:

        Loans secured by 1-4 family residential properties

54,603

63,392
        Commercial

46,412

47,826
        Consumer

802

846
    Total acquired Eurobank loans

101,817

112,064
        Allowance for loan and lease losses on Eurobank loans

(22,370)

(24,971)
    Total acquired Eurobank loans, net

79,447

87,093
    Total acquired loans, net

649,689

763,602
Total held for investment, net

4,371,644

4,421,226
Mortgage loans held-for-sale

23,504

10,368
Other loans held for sale

12,042

-
Total loans, net
$
4,407,190

$
4,431,594

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~Originated and Other Loans and Leases Held for Investment~~

~~Oriental’s originated and other loans held for investment are encompassed within four portfolio segments: mortgage, commercial, consumer, and auto and leasing.~~

~~The tables below present the aging of the recorded investment in gross originated and other loans held for investment at September 30,~~ 2019, ~~and December 31, 2018, by class of loans.~~ Mortgage loans past due include delinquent loans in the GNMA buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option.

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

September 30, 2019

Loans 90+

Days Past

Due and

30-59 Days

60-89 Days

90+ Days

Total Past

Still

Past Due

Past Due

Past Due

Due

Current

Total Loans

Accruing

(In thousands)

Mortgage

    Traditional (by origination year):

        Up to the year 2002
$
72

$
663

$
1,107

$
1,842

$
33,451

$
35,293

$
192
        Years 2003 and 2004

142

2,472

1,529

4,143

61,395

65,538

-
        Year 2005

80

982

1,151

2,213

31,291

33,504

-
        Year 2006

227

970

1,227

2,424

46,102

48,526

-
        Years 2007, 2008
            and 2009

-

557

1,137

1,694

48,994

50,688

139
        Years 2010, 2011, 2012, 2013

300

1,211

2,630

4,141

94,626

98,767

89
        Years 2014, 2015, 2016, 2017 and 2018

-

493

208

701

139,022

139,723

-

821

7,348

8,989

17,158

454,881

472,039

420
        Non-traditional

-

-

1,072

1,072

8,868

9,940

-
        Loss mitigation program

8,989

4,473

8,503

21,965

73,808

95,773

2,477

9,810

11,821

18,564

40,195

537,557

577,752

2,897
    Home equity secured personal loans

-

-

-

-

228

228

-
    GNMA's buy-back option program

-

-

11,403

11,403

-

11,403

-

9,810

11,821

29,967

51,598

537,785

589,383

2,897
Commercial

    Commercial secured by real estate:

        Corporate

-

-

7,264

7,264

235,585

242,849

-
        Institutional

-

-

-

-

76,055

76,055

-
        Middle market

-

-

5,084

5,084

199,798

204,882

-
        Retail

2,954

466

2,503

5,923

218,702

224,625

-
        Floor plan

-

-

-

-

3,136

3,136

-
        Real estate

-

-

-

-

17,966

17,966

-
        US Loan Program

-

-

-

-

16,782

16,782

-

2,954

466

14,851

18,271

768,024

786,295

-
    Other commercial and industrial:

        Corporate

-

-

-

-

160,222

160,222

-
        Institutional

-

-

-

-

153,981

153,981

-
        Middle market

63

-

4,842

4,905

72,676

77,581

-
        Retail

696

224

297

1,217

108,987

110,204

-
        Floor plan

-

-

3

3

38,567

38,570

-
        US Loan Program

-

-

-

-

246,776

246,776

-

759

224

5,142

6,125

781,209

787,334

-

3,713

690

19,993

24,396

1,549,233

1,573,629

-

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

September 30, 2019

Loans 90+

Days Past

Due and

30-59 Days

60-89 Days

90+ Days

Total Past

Still

Past Due

Past Due

Past Due

Due

Current

Total Loans

Accruing

(In thousands)

Consumer

        Credit cards
$
713

$
356

$
592

$
1,661

$
26,104

$
27,765

$
-
        Overdrafts

38

-

-

38

406

444

-
        Personal lines of credit

8

26

76

110

1,801

1,911

-
        Personal loans

5,058

2,185

1,386

8,629

307,240

315,869

-
        Cash collateral personal loans

147

19

306

472

15,897

16,369

-

5,964

2,586

2,360

10,910

351,448

362,358

-
Auto and leasing

72,967

30,379

14,220

117,566

1,148,500

1,266,066

-
    Total
$
92,454

$
45,476

$
66,540

$
204,470

$
3,586,966

$
3,791,436

$
2,897

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

December 31, 2018

Loans 90+

Days Past

Due and

30-59 Days

60-89 Days

90+ Days

Total Past

Still

Past Due

Past Due

Past Due

Due

Current

Total Loans

Accruing

(In thousands)

Mortgage

    Traditional (by origination year):

        Up to the year 2002
$
77

$
1,516

$
2,707

$
4,300

$
36,344

$
40,644

$
168
        Years 2003 and 2004

91

2,412

5,632

8,135

67,707

75,842

-
        Year 2005

-

552

3,531

4,083

35,004

39,087

-
        Year 2006

255

1,693

5,074

7,022

49,213

56,235

-
        Years 2007, 2008
            and 2009

255

1,059

6,677

7,991

52,781

60,772

56
        Years 2010, 2011, 2012, 2013

253

328

8,697

9,278

104,429

113,707

270
        Years 2014, 2015, 2016 and 2017

-

483

1,462

1,945

139,500

141,445

-

931

8,043

33,780

42,754

484,978

527,732

494
        Non-traditional

-

116

3,085

3,201

11,072

14,273

-
        Loss mitigation program

10,793

6,258

19,389

36,440

70,393

106,833

2,223

11,724

14,417

56,254

82,395

566,443

648,838

2,717
    Home equity secured personal loans

9

-

-

9

241

250

-
    GNMA's buy-back option program

-

-

19,721

19,721

-

19,721

-

11,733

14,417

75,975

102,125

566,684

668,809

2,717
Commercial

    Commercial secured by real estate:

        Corporate

-

-

-

-

289,052

289,052

-
        Institutional

-

-

1,200

1,200

68,413

69,613

-
        Middle market

-

1,430

5,202

6,632

200,831

207,463

-
        Retail

1,641

463

8,570

10,674

210,251

220,925

-
        Floor plan

-

-

-

-

4,184

4,184

-
        Real estate

-

-

-

-

19,009

19,009

-
        US Loan Program

-

-

-

-

3,189

3,189

-

1,641

1,893

14,972

18,506

794,929

813,435

-
    Other commercial and industrial:

        Corporate

-

-

-

-

179,885

179,885

-
        Institutional

-

-

-

-

156,410

156,410

-
        Middle market

917

-

6,020

6,937

81,030

87,967

-
        Retail

571

546

817

1,934

88,000

89,934

-
        Floor plan

-

-

46

46

49,633

49,679

-
        US Loan Program

-

-

-

-

220,278

220,278

-

1,488

546

6,883

8,917

775,236

784,153

-

3,129

2,439

21,855

27,423

1,570,165

1,597,588

-

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

December 31, 2018

Loans 90+

Days Past

Due and

30-59 Days

60-89 Days

90+ Days

Total Past

Still

Past Due

Past Due

Past Due

Due

Current

Total Loans

Accruing

(In thousands)

Consumer

        Credit cards
$
725

$
363

$
411

$
1,499

$
26,535

$
28,034

$
-
        Overdrafts

10

-

-

10

204

214

-
        Personal lines of credit

57

11

22

90

1,827

1,917

-
        Personal loans

3,966

1,740

1,262

6,968

296,151

303,119

-
        Cash collateral personal loans

74

339

3

416

15,280

15,696

-

4,832

2,453

1,698

8,983

339,997

348,980

-
Auto and leasing

58,094

27,945

13,494

99,533

1,030,162

1,129,695

-
    Total
$
77,788

$
47,254

$
113,022

$
238,064

$
3,507,008

$
3,745,072

$
2,717

~~At September 30, 2019, and December 31, 2018,~~ Oriental had a carrying balance of ~~$96.7~~$157.4 million and ~~$91.4~~ $134.0 million, respectively, in current status, in ~~originated and other~~ loans held for investment granted to the Puerto Rico government, including its instrumentalities, public corporations and municipalities, as part of the institutional commercial loan segment. All ~~originated and other~~ loans granted 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. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations.

~~Acquired Loans~~

~~Acquired loans were initially measured at fair value and subsequently accounted for under either ASC 310-30 or ASC 310-20. We have acquired loans in the acquisitions of BBVAPR and Eurobank.~~

~~Acquired BBVAPR Loans~~

~~Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)~~

Credit cards, retail and commercial revolving lines of credits, floor plans and performing auto loans with FICO scores over 660 acquired at a premium are accounted for under the guidance of ASC 310-20, which requires that any contractually required loan payment receivable in excess of Oriental’s initial investment in the loans be accreted into interest income on a level-yield basis over the life of the loan. Loans accounted for under ASC 310-20 are placed on non-accrual status when past due in accordance with Oriental’s non-accrual policy, and any accretion of discount or amortization of premium is discontinued. Acquired BBVAPR loans that were accounted for under the provisions of ASC 310-20 are removed from the acquired loan category at the end of the reporting period upon refinancing, renewal or normal re-underwriting.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

The ~~following~~ tables below present the aging of the ~~recorded~~amortized cost of loans held for investment ~~in gross acquired BBVAPR loans accounted for under ASC 310-20 as of September 30, 2019 and December~~at March 31, ~~2018,~~2020, by class of ~~loans:~~loans. Mortgage loans past due include delinquent loans in the GNMA buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option.

	September 30, 2019														March 31, 2020
													Loans 90+														Loans 90+
													Days Past														Days Past
													Due and														Due and
	30-59 Days		60-89 Days		90+ Days		Total Past						Still		30-59 Days		60-89 Days		90+ Days		Total Past						Still
	Past Due		Past Due		Past Due		Due		Current		Total Loans		Accruing		Past Due		Past Due		Past Due		Due		Current		Total Loans		Accruing
	(In thousands)														(In thousands)
Commercial
Commercial secured by real estate															$	2,620	$	1,174	$	22,718	$	26,512	$	827,675	$	854,187	$	-
Retail	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Floor plan		-		-		787		787		33		820		-
Other commercial and industrial																1,904		376		4,951		7,231		736,744		743,975		-
US Loan Program																-		-		-		-		312,031		312,031		-
		-		-		787		787		33		820		-		4,524		1,550		27,669		33,743		1,876,450		1,910,193		-
Other commercial and industrial
Retail		29		35		21		85		1,312		1,397		-
Mortgage																4,770		15,748		101,570		122,088		765,894		887,982		2,794
Consumer
Personal loans																6,397		2,947		1,815		11,159		347,094		358,253		-
Credit lines																953		209		547		1,709		49,670		51,379		-
Credit cards																1,809		763		1,317		3,889		67,986		71,875		-
Overdraft																42		7		-		49		154		203		-
Auto																65,502		45,457		20,756		131,715		1,355,986		1,487,701		-
		29		35		21		85		1,312		1,397		-		74,703		49,383		24,435		148,521		1,820,890		1,969,411		-
		29		35		808		872		1,345		2,217		-
Consumer
Credit cards		501		258		195		954		18,467		19,421		-
Personal loans		29		22		10		61		1,979		2,040		-
		530		280		205		1,015		20,446		21,461		-
Auto		55		51		44		150		87		237		-
Total	$	614	$	366	$	1,057	$	2,037	$	21,878	$	23,915	$	-

Total loans															$	83,997	$	66,681	$	153,674	$	304,352	$	4,463,234	$	4,767,586	$	2,794

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

December 31, 2018

Loans 90+

Days Past

Due and

30-59 Days

60-89 Days

90+ Days

Total Past

Still

Past Due

Past Due

Past Due

Due

Current

Total Loans

Accruing

(In thousands)

Commercial

    Commercial secured by real estate

        Retail
$
-

$
-

$
54

$
54

$
-

$
54

$
-
        Floor plan

-

-

888

888

94

982

-

-

-

942

942

94

1,036

-
    Other commercial and industrial

        Retail

30

11

8

49

1,461

1,510

-

30

11

8

49

1,461

1,510

-

30

11

950

991

1,555

2,546

-
    Consumer

        Credit cards

499

147

380

1,026

20,796

21,822

-
        Personal loans

64

32

18

114

2,052

2,166

-

563

179

398

1,140

22,848

23,988

-
    Auto

405

241

200

846

3,589

4,435

-
       Total
$
998

$
431

$
1,548

$
2,977

$
27,992

$
30,969

$
-

~~Acquired BBVAPR Loans Accounted for under ASC 310-30 (including those~~Upon adoption of CECL, Oriental elected to maintain pools of loans that were previously accounted for under ASC 310-30 ~~by analogy)~~and will continue to account for these pools as a unit of account. As such, PCD loans are not included in the table above.

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~At September 30, 2019 and December 31, 2018, Oriental had $32.9~~ ~~million and $44.5~~ ~~million, respectively, in loans granted to Puerto Rico municipalities as part of its acquired BBVAPR loans accounted for under ASC 310-30.~~ ~~These loans are primarily secured municipal general obligations.~~

TheThe following ~~tables describe~~table describes the accretable yield and non-accretable discount activity of acquired BBVAPR loans accounted for under ASC 310-30 for the ~~quarters and nine-month periods~~quarter ended ~~September 30, 2019 and 2018:~~March 31, 2019:

	Quarter Ended September 30, 2019										Quarter Ended March 31, 2019
	Mortgage		Commercial		Auto		Consumer		Total		Mortgage		Commercial		Auto		Consumer		Total
	(In thousands)										(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	217,549	$	34,638	$	43	$	288	$	252,518	$	232,199	$	36,508	$	243	$	560	$	269,510
Accretion		(5,876)		(2,379)		(77)		(151)		(8,483)		(6,350)		(2,656)		(216)		(298)		(9,520)
Change in expected cash flows		-		3,995		5		151		4,151		-		3,265		3		298		3,566
Transfer (to) from non-accretable discount		(9,849)		(17,128)		57		(94)		(27,014)
Transfer from (to) non-accretable discount												1,058		262		150		(133)		1,337
Balance at end of period	$	201,824	$	19,126	$	28	$	194	$	221,172	$	226,907	$	37,379	$	180	$	427	$	264,893

Non-Accretable Discount Activity:
Balance at beginning of period	$	292,258	$	10,904	$	24,083	$	18,810	$	346,055	$	291,887	$	10,346	$	24,245	$	18,945	$	345,423
Change in actual and expected losses		(21,356)		(3,913)		44		(118)		(25,343)		(729)		(173)		(39)		(243)		(1,184)
Transfer from (to) accretable yield		9,849		17,128		(57)		94		27,014
Transfer (to) from accretable yield												(1,058)		(262)		(150)		133		(1,337)
Balance at end of period	$	280,751	$	24,119	$	24,070	$	18,786	$	347,726	$	290,100	$	9,911	$	24,056	$	18,835	$	342,902

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

Quarter Ended September 30, 2018

Mortgage

Commercial

Auto

Consumer

Total

(In thousands)
Accretable Yield Activity:

Balance at beginning of period
$
243,903

$
42,521

$
1,071

$
497

$
287,992
    Accretion

(6,722)

(3,977)

(466)

(88)

(11,253)
    Change in expected cash flows

-

1,334

3

25

1,362
    Transfer from (to) non-accretable discount

1,456

(1,140)

3

(26)

293
Balance at end of period
$
238,637

$
38,738

$
611

$
408

$
278,394

Non-Accretable Discount Activity:

Balance at beginning of period
$
296,137

$
11,143

$
23,645

$
19,332

$
350,257
    Change in actual and expected losses

(1,860)

(1,125)

181

13

(2,791)
    Transfer (to) from accretable yield

(1,456)

1,140

(3)

26

(293)
Balance at end of period
$
292,821

$
11,158

$
23,823

$
19,371

$
347,173

Nine-Month Period Ended September 30, 2018

Mortgage

Commercial

Auto

Consumer

Total

(In thousands)
Accretable Yield Activity:

Balance at beginning of period
$
258,498

$
46,764

$
2,766

$
885

$
308,913
    Accretion

(20,710)

(11,259)

(1,991)

(538)

(34,498)
    Change in expected cash flows

-

7,265

829

156

8,250
    Transfer from (to) non-accretable discount

849

(4,032)

(993)

(95)

(4,271)
Balance at end of period
$
238,637

$
38,738

$
611

$
408

$
278,394

Non-Accretable Discount Activity:

Balance at beginning of period
$
299,501

$
10,596

$
23,050

$
19,284

$
352,431
    Change in actual and expected losses

(5,831)

(3,470)

(220)

(8)

(9,529)
    Transfer (to) from accretable yield

(849)

4,032

993

95

4,271
Balance at end of period
$
292,821

$
11,158

$
23,823

$
19,371

$
347,173

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~Acquired Eurobank Loans~~

~~The carrying amount of acquired Eurobank loans at September 30, 2019 and December 31, 2018 is as follows:~~

September 30

December 31,

2019

2018

(In thousands)
Contractual required payments receivable
$
139,119

$
156,722
Less: Non-accretable discount

1,714

2,959
Cash expected to be collected

137,405

153,763
Less: Accretable yield

35,588

41,699
Carrying amount, gross

101,817

112,064
Less: Allowance for loan and lease losses

22,370

24,971
Carrying amount, net
$
79,447

$
87,093

The following ~~tables describe~~table describes the accretable yield and non-accretable discount activity of acquired Eurobank loans for the ~~quarters and nine-months periods~~quarter ended ~~September 30, 2019 and 2018:~~March 31, 2019:

	Quarter Ended September 30, 2019												Quarter Ended March 31, 2019
	Loans Secured by 1-4 Family Residential Properties		Commercial		Construction & Development Secured by 1-4 Family Residential Properties		Leasing		Consumer		Total		Mortgage		Commercial		Leasing		Consumer		Total
	(In thousands)												(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	35,935		1,856		603		-		-		38,394	$	38,389	$	3,310		-	$	-	$	41,699
Accretion		(1,218)		(1,075)		-		3		(89)		(2,379)		(1,351)		(1,165)		(12)		(46)		(2,574)
Change in expected cash flows		1,917		550		-		(93)		132		2,506		(423)		(44)		(31)		87		(411)
Transfer (to) from non-accretable discount		(2,518)		(438)		(24)		90		(43)		(2,933)
Transfer from (to) non-accretable discount														407		159		43		(41)		568
Balance at end of period	$	34,116	$	893	$	579	$	-	$	-	$	35,588	$	37,022	$	2,260	$	-	$	-	$	39,282

Non-Accretable Discount Activity:
Balance at beginning of period	$	79		-		1,602		-		118		1,799	$	2,826	$	-	$	-	$	133	$	2,959
Change in actual and expected losses		(2,597)		(438)		-		90		(73)		(3,018)		7		159		43		(58)		151
Transfer from (to) accretable yield		2,518		438		24		(90)		43		2,933
Transfer (to) from accretable yield														(407)		(159)		(43)		41		(568)
Balance at end of period	$	-	$	-	$	1,626	$	-	$	88	$	1,714	$	2,426	$	-	$	-	$	116	$	2,542

Nine-Month Period Ended September 30, 2019

Loans Secured by   1-4 Family Residential Properties

Commercial

Construction & Development Secured by 1-4 Family Residential Properties

Leasing

Consumer

Total

(In thousands)
Accretable Yield Activity:

Balance at beginning of period
$
37,734

$
3,310

$
655

$
-

$
-

$
41,699
    Accretion

(3,849)

(3,439)

-

(12)

(152)

(7,452)
    Change in expected cash flows

1,524

1,416

-

(134)

250

3,056
    Transfer (to) from non-accretable discount

(1,293)

(394)

(76)

146

(98)

(1,715)
Balance at end of period
$
34,116

$
893

$
579

$
-

$
-

$
35,588

Non-Accretable Discount Activity:

Balance at beginning of period
$
1,276

$
-

$
1,550

$
-

$
133

$
2,959
    Change in actual and expected losses

(2,569)

(394)

-

146

(143)

(2,960)
    Transfer from (to) accretable yield

1,293

394

76

(146)

98

1,715
Balance at end of period
$
-

$
-

$
1,626

$
-

$
88

$
1,714

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

Quarter Ended September 30, 2018

Loans Secured by   1-4 Family Residential Properties

Commercial

Construction & Development Secured by 1-4 Family Residential Properties

Leasing

Consumer

Total

(In thousands)
Accretable Yield Activity:

Balance at beginning of period
$
39,269

$
4,585

$
1,224

-

$
-

$
45,078
    Accretion

(1,440)

(1,883)

-

(7)

(155)

(3,485)
    Change in expected cash flows

6

2,063

-

(143)

283

2,209
    Transfer from (to) non-accretable discount

188

(412)

(525)

150

(128)

(727)
Balance at end of period
$
38,023

$
4,353

$
699

$
-

$
-

$
43,075

Non-Accretable Discount Activity:

Balance at beginning of period
$
2,638

$
-

$
981

$
-

$
200

$
3,819
    Change in actual and expected losses

63

(412)

-

150

(160)

(359)
    Transfer (to) from accretable yield

(188)

412

525

(150)

128

727
Balance at end of period
$
2,513

$
-

$
1,506

$
-

$
168

$
4,187

Non-accrual Loans

The following table presents the amortized cost basis of loans on nonaccrual status as of March 31, 2020:


	March 31, 2020
	Nonaccrual with		Nonaccrual with no
	Allowance		Allowance
	for Credit Loss		for Credit Loss
	(In thousands)
Non-PCD:
Commercial
Commercial secured by real estate	$	18,473	$	18,617
Other commercial and industrial		2,349		3,229
		20,822		21,846
Mortgage		17,631		7,937
Consumer
Personal loans		1,504		315
Personal lines of credit		552		-
Credit cards		1,319		-
Auto and leasing		21,147		-
		24,522		315
Total non-accrual loans	$	62,975	$	30,098

PCD:
Commercial
Commercial secured by real estate	$	12,821	$	3,150
Other commercial and industrial		66,351		89
		79,172		3,239
Mortgage		1,341		-
Consumer
Personal loans		10		-
		10		-
Total non-accrual loans	$	80,523	$	3,239

Upon adoption of CECL, Oriental elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. As such, for these loans the determination of nonaccrual or accrual status is made at the pool level, not the individual loan level.

3529

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

Nine-Month Period Ended September 30, 2018

Loans Secured by   1-4 Family Residential Properties

Commercial

Construction & Development Secured by 1-4 Family Residential Properties

Leasing

Consumer

Total

(In thousands)
Accretable Yield Activity:

Balance at beginning of period
$
41,474

$
6,751

$
1,447

$
-

$
-

$
49,672
    Accretion

(4,583)

(5,195)

-

(45)

(369)

(10,192)
    Change in expected cash flows

(974)

4,793

-

(317)

697

4,199
    Transfer from (to) non-accretable discount

2,106

(1,996)

(748)

362

(328)

(604)
Balance at end of period
$
38,023

$
4,353

$
699

$
-

$
-

$
43,075

Non-Accretable Discount Activity:

Balance at beginning of period
$
4,576

$
276

$
758

$
-

$
235

$
5,845
    Change in actual and expected losses

43

(2,272)

-

362

(395)

(2,262)
    Transfer (to) from accretable yield

(2,106)

1,996

748

(362)

328

604
Balance at end of period
$
2,513

$
-

$
1,506

$
-

$
168

$
4,187

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~Non-accrual Loans~~

The following table presents the recorded investment in loans in non-accrual status by class of loans as of ~~September 30, 2019 and~~ December 31, ~~2018:~~2019:

September 30,

December 31

2019

2018

(In thousands)
Originated and other loans and leases held for investment

Mortgage

    Traditional (by origination year):

        Up to the year 2002
$
916

$
2,538
        Years 2003 and 2004

1,529

5,818
        Year 2005

1,151

3,600
        Year 2006

1,227

5,140
        Years 2007, 2008 and 2009

1,075

6,697
        Years 2010, 2011, 2012, 2013

2,540

8,427
        Years 2014, 2015, 2016, 2017 and 2018

208

1,462

8,646

33,682
        Non-traditional

1,072

3,085
        Loss mitigation program

7,995

22,107

17,713

58,874
Commercial

    Commercial secured by real estate

        Corporate

7,264

-
        Institutional

9,295

9,911
        Middle market

5,860

7,266
        Retail

7,824

16,123

30,243

33,300
    Other commercial and industrial

        Middle market

4,841

6,481
        Retail

514

2,629
        Floor plan

3

46

5,358

9,156

35,601

42,456
Consumer

    Credit cards

592

411
    Overdrafts

-

-
    Personal lines of credit

82

31
    Personal loans

3,027

2,909
    Cash collateral personal loans

307

3

4,008

3,354
Auto and leasing

15,019

13,494
    Total non-accrual originated loans
$
72,341

$
118,178

	December 31,
	2019
	(In thousands)
Originated and other loans and leases held for investment
Commercial
Commercial secured by real estate	$	30,034
Other commercial and industrial		9,055
		39,089
Mortgage		18,735
Consumer
Personal loans		4,140
Personal lines of credit		15
Credit cards		546
Auto and leasing		14,239
		18,940
Total non-accrual originated loans	$	76,764

Acquired Scotiabank PR & USVI loans accounted for under ASC 310-20
Commercial
Commercial secured by real estate	$	1,922
Other commercial and industrial		805
		2,727
Consumer
Personal loans		2
Personal lines of credit		212
Auto		26
		240
Total non-accrual acquired Scotiabank PR & USVI loans accounted for under ASC 310-20		2,967

Acquired BBVAPR loans accounted for under ASC 310-20
Commercial
Commercial secured by real estate	$	764
Other commercial and industrial		26
		790
Consumer
Personal loans		22
Credit cards		350
Auto		30
		402
Total non-accrual acquired BBVAPR loans accounted for under ASC 310-20		1,192
Total non-accrual loans	$	80,923

3730

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

September 30,

December 31,

2019

2018

(In thousands)
Acquired BBVAPR loans accounted for under ASC 310-20

Commercial

    Commercial secured by real estate

        Retail
$
-

$
54
        Floor plan

787

888

787

942
    Other commercial and industrial

        Retail

21

8

808

950
Consumer

    Credit cards

195

380
    Personal loans

10

18

205

398
Auto

44

200
    Total non-accrual acquired BBVAPR loans accounted for under ASC 310-20

1,057

1,548
            Total non-accrual loans
$
73,398

$
119,726

Loans accounted for under ASC 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses or are accounted under the cost recovery method.

Delinquent residential mortgage loans insured or guaranteed under applicable FHA and VA programs are classified as non-performing loans when they become 90 days or more past due but are not placed in non-accrual status until they become 12 months or more past due, since they are insured loans. Therefore, ~~these~~those loans are included as non-performing loans but excluded from non-accrual loans.~~In addition, these loans are excluded from the impairment analysis.~~

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, loans whose terms have been extended and which ~~are~~were classified as troubled-debt restructurings that ~~are~~were not included in non-accrual loans amounted to ~~$103.8~~$105.3 million and ~~$112.9~~$103.7 million, respectively, as they ~~are~~were performing under their new terms.

~~At September 30, 2019 and December 31, 2018, loans that are current in their monthly payments, but placed in non-accrual due to credit deterioration amounted to $16.6~~ ~~million and $21.2~~ ~~million, respectively.~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Impaired Loans

Oriental evaluates all loans, some individually and others as homogeneous groups, for purposes of determining impairment. The total investment in impaired commercial loans that were individually evaluated for impairment ~~was $59.5~~ ~~million and $82.0~~ ~~million~~ at ~~September 30, 2019 and~~ December 31, ~~2018, respectively.~~ 2019 was $61.1 million. The impairments on these commercial loans were measured based on the fair value of collateral or the present value of cash flows, including those identified as troubled-debt ~~restructurings~~.restructurings. The allowance for loan and lease losses for these impaired commercial loans amounted to ~~$4.9~~ ~~million and $8.4~~$8.2 million at ~~September 30, 2019 and~~ December 31, ~~2018, respectively.~~2019. The total investment in impaired mortgage loans that were individually evaluated for impairment was ~~$71.7~~ ~~million and $84.2~~$71.2 million at ~~September 30, 2019 and~~ December 31, ~~2018, respectively.~~2019. Impairment on mortgage loans assessed as troubled-debt restructurings was measured using the present value of cash flows. The allowance for loan losses for these impaired mortgage loans amounted to ~~$6.8~~ ~~million and $10.2~~$6.9 million at ~~September 30, 2019 and~~ December 31, ~~2018, respectively.~~2019.

Originated and Other Loans and Leases Held for Investment

Prior to the adoption of CECL, Oriental’s recorded investment in commercial and mortgage loans categorized as originated and other loans and leases held for investment that were individually evaluated for impairment and the related allowance for loan and lease losses at ~~September 30, 2019 and~~ December 31, ~~2018~~ ~~are~~2019 were as follows:

	September 30, 2019							December 31, 2019
	Unpaid		Recorded		Related			Unpaid		Recorded		Related
	Principal		Investment		Allowance		Coverage	Principal		Investment		Allowance		Coverage
	(In thousands)							(In thousands)
Impaired loans with specific allowance:
Commercial	$	34,590	$	30,813	$	4,849	16%	$	33,454	$	28,555	$	8,215	29%
Residential impaired and troubled-debt restructuring		78,836		71,658		6,816	10%		78,666		71,196		6,874	10%
Impaired loans with no specific allowance:
Impaired loans with no specific allowance
Commercial		36,139		28,016		N/A	0%		39,109		31,895		N/A	0%
Total investment in impaired loans	$	149,565	$	130,487	$	11,665	9%	$	151,229	$	131,646	$	15,089	11%

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

Acquired BBVAPR Loans Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)

Prior to the adoption of CECL, Oriental’s recorded investment in acquired BBVAPR commercial loans accounted for under ASC 310-20 that were individually evaluated for impairment and the related allowance for loan and lease losses at ~~September 30, 2019 and~~ December 31, ~~2018 are~~2019 were as follows:


	September 30, 2019							December 31, 2019
	Unpaid		Recorded		Related			Unpaid		Recorded		Related
	Principal		Investment		Allowance		Coverage	Principal		Investment		Allowance		Coverage
	(In thousands)							(In thousands)
Impaired loans with specific allowance
Commercial	$	926	$	678	$	19	3%	$	926	$	678	$	2	0%
Impaired loans with no specific allowance
Commercial	$	-	$	-		N/A	0%	$	-	$	-		N/A	0%
Total investment in impaired loans	$	926	$	678	$	19	3%	$	926	$	678	$	2	0%


	December 31, 2018
	Unpaid		Recorded		Specific
	Principal		Investment		Allowance		Coverage
	(In thousands)
Impaired loans with specific allowance
Commercial	$	926	$	747	$	14	2%
Impaired loans with no specific allowance
Commercial	$	-	$	-		N/A	0%
Total investment in impaired loans	$	926	$	747	$	14	2%

Acquired BBVAPR Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)

Prior to the adoption of CECL, Oriental’s recorded investment in acquired BBVAPR loan pools accounted for under ASC 310-30 that have recorded impairments and their related allowance for loan and lease losses at ~~September 30, 2019 and~~ December 31, ~~2018~~ ~~are~~2019 were as follows:

	September 30, 2019							December 31, 2019
							Coverage							Coverage
	Unpaid		Recorded				to Recorded	Unpaid		Recorded				to Recorded
	Principal		Investment		Allowance		Investment	Principal		Investment		Allowance		Investment
	(In thousands)							(In thousands)
Impaired loan pools with specific allowance:
Mortgage	$	433,079	$	439,676	$	20,458	5%	$	400,964	$	411,531	$	9,376	2%
Commercial		105,331		103,667		28,647	28%		87,103		84,117		6,713	8%
Auto		5,347		3,882		2,289	59%		39,477		1,790		947	53%
Total investment in impaired loan pools	$	543,757	$	547,225	$	51,394	9%	$	527,544	$	497,438	$	17,036	3%

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

December 31 , 2018

Coverage

Unpaid

Recorded

to Recorded

Principal

Investment

Allowance

Investment

(In thousands)
Impaired loan pools with specific allowance:

        Mortgage
$
498,537

$
492,890

$
15,225

3%
        Commercial

188,413

180,790

20,641

11%
        Auto

14,551

14,403

6,144

43%
            Total investment in impaired loan pools
$
701,501

$
688,083

$
42,010

6%

The tables above only present information with respect to acquired BBVAPR loan pools accounted for under ASC 310-30 if there is a recorded impairment to such loan pools and a specific allowance for loan losses.

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

The following table presents the interest recognized in commercial and mortgage loans that were individually evaluated for impairment, which excludes loans accounted for under ASC 310-30, for the ~~quarters and nine-month periods~~quarter ended ~~September 30, 2019 and 2018:~~ March 31, 2019.

	Quarter Ended March 31,
	2019
	Interest Income Recognized		Average Recorded Investment
	(In thousands)
Originated and other loans held for investment:
Impaired loans with specific allowance
Commercial	$	399	$	50,890
Residential troubled-debt restructuring		667		83,657
Impaired loans with no specific allowance
Commercial		305		32,246
		1,371		166,793
Acquired loans accounted for under ASC 310-20:
Impaired loans with specific allowance
Commercial		-		747
Total interest income from impaired loans	$	1,371	$	167,540

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

Quarter Ended September 30, 2019

Number of contracts

Pre-Modification Outstanding Recorded Investment

Pre-Modification Weighted Average Rate

Pre-Modification Weighted Average Term (in Months)

Post-Modification Outstanding Recorded Investment

Post-Modification Weighted Average Rate

Post-Modification Weighted Average Term (in Months)

(Dollars in thousands)
Mortgage
21

$
2,446

5.97%

358

$
2,307

5.25%

345
Commercial
1

81

8.50%

60

81

8.50%

95
Consumer
124

1,818

16.50%

65

1,776

11.68%

75
Auto
8

112

6.96%

71

112

8.60%

43

Nine-Month Period Ended September 30, 2019

Number of contracts

Pre-Modification Outstanding Recorded Investment

Pre-Modification Weighted Average Rate

Pre-Modification Weighted Average Term (in Months)

Post-Modification Outstanding Recorded Investment

Post-Modification Weighted Average Rate

Post-Modification Weighted Average Term (in Months)

(Dollars in thousands)
Mortgage
109

$
13,940

5.91%

383

$
12,893

5.14%

346
Commercial
3

1,245

7.12%

55

1,245

5.96%

86
Consumer
265

3,833

15.92%

66

3,825

11.69%

75
Auto
21

305

7.35%

70

313

8.97%

45

Quarter Ended September 30, 2018

Number of contracts

Pre-Modification Outstanding Recorded Investment

Pre-Modification Weighted Average Rate

Pre-Modification Weighted Average Term (in Months)

Post-Modification Outstanding Recorded Investment

Post-Modification Weighted Average Rate

Post-Modification Weighted Average Term (in Months)

(Dollars in thousands)
Mortgage
21

$
2,621

5.42%

373

$
2,579

4.19%

344
Commercial
5

3,007

5.79%

71

3,002

5.10%

83
Consumer
52

758

15.06%

66

765

12.04%

73
Auto
2

40

10.28%

37

40

10.28%

37

Nine-Month Period Ended September 30, 2018

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
104

$
14,087

5.61%

382

$
13,597

4.82%

344
Commercial
13

10,341

5.50%

53

10,332

5.74%

60
Consumer
101

1,469

15.58%

59

1,477

11.51%

72
Auto
2

40

10.28%

37

40

10.28%

37

The following table presents troubled-debt restructurings for which there was a payment default during the ~~twelve-month periods~~quarters ended ~~September 30, 2019~~March 31, 2020 and ~~2018:~~2019:

��	Twelve month Period Ended September 30,
							Twelve month Period Ended March 31,
	2019			2018			2020			2019
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in thousands)						(Dollars in thousands)
Mortgage	32	$	4,065	19	$	2,756	26	$	3,037	27	$	3,011
Commercial	2	$	350	2	$	281	-	$	-	4	$	1,981
Consumer	61	$	710	11	$	107	107	$	1,543	43	$	587
Auto	3	$	51	-	$	-

Collateral-dependent Loans

The table below present the amortized cost of collateral-dependent loans held for investment at March 31, 2020, by class of loans.

	March 31, 2020
	Real Estate		Equipment		Total
	(In thousands)
Commercial loans:
Commercial secured by real estate	$	29,671	$	-	$	29,671
Other commercial and industrial		3,144		879		4,023
Total loans	$	32,815	$	879	$	33,694

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

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

Credit Quality Indicators

Oriental categorizes ~~originated and other~~its loans ~~and acquired loans accounted for under ASC 310-20~~ into ~~risk categories~~loan grades based on relevant information about the ability of borrowers to service their debt, such as economic conditions, portfolio risk characteristics, prior loss experience, and the results of periodic credit reviews of individual loans.

Oriental uses the following definitions for ~~risk ratings:~~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~~.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~~.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~~.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~~.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~~.future.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass ~~rated~~ loans.

4536

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

As of ~~September 30, 2019 and December~~March 31, ~~2018~~,2020 and based on the most recent analysis performed, the risk category of ~~gross originated and other~~ loans ~~and BBVAPR acquired loans accounted for under ASC 310-20~~ subject to risk rating by class of loans is as ~~follows:~~follows.



	Term Loans												Revolving
	Amortized Cost Basis by Origination Year												Loans
													Amortized
	2020		2019		2018		2017		2016		Prior		Cost Basis		Total
	(In thousands)
Commercial:
Commercial secured by real estate:
Loan grade:
Pass	$	7,302	$	128,853	$	126,387	$	91,250	$	63,919	$	276,985	$	56,161	$	750,857
Special Mention		10,147		3,588		2,219		16,582		119		23,179		1,591		57,425
Substandard		-		338		822		8,771		458		26,903		8,580		45,872
Doubtful		-		-		-		-		-		-		34		34
Loss		-		-		-		-		-		-		-		-
Total commercial secured by real estate		17,449		132,779		129,428		116,603		64,496		327,067		66,366		854,188
Other commercial and industrial:
Loan grade:
Pass		2,689		104,871		102,701		17,761		8,906		83,310		408,054		728,292
Special Mention		-		75		-		-		7		6,007		3,455		9,544
Substandard		37		748		101		185		3,023		129		1,818		6,041
Doubtful		-		-		-		-		-		-		98		98
Loss		-		-		-		-		-		-		-		-
Total other commercial and industrial:		2,726		105,694		102,802		17,946		11,936		89,446		413,425		743,975
US Loan Program:
Loan grade:
Pass		38,921		69,580		146,014		7,220		-		-		37,135		298,870
Special Mention		-		-		9,827		-		-		-		-		9,827
Substandard		-		-		-		-		-		-		3,333		3,333
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total US loan program:		38,921		69,580		155,841		7,220		-		-		40,468		312,030
Total commercial loans	$	59,096	$	308,053	$	388,071	$	141,769	$	76,432	$	416,513	$	520,259	$	1,910,193

September 30, 2019

Risk Ratings

Balance

Special

Outstanding

Pass

Mention

Substandard

Doubtful

Loss

(In thousands)
Commercial - originated and other loans held for investment

  Commercial secured by real estate:

    Corporate
$
242,849

$
218,501

$
17,084

$
7,264

$
-

$
-
    Institutional

76,055

66,405

355

9,295

-

-
    Middle market

204,882

157,063

27,901

19,918

-

-
    Retail

224,625

209,961

3,777

10,887

-

-
    Floor plan

3,136

3,136

-

-

-

-
    Real estate

17,966

17,966

-

-

-

-
    US Loan Program

16,782

16,782

-

-

-

-

786,295

689,814

49,117

47,364

-

-
Other commercial and industrial:

    Corporate

160,222

157,655

2,567

-

-

-
    Institutional

153,981

153,981

-

-

-

-
    Middle market

77,581

69,263

2,706

5,612

-

-
    Retail

110,204

109,689

96

419

-

-
    Floor plan

38,570

36,440

2,127

3

-

-
    US Loan Program

246,776

246,776

-

-

-

-

787,334

773,804

7,496

6,034

-

-
      Total

1,573,629

1,463,618

56,613

53,398

-

-

Commercial - acquired loans
      (under ASC 310-20)

  Commercial secured by real estate:

    Retail

-

-

-

-

-

-
    Floor plan

820

33

-

787

-

-

820

33

-

787

-

-
Other commercial and industrial:

    Retail

1,397

1,397

-

-

-

-
    Floor plan

-

-

-

-

-

-

1,397

1,397

-

-

-

-
      Total

2,217

1,430

-

787

-

-

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

September 30, 2019

Risk Ratings

Balance

Special

Outstanding

Pass

Mention

Substandard

Doubtful

Loss

(In thousands)
Retail - originated and other loans held for investment

Mortgage:

    Traditional

472,039

463,050

-

8,989

-

-
    Non-traditional

9,940

8,868

-

1,072

-

-
    Loss mitigation program

95,773

87,270

-

8,503

-

-
    Home equity secured personal loans

228

228

-

-

-

-
    GNMA's buy-back option program

11,403

-

-

11,403

-

-

589,383

559,416

-

29,967

-

-

Consumer:

    Credit cards

27,765

27,173

-

592

-

-
    Overdrafts

444

406

-

38

-

-
    Unsecured personal lines of credit

1,911

1,834

-

77

-

-
    Unsecured personal loans

315,869

314,484

-

1,385

-

-
    Cash collateral personal loans

16,369

16,063

-

306

-

-

362,358

359,960

-

2,398

-

-
    Auto and Leasing

1,266,066

1,251,845

-

14,221

-

-
      Total

2,217,807

2,171,221

-

46,586

-

-

Retail - acquired loans (accounted for under ASC 310-20)

Consumer:

   Credit cards

19,421

19,226

-

195

-

-
    Personal loans

2,040

2,030

-

10

-

-

21,461

21,256

-

205

-

-
    Auto

237

194

-

43

-

-

21,698

21,450

-

248

-

-

$
3,815,351

$
3,657,719

$
56,613

$
101,019

$
-

$
-

At March 31, 2020, the balance of revolving loans converted to term loans was $27.2 million.

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

4738

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

December 31, 2018

Risk Ratings

Balance

Special

Outstanding

Pass

Mention

Substandard

Doubtful

Loss

(In thousands)
Commercial - originated and other loans held for investment

Commercial secured by real estate:

   Corporate
$
289,052

$
246,711

$
26,544

$
15,797

$
-

$
-
    Institutional

69,613

59,509

-

10,104

-

-
    Middle market

207,463

151,638

32,638

23,187

-

-
    Retail

220,925

195,213

3,996

21,716

-

-
    Floor plan

4,184

2,890

-

1,294

-

-
    Real estate

19,009

19,009

-

-

-

-
    US Loan Program

3,189

3,189

-

-

-

-

813,435

678,159

63,178

72,098

-

-
Other commercial and industrial:

   Corporate

179,885

154,629

25,256

-

-

-
    Institutional

156,410

156,410

-

-

-

-
    Middle market

87,967

63,876

13,737

10,354

-

-
    Retail

89,934

86,882

318

2,734

-

-
    Floor plan

49,679

47,092

2,541

46

-

-
    US Loan Program

220,278

220,278

-

-

-

-

784,153

729,167

41,852

13,134

-

-
      Total

1,597,588

1,407,326

105,030

85,232

-

-

Commercial - acquired loans
      (under ASC 310-20)

Commercial secured by real estate:

    Retail

54

-

-

54

-

-
    Floor plan

982

94

-

888

-

-

1,036

94

-

942

-

-
Other commercial and industrial:

    Retail

1,510

1,510

-

-

-

-
    Floor plan

-

-

-

-

-

-

1,510

1,510

-

-

-

-
      Total

2,546

1,604

-

942

-

-

															Revolving Loans
	Term Loans												Revolving		Converted to
	Amortized Cost Basis by Origination Year												Loans		Term Loans
													Amortized		Amortized
	2020		2019		2018		2017		2016		Prior		Cost Basis		Cost Basis		Total
	(In thousands)
Mortgage:
Payment performance:
Performing	$	706	$	21,770	$	33,825	$	36,620	$	43,605	$	720,381	$	-	$	-	$	856,907
Nonperforming		-		150		455		193		535		29,742		-		-		31,075
Total mortgage loans:		706		21,920		34,280		36,813		44,140		750,123		-		-		887,982
Consumer:
Personal loans:
Payment performance:
Performing		39,247		153,670		81,858		43,541		23,228		14,890		-		-		356,434
Nonperforming		-		293		487		399		250		390		-		-		1,819
Total personal loans		39,247		153,963		82,345		43,940		23,478		15,280		-		-		358,253
Credit lines:
Payment performance:
Performing		-		-		-		-		-		-		50,827		-		50,827
Nonperforming		-		-		-		-		-		-		552		-		552
Total credit lines		-		-		-		-		-		-		51,379		-		51,379
Credit cards:
Payment performance:
Performing		-		-		-		-		-		-		70,556		-		70,556
Nonperforming		-		-		-		-		-		-		1,319		-		1,319
Total credit cards		-		-		-		-		-		-		71,875		-		71,875
Overdrafts:
Payment performance:
Performing		-		-		-		-		-		-		203		-		203

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

December 31, 2018

Risk Ratings

Balance

Special

Outstanding

Pass

Mention

Substandard

Doubtful

Loss

(In thousands)
Retail - originated and other loans held for investment

Mortgage:

    Traditional

527,732

493,952

-

33,780

-

-
    Non-traditional

14,273

11,188

-

3,085

-

-
    Loss mitigation program

106,833

87,444

-

19,389

-

-
    Home equity secured personal loans

250

250

-

-

-

-
    GNMA's buy-back option program

19,721

-

-

19,721

-

-

668,809

592,834

-

75,975

-

-

Consumer:

    Credit cards

28,034

27,623

-

411

-

-
    Overdrafts

214

204

-

10

-

-
    Unsecured personal lines of credit

1,917

1,895

-

22

-

-
    Unsecured personal loans

303,119

301,857

-

1,262

-

-
    Cash collateral personal loans

15,696

15,693

-

3

-

-

348,980

347,272

-

1,708

-

-
    Auto and Leasing

1,129,695

1,116,201

-

13,494

-

-
      Total

2,147,484

2,056,307

-

91,177

-

-

Retail - acquired loans
      (under ASC 310-20)

Consumer:

   Credit cards

21,822

21,442

-

380

-

-
    Personal loans

2,166

2,148

-

18

-

-

23,988

23,590

-

398

-

-
    Auto

4,435

4,235

-

200

-

-
      Total

28,423

27,825

-

598

-

-

$
3,776,041

$
3,493,062

$
105,030

$
177,949

$
-

$
-

Nonperforming		-		-		-		-		-		-		-		-		-
Total overdrafts		-		-		-		-		-		-		203		-		203
Total consumer loans		39,247		153,963		82,345		43,940		23,478		15,280		123,457		-		481,710
Total mortgage and consumer loans	$	39,953	$	175,883	$	116,625	$	80,753	$	67,618	$	765,403	$	123,457	$	-	$	1,369,692

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~NOTE 6 – ALLOWANCE FOR LOAN AND LEASE LOSSES~~

~~The composition of Oriental’s allowance~~Oriental evaluates credit quality for ~~loan~~auto loans and ~~lease losses at September 30, 2019 and December 31, 2018~~ ~~was as follows:~~

September 30,

December 31,

2019

2018

(In thousands)
Allowance for loans and lease losses:

    Originated and other loans and leases held for investment:

        Mortgage
$
8,391

$
19,783
        Commercial

22,323

30,326
        Consumer

15,328

15,571
        Auto and leasing

33,047

29,508
      Total allowance for originated and other loans and lease losses

79,089

95,188

    Acquired BBVAPR loans:

     Accounted for under ASC 310-20 (Loans with revolving feature and/or

        acquired at a premium)

        Commercial

20

22
        Consumer

1,448

1,905
        Auto

22

135

1,490

2,062
     Accounted for under ASC 310-30 (Loans acquired with deteriorated

         credit quality, including those by analogy)

        Mortgage

20,458

15,225
        Commercial

28,647

20,641
        Auto

2,289

6,144

51,394

42,010
      Total allowance for acquired BBVAPR loans and lease losses

52,884

44,072
Acquired Eurobank loans:

    Loans secured by 1-4 family residential properties

13,809

15,382
    Commercial

8,561

9,585
    Consumer

-

4
      Total allowance for acquired Eurobank loan and lease losses

22,370

24,971
Total allowance for loan and lease losses
$
154,343

$
164,231

Oriental maintains an allowance for loan and lease losses at a level that management considers adequate to provide for probable losses based upon an evaluation of known and inherent risks. Oriental’s allowance for loan and lease losses policy provides for a detailed quarterly analysis of probable losses. The analysis includes a review of historical loan loss experience, value of underlying collateral, current economic conditions, financial condition of borrowers and other pertinent factors. While management uses available information in estimating probable loan losses, future additions to the allowance may be requiredleases based on ~~factors beyond Oriental’s control. We also~~FICO score. The following table presents the amortized cost in auto loans and leases based on FICO score:

															Revolving
															Loans
	Term Loans												Revolving		Converted to
	Amortized Cost Basis by Origination Year												Loans		Term Loans
													Amortized		Amortized
	2020		2019		2018		2017		2016		Prior		Cost Basis		Cost Basis		Total
	(In thousands)
Auto:
FICO score:
1-660		19,459		158,140		139,073		83,191		47,310		48,792		-		-		495,965
661-699		11,031		96,585		63,852		32,279		18,638		19,004		-		-		241,389
700+		20,003		211,214		195,463		107,344		61,740		63,567		-		-		659,331
No FICO		28,821		39,335		9,542		6,113		3,777		3,428		-		-		91,016
Total auto:	$	79,314	$	505,274	$	407,930	$	228,927	$	131,465	$	134,791	$	-	$	-	$	1,487,701

Upon adoption of CECL, Oriental elected to maintain ~~an allowance for loan losses on acquired~~pools of loans ~~when: (i) for loans~~that were previously accounted for under ASC 310-30 ~~there is deterioration~~and will continue to account for these pools as a unit of account. As such, PCD loans are not included in ~~credit quality subsequent to acquisition,~~the table above.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

	December 31, 2019
	Loan Grades

	Balance				Special
	Outstanding		Pass		Mention		Substandard		Doubtful		Loss
	(In thousands)
Commercial - originated and other loans held for investment
Commercial secured by real estate	$	831,040	$	729,116	$	55,835	$	46,089	$	-	$	-
Other commercial and industrial		563,859		547,304		6,634		9,921		-		-
US Loan Program		272,595		262,745		9,850		-		-		-
Total Commercial - originated and other loans		1,667,494		1,539,165		72,319		56,010		-		-

Scotiabank PR & USVI Commercial - acquired loans (under ASC 310-20) (under ASC 310-20)
Commercial secured by real estate		34,881		33,306		35		1,504		36		-
Other commercial and industrial		158,311		158,171		-		39		101		-
Total Scotiabank PR & USVI commercial - acquired loans		193,192		191,477		35		1,543		137		-

BBVAPR Commercial - acquired loans (under ASC 310-20) (under ASC 310-20)
Commercial secured by real estate		785		21		-		764		-		-
Other commercial and industrial		1,356		1,356		-		-		-		-
Total BBVAPR commercial - acquired loans		2,141		1,377		-		764		-		-
Total commercial loans	$	1,862,827	$	1,732,019	$	72,354	$	58,317	$	137	$	-

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

	December 31, 2019
	Loan Grades

	Balance				Special
	Outstanding		Pass		Mention		Substandard		Doubtful		Loss

Retail - originated and other loans held for investment
Mortgage	$	577,416	$	547,683	$	-	$	29,733	$	-	$	-
Personal loans		332,030		330,474		-		1,556		-		-
Personal lines of credit		1,778		1,769		-		9		-		-
Credit cards		27,614		27,068		-		546		-		-
Overdrafts		216		165		-		51		-		-
Auto		1,277,732		1,263,506		-		14,226		-		-
Total consumer loans		1,639,370		1,622,982		-		16,388		-		-
Total retail originated loans		2,216,786		2,170,665		-		46,121		-		-
Retail - acquired loans (accounted for under ASC 310-20) - Scotiabank PR & USVI
Mortgage		322,179		257,803		-		64,376		-		-
Personal loans		33,147		33,147		-		-		-		-
Personal lines of credit		50,836		50,624		-		212		-		-
Credit cards		28,774		28,774		-		-		-		-
Auto		191,015		191,000		-		15		-		-
Total consumer loans		303,772		303,545		-		227		-		-
Total retail acquired Scotiabank PR & USVI non-PCI loans		625,951		561,348		-		64,603		-		-
Retail - acquired loans (accounted for under ASC 310-20) - BBVPR
Consumer:
Credit cards		18,814		18,464		-		350		-		-
Personal loans		1,980		1,958		-		22		-		-
Auto		135		106		-		29		-		-
Total retail acquired BBVAPR non-PCI loans		20,929		20,528		-		401		-		-
Total retail originated and acquired non-PCI loans	$	2,863,666	$	2,752,541	$	-	$	111,125	$	-	$	-

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6 – ALLOWANCE FOR CREDIT LOSSES

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

~~Allowance for Originated~~As of January 1, 2020, Oriental used a probability weighted scenario approach as it is expected that Puerto Rico’s economic forecast should be close to an average between the baseline and ~~Other Loan and Lease Losses Held for Investment~~

a moderate recession. During the quarter ended ~~September 30,~~March 31, 2020, there was a significant change in the economic outlook impacting the allowance for credit losses, with key economic factors such as the unemployment rate and gross domestic product projected to deteriorate sharply in the second quarter of 2020 driven by the impact of COVID-19. In response to these changes, Oriental reassessed the selection and probability weightings as well as analyzed various scenarios with immediate deterioration in economic variables followed by different recovery assumptions as part of the process for setting the allowance for credit loss reserve. Based on these analyses, the Oriental is now effectively fully weighted to a moderate recessionary economic environment within our forecast period. In addition, the allowance for credit losses at March 31, 2020 included additional qualitative reserves for certain segments that Oriental views as higher risk that may not be fully recognized through its quantitative models such as commercial loans concentrated in certain industries. As a result of these developments, Oriental has increased provision for credit losses in the quarter ended March 31, 2020 by $34.1 million. There are still many unknowns including the duration of the impact of COVID-19 on the economy and the results of the government fiscal and monetary actions along with recently implemented payment deferral programs.

Loans acquired in the Scotiabank PR & USVI Acquisition were recognized at fair value as of December 31, 2019, ~~Oriental transferred to held-for-sale $25.9~~ ~~million~~which included the impact of ~~mostly non-performing loans, increasing the provision by $15.9~~ ~~million.~~expected credit losses, and therefore, no allowance for credit losses was recorded at acquisition date.

The following ~~tables present~~table presents the activity in our allowance for ~~loan and lease~~credit losses ~~and the related recorded investment of the originated and other loans held for investment portfolio~~ by segment for the periods indicated:

	Quarter Ended March 31, 2020
	Commercial		Mortgage		Consumer		Auto		Total
	(In thousands)
Allowance for credit losses Non-PCD:
Balance at beginning of period	$	25,993	$	8,727	$	18,446	$	31,878	$	85,044
Impact of ASC 326 adoption		3,562		10,980		8,418		16,238		39,198
Provision for credit losses		21,890		156		6,270		14,034		42,350
Charge-offs		(3,771)		(418)		(6,015)		(13,053)		(23,257)
Recoveries		1,522		249		644		4,211		6,626
Balance at end of period	$	49,196	$	19,694	$	27,763	$	53,308	$	149,961

Quarter Ended September 30, 2019

Mortgage

Commercial

Consumer

Auto and Leasing

Total

(In thousands)
Allowance for loan and lease losses for originated and other loans:

      Balance at beginning of period
$
15,361

$
29,234

$
15,831

$
29,526

$
89,952
          Charge-offs

(16,299)

(8,402)

(5,046)

(12,331)

(42,078)
          Recoveries

493

174

1,260

5,724

7,651
          Provision for loan and lease losses

8,836

1,317

3,283

10,128

23,564
      Balance at end of period
$
8,391

$
22,323

$
15,328

$
33,047

$
79,089

Nine-Month Period Ended September 30, 2019

Mortgage

Commercial

Consumer

Auto and Leasing

Total

(In thousands)
Allowance for loan and lease losses for originated and other loans:

      Balance at beginning of period
$
19,783

$
30,326

$
15,571

$
29,508

$
95,188
          Charge-offs

(17,490)

(11,634)

(14,005)

(34,374)

(77,503)
          Recoveries

1,096

497

1,850

14,583

18,026
          Provision for loan and lease losses

5,002

3,134

11,912

23,330

43,378
      Balance at end of period
$
8,391

$
22,323

$
15,328

$
33,047

$
79,089

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

September 30, 2019

Mortgage

Commercial

Consumer

Auto and Leasing

Total

(In thousands)
Allowance for loan and lease losses on originated and other loans:

    Ending allowance balance attributable
      to loans:

        Individually evaluated for impairment
$
6,816

$
4,849

$
-

$
-

$
11,665
        Collectively evaluated for impairment

1,575

17,474

15,328

33,047

67,424
                Total ending allowance balance
$
8,391

$
22,323

$
15,328

$
33,047

$
79,089
Loans:

        Individually evaluated for impairment
$
71,658

$
58,829

$
-

$
-

$
130,487
        Collectively evaluated for impairment

517,725

1,514,800

362,358

1,266,066

3,660,949
                Total ending loan balance
$
589,383

$
1,573,629

$
362,358

$
1,266,066

$
3,791,436

	Quarter Ended March 31, 2020
	Commercial		Mortgage		Consumer		Auto		Total
	(In thousands)
Allowance for credit losses PCD:
Balance at beginning of period	$	8,893	$	21,655	$	-	$	947	$	31,495
Impact of ASC 326 adoption		42,143		7,830		181		368		50,522
Provision for credit losses		(218)		6,139		364		(105)		6,180
Charge-offs		(2,357)		(5,143)		(431)		(375)		(8,306)
Recoveries		375		122		63		343		903
Balance at end of period	$	48,836	$	30,603	$	177	$	1,178	$	80,794

	Quarter Ended March 31, 2020
	Commercial		Mortgage		Consumer		Auto		Total
	(In thousands)
Total Allowance for credit losses:
Balance at beginning of period	$	34,886	$	30,382	$	18,446	$	32,825	$	116,539
Impact of ASC 326 adoption		45,705		18,810		8,599		16,606		89,720
Provision for credit losses		21,672		6,295		6,634		13,929		48,530
Charge-offs		(6,128)		(5,561)		(6,446)		(13,428)		(31,563)
Recoveries		1,897		371		707		4,554		7,529
Balance at end of period	$	98,032	$	50,297	$	27,940	$	54,486	$	230,755

	Quarter Ended March 31, 2019
	Mortgage		Commercial		Consumer		Auto and Leasing		Total
	(In thousands)
Allowance for loan and lease losses for originated and other loans:
Balance at beginning of period	$	19,783	$	30,326	$	15,571	$	29,508	$	95,188
Provision for credit losses		(2,794)		2,767		4,372		6,988		11,333
Charge-offs		(587)		(1,086)		(4,121)		(11,371)		(17,165)
Recoveries		287		147		263		3,982		4,679
Balance at end of period	$	16,689	$	32,154	$	16,085	$	29,107	$	94,035

	Quarter Ended March 31, 2019
	Commercial		Consumer		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Balance at beginning of period	$	22	$	1,905	$	135	$	2,062
Charge-offs		-		(440)		(85)		(525)
Recoveries		3		40		90		133
Provision (recapture) for acquired loan and lease losses accounted for under ASC 310-20		7		364		(73)		298
Balance at end of period	$	32	$	1,869	$	67	$	1,968

Quarter Ended September 30, 2018

Mortgage

Commercial

Consumer

Auto and Leasing

Total

(In thousands)
Allowance for loan and lease losses for originated and other loans:

      Balance at beginning of period
$
19,323

$
31,480

$
16,192

$
27,223

$
94,218
          Charge-offs

(1,429)

(3,249)

(4,591)

(9,111)

(18,380)
          Recoveries

139

119

278

5,442

5,978
          Provision for originated and other loan and lease losses

1,512

4,141

3,836

3,931

13,420
                Balance at end of period
$
19,545

$
32,491

$
15,715

$
27,485

$
95,236

Nine-Month Period Ended September 30, 2018

Mortgage

Commercial

Consumer

Auto and Leasing

Total

(In thousands)
Allowance for loan and lease losses for originated and other loans:

      Balance at beginning of period
$
20,439

$
30,258

$
16,454

$
25,567

$
92,718
          Charge-offs

(3,727)

(6,396)

(13,438)

(31,842)

(55,403)
          Recoveries

919

528

757

14,498

16,702
          Provision for originated and other loan and lease losses

1,914

8,101

11,942

19,262

41,219
                Balance at end of period
$
19,545

$
32,491

$
15,715

$
27,485

$
95,236

5244

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

December 31, 2018

Mortgage

Commercial

Consumer

Auto and Leasing

Total

(In thousands)
Allowance for loan and lease losses on originated and other loans:

    Ending allowance balance attributable
      to loans:

        Individually evaluated for impairment
$
10,186

$
8,434

$
-

$
-

$
18,620
        Collectively evaluated for impairment

9,597

21,892

15,571

29,508

76,568
                Total ending allowance balance
$
19,783

$
30,326

$
15,571

$
29,508

$
95,188
Loans:

        Individually evaluated for impairment
$
84,174

$
81,229

$
-

$
-

$
165,403
        Collectively evaluated for impairment

584,635

1,516,359

348,980

1,129,695

3,579,669
                Total ending loan balance
$
668,809

$
1,597,588

$
348,980

$
1,129,695

$
3,745,072

	Quarter Ended March 31, 2019
	Mortgage		Commercial		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-30:
Balance at beginning of period	$	15,225	$	20,641	$	6,144	$	42,010
Provision (recapture) for acquired BBVAPR loans and lease losses accounted for under ASC 310-30		2,733		850		(2,314)		1,269
Allowance de-recognition		(57)		(758)		(331)		(1,146)
Balance at end of period	$	17,901	$	20,733	$	3,499	$	42,133

	Quarter Ended March 31, 2019
	Mortgage		Commercial		Consumer		Total
	(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of period	$	15,382	$	9,585	$	4	$	24,971
Provision for acquired Eurobank loan and lease losses		(202)		(449)		-		(651)
Allowance de-recognition		(70)		106		(4)		32
Balance at end of period	$	15,110	$	9,242	$	-	$	24,352

	December 31, 2019
	Mortgage		Commercial		Consumer		Auto and Leasing		Total
	(In thousands)
Allowance for loan and lease losses on originated and other loans:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	6,874	$	8,215	$	-	$	-	$	15,089
Collectively evaluated for impairment		1,853		17,774		16,882		31,873		68,382
Total ending allowance balance	$	8,727	$	25,989	$	16,882	$	31,873	$	83,471
Loans:
Individually evaluated for impairment	$	71,196	$	60,450	$	-	$	-	$	131,646
Collectively evaluated for impairment		506,220		1,607,044		361,638		1,277,732		3,752,634
Total ending loan balance	$	577,416	$	1,667,494	$	361,638	$	1,277,732	$	3,884,280

~~Allowance for BBVAPR Acquired Loan Losses~~

~~Loans accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)~~

The following tables present the activity in our allowance for loan losses and related recorded investment of the associated loans in our BBVAPR acquired loan portfolio accounted for under ASC 310-20, for the periods indicated:

Quarter Ended September 30, 2019

Commercial

Consumer

Auto

Total

(In thousands)
Allowance for loan and lease losses
    for acquired BBVAPR loans
    accounted for under ASC 310-20:

      Balance at beginning of period
$
31

$
1,617

$
37

$
1,685
          Charge-offs

(19)

(270)

(52)

(341)
          Recoveries

1

203

78

282
          (Recapture) provision for acquired BBVAPR
          loan and lease losses accounted for
          under ASC 310-20

7

(102)

(41)

(136)
                Balance at end of period
$
20

$
1,448

$
22

$
1,490

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

Nine-Month Period Ended September 30, 2019

Commercial

Consumer

Auto

Total

(In thousands)
Allowance for loan and lease losses
    for acquired BBVAPR loans
    accounted for under ASC 310-20:

      Balance at beginning of period
$
22

$
1,905

$
135

$
2,062
          Charge-offs

(99)

(1,143)

(193)

(1,435)
          Recoveries

6

321

239

566
          Provision (recapture) for acquired BBVAPR
          loan and lease losses accounted for
          under ASC 310-20

91

365

(159)

297
                Balance at end of period
$
20

$
1,448

$
22

$
1,490

	December 31, 2019
	Commercial		Consumer		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2	$	-	$	-	$	2
Collectively evaluated for impairment		2		1,564		5		1,571
Total ending allowance balance	$	4	$	1,564	$	5	$	1,573
Loans:
Individually evaluated for impairment	$	678	$	-	$	-	$	678
Collectively evaluated for impairment		1,463		20,794		135		22,392
Total ending loan balance	$	2,141	$	20,794	$	135	$	23,070

September 30, 2019

Commercial

Consumer

Auto

Total

(In thousands)
Allowance for loan and lease losses
for acquired BBVAPR loans
accounted for under ASC 310-20:

    Ending allowance balance attributable
      to loans:

        Individually evaluated for impairment
$
19

$
-

$
-

$
19
        Collectively evaluated for impairment

1

1,448

22

1,471
                Total ending allowance balance
$
20

$
1,448

$
22

$
1,490
Loans:

        Individually evaluated for impairment
$
678

$
-

$
-

$
678
         Collectively evaluated for impairment

1,539

21,461

237

23,237
                Total ending loan balance
$
2,217

$
21,461

$
237

$
23,915

Quarter Ended September 30, 2018

Commercial

Consumer

Auto

Total

(In thousands)
Allowance for loan and lease losses
    for acquired BBVAPR loans
    accounted for under ASC 310-20:

      Balance at beginning of period
$
86

$
2,357

$
283

$
2,726
          Charge-offs

(1)

(638)

(72)

(711)
          Recoveries

3

95

169

267
          (Recapture) provision for acquired
            loan and lease losses accounted for
            under ASC 310-20

(71)

326

(187)

68
                Balance at end of period
$
17

$
2,140

$
193

$
2,350

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Nine-Month Period Ended September 30, 2018

Commercial

Consumer

Auto

Total

(In thousands)
    Allowance for loan and lease losses
    for acquired BBVAPR loans
    accounted for under ASC 310-20:

      Balance at beginning of period
$
42

$
3,225

$
595

$
3,862
          Charge-offs

(6)

(2,080)

(285)

(2,371)
          Recoveries

18

243

641

902
          (Recapture) provision for acquired
            loan and lease losses accounted for
            under ASC 310-20

(37)

752

(758)

(43)
                Balance at end of period
$
17

$
2,140

$
193

$
2,350

December 31, 2018

Commercial

Consumer

Auto

Total

(In thousands)
    Allowance for loan and lease losses
    for acquired BBVAPR loans
    accounted for under ASC 310-20:

    Ending allowance balance attributable
      to loans:

        Individually evaluated for impairment
$
14

$
-

$
-

$
14
        Collectively evaluated for impairment

8

1,905

135

2,048
                Total ending allowance balance
$
22

$
1,905

$
135

$
2,062
Loans:

        Individually evaluated for impairment
$
747

$
-

$
-

$
747
        Collectively evaluated for impairment

1,799

23,988

4,435

30,222
                Total ending loan balance
$
2,546

$
23,988

$
4,435

$
30,969

~~Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)~~

For loans accounted for under ASC 310-30, as part of the evaluation of actual versus expected cash flows, Oriental assesses on a quarterly basis the credit quality of these loans based on delinquency, severity factors and risk ratings, among other assumptions. Migration and credit quality trends are assessed at the pool level, by comparing information from the latest evaluation period through the end of the reporting period.

~~During the second and third quarter of 2019, Oriental decided to sell mostly non-performing loans increasing the provision of acquired BBVAPR loans accounted under ASC 310-30 by $20.8~~ ~~million and $8.7~~ ~~million, respectively.~~

The following tables present the activity in our allowance for loan losses and related recorded investment of the acquired BBVAPR loan portfolio accounted for under ASC 310-30 for the periods indicated:

Quarter Ended September 30, 2019

Mortgage

Commercial

Consumer

Auto

Total

(In thousands)
Allowance for loan and lease losses for
acquired BBVAPR loans accounted for under
ASC 310-30:

      Balance at beginning of period
$
25,208

$
17,083

$
-
$
3,136

45,427
          Provision (recapture) for acquired BBVAPR                                                                                                                                                                                                                                                                                                         loans and lease losses accounted for under ASC 310-30

7,953

11,714

-

(396)

19,271
          Allowance de-recognition

(12,703)

(150)

-

(451)

(13,304)
                Balance at end of period
$
20,458

$
28,647

$
-
$
2,289

51,394

Nine-Month Period Ended September 30, 2019

Mortgage

Commercial

Consumer
Auto

Total

(In thousands)
Allowance for loan and lease losses for
acquired BBVAPR loans accounted for under
ASC 310-30:

      Balance at beginning of period
$
15,225

$
20,641

$
-
$
6,144

42,010
          Provision (recapture) for acquired BBVAPR                                                                                                                                                                                                                                                                                                         loans and lease losses accounted for under ASC 310-30

18,077

12,485

-

(2,710)

27,852
          Allowance de-recogntion

(12,844)

(4,479)

-

(1,145)

(18,468)
                Balance at end of period
$
20,458

$
28,647

$
-
$
2,289

51,394

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Quarter Ended September 30, 2018

Mortgage

Commercial

Consumer

Auto

Total

(In thousands)
Allowance for loan and lease losses for
acquired BBVAPR loans accounted for under
ASC 310-30:

      Balance at beginning of period
$
14,567

$
23,019

$
18

$
6,572

$
44,176
          Provision for acquired BBVAPR loans                                                                                                                                                                                                                                                                                                                and lease losses accounted for under ASC 310-30

746

61

-

-

807
          Allowance de-recognition

(55)

(824)

-

(229)

(1,108)
                Balance at end of period
$
15,258

$
22,256

$
18

$
6,343

$
43,875

Nine-Month Period Ended September 30, 2018

Mortgage

Commercial

Consumer

Auto

Total

(In thousands)
Allowance for loan and lease losses for
acquired BBVAPR loans accounted for under
ASC 310-30:

      Balance at beginning of period
$
14,085

$
23,691

$
18

$
7,961

$
45,755
          Provision (recapture) for acquired BBVAPR loans                                                                                                                                                                                                                                                                                                                and lease losses accounted for under ASC 310-30

1,296

2,119

-

(887)

2,528
          Allowance de-recognition

(123)

(3,554)

-

(731)

(4,408)
                Balance at end of period
$
15,258

$
22,256

$
18

$
6,343

$
43,875

~~Allowance for Acquired Eurobank Loan Losses~~

~~The changes in the allowance for loan and lease losses on acquired Eurobank loans for the quarters and nine-month periods ended September 30, 2019 and 2018 were as follows:~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Quarter Ended September 30, 2019

Loans Secured by   1-4 Family Residential Properties

Commercial

Consumer

Total

(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:

      Balance at beginning of period
$
17,213

$
8,365

$
-

$
25,578
       Provision for loan and lease losses, net

953

118

-

1,071
         Allowance de-recognition

(4,357)

$
78

$
-

(4,279)
                Balance at end of period
$
13,809

$
8,561

$
-

$
22,370

Nine-Month Period Ended September 30, 2019

Loans Secured by   1-4 Family Residential Properties

Commercial

Consumer

Total

(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:

      Balance at beginning of period
$
15,382

$
9,585

$
4

$
24,971
          Provision (recapture) for loan and lease losses, net

3,253

(1,056)

-

2,197
          Allowance de-recognition

(4,826)

32

(4)

(4,798)
                Balance at end of period
$
13,809

$
8,561

$
-

$
22,370

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Quarter Ended September 30, 2018

Loans secured by 1-4 Family Residential Properties

Commercial

Consumer

Total

(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:

      Balance at beginning of period
$
15,170

$
9,140

$
4

$
24,314
          Provision (recapture) for acquired Eurobank loan and lease losses, net

231

75

-

306
          Allowance de-recognition

(246)

(93)

-

(339)
                Balance at end of period
$
15,155

$
9,122

$
4

$
24,281

Nine-Month Period Ended September 30, 2018

Loans secured by 1-4 Family Residential Properties

Commercial

Consumer

Total

(In thousands)
Allowance for loan and lease losses for Eurobank loans:

      Balance at beginning of period
$
15,187

$
9,983

$
4

$
25,174
          Provision (recapture) for acquired Eurobank loan and lease losses, net

1,015

95

-

1,110
          Allowance de-recognition

(1,047)

(956)

-

(2,003)
                Balance at end of period
$
15,155

$
9,122

$
4

$
24,281

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

NOTE 7 —FORECLOSED REAL ESTATE

The following tables present the activity related to foreclosed real estate for the quarters ended March 31, 2020, and ~~nine-month periods~~2019:

	Quarter Ended March 31,
	2020		2019
		(In thousands)

Balance at beginning of period	$	29,909	$	33,768
Decline in value		(550)		(1,746)
Additions		1,900		3,801
Sales		(3,967)		(4,958)
Balance at end of period	$	27,292	$	30,865

NOTE 8 - SERVICING ASSETS

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

All separately recognized servicing assets are recognized at fair value using the fair value measurement method. Under the fair value measurement method, Oriental measures servicing rights at fair value at each reporting date, reports changes in fair value of servicing assets in earnings in the period in which the changes occur, and includes these changes, if any, with mortgage banking activities in the consolidated statements of operations. The fair value of servicing rights is subject to fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. The impact of COVID-19 has been considered in the fair value for the quarter ended ~~September 30, 2019 and 2018~~: March 31, 2020.

Quarter Ended September 30, 2019

Originated and other loans and leases held for investment

Acquired BBVAPR loans

Acquired Eurobank loans

Total

(In thousands)

      Balance at beginning of period
$
10,953

$
11,240

$
7,316

$
29,509
          Decline in value

(526)

(334)

(233)

(1,093)
          Additions

2,501

1,472

599

4,572
           Sales

(1,718)

(2,644)

(1,674)

(6,036)
                Balance at end of period
$
11,210

$
9,734

$
6,008

$
26,952

Nine-Month Period Ended September 30, 2019

Originated and other loans and leases held for investment

Acquired BBVAPR loans

Acquired Eurobank loans

Total

(In thousands)

       Balance at beginning of period
$
9,571

$
14,617

9,580

$
33,768
          Decline in value

(1,116)

(2,123)

(1,177)

(4,416)
           Additions

7,319

4,203

1,346

12,868
          Sales

(4,564)

(6,963)

(3,741)

(15,268)
                Balance at end of period
$
11,210

$
9,734

$
6,008

$
26,952

6046

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

Quarter Ended September 30, 2018

Originated and other loans and leases held for investment

Acquired BBVAPR loans

Acquired Eurobank loans

Total

(In thousands)

      Balance at beginning of year
$
12,186

$
17,492

$
10,873

$
40,551
           Decline in value

(359)

(244)

(302)

(905)
          Additions

1,547

2,476

928

4,951
           Sales

(3,080)

(2,680)

(969)

(6,729)
                Balance at end of year
$
10,294

$
17,044

$
10,530

$
37,868

Nine-Month Period Ended September 30, 2018

Originated and other loans and leases held for investment

Acquired BBVAPR loans

Acquired Eurobank loans

Total

(In thousands)

      Balance at beginning of year
$
14,283

$
18,347

$
11,544

$
44,174
           Decline in value

(1,017)

(1,758)

(1,054)

(3,829)
          Additions

4,816

7,401

2,868

15,085
           Sales

(7,788)

(6,946)

(2,828)

(17,562)
                Balance at end of year
$
10,294

$
17,044

$
10,530

$
37,868

The fair value of servicing rights is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions.

At March 31, 2020, the servicing asset amounted to $49.3 million ($50.8 million — December 31, 2019) related to mortgage servicing rights.

The following table presents the changes in servicing rights measured using the fair value method for quarters ended March 31, 2020 and 2019:

	Quarter Ended March 31,
	2020		2019
		(In thousands)
Fair value at beginning of period	$	50,779	$	10,716
Servicing from mortgage securitizations or asset transfers		456		302
Changes due to payments on loans		(767)		(201)
Changes in fair value due to changes in valuation model inputs or assumptions		(1,181)		(194)
Fair value at end of period	$	49,287	$	10,623

The following table presents key economic assumption ranges used in measuring the mortgage-related servicing asset fair value for the quarters ended March 31, 2020 and 2019:

	Quarter Ended March 31,
	2020	2019
Constant prepayment rate	5.02% - 19.08%	4.38% - 8.96%
Discount rate	10.00% - 15.50%	10.00% - 12.00%

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

	March 31, 2020
	(In thousands)
Mortgage-related servicing asset
Carrying value of mortgage servicing asset	$	49,287
Constant prepayment rate
Decrease in fair value due to 10% adverse change	$	(1,136)
Decrease in fair value due to 20% adverse change	$	(2,225)
Discount rate
Decrease in fair value due to 10% adverse change	$	(1,987)
Decrease in fair value due to 20% adverse change	$	(3,837)

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

Changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or offset the sensitivities. Mortgage banking activities, a component of total banking and financial service revenue in the consolidated statements of operations, include the changes from period to period in the fair value of the 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.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Servicing fee income is based on a contractual percentage of the outstanding principal balance and is recorded as income when earned. Servicing fees on mortgage loans for the quarters ended March 31, 2020 and 2019 totaled $4.8 million and $1.0 million, respectively.

NOTE 8 9 —DERIVATIVES

The following table presents Oriental’s derivative assets and liabilities at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:

	September 30,		December 31,		March 31,		December 31,
	2019		2018		2020		2019
	(In thousands)				(In thousands)
Derivative assets:
Interest rate swaps designated as cash flow hedges	$	-	$	14
Interest rate swaps not designated as hedges		-		126
Interest rate caps		13		207	$	2	$	6
	$	13	$	347	$	2	$	6
Derivative liabilities:
Interest rate swaps designated as cash flow hedges	$	1,146	$	-	$	2,057	$	907
Interest rate swaps not designated as hedges		-		126
Interest rate caps		13		207		2		6
	$	1,159	$	333	$	2,059	$	913

Interest Rate Swaps

Oriental enters into interest rate swap contracts to hedge the variability of future interest cash flows of forecasted wholesale borrowings attributable to changes in a predetermined variable index rate. The interest rate swaps effectively fix Oriental’s interest payments on an amount of forecasted interest expense attributable to the variable index rate corresponding to the swap notional stated

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

rate. These swaps are designated as cash flow hedges for the forecasted wholesale borrowing transactions and are properly documented as such; therefore, qualify for cash flow hedge accounting. Any gain or loss associated with the effective portion of the cash flow hedges is recognized in other comprehensive income ~~(loss)~~ and is subsequently reclassified into operations in the period during which the hedged forecasted transactions affect earnings. Changes in the fair value of these derivatives are recorded in accumulated other comprehensive income to the extent there is no significant ineffectiveness in the cash flow hedging relationships. Currently, Oriental does not expect to reclassify any amount included in other comprehensive income ~~(loss)~~ related to these interest rate swaps to operations in the next twelve months.

The following table shows a summary of these swaps and their terms at ~~September 30, 2019:~~

Notional

Fixed

Variable

Trade

Settlement

Maturity
Type

Amount

Rate

Rate Index

Date

Date

Date

(In thousands)

Interest Rate Swaps

$
32,367

2.4210%

1-Month LIBOR

07/03/13

07/03/13

08/01/23

$
32,367

March 31, 2020:

~~An accumulated~~

Notional

Fixed

Variable

Trade

Settlement

Maturity

Type

Amount

Rate

Rate Index

Date

(In thousands)

Interest Rate Swaps

31,539

2.4210%

1-Month LIBOR

07/03/13

08/01/23

31,539

Accumulated unrealized ~~loss~~losses of ~~$1.1~~$2.1 million and ~~a gain of $14~~ $907 thousand were recognized in accumulated other comprehensive income related to the valuation of these swaps at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, and the related ~~asset or~~ liability is being reflected in the consolidated statements of financial condition.

OFG BANCORP

~~At December 31, 2018, interest rate swaps not designated as hedging instruments that were offered to clients represented an asset of $126~~ thousand and were included as part of derivative assets in the consolidated statements of financial position. The credit risk to these clients stemming from these derivatives, if any, is not material. At December 31, 2018, interest rate swaps not designated as hedging instruments that are the mirror-images of the derivatives offered to clients represented a liability of $126 ~~thousand and were included as part of derivative liabilities in the consolidated statements of financial condition. No interest rate swaps were offered to clients at September 30, 2019.~~ NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Interest Rate Caps

Oriental has entered into interest rate cap transactions with various clients with floating-rate debt who wish to protect their financial results against increases in interest rates. In these cases, Oriental simultaneously enters into mirror-image interest rate cap transactions with financial counterparties. None of these cap transactions qualify for hedge accounting, and therefore, they are marked to market through earnings. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018, t~~he2019, the outstanding total notional amount of interest rate caps was $~~41.8~~ $41.3 million and ~~$150.9~~ $41.5 million, respectively. At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~,2019, the interest rate caps sold to clients represented a liability of ~~$13~~$2 thousand and ~~$207~~$6 thousand, respectively, and were included as part of derivative liabilities in the consolidated statements of financial condition. At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~,2019, the interest rate caps purchased as mirror-images represented an asset of ~~$13~~$2 thousand and ~~$207~~$6 thousand, respectively, and were included as part of derivative assets in the consolidated statements of financial condition.

NOTE 10 — CORE DEPOSIT, CUSTOMER RELATIONSHIP AND OTHER INTANGIBLES

~~NOTE 9~~ — ~~ACCRUED INTEREST RECEIVABLE AND~~~~OTHER ASSETS~~

~~Accrued interest receivable~~Core deposit, customer relationship and other intangibles at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 consists of the following:

September 30,

December 31,

2019

2018

(In thousands)
Loans, excluding acquired loans
$
28,890

$
30,409
Investments

1,580

3,845

$
30,470

$
34,254

	March 31,		December 31
	2020		2019
	(In thousands)
Core deposit intangibles	$	41,111	$	43,185
Customer relationship intangibles		12,567		13,213
Other intangibles		496		567
	$	54,174	$	56,965

O~~ther assets at September 30, 2019 and December 31, 2018 consist of the following:~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

September 30,

December 31,

2019

2018

(In thousands)
Prepaid expenses
$
14,083

$
9,788
Other repossessed assets

3,537

2,986
Core deposit and customer relationship intangibles

2,491

3,369
Tax credits

277

2,277
Investment in Statutory Trust

1,083

1,083
Accounts receivable and other assets

35,140

37,842

$
56,611

$
57,345

~~Prepaid expenses amounting to $14.1 million and $9.8 million at September 30, 2019 and December 31, 2018, respectively, include prepaid municipal, property and income taxes aggregating to $7.4~~ ~~million and $5.5~~ ~~million, respectively.~~

Other repossessed assets totaled $3.5 million and $3.0 million at September 30, 2019 and December 31, 2018, respectively, that consist mainly of repossessed automobiles, which are recorded at their net realizable value.

In connection with the FDIC-assisted acquisition, the BBVAPR Acquisition and the ~~BBVAPR~~Scotiabank PR & USVI Acquisition, Oriental recorded a core deposit intangible representing the value of checking and savings deposits acquired. At ~~September 30, 2019 and December~~March 31, ~~2018~~2020 this core deposit intangible amounted to ~~$1.9~~ $41.1 million. At December 31, 2019 core deposit intangible amounted to $43.2 million, ~~and $2.5~~ ~~million, respectively.~~including $41.5 from the Scotiabank PR & USVI Acquisition. In addition, Oriental recorded a customer relationship intangible representing the value of customer relationships acquired with the acquisition of the securities broker-dealer and insurance agency in the BBVAPR ~~Acquisition.~~and insurance agency in the Scotiabank PR & USVI Acquisitions. At ~~September 30, 2019 and December~~March 31, ~~2018~~,2020 this customer relationship intangible amounted to ~~$612~~ $12.6 million. At December 31, 2019 customer relationship intangible amounted to $13.2 million, including $12.7 million from the Scotiabank PR & USVI Acquisition. Oriental also recorded other intangibles from the Scotiabank PR & USVI Acquisition which amounted to $ 496 thousand and ~~$888~~ $567 thousand ~~respectively.~~

~~At September 30, 2019~~at March 31, 2020 and December 31, ~~2018, tax credits for Oriental~~2020, respectively.

NOTE 11 — ACCRUED INTEREST RECEIVABLE ANDOTHER ASSETS

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

	March 31,		December 31,
	2020		2019
	(In thousands)
Loans, excluding acquired loans	$	37,433	$	32,728
Investments		2,748		4,053
	$	40,181	$	36,781

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

	March 31,		December 31,
	2020		2019
	(In thousands)
Prepaid expenses	$	44,582	$	52,558
Other repossessed assets		3,096		3,327
Tax credits		-		277
Investment in Statutory Trust		1,083		1,083
Accounts receivable and other assets		70,359		78,600
	$	119,120	$	135,845

Prepaid expenses amounting to $44.6 million at March 31, 2020, include prepaid municipal, property and income taxes aggregating to $38.6 million. At December 31, 2019 prepaid expenses amounted to $52.6 million, including prepaid municipal, property and income taxes aggregating to $45.3 million, from which $31.9 million corresponded to the Scotiabank PR & USVI Acquisition.

Other repossessed assets totaled ~~$277 thousand~~$3.1 million and ~~$2.3~~$3.3 million ~~respectively. These tax credits do not have an expiration date.~~at March 31, 2020 and December 31, 2019, respectively, that consist mainly of repossessed automobiles, which are recorded at their net realizable value.

NOTE 1012—DEPOSITS AND RELATED INTEREST

Total deposits, including related accrued interest payable, as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 consist of the following:

	September 30,		December 31,		March 31,			December 31,
	2019		2018		2020			2019
	(In thousands)				(In thousands)
Non-interest bearing demand deposits	$	1,100,235	$	1,105,324	$	1,712,943		$	1,675,315
Interest-bearing savings and demand deposits		2,334,591		2,274,423		3,827,602			3,718,846
Retail certificates of deposit		933,308		805,712		1,759,487			1,781,237
Institutional certificates of deposit		221,562		197,559		263,725			279,714
Total core deposits		4,589,696		4,383,018		7,563,757			7,455,112
Brokered deposits		288,362		525,097		255,514			243,498
Total deposits	$	4,878,058	$	4,908,115	$	7,819,271	��	$	7,698,610

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Brokered deposits include ~~$269.3~~$212.8 million in certificates of deposits and ~~$19.1~~$42.7 million in money market accounts at ~~September 30, 2019,~~March 31, 2020, and ~~$500.8~~$222.1 million in certificates of deposits and ~~$24.3~~$21.4 million in money market accounts at December 31, ~~2018. As part of the sale $672.1 million available-for-sale mortgage-backed securities during the nine-month period ended September 30, 2019, Oriental reduced $62.8~~ ~~million brokered deposits.~~2019.

The weighted average interest rate of Oriental’s deposits was ~~0.84~~%0.90% and ~~0.67~~%0.86%, respectively, at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. Interest expense for the quarters ended March 31, 2020 and ~~nine-month periods ended September 30,~~ 2019 ~~and 2018~~ was as follows:

	Quarter Ended September 30,				Nine-Month Period Ended September 30,				Quarter Ended March 31,
	2019		2018		2019		2018		2020		2019
	(In thousands)								(In thousands)
Demand and savings deposits	$	3,949	$	3,157	$	11,308	$	8,924	$	6,985	$	3,411
Certificates of deposit		6,605		5,448		18,286		14,630		9,635		5,638
	$	10,554	$	8,605	$	29,594	$	23,554	$	16,620	$	9,049

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~,2019, time deposits in denominations of $250 thousand or higher, excluding accrued interest and unamortized discounts, amounted to ~~$410.5~~ $683.6 million and ~~$346.0~~$692.1 million, respectively. Such amounts include public funds time deposits from various Puerto Rico government municipalities, agencies and corporations of ~~$5.0~~ $243.4 million and ~~$19.6~~$257.2 million at a weighted average rate of ~~150.0~~%58.0% and ~~116.4~~%67.0% at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~,2019, respectively.

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, total public fund deposits from various Puerto Rico government municipalities, agencies and corporations amounted to ~~$250.1~~$264.4 million and ~~$207.4~~$278.7 million, respectively. These public funds were collateralized with commercial loans and securities amounting to ~~$295.0~~ $325.8 million and ~~$281.2~~ $320.8 million at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

Excluding accrued interest of approximately ~~$1.8~~ $10.8 million, the scheduled maturities of certificates of deposit at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 are as ~~follows~~:follows:

	September 30,		December 31,		March 31,		December 31,
		2019		2018		2020		2019
	(In thousands)				(In thousands)
Within one year:
Three (3) months or less	$	221,701	$	305,088	$	253,498	$	314,796
Over 3 months through 1 year		530,791		545,363		984,807		881,183
		752,492		850,451		1,238,305		1,195,979
Over 1 through 2 years		504,671		484,197		641,084		732,421
Over 2 through 3 years		89,787		89,340		183,694		175,032
Over 3 through 4 years		40,926		34,018		87,391		89,148
Over 4 through 5 years		34,496		42,998		74,803		78,706
	$	1,422,372	$	1,501,004	$	2,225,277	$	2,271,286

The table of scheduled maturities of certificates of deposits above includes brokered-deposits and individual retirement accounts.

The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans amounted to ~~$1.2~~ ~~million~~$709 thousand and ~~$1.1~~ $1.0 million as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

NOTE 1113—BORROWINGS AND RELATED INTEREST

Securities Sold under Agreements to Repurchase

At ~~September 30, 2019,~~ March 31, 2020, securities underlying agreements to repurchase were delivered to, and are being held by, the counterparties with whom the repurchase agreements were transacted. The counterparties have agreed to resell to Oriental the same or similar securities at the maturity of these agreements. The purpose of these transactions is to provide financing for Oriental’s securities portfolio.

The following table shows Oriental’s repurchase agreements, excluding accrued interest in the amount of ~~$261~~$103 thousand and ~~$785~~$274 thousand at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively:

September 30,

December 31,

2019

2018

(In thousands)
Short-term fixed-rate repurchase agreements (December 31, 2018; 2.45% to 2.95%)
$
-

$
214,723
Long-term fixed-rate repurchase agreements, interest ranging from 1.85% to 2.86% (December 31, 2018; 1.72% to 2.86%)

190,000

240,000
Total assets sold under agreements to repurchase
$
190,000

$
454,723

	March 31,		December 31,
	2020		2019
	(In thousands)
Short-term fixed-rate repurchase agreements, interest ranging from 1.85% to 2.70% (December 31, 2019)	$	-	$	140,000
Long-term fixed-rate repurchase agreements, interest ranging from 1.85% to 2.86% (December 31, 2019; 1.85% to 2.86%)		50,000		50,000
Total assets sold under agreements to repurchase	$	50,000	$	190,000

Repurchase agreements mature as follows:

OFG BANCORP

September 30,

December 31,

2019

2018

(In thousands)
     Less than 90 days
$
-

$
214,723
     Over 90-days

190,000

240,000
      Total
$
190,000

$
454,723

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

	March 31,		December 31,
	2020		2019
	(In thousands)
Less than 90 days	$	-	$	140,000
Over 90-days		50,000		50,000
Total	$	50,000	$	190,000

During the ~~nine-month period~~quarter ended ~~September 30, 2019, Oriental sold $672.1~~ ~~million available-for-sale mortgage-backed securities. As a result of such sales, Oriental terminated before maturity $191.2~~ ~~million securities sold under agreements to repurchase, at a cost of $7~~ ~~thousand, included in the statement of operations of the financial statements. Also, $73.7~~March 31, 2020 $140.0 million of repurchase agreements matured and were not renewed.~~This sale provided opportunity to further reduce wholesale funding outstanding balances.~~

The following securities were sold under agreements to ~~repurchase~~:repurchase:

	March 31, 2020
	Amortized				Approximate		Weighted
	Cost of				Fair Value		Average
	Underlying		Balance of		of Underlying		Interest Rate
Underlying Securities	Securities		Borrowing		Securities		of Security
	(Dollars in thousands)
FNMA and FHLMC Certificates	$	54,054	$	50,000	$	54,756		3.12%
Total	$	54,054	$	50,000	$	54,756		3.12%


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

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

September 30, 2019

Amortized

Approximate

Weighted

Cost of

Fair Value

Average

Underlying

Balance of

of Underlying

Interest Rate
Underlying Securities
Securities

Borrowing

Securities

of Security

(Dollars in thousands)
FNMA and FHLMC Certificates
$
206,567

$
190,000

$
205,662

2.98%
Total
$
206,567

$
190,000

$
205,662

2.98%

December 31, 2018

Amortized

Approximate

Weighted

Cost of

Fair Value

Average

Underlying

Balance of

of Underlying

Interest Rate
Underlying Securities
Securities

Borrowing

Securities

of Security

(Dollars in thousands)
FNMA and FHLMC Certificates
$
496,814

$
454,723

$
487,181

3.01%
Total
$
496,814

$
454,723

$
487,181

3.01%

Advances from the Federal Home Loan Bank of New York

Advances are received from the FHLB-NY under an agreement whereby Oriental is required to maintain a minimum amount of qualifying collateral with a fair value of at least ~~110~~%110% of the outstanding advances. At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~,2019, these advances were secured by mortgage and commercial loans amounting to ~~$823.1~~ ~~million~~$1.028 billion and ~~$847.3~~ ~~million,~~$1.060 billion, respectively. Also, at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~,2019, Oriental had an additional borrowing capacity with the FHLB-NY of ~~$744.2~~$951 million and ~~$762.0~~$983 million, respectively. At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~,2019, the weighted average remaining maturity of FHLB’s advances was ~~24.4~~20.8 months and ~~26.6~~22.7 months, respectively. The original terms of these advances range between one day and seven years, and the FHLB-NY does not have the right to exercise put options at par on any advances outstanding as of ~~September 30, 2019.~~March 31, 2020.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table shows a summary of the advances and their terms, excluding accrued interest in the amount of ~~$170~~$154 thousand and ~~$176~~$160 thousand, at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively:


	March 31,		December 31
		2020		2019
		(In thousands)
Short-term fixed-rate advances from FHLB, with a weighted average interest rate of 1.71% to 2.59% (December 31, 2019 - 1.85% to 2.59%)	$	39,967	$	40,472
Long-term fixed-rate advances from FHLB, with a weighted average interest rate of 2.92% to 3.24% (December 31, 2019 - 2.92% to 3.24% )		36,840		37,377
	$	76,807	$	77,849

September 30,

December 31,

2019

2018

(In thousands)
Short-term fixed-rate advances from FHLB, with a weighted average interest rate of 2.28% (December 31, 2018 - 2.61%)

$
32,367

$
33,572
Long-term fixed-rate advances from FHLB, with a weighted average interest rate of 2.97% (December 31, 2018 - 2.89%)

46,515

43,872

$
78,882

$
77,444

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Advances from FHLB mature as follows:


	March 31,		December 31,
		2020		2019
	(In thousands)
Under 90 days	$	39,967	$	31,955
Over one to three years		-		8,517
Over three to five years		32,512		33,018
Over five years		4,328		4,359
	$	76,807	$	77,849

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

September 30,

2019

(In thousands)
Under 90 days

$
32,367
Over one to three years

8,605
Over three to five years

33,520
Over five years

4,390

$
78,882

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

Subordinated Capital Notes

Subordinated capital notes amounted to $36.1 million at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~ 2019.

NOTE 1214 – OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES

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

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the potential effect of rights of set-off associated with Oriental’s recognized financial assets and liabilities at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~:2019:

March 31, 2020

Gross Amounts Not Offset in the Statement of Financial Condition

Gross Amounts

Net Amount of

Offset in the

Assets Presented

Gross Amount

Statement of

in Statement

Cash

of Recognized

Financial

of Financial

Financial

Collateral

Net

Assets

Condition

Instruments

Received

Amount

(In thousands)

Derivatives

December 31, 2019

Gross Amounts Not Offset in the Statement of Financial Condition

Gross Amounts

Net amount of

Offset in the

Assets Presented

Gross Amount

Statement of

in Statement

Cash

of Recognized

Financial

of Financial

Financial

Collateral

Net

Assets

Condition

Instruments

Received

Amount

(In thousands)

Derivatives

September 30, 2019

Gross Amounts Not Offset in the Statement of Financial Condition

Gross Amounts

Net Amount of

Offset in the

Assets Presented

Gross Amount

Statement of

in Statement

Cash

of Recognized

Financial

of Financial

Financial

Collateral

Net

Assets

Condition

Condition

Instruments

Received

Amount

(In thousands)
Derivatives

$
13

$
-

$
13

$
-

$
-

$
13

December 31, 2018

Gross Amounts Not Offset in the Statement of Financial Condition

Gross Amounts

Net amount of

Offset in the

Assets Presented

Gross Amount

Statement of

in Statement

Cash

of Recognized

Financial

of Financial

Financial

Collateral

Net

Assets

Condition

Condition

Instruments

Received

Amount

(In thousands)
Derivatives

$
347

$
-

$
347

$
2,037

$
-

$
(1,690)

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020
							Gross Amounts Not Offset in the Statement of Financial Condition
					Net Amount of
			Gross Amounts		Liabilities
			Offset in the		Presented
	Gross Amount		Statement of		in Statement				Cash
	of Recognized		Financial		of Financial		Financial		Collateral		Net
	Liabilities		Condition		Condition		Instruments		Provided		Amount
	(In thousands)
Derivatives	$	2,059	$	-	$	2,059	$	-	$	-	$	2,059
Securities sold under agreements to repurchase		50,000		-		50,000		54,756		-		(4,756)
Total	$	52,059	$	-	$	52,059	$	54,756	$	-	$	(2,697)


December 31, 2019
							Gross Amounts Not Offset in the Statement of Financial Condition
					Net Amount of
			Gross Amounts		Liabilities
			Offset in the		Presented
	Gross Amount		Statement of		in Statement				Cash
	of Recognized		Financial		of Financial		Financial		Collateral		Net
	Liabilities		Condition		Condition		Instruments		Provided		Amount
	(In thousands)
Derivatives	$	913	$	-	$	913	$	-		-	$	913
Securities sold under agreements to repurchase		190,000		-		190,000		204,068		-		(14,068)
Total	$	190,913	$	-	$	190,913	$	204,068	$	-	$	(13,155)

September 30, 2019

Gross Amounts Not Offset in the Statement of Financial Condition

Net Amount of

Gross Amounts

Liabilities

Offset in the

Presented

Gross Amount

Statement of

in Statement

Cash

of Recognized

Financial

of Financial

Financial

Collateral

Net

Liabilities

Condition

Condition

Instruments

Provided

Amount

(In thousands)
Derivatives

$
1,159

$
-

$
1,159

$
-

$
-

$
1,159
Securities sold under agreements to repurchase

190,000

-

190,000

205,662

-

(15,662)
Total

$
191,159

$
-

$
191,159

$
205,662

$
-

$
(14,503)

December 31, 2018

Gross Amounts Not Offset in the Statement of Financial Condition

Net Amount of

Gross Amounts

Liabilities

Offset in the

Presented

Gross Amount

Statement of

in Statement

Cash

of Recognized

Financial

of Financial

Financial

Collateral

Net

Liabilities

Condition

Condition

Instruments

Provided

Amount

(In thousands)
Derivatives

$
333

$
-

$
333

$
-

1,980

$
(1,647)
Securities sold under agreements to repurchase

454,723

-

454,723

487,181

-

(32,458)
Total

$
455,056

$
-

$
455,056

$
487,181

$
1,980

$
(34,105)

NOTE 13 15 —INCOME TAXES

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

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

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, Oriental’s net deferred tax asset amounted to ~~$112.6~~$196.1 million and ~~$113.8~~$176.7 million, respectively. In assessing the realizability of the deferred tax asset, management considers whether it is more likely than not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of the deferred tax asset is mainly dependent upon

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax asset is deductible, management believes it is more likely than not that Oriental will realize the deferred tax asset, net of the existing valuation allowances recorded at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. The amount of the deferred tax asset that is considered realizable could be reduced in the near term if there are changes in estimates of future taxable income.

Oriental maintained an effective tax rate lower than statutory rate for the ~~nine-month periods~~quarters ended ~~September 30,~~March 31, 2020 and 2019 of 14.2% and ~~2018~~33.0%, respectively. The estimated annual effective tax rate was 26%; however, the current effective tax rate was 14.2% due to a discrete tax windfall on stock awards, compared to 33.0% the change of ~~30.5~~%which reflected a higher proportion of exempt income and ~~33.7%, respectively, mainly by investing in tax-exempt obligations, doing business through its international banking entity, and by expanding its operations in the U.S, which are taxed~~income tax at ~~a lower rate.~~preferential tax rates.

Oriental classifies unrecognized tax benefits in other liabilities. These gross unrecognized tax benefits would affect the effective tax rate if realized. At ~~September 30, 2019~~both, March 31, 2020 and December 31, ~~2018,~~2019, unrecognized tax benefits amounted at ~~$478~~ ~~thousand and $875~~ ~~thousand,~~$2.7 million, respectively. Oriental had accrued ~~$42~~$8 thousand at ~~September 30, 2019~~March 31, 2020 (December 31, ~~2018~~2019 - ~~$81~~$51 thousand) for the payment of interest and penalties relating to unrecognized tax benefits. ~~In addition, $438~~ ~~thousand were released from the liabilities due to the expiration of the statute of limitations.~~

Income tax expense for the quarters ended ~~September 30,~~March 31, 2020 and 2019, was $297 thousand and ~~2018, was $1.0 million and $12.3~~$11.6 million, respectively. ~~Income tax expense for the nine-month periods ended September 30, 2019 and 2018 was $23.5 million and $29.9 million, respectively.~~

NOTE 1416 — REGULATORY CAPITAL REQUIREMENTS

Regulatory Capital Requirements

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

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

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

4.5% CET1 to risk-weighted assets;

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

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

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

as the “leverage ratio”).

7057

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, OFG Bancorp and the Bank met all capital adequacy requirements to which they are subject. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~,2019, the Bank is “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” an institution must maintain minimum CET1 risk-based, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios as set forth in the tables presented below.

OFG Bancorp’s and the Bank’s actual capital amounts and ratios as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 are as follows:

				Minimum Capital			Minimum to be Well						Minimum Capital			Minimum to be Well
	Actual			Requirement			Capitalized			Actual			Requirement			Capitalized
	Amount		Ratio	Amount		Ratio		Amount	Ratio	Amount		Ratio	Amount		Ratio		Amount	Ratio
	(Dollars in thousands)									(Dollars in thousands)
OFG Bancorp Ratios
As of September 30, 2019
As of March 31, 2020
Total capital to risk-weighted assets	$	1,035,910	21.71%	$	381,693	8.00%	$	477,117	10.00%	$	1,020,748	14.62%	$	558,690	8.00%	$	698,363	10.00%
Tier 1 capital to risk-weighted assets	$	974,962	20.43%	$	286,270	6.00%	$	381,693	8.00%	$	933,226	13.36%	$	419,018	6.00%	$	558,690	8.00%
Common equity tier 1 capital to risk-weighted assets	$	858,092	17.98%	$	214,702	4.50%	$	310,126	6.50%	$	816,356	11.69%	$	314,263	4.50%	$	453,936	6.50%
Tier 1 capital to average total assets	$	974,962	15.41%	$	253,010	4.00%	$	316,262	5.00%	$	933,226	10.14%	$	368,210	4.00%	$	460,263	5.00%
As of December 31, 2018
As of December 31, 2019
Total capital to risk-weighted assets	$	990,499	20.48%	$	386,977	8.00%	$	483,721	10.00%	$	937,962	13.91%	$	539,268	8.00%	$	674,085	10.00%
Tier 1 capital to risk-weighted assets	$	928,577	19.20%	$	290,233	6.00%	$	386,977	8.00%	$	852,311	12.64%	$	404,451	6.00%	$	539,268	8.00%
Common equity tier 1 capital to risk-weighted assets	$	811,707	16.78%	$	217,675	4.50%	$	314,419	6.50%	$	735,441	10.91%	$	303,338	4.50%	$	438,155	6.50%
Tier 1 capital to average total assets	$	928,577	14.22%	$	261,125	4.00%	$	326,406	5.00%	$	852,311	9.24%	$	369,151	4.00%	$	461,438	5.00%

7158

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~



				Minimum Capital			Minimum to be Well						Minimum Capital			Minimum to be Well
	Actual			Requirement			Capitalized			Actual			Requirement			Capitalized
	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio
	(Dollars in thousands)									(Dollars in thousands)
Bank Ratios
As of September 30, 2019
As of March 31, 2020
Total capital to risk-weighted assets	$	990,903	20.83%	$	380,599	8.00%	$	475,749	10.00%	$	978,518	14.06%	$	556,816	8.00%	$	696,020	10.00%
Tier 1 capital to risk-weighted assets	$	930,216	19.55%	$	285,449	6.00%	$	380,599	8.00%	$	891,285	12.81%	$	417,612	6.00%	$	556,816	8.00%
Common equity tier 1 capital to risk-weighted assets	$	930,216	19.55%	$	214,087	4.50%	$	309,237	6.50%	$	891,285	12.81%	$	313,209	4.50%	$	452,413	6.50%
Tier 1 capital to average total assets	$	930,216	14.83%	$	250,964	4.00%	$	313,705	5.00%	$	891,285	9.68%	$	368,376	4.00%	$	460,470	5.00%
As of December 31, 2018
As of December 31, 2019
Total capital to risk-weighted assets	$	949,596	19.68%	$	385,992	8.00%	$	482,490	10.00%	$	898,812	13.36%	$	538,279	8.00%	$	672,848	10.00%
Tier 1 capital to risk-weighted assets	$	887,918	18.40%	$	289,494	6.00%	$	385,992	8.00%	$	813,444	12.09%	$	403,709	6.00%	$	538,279	8.00%
Common equity tier 1 capital to risk-weighted assets	$	887,918	18.40%	$	217,120	4.50%	$	313,618	6.50%	$	813,444	12.09%	$	302,782	4.50%	$	437,351	6.50%
Tier 1 capital to average total assets	$	887,918	13.68%	$	259,547	4.00%	$	324,434	5.00%	$	813,444	8.85%	$	367,537	4.00%	$	459,421	5.00%

NOTE 1517 – STOCKHOLDERS’ EQUITY

Preferred Stock and Common Stock

~~On October 22, 2018, Oriental completed the conversion of all of its 84,000~~ ~~shares of Series C preferred stock into common stock. Each share of Series C preferred stock was converted into 86.4225~~ shares of common stock. Upon conversion, the Series C preferred stock is no longer outstanding and all rights with respect to the Series C preferred stock have ceased and terminated, except the right to receive the number of whole shares of common stock issuable upon conversion of the Series C preferred stock and any required cash-in-lieu of fractional shares. At both ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, preferred and common stock paid-in capital amounted $~~92.0~~$92.0 million and $~~59.9~~$59.9 million, respectively.

Additional Paid-in Capital

Additional paid-in capital represents contributed capital in excess of par value of common and preferred stock net of the costs of issuance. As of both ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, accumulated issuance costs charged against additional paid-in capital amounted to $~~13.6~~$13.6 million and $~~10.1~~$10.1 million for common and preferred stock, respectively.

Legal Surplus

The Puerto Rico Banking Act requires that a minimum of 10% of the Bank’s net income for the year be transferred to a reserve fund until such fund (legal surplus) equals the total paid in capital on common and preferred stock. At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~ 2019, the Bank’s legal surplus amounted to ~~$95.8~~$95.9 million and ~~$90.2~~$95.8 million, respectively. The amount transferred to the legal surplus account is not available for the payment of dividends to shareholders.

Treasury Stock

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Under Oriental’s current stock repurchase program, it is authorized to purchase in the open market up to $~~7.7~~ $5.5 million of its outstanding shares of common stock. The shares of common stock repurchased are to be held by Oriental as treasury shares. During the ~~nine-month periods~~quarter ended ~~September 30,~~March 31, 2020, Oriental purchased 175,000 shares under this program for a total of $2.2 million, at an average price of $12.69 per share. During the quarter ended March 31, 2019, ~~and 2018,~~ Oriental did ~~not~~0t repurchase any shares under the program.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

At ~~September 30, 2019~~March 31, 2020 the number of shares that may yet be purchased under the $70 million program is estimated at ~~353,007,~~,492885, and was calculated by dividing the remaining balance of ~~$7.7~~$5.5 million by ~~$21.90~~$11.18 (closing price of Oriental's common stock at ~~September 30, 2019)~~March 31, 2020).

The activity in connection with common shares held in treasury by Oriental for the ~~nine-month periods~~quarters ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ is set forth below:

		Nine-Month Period Ended September 30,							Quarter Ended March 31,
		2019			2018				2020			2019
			Dollar			Dollar				Dollar			Dollar
		Shares	Amount		Shares	Amount			Shares	Amount		Shares	Amount
		(In thousands, except shares data)							(In thousands, except shares data)
Beginning of period	$	8,591,310	$	103,633	8,678,427	$	104,502	$	8,486,278	$	102,339	8,591,310	$	103,633
Common shares used upon lapse of restricted stock units and options		(53,132)		(697)	(58,424)		(796)		(103,042)		(1,276)	(34,507)		(437)
Common shares repurchased as part of the stock repurchase program									175,000		2,226	-		-
End of period	$	8,538,178	$	102,936	8,620,003	$	103,706	$	8,558,236	$	103,289	8,556,803	$	103,196

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

NOTE 1618 - ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income, net of income taxes, as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 consisted of:

	September 30,		December 31,		March 31,		December 31,
	2019		2018		2020		2019
	(In thousands)				(In thousands)
Unrealized loss on securities available-for-sale which are not other-than-temporarily impaired	$	(1,865)	$	(12,654)	$	8,895	$	(306)
Income tax effect of unrealized loss on securities available-for-sale		123		1,682		(1,320)		(135)
Net unrealized gain on securities available-for-sale which are not other-than-temporarily impaired		(1,742)		(10,972)		7,575		(441)
Unrealized (loss) gain on cash flow hedges		(1,146)		14		(2,057)		(907)
Income tax effect of unrealized (loss) gain on cash flow hedges		430		(5)		772		340
Net unrealized (loss) gain on cash flow hedges		(716)		9		(1,285)		(567)
Accumulated other comprehensive (loss), net of income taxes	$	(2,458)	$	(10,963)	$	6,290	$	(1,008)

~~Unrealized losses on available-for-sale securities includes $12.0~~ million, net of tax effect of the adoption of ASU No. 2017-12 from reclassification of all of its mortgage backed securities with carrying value of $424.7 million, from the held-to-maturity portfolio into the available-for-sale portfolio.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents changes in accumulated other comprehensive income by component, net of taxes, for the quarters ended March 31, 2020 and ~~nine-month periods ended September 30, 2019 and 2018:~~ 2019:

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

	Quarter Ended March 31,
	2019
	Net unrealized		Net unrealized		Accumulated
	gains on		loss on		other
	securities		cash flow		comprehensive
	available-for-sale		hedges		(loss) income
	(In thousands)
Beginning balance	$	(10,972)	$	9	$	(10,963)
Transfer of securities held-to-maturity to available-for-sale		(12,041)		-		(12,041)
Other comprehensive income (loss) before reclassifications		15,189		(432)		14,757
Amounts reclassified out of accumulated other comprehensive (loss) income		(17)		217		200
Other comprehensive income (loss)		3,131		(215)		2,916
Ending balance	$	(7,841)	$	(206)	$	(8,047)

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Quarter Ended September 30,

2019

2018

Net unrealized

Net unrealized

Accumulated

Net unrealized

Net unrealized

Accumulated

gains on

loss on

other

gains on

loss on

other

securities

cash flow

comprehensive

securities

cash flow

comprehensive

available-for-sale

hedges

(loss) income

available-for-sale

hedges

(loss) income

(In thousands)
Beginning balance
$
(3,087)

$
(599)

$
(3,686)

$
(15,518)

$
256

$
(15,262)
     Other comprehensive income (loss) before reclassifications

(2,143)

(666)

(2,809)

(5,607)

(380)

(5,987)
     Amounts reclassified out of accumulated other comprehensive (loss) income

3,488

549

4,037

(63)

517

454
     Other comprehensive income (loss)

1,345

(117)

1,228

(5,670)

137

(5,533)
Ending balance
$
(1,742)

$
(716)

$
(2,458)

$
(21,188)

$
393

$
(20,795)

Nine-Month Period Ended September 30,

2019

2018

Net unrealized

Net unrealized

Accumulated

Net unrealized

Net unrealized

Accumulated

gains on

loss on

other

gains on

loss on

other

securities

cash flow

comprehensive

securities

cash flow

comprehensive

available-for-sale

hedges

(loss) income

available-for-sale

hedges

(loss) income

(In thousands)
Beginning balance
$
(10,972)

$
9

$
(10,963)

$
(2,638)

$
(311)

$
(2,949)
Transfer of securities held to maturity to available-for-sale

(12,041)

-

(12,041)

-

-

-
Other comprehensive (loss) income before reclassifications

13,034

(2,050)

10,984

(18,361)

(635)

(18,996)
Amounts reclassified out of accumulated other comprehensive (loss) income

8,237

1,325

9,562

(189)

1,339

1,150
Other comprehensive income (loss)

9,230

(725)

8,505

(18,550)

704

(17,846)
Ending balance
$
(1,742)

$
(716)

$
(2,458)

$
(21,188)

$
393

$
(20,795)

The following table presents reclassifications out of accumulated other comprehensive income for the quarters ended March 31, 2020 and ~~nine-month periods ended September 30, 2019 and 2018:~~ 2019:

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

	Quarter Ended March 31,
		2020		2019
	(In thousands)
Cash flow hedges:
Interest-rate contracts	$	110	$	217	Net interest expense
Available-for-sale securities:
Gain on sale of investments		4,728		-	Net gain on sale of securities
Tax effect from changes in tax rates		-		(17)	Income tax expense
	$	4,838	$	200

7561

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

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

Quarter Ended September 30,

2019

2018

(In thousands)

Cash flow hedges:

Interest-rate contracts
$
549

$
517
Net interest expense
Available-for-sale securities:

Gain on sale of investments

3,498

-
Net gain on sale of securities
Tax effect from changes in tax rates

(10)

(63)
Income tax expense

$
4,037

$
454

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

Nine-Month Period Ended September 30,

2019

2018

(In thousands)

Cash flow hedges:

Interest-rate contracts
$
1,325

$
1,339
Net interest expense
Available-for-sale securities:

Gain on sale of investments

8,274

-
Net gain on sale of securities
Residual tax effect from OIB's change in applicable tax rate

-

5
Income tax expense
Tax effect from changes in tax rates

(38)

(194)
Income tax expense

$
9,561

$
1,150

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

NOTE 1719 – EARNINGS PER COMMON SHARE

The calculation of earnings per common share for the quarters ended March 31, 2020 and ~~nine-month periods ended September 30,~~ 2019 ~~and 2018~~ is as follows:

	Quarter Ended September 30,				Nine-Month Period Ended September 30,				Quarter Ended March 31,
	2019		2018		2019		2018		2020		2019
	(In thousands, except per share data)								(In thousands, except per share data)
Net income	$	7,383	$	23,100	$	54,832	$	59,666	$	1,801	$	23,470
Less: Dividends on preferred stock
Non-convertible preferred stock (Series A, B, and D)		(1,628)		(1,628)		(4,884)		(4,883)		(1,628)		(1,628)
Convertible preferred stock (Series C)		-		(1,838)		-		(5,513)
Income available to common shareholders	$	5,755	$	19,634	$	49,948	$	49,270	$	173	$	21,842
Effect of assumed conversion of the convertible preferred stock		-		1,838		-		5,513
Income available to common shareholders assuming conversion	$	5,755	$	21,472	$	49,948	$	54,783	$	173	$	21,842

Weighted average common shares and share equivalents:
Average common shares outstanding		51,345		43,996		51,327		43,975		51,404		51,305
Effect of dilutive securities:
Average potential common shares-options		427		209		368		110		309		321
Average potential common shares-assuming conversion of convertible preferred stock		-		7,259		-		7,259
Total weighted average common shares outstanding and equivalents		51,772		51,464		51,695		51,344		51,713		51,626
Earnings per common share - basic	$	0.11	$	0.45	$	0.97	$	1.12	$	-	$	0.43
Earnings per common share - diluted	$	0.11	$	0.42	$	0.97	$	1.07	$	-	$	0.42

~~During the last quarter of 2018, Oriental converted all of its 84,000~~ ~~outstanding shares of Series C Preferred Stock into common stock. Each Series C Preferred Stock share was converted into 86.4225~~ shares of common stock. In computing diluted earnings per common share during the first nine months of 2018, the 84,000 shares of Series C Preferred Stock that remained outstanding, with a conversion rate, subject to certain conditions, of 86.4225 shares of common stock per share, were included as average potential common shares from the date they were issued and outstanding. Moreover, in computing diluted earnings per common share, the dividends declared during the quarter and nine-month period ended September 30, 2018 on the convertible preferred stock were added back as income available to common shareholders.

For the quarter ~~and nine-month periods~~ ended ~~September 30, 2019,~~March 31, 2020, Oriental did not have weighted-average stock options with an anti-dilutive effect on earnings per share. For the ~~quarter and nine-month periods~~quarters ended ~~September 30, 2018,~~March 31, 2019, weighted-average stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to ~~307,925~~ ~~and 435,950, respectively.~~28,414.

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

NOTE 1820 – GUARANTEES

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the ~~unamortized balance~~notional amount of the obligations undertaken in issuing the guarantees under standby letters of credit represented a liability of ~~$12.9~~ $21.6 million and ~~$23.9~~ $47.3 million, respectively.

Oriental has a liability for residential mortgage loans sold subject to credit recourse pursuant to GNMA’s and FNMA’s residential mortgage loan sales and securitization programs. At ~~September 30, 2019 and December~~March 31, ~~2018,~~2020, the unpaid principal balance of residential mortgage loans sold subject to credit recourse was ~~$5.0~~ $140.5 million. At December 31, 2019, the unpaid principal balance of residential mortgage loans sold subject to credit recourse was $147.4 million, ~~and $5.4~~ from which $142.5 million ~~respectively.~~were related to the Scotiabank PR & USVI Acquisition.

The following table shows the changes in Oriental’s liability for estimated losses from these credit recourse agreements, included in the consolidated statements of financial condition during the quarters ended March 31, 2020 and ~~nine-month periods ended September 30, 2019 and 2018.~~ 2019.

	Quarter Ended September 30,				Nine-Month Period Ended September 30,				Quarter Ended March 31,
	2019		2018		2019		2018		2020		2019
	(In thousands)								(In thousands)
Balance at beginning of period	$	225	$	264	$	346	$	358	$	985	$	346
Net (charge-offs/terminations) recoveries		20		(60)		(101)		(154)		(79)		(132)
Balance at end of period	$	245	$	204	$	245	$	204	$	906	$	214

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The estimated losses to be absorbed under the credit recourse arrangements were recorded as a liability when the credit recourse was assumed and are updated on a quarterly basis. The expected loss, which represents the amount expected to be lost on a given loan, considers the probability of default and loss severity. The probability of default represents the probability that a loan in good standing would become 120 days delinquent, in which case Oriental is obligated to repurchase the loan.

If a borrower defaults, pursuant to the credit recourse provided, Oriental is required to repurchase the loan or reimburse the third-party investor for the incurred loss. The maximum potential amount of future payments that Oriental would be required to make under the recourse arrangements is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During the quarter ~~and nine-month period~~ ended ~~September 30,~~March 31, 2020, Oriental repurchased $479 thousand in mortgage loans subject to credit recourse. During the quarter ended March 31, 2019, Oriental did not repurchase any mortgage loans subject to the credit recourse provision. ~~During the quarter and nine-month period ended September 30, 2018, Oriental repurchased approximately $234~~ ~~thousand and $569~~ ~~thousand, respectively, of unpaid principal balance in mortgage loans subject to the credit recourse provisions.~~ If a borrower defaults, Oriental has rights to the underlying collateral securing the mortgage loan. Oriental suffers losses on these mortgage loans when the proceeds from a foreclosure sale of the collateral property are less than the outstanding principal balance of the loan, any uncollected interest advanced, and the costs of holding and disposing the related property. At ~~September 30, 2019,~~March 31, 2020, Oriental’s liability for estimated credit losses related to loans sold with credit recourse amounted to ~~$245~~$906 thousand (December 31, ~~2018– $346~~2019– $985 thousand).

When Oriental sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. Oriental's mortgage operations division groups conforming mortgage loans into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or are sold directly to FNMA or other private investors for cash. As required under such mortgage backed securities programs, quality review procedures are performed by Oriental to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, Oriental may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the loans. During the ~~quarters~~quarter ended ~~September 30,~~ ~~2019~~March 31, 2020, Oriental repurchased ~~$528~~ ~~thousand~~ $8.4 million (~~September 30, 2018~~March 31, 2019 – ~~$1.6~~ $1.9 million) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to credit recourse provision referred above. ~~During the nine-month periods ended September 30,~~At March 31, 2020 and December 31, 2019, Oriental ~~repurchased $10.5~~had a $4.0 million ~~(September 30, 2018 – $5.9~~ ~~million)~~ ~~of unpaid principal balance in mortgage loans, excluding mortgage loans subject~~and a $4.6 million liability, respectively, for the estimated credit losses related to ~~credit recourse provision referred above.~~these loans.

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

During the quarters ended ~~September 30,~~ ~~2019~~March 31, 2020 and ~~2018,~~2019, Oriental recognized ~~$20~~$14 thousand and ~~$30~~$116 thousand, respectively, in losses from the repurchase of residential mortgage loans sold subject to credit recourse, and ~~$19~~$405 thousand and ~~$41~~$16 thousand, respectively, in losses 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,~~ ~~2019 and 2018, Oriental recognized $48~~ ~~thousand and $406~~ ~~thousand, respectively,~~ ~~in losses from the repurchase of residential mortgage loans sold subject to credit recourse, and $60~~ ~~thousand and $71~~ ~~thousand, respectively, in losses from the repurchase of residential mortgage loans as a result of breaches of customary representations and warranties.~~

Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including the FHLMC, require Oriental to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. At ~~September 30, 2019~~March 31, 2020, Oriental serviced ~~$900.4~~ ~~million~~$4.3 billion (December 31, ~~2018~~2019 - ~~$895.6~~ ~~million)~~$4.4 billion) in mortgage loans for ~~third-parties.~~third parties. Oriental generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, in the meantime, Oriental must absorb the cost of the funds it advances during the time the advance is outstanding. Oriental must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and Oriental would not receive any future servicing income with respect to that loan. At ~~September 30, 2019~~March 31, 2020, the outstanding balance of funds advanced by Oriental under such mortgage loan servicing agreements was approximately ~~$616~~ ~~thousand~~ $3.8 million (December 31, ~~2018~~ 2019 - ~~$706~~ ~~thousand)~~$3.6 million). To the extent the mortgage loans underlying Oriental's servicing portfolio experience increased delinquencies, Oriental would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

NOTE 1921—COMMITMENTS AND CONTINGENCIES

Loan Commitments

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

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

Credit-related financial instruments at ~~September 30, 2019~~ March 31, 2020 and December 31, ~~2018~~2019 were as follows:

	September 30,		December 31,		March 31,		December 31,
	2019		2018		2020		2019
	(In thousands)				(In thousands)
Commitments to extend credit	$	610,516	$	541,423	$	847,105	$	853,148
Commercial letters of credit		459		340		451		2,178

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

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, commitments to extend credit consisted mainly of undisbursed available amounts on commercial lines of credit, construction loans, and revolving credit card arrangements. Since many of the unused commitments are expected to expire unused or be only partially used, the total amount of these unused commitments does not necessarily represent future cash requirements.~~These lines of credit had a reserve of $505~~ ~~thousand and $627~~ ~~thousand, at~~ ~~September 30, 2019 and December 31, 2018, respectively~~.

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, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, is as follows:

	September 30,		December 31,		March 31,		December 31,
	2019		2018		2020		2019
	(In thousands)				(In thousands)
Standby letters of credit and financial guarantees	$	12,884	$	23,889	$	21,612	$	47,251
Loans sold with recourse		4,962		5,414		140,526		147,399

Standby letters of credit and financial guarantees are written conditional commitments issued by Oriental to guarantee the payment and/or performance of a customer to a third party (“beneficiary”). If the customer fails to comply with the agreement, the beneficiary may draw on the standby letter of credit or financial guarantee as a remedy. The amount of credit risk involved in issuing letters of credit in the event of non-performance is the face amount of the letter of credit or financial guarantee. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The amount of collateral obtained, if it is deemed necessary by Oriental upon extension of credit, is based on management’s credit evaluation of the customer.

On January 1, 2020,Oriental adopted CECL, which requires the measurement of the allowance for credit losses to be based on management’s best estimate of lifetime expected credit losses inherent in all financial assets measured at amortized cost and off-balance-sheet credit exposures. Upon adoption, Oriental recognized an increase in the off-balance sheet allowance of $0.2 million with the corresponding decrease in retained earnings. At March 31, 2020 and December 31, 2019, the allowance for credit losses for off-balance sheet credit exposures corresponding to commitments to extend credit, stand by letters of credit and loans sold with recourse amounted to $2.4 million and $3.7 million, respectively, and is included in other liabilities in the statement of financial condition.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Contingencies

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

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

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

NOTE 2022—OPERATING LEASES

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, Oriental adopted ASU No. 2016-02 ~~“Leases” (Topic 842)~~ and all subsequent ASUs that modified Topic 842. For Oriental, Topic 842 primarily affected the accounting treatment for operating lease agreements in which Oriental is the lessee. Oriental elected the hindsight practical expedient, which allows entities to use hindsight when determining lease term and impairment of right-of-use assets. As a result of the changes to the lease terms, Oriental reduced its retained earnings by $736 ~~thousand on the effective date, January 1, 2019.~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Lessee Accounting

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

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

Oriental’s leases do not contain residual value guarantees or material variable lease payments. All leases were classified as operating leases.

Substantially all of the leases in which Oriental is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2032. All of our leases are classified as operating leases, and therefore, were previously not recognized on Oriental’s consolidated statements of financial condition. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated statements of financial condition as a right-of-use asset and a corresponding lease liability. Oriental leases to others certain space in its principal offices for terms extending through 2023; all are operating leases.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Operating Lease Cost

	Quarter Ended September 30, 2019		Nine-Month Period Ended September 30, 2019			Quarter Ended March 31,
	Quarter Ended September 30, 2019		Nine-Month Period Ended September 30, 2019		Statement of Operations Classification	2020		2019		Statement of Operations Classification
	(In thousands)
Lease costs	$	1,608	$	4,949	Occupancy and equipment	$	3,338	$	1,529	Occupancy and equipment
Variable lease costs		350		1,699	Occupancy and equipment		588		684	Occupancy and equipment
Short-term lease cost		81		104	Occupancy and equipment
Short-term lease cost (benefit)							(157)		156	Occupancy and equipment
Lease income		(135)		(431)	Occupancy and equipment		(123)		(155)	Occupancy and equipment
Total lease cost	$	1,904	$	6,321		$	3,646	$	2,214

~~Rent expenses for the quarter and nine-month period ended September 30, 2018, prior to adoption of ASU 2016-02 (Topic 842), were $2.0~~ ~~million and $7.4~~ ~~million, respectively, included in the "occupancy and equipment" caption in the unaudited consolidated statements of operations.~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Operating Lease Assets and Liabilities

		September 30 2019			March 31	December 31
		September 30 2019	Statement of Financial Condition Classification		2020	2019		Statement of Financial Condition Classification
		(In thousands)		(In thousands)
Right-of-use assets	$	19,318	Operating lease right-of-use assets	$	36,844	$	39,112	Operating lease right-of-use assets
Lease Liabilities	$	21,081	Operating leases liabilities	$	37,702	$	39,840	Operating leases liabilities

	~~September 30, 2019~~March 31, 2020
	~~September 30, 2019~~March 31, 2020
	(In thousands)
Weighted-average remaining lease term		~~6.2~~6.4 years
Weighted-average discount rate		~~8.6%~~6.8%

Future minimum payments for operating leases with initial or remaining terms of one year or more as of ~~September 30, 2019~~March 31, 2020 were as follows:

	Minimum Rent		Minimum Rent
Year Ending December 31,	(In thousands)		(In thousands)
2019	$	1,596
2020		5,716	$	8,030
2021		4,717		8,598
2022		3,843		7,230
2023		2,991		6,081
2024				4,102
Thereafter		8,954		13,358
Total lease payments	$	27,817	$	47,399
Less imputed interest		6,736		9,697
Present value of lease liabilities	$	21,081	$	37,702

~~Future minimum payments for operating leases with initial or remaining terms of one year or more as of December 31, 2018 were as follows:~~

Minimum Rent
Year Ending December 31,
(In thousands)
2019
$
5,618
2020

4,293
2021

3,360
2022

2,494
2023

1,968
Thereafter

6,679
Total future minimum lease payments
$
24,412

8266

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

NOTE 21 23 - FAIR VALUEOF FINANCIAL INSTRUMENTS

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

Fair Value Measurement

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

Money market investments

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

Investment securities

The fair value of investment securities is based on valuations obtained from an independent pricing provider, ICE Data Pricing (formerly known as IDC). ICE is a well-recognized pricing company and an established leader in financial information. Such securities are classified as Level 1 or Level 2 depending on the basis for determining fair value. If listed prices or quotes are not available, fair value is based upon externally developed models that use both observable and unobservable inputs depending on the market activity of the instrument, and such securities are classified as Level 3. At ~~September 30,~~March 31, 2020 and 2019, ~~and December 31, 2018,~~ Oriental did not have investment securities classified as Level 3.

Derivative instruments

The fair value of the interest rate swaps is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, for the most part, on the shape of the yield curve, the level of interest rates, as well as the expectations for rates in the future. The fair value of most of these derivative instruments is based on observable market parameters, which include discounting the instruments’ cash flows using the U.S. dollar LIBOR-based discount rates, and also applying yield curves that account for the industry sector and the credit rating of the counterparty and/or Oriental. Certain other derivative instruments with limited market activity are valued using externally developed models that consider unobservable market parameters. Based on their valuation methodology, derivative instruments are classified as Level 2 or Level 3.

Servicing assets

Servicing assets do not trade in an active market with readily observable prices. Servicing assets are priced using a discounted cash flow model. The valuation model considers servicing fees, portfolio characteristics, prepayment assumptions, delinquency rates, late charges, other ancillary revenues, cost to service and other economic factors. Due to the unobservable nature of certain valuation inputs, the servicing rights are classified as Level 3.

~~Impaired Loans~~

Impaired loans are carried at the present value of expected future cash flows using the loan’s existing rate in a discounted cash flow calculation, or the fair value of the collateral if the loan is collateral-dependent. Expected cash flows are based on internal inputs reflecting expected default rates on contractual cash flows. This method of estimating fair value does not incorporate the exit-price concept of fair value described in ASC 820-10 and would generally result in a higher value than the exit-price approach. For loans measured using the estimated fair value of collateral less costs to sell, fair value is generally determined based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC 310-10-35 less disposition costs. Currently, the associated loans considered impaired are classified as Level 3.

Foreclosed real estate

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Foreclosed real estate includes real estate properties securing residential mortgage and commercial loans. The fair value of foreclosed real estate may be determined using an external appraisal, broker price option or an internal valuation. These foreclosed assets are classified as Level 3 given certain internal adjustments that may be made to external appraisals.

Other repossessed assets

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

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

	September 30, 2019								March 31, 2020
	Fair Value Measurements								Fair Value Measurements
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
	(In thousands)								(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale	$	-	$	519,095	$	-	$	519,095	$	298,986	$	358,474	$	-	$	657,460
Trading securities		-		41		-		41		-		29		-		29
Money market investments		8,035		-		-		8,035		10,203		-		-		10,203
Derivative assets		-		13		-		13		-		2		-		2
Servicing assets		-		-		10,125		10,125		-		-		49,287		49,287
Derivative liabilities		-		(1,159)		-		(1,159)		-		(2,059)		-		(2,059)
	$	8,035	$	517,990	$	10,125	$	536,150	$	309,189	$	356,446	$	49,287	$	714,922
Non-recurring fair value measurements:
Impaired commercial loans	$	-	$	-	$	59,507	$	59,507
Collateral dependant loans										-		-		33,694		33,694
Foreclosed real estate		-		-		26,952		26,952		-		-		27,292		27,292
Other repossessed assets		-		-		3,537		3,537		-		-		3,096		3,096
	$	-	$	-	$	89,996	$	89,996	$	-	$	-	$	64,082	$	64,082

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

December 31, 2018

Fair Value Measurements

Level 1

Level 2

Level 3

Total

(In thousands)
Recurring fair value measurements:

    Investment securities available-for-sale
$
-

$
841,857

$
-

$
841,857
    Trading securities

-

360

-

360
    Money market investments

4,930

-

-

4,930
    Derivative assets

-

347

-

347
    Servicing assets

-

-

10,716

10,716
    Derivative liabilities

-

(333)

-

(333)

$
4,930

$
842,231

$
10,716

$
857,877
Non-recurring fair value measurements:

    Impaired commercial loans
$
-

$
-

$
81,976

$
81,976
    Foreclosed real estate

-

-

33,768

33,768
    Other repossessed assets

-

-

2,986

2,986

$
-

$
-

$
118,730

$
118,730

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarters ended March 31, 2020 and ~~nine-month periods~~2019:

Level 3 Instruments Only	Servicing Assets
	(In thousands)
	Quarter Ended March 31,
	2020		2019
Balance at beginning period	$	50,779	$	10,716
New instruments acquired		456		302
Principal repayments		(767)		(201)
Changes in fair value of servicing assets		(1,181)		(194)
Balance at end of period	$	49,287	$	10,623

There were 0 transfers into or out of level 3 and 0 changes in unrealized gains and losses from recurring level 3 fair value measurements held at March 31, 2020 and 2020 during the quarters then ended ~~September 30, 2019 and 2018:~~included in other comprehensive income. For more information on the qualitative information about level 3 fair value measurements, see Note 9 – Servicing Assets.

Level 3 Instruments Only
Servicing Assets

(In thousands)

Quarter Ended September 30,

2019

2018
Balance at beginning of period
$
10,134

$
10,829
    New instruments acquired

352

417
    Principal repayments

(243)

(184)
    Changes in fair value of servicing assets

(118)

(196)
Balance at end of period
$
10,125

$
10,866

Level 3 Instruments Only
Servicing Assets

(In thousands)

Nine-Month Period Ended September 30,

2019

2018

(In thousands)
Balance at beginning of period
$
10,716

$
9,821
    New instruments acquired

860

1,158
    Principal repayments

(694)

(593)
    Changes in fair value of servicing assets

(757)

480
Balance at end of period
$
10,125

$
10,866

During the quarters ended March 31, 2020 and ~~nine-month periods ended September 30,~~ 2019, ~~and 2018,~~ there were purchases and sales of assets and liabilities measured at fair value on a recurring basis. ~~There were no transfers into and out of Level 1 and Level 2 fair value measurements during such periods.~~

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, 2019:~~March 31, 2020:

	March 31, 2020
	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average
	(In thousands)

Servicing assets	$	49,287	Cash flow valuation	Constant prepayment rate	5.02% - 19.08%	6.72%
				Discount rate	10.00% - 15.50%	11.35%

Collateral dependent loans	$	33,694	Fair value of property or collateral	Appraised value less disposition costs	13.20% - 44.20%	23.00%

Foreclosed real estate	$	27,292	Fair value of property or collateral	Appraised value less disposition costs	13.20% - 44.20%	18.53%

Other repossessed assets	$	3,096	Fair value of property or collateral	Estimated net realizable value less disposition costs	36.00% - 64.00%	52.0%

8569

September 30, 2019

Fair Value

Valuation Technique

Unobservable Input

Range

(In thousands)

Servicing assets

$
10,125

Cash flow valuation

Constant prepayment rate

4.38% -9.44%

Discount rate

10.00% - 12.00%
Collateral dependent
    impaired loans

$
31,564

Fair value of property
    or collateral

Appraised value less disposition costs

15.20% - 36.20%

Other non-collateral dependent impaired loans

$
27,943

Cash flow valuation

Discount rate

4.25% - 12.25%

Foreclosed real estate

$
26,952

Fair value of property
    or collateral

Appraised value less disposition costs

15.20% - 36.20%

Other repossessed assets

$
3,537

Fair value of property
    or collateral

Estimated net realizable value less disposition costs

28.00% - 72.00%

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Information about Sensitivity to Changes in Significant Unobservable Inputs

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

Fair Value of Financial Instruments

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

The estimated fair value is subjective in nature, involves uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could affect these fair value estimates. The fair value estimates do not take into consideration the value of future business and the value of assets and liabilities that are not financial instruments. Other significant tangible and intangible assets that are not considered financial instruments are the value of long-term customer relationships of retail deposits, and premises and ~~equipment~~.equipment.

8670

86OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The estimated fair value and carrying value of Oriental’s financial instruments at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 is as follows:

	September 30,				December 31,				March 31,				December 31,
	2019				2018				2020				2019
	Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying
	Value		Value		Value		Value		Value		Value		Value		Value
	(In thousands)								(In thousands)
Level 1
Financial Assets:
Cash and cash equivalents	$	961,837	$	961,837	$	447,033	$	447,033	$	1,324,891	$	1,324,891	$	851,307	$	851,307
Restricted cash	$	1,050	$	1,050	$	3,030	$	3,030	$	1,050	$	1,050	$	1,450	$	1,450
Level 2
Financial Assets:
Trading securities	$	41	$	41	$	360	$	360	$	29	$	29	$	37	$	37
Investment securities available-for-sale	$	519,095	$	519,095	$	841,857	$	841,857	$	657,460	$	657,460	$	1,074,169	$	1,074,169
Investment securities held-to-maturity	$	-	$	-	$	410,353	$	424,740
Federal Home Loan Bank (FHLB) stock	$	10,525	$	10,525	$	12,644	$	12,644	$	10,301	$	10,301	$	13,048	$	13,048
Other investments	$	57	$	57	$	3	$	3	$	973	$	973	$	560	$	560
Derivative assets	$	13	$	13	$	347	$	347	$	2	$	2	$	6	$	6
Financial Liabilities:
Derivative liabilities	$	1,159	$	1,159	$	333	$	333	$	2,059	$	2,059	$	913	$	913
Level 3
Financial Assets:
Total loans (including loans held-for-sale)	$	4,106,958	$	4,407,190	$	4,106,628	$	4,431,594	$	6,166,068	$	6,541,174	$	5,894,745	$	6,641,847
Accrued interest receivable	$	30,470	$	30,470	$	34,254	$	34,254	$	40,181	$	40,181	$	36,781	$	36,781
Servicing assets	$	10,125	$	10,125	$	10,716	$	10,716	$	49,287	$	49,287	$	50,779	$	50,779
Accounts receivable and other assets	$	35,140	$	35,140	$	37,842	$	37,842	$	70,351	$	70,351	$	78,595	$	78,595
Financial Liabilities:
Deposits	$	4,888,607	$	4,878,058	$	4,881,903	$	4,908,115	$	7,802,049	$	7,819,271	$	7,679,685	$	7,698,610
Securities sold under agreements to repurchase	$	190,322	$	190,261	$	453,135	$	455,508	$	49,907	$	50,103	$	190,345	$	190,274
Advances from FHLB	$	81,075	$	79,052	$	78,503	$	77,620	$	80,070	$	76,961	$	79,620	$	78,009
Other borrowings	$	551	$	551	$	1,214	$	1,214	$	640	$	640	$	1,195	$	1,195
Subordinated capital notes	$	37,830	$	36,083	$	36,184	$	36,083	$	38,693	$	36,083	$	35,886	$	36,083
Accrued expenses and other liabilities	$	56,388	$	56,388	$	87,665	$	87,665	$	181,395	$	181,395	$	185,661	$	185,661

8771

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

The following methods and assumptions were used to estimate the fair values of significant financial instruments at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:

• Cash and cash equivalents (including money market investments and time deposits with other banks), restricted cash, accrued interest receivable, accounts receivable and other assets, accrued expenses and other liabilities, and other borrowings have been valued at the carrying amounts reflected in the consolidated statements of financial condition as these are reasonable estimates of fair value given the short-term nature of the ~~instruments~~.instruments.

• Investments in FHLB-NY stock are valued at their redemption value.

• The fair value of investment securities, including trading securities and other investments, is based on quoted market prices, when available or prices provided from contracted pricing providers, or market prices provided by recognized broker-dealers. If listed prices or quotes are not available, fair value is based upon externally developed models that use both observable and unobservable inputs depending on the market activity of the ~~instrument~~.instrument.

• The fair value of servicing asset is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market ~~conditions~~.conditions.

• The fair values of the derivative instruments,, which include interest rate swaps and forward-settlement swaps, are based on the net discounted value of the contractual projected cash flows of both the pay-fixed receive-variable legs of the contracts. The projected cash flows are based on the forward yield curve and discounted using current estimated market ~~rates~~.rates.

• The fair value of the loan portfolio (including loans held-for-sale and non-performing loans) is based on the exit market price, which is estimated by segregating by type, such as mortgage, commercial, consumer, auto and leasing. Each loan segment is further segmented into fixed and adjustable interest rates. The fair value is calculated by discounting contractual cash flows, adjusted for prepayment estimates (voluntary and involuntary), if any, using estimated current market discount rates that reflect the credit and interest rate risk inherent in the loan.

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

• The fair value of long-term borrowings, which include securities sold under agreements to repurchase, advances from FHLB, and subordinated capital notes is based on the discounted value of the contractual cash flows using current estimated market discount rates for borrowings with similar terms, remaining maturities and put ~~dates~~.dates.

8872

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

NOTE 2224 – BANKING AND FINANCIAL SERVICE REVENUES

The following table presents the major categories of banking and financial service revenues for the quarters ended March 31, 2020 and ~~nine-month periods ended~~ ~~September 30, 2019 and 2018~~:2019:

	Quarter Ended March 31,
	2020		2019
	(In thousands)
Banking service revenues:
Checking accounts fees	$	2,660	$	1,473
Savings accounts fees		440		155
Electronic banking fees		11,248		7,892
Credit life commissions		128		117
Branch service commissions		512		373
Servicing and other loan fees		443		316
International fees		156		137
Miscellaneous income		59		2
Total banking service revenues		15,646		10,465

Wealth management revenue:
Insurance income		2,410		1,281
Broker fees		1,915		1,757
Trust fees		2,753		2,604
Retirement plan and administration fees		208		240
Total wealth management revenue		7,286		5,882

Mortgage banking activities:
Net servicing fees		2,690		944
Net gains on sale of mortgage loans and valuation		565		162
Other		(21)		100
Total mortgage banking activities		3,234		1,206
Total banking and financial service revenues	$	26,166	$	17,553

Quarter Ended September 30,

Nine-Month Period Ended September 30,

2019

2018

2019

2018

(In thousands)
Banking service revenues:

Checking accounts fees

$
1,545

$
1,502

$
4,494

$
4,386
Savings accounts fees

187

161

484

473
Electronic banking fees

8,018

8,104

24,121

23,960
Credit life commissions

158

142

426

401
Branch service commissions

337

365

1,055

1,089
Servicing and other loan fees

433

334

1,069

1,554
International fees

127

185

393

534
Miscellaneous income

8

4

12

7
Total banking service revenues

10,813

10,797

32,054

32,404

Wealth management revenue:

Insurance income

1,576

1,654

4,505

4,298
Broker fees

1,913

1,941

5,637

5,387
Trust fees

2,895

2,541

8,307

8,138
Retirement plan and administration fees

227

271

713

856
Investment banking fees

-

-

-

9
Total wealth management revenue

6,611

6,407

19,162

18,688

Mortgage banking activities:

Net servicing fees

1,033

1,059

2,592

4,130
Net gains on sale of mortgage loans and valuation

124

103

375

182
Other

(39)

80

(14)

(325)
Total mortgage banking activities

1,118

1,242

2,953

3,987
Total banking and financial service revenues

$
18,542

$
18,446

$
54,169

$
55,079

In May 2014 FASB issued ASU No. 2014-09 - Revenue from Contracts with Customers (ASC 606) to clarify the principles for recognizing revenue and to develop a common revenue standard that would remove inconsistencies in revenue requirements, provide a more robust framework for addressing the revenue issues, improve comparability in revenue recognition and to simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.

The standard defines revenue (ASC-606-10-20) as inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.

Revenue is recognized when (or as) the performance obligation is satisfied by transferring control of a promised good or service to a customer, either at a point in time or over time. Where a performance obligation is satisfied over time, the related revenue is also recognized over time.73

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

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

Banking Service Revenues

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

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

Other income as credit life commissions, servicing and other loan fees, international fees, and miscellaneous fees recognized as banking services revenue are out of the scope of the 606 guidelines.

Wealth Management Revenue

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

Brokers fees consist of two categories:

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

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

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

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

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

Mortgage Banking Activities

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

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

~~OFG BANCORP~~

NOTE 25 – BUSINESSSEGMENTS

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~NOTE 23~~ – ~~BUSINESS~~~~SEGMENTS~~

Oriental segregates its businesses into the following major reportable segments of business: Banking, Wealth Management, and Treasury. Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as Oriental’s organization, nature of its products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. Oriental measures the performance of these reportable segments based on pre-established goals of different financial parameters such as net income, net interest income, loan production, and fees generated. Oriental’s methodology for allocating non-interest expenses among segments is based on several factors such as revenue, employee headcount, occupied space, dedicated services or time, among others. These factors are reviewed on a periodical basis and may change if the conditions warrant.

Banking includes the Bank’s branches and traditional banking products such as deposits and commercial, consumer and mortgage loans. Mortgage banking activities are carried out by the Bank’s mortgage banking division, whose principal activity is to originate mortgage loans for Oriental’s own portfolio. As part of its mortgage banking activities, Oriental may sell loans directly into the secondary market or securitize conforming loans into mortgage-backed securities.

Wealth Management is comprised of the Bank’s trust division, Oriental Financial Services, Oriental Insurance, and OPC. The core operations of this segment are financial planning, money management and investment banking, brokerage services, insurance sales activity, corporate and individual trust and retirement services, as well as retirement plan administration services.

The Treasury segment encompasses all of Oriental’s asset/liability management activities, such as purchases and sales of investment securities, interest rate risk management, derivatives, and borrowings. Intersegment sales and transfers, if any, are accounted for as if the sales or transfers were to third parties, that is, at current market prices.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ~~– (Continued)~~

Following are the results of operations and the selected financial information by operating segment for the quarters ended March 31, 2020 and ~~nine-month periods ended September 30, 2019 and 2018:~~2019:

	Quarter Ended March 31, 2020
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	119,446	$	18	$	4,300	$	123,764	$	-	$	123,764
Interest expense		(15,889)		-		(2,707)		(18,596)		-		(18,596)
Net interest income		103,557		18		1,593		105,168		-		105,168
Provision for loan and lease losses, net		(47,131)		-		-		(47,131)		-		(47,131)
Non-interest income		19,477		7,375		4,531		31,383		-		31,383
Non-interest expenses		(82,545)		(3,724)		(1,053)		(87,322)		-		(87,322)
Intersegment revenue		457		-		-		457		(457)		-
Intersegment expenses		-		(154)		(303)		(457)		457		-
Income before income taxes	$	(6,185)	$	3,515	$	4,768	$	2,098	$	-	$	2,098
Income tax expense		(2,319)		1,318		1,298		297		-		297
Net income	$	(3,866)	$	2,197	$	3,470	$	1,801	$	-	$	1,801
Total assets	$	9,207,848	$	34,014	$	1,069,334	$	10,311,196	$	(1,072,625)	$	9,238,571

	Quarter Ended March 31, 2019
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	83,516	$	18	$	11,176	$	94,710	$	-	$	94,710
Interest expense		(8,636)		-		(4,285)		(12,921)		-		(12,921)
Net interest income		74,880		18		6,891		81,789		-		81,789
Provision for loan and lease losses, net		(12,207)		-		(42)		(12,249)		-		(12,249)
Non-interest income		11,656		5,984		16		17,656		-		17,656
Non-interest expenses		(46,483)		(4,327)		(1,342)		(52,152)		-		(52,152)
Intersegment revenue		554		-		-		554		(554)		-
Intersegment expenses		-		(174)		(380)		(554)		554		-
Income before income taxes	$	28,400	$	1,501	$	5,143	$	35,044	$	-	$	35,044
Income tax expense		10,650		563		361		11,574		-		11,574
Net income	$	17,750	$	938	$	4,782	$	23,470	$	-	$	23,470
Total assets	$	5,862,487	$	25,425	$	1,742,557	$	7,630,469	$	(1,027,278)	$	6,603,191

Quarter Ended September 30, 2019




Wealth



Total Major



Consolidated

Banking

Management

Treasury

Segments

Eliminations

Total

(In thousands)
Interest income
$
85,147

$
16

$
8,492

$
93,655

$
-

$
93,655
Interest expense

(9,260)

-

(3,685)

(12,945)

-

(12,945)
Net interest income

75,887

16

4,807

80,710

-

80,710
Provision for loan and lease losses, net

(43,678)

-

(92)

(43,770)

-

(43,770)
Non-interest income

11,946

6,719

3,513

22,178

-

22,178
Non-interest expenses

(46,555)

(3,450)

(722)

(50,727)

-

(50,727)
Intersegment revenue

507

-

-

507

(507)

-
Intersegment expenses

-

(141)

(366)

(507)

507

-
(lLoss) income before income taxes
$
(1,893)

$
3,144

$
7,140

$
8,391

$
-

$
8,391
Income tax (benefit) expense

(738)

1,226

520

1,008

-

1,008
Net income (loss)
$
(1,155)

$
1,918

$
6,620

$
7,383

$
-

$
7,383
Total assets
$
5,919,877

$
26,596

$
1,465,329

$
7,411,802

$
(1,078,297)

$
6,333,505

Nine-Month Period Ended September 30, 2019




Wealth



Total Major



Consolidated

Banking

Management

Treasury

Segments

Eliminations

Total

(In thousands)
Interest income
$
253,138

$
53

$
29,429

$
282,620

$
-

$
282,620
Interest expense

(27,083)

-

(11,953)

(39,036)

-

(39,036)
Net interest income

226,055

53

17,476

243,584

-

243,584
Provision for loan and lease losses, net

(73,560)

-

(164)

(73,724)

-

(73,724)
Non-interest income

34,932

19,537

8,313

62,782

-

62,782
Non-interest expenses

(139,384)

(11,675)

(3,272)

(154,331)

-

(154,331)
Intersegment revenue

1,648

-

-

1,648

(1,648)

-
Intersegment expenses

-

(480)

(1,168)

(1,648)

1,648

-
Income before income taxes
$
49,691

$
7,435

$
21,185

$
78,311

$
-

$
78,311
Income tax expense

18,634

2,788

2,057

23,479

-

23,479
Net income
$
31,057

$
4,647

$
19,128

$
54,832

$
-

$
54,832
Total assets
$
5,919,877

$
26,596

$
1,465,329

$
7,411,802

$
(1,078,297)

$
6,333,505

Quarter Ended September 30, 2018




Wealth



Total Major



Consolidated

Banking

Management

Treasury

Segments

Eliminations

Total

(In thousands)
Interest income
$
83,664

$
9

$
10,464

$
94,137

$
-

$
94,137
Interest expense

(7,701)

-

(4,159)

(11,860)

-

(11,860)
Net interest income

75,963

9

6,305

82,277

-

82,277
Provision for loan and lease losses, net

(14,478)

-

(123)

(14,601)

-

(14,601)
Non-interest income

12,157

6,463

-

18,620

-

18,620
Non-interest expenses

(46,049)

(3,720)

(1,172)

(50,941)

-

(50,941)
Intersegment revenue

616

-

-

616

(616)

-
Intersegment expenses

-

(273)

(343)

(616)

616

-
Income before income taxes
$
28,209

$
2,479

$
4,667

$
35,355

$
-

$
35,355
Income tax expense

11,001

967

287

12,255

-

12,255
Net income
$
17,208

$
1,512

$
4,380

$
23,100

$
-

$
23,100
Total assets
$
6,156,500

$
25,243

$
1,459,682

$
7,641,425

$
(984,751)

$
6,656,674

Nine-Month Period Ended September 30, 2018




Wealth



Total Major



Consolidated

Banking

Management

Treasury

Segments

Eliminations

Total

(In thousands)
Interest income
$
236,171

$
35

$
29,107

$
265,313

$
-

$
265,313
Interest expense

(21,123)

-

(10,331)

(31,454)

-

(31,454)
Net interest income

215,048

35

18,776

233,859

-

233,859
Provision for loan and lease losses, net

(44,677)

-

(131)

(44,808)

-

(44,808)
Non-interest income

36,590

19,219

28

55,837

-

55,837
Non-interest expenses

(140,239)

(12,288)

(2,835)

(155,362)

-

(155,362)
Intersegment revenue

1,519

-

-

1,519

(1,519)

-
Intersegment expenses

-

(660)

(859)

(1,519)

1,519

-
Income before income taxes
$
68,241

$
6,306

$
14,979

$
89,526

$
-

$
89,526
Income tax expense

26,614

2,459

787

29,860

-

29,860
Net income
$
41,627

$
3,847

$
14,192

$
59,666

$
-

$
59,666
Total assets
$
6,156,500

$
25,243

$
1,459,682

$
7,641,425

$
(984,751)

$
6,656,674

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

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

INTRODUCTION

The following discussion of Oriental’s financial condition and results of operations should be read in conjunction with the “Selected Financial Data” and Oriental’s consolidated financial statements and related notes. This discussion and analysis contains forward-looking statements. Please see “Forward-Looking Statements”, “Risk Factors”, and "Quantitative and Qualitative Disclosures about Market Risk" in this Quarterly Report on Form 10-Q for the ~~risk factors~~quarter ended March 31, 2020 and set forth in our Form 10-K for the year ended December 31, ~~2018~~2019 (the ~~“2018~~“2019 Form 10-K”), for discussion of the uncertainties, risks and assumptions associated with these statements.

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

Oriental is a publicly-owned financial holding company that provides a full range of banking and financial services through its subsidiaries, including commercial, consumer, auto and mortgage lending; checking and savings accounts; financial planning, insurance and securities brokerage services; and corporate and individual trust and retirement services. Oriental operates through three major business segments: Banking, Wealth Management, and Treasury, and distinguishes itself based on quality service. Oriental has 39 branches in Puerto Rico, ~~and~~ a subsidiary in Boca Raton, Florida, and a non-bank operating subsidiary in Cornelius, North Carolina. Oriental’s long-term goal is to strengthen its banking and financial services franchise by expanding its lending businesses, increasing the level of integration in the marketing and delivery of banking and financial services, maintaining effective asset-liability management, growing non-interest revenue from banking and financial services, and improving operating efficiencies.

Oriental’s diversified mix of businesses and products generates both the interest income traditionally associated with a banking institution and non-interest income traditionally associated with a financial services institution (generated by such businesses as securities brokerage, fiduciary services, investment banking, insurance agency, and retirement plan administration). Although all of these businesses, to varying degrees, are affected by interest rate and financial market fluctuations and other external factors, Oriental’s commitment is to continue producing a balanced and growing revenue stream.

RECENT DEVELOPMENTS

COVID-19 Pandemic 2020

In the first quarter of 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The COVID-19 pandemic has resulted in authorities implementing numerous measures attempting to contain the spread and impact of COVID-19, such as travel bans and restrictions, quarantines, shelter-in-place orders and limitations on business activity, including closures. These measures are, among other things, severely restricting global economic activity, which is disrupting global supply chains, lowering asset valuations, significantly increasing unemployment and underemployment levels, decreasing liquidity in markets for certain securities and causing significant volatility and disruptions in financial markets. These measures have also negatively impacted, and could continue to negatively impact businesses, market participants, our clients, and the P.R., U.S. and global economy for a prolonged period of time. To address the economic impact in the U.S., in March and April 2020, the President signed into law four economic stimulus packages to provide relief to businesses and individuals, including the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Among other measures, the CARES Act created funding for the Small Business Administration (SBA) Paycheck Protection Program (PPP), which provides loans to small businesses to keep their employees on payroll and make other eligible payments. The original funding for the PPP was fully allocated by mid-April 2020, with additional funding made available on April 24, 2020 under the Paycheck Protection Program and Health Care Enhancement Act. On April 9, 2020, the Board of Governors of the Federal Reserve System (Federal Reserve) provided additional funding sources for small and mid-sized businesses as well as for state and local governments as they work through cash flow stresses caused by the COVID-19 pandemic. Additionally, the Federal Reserve has taken other steps to provide fiscal and monetary stimuli, including reducing the federal funds rate and the interest rate on the Federal Reserve’s discount window, and implementing programs to promote liquidity in certain securities markets. The Federal Reserve, along with other U.S. banking regulators, has also issued interagency guidance to financial institutions that are working with borrowers affected by COVID-19. On March 15, 2020, the Governor of the Commonwealth of Puerto Rico ordered all individuals living in the Puerto Rico to stay within their residence to prevent the spread of the novel coronavirus and many businesses have suspended or reduced business activities. The Puerto Rico "stay at home" directive excludes essential businesses, including banks, and Oriental remains open and fully operational as described below. These "stay at home" directives have, however, significantly reduced

economic activity in the United States and in Puerto Rico. In recent weeks, Puerto Rico-based initial claims for unemployment have risen considerably since March of 2020.
In response to the pandemic, Oriental has implemented protocols and processes to help protect our employees and clients. These measures include:
Enhancing workplace safety by providing protective gear, increased sanitation and enforcing social distancing.
Operating our businesses from remote locations, leveraging our business continuity plans and capabilities that include having over 50% of employees work from home, and other employees operating using pre-planned contingency strategies for critical site-based operations. These capabilities have allowed us to continue to service our clients. We will continue to manage the increased operational risk related to the execution of our business continuity plans in accordance with our Risk Framework and Operational Risk Management Program.
Expanding health insurance and benefits for employees, including coverage of the COVID-19 tests and related telemedicine, opening insurance networks of laboratories, pharmacies and doctors to ease employee access, and providing a safety kits to all employees for personal or family use.
Providing uninterrupted and excellent levels of service, achieved through all channels, phone, digital, branch appointments, ATMs, interactive ATMs, and drive-thru tellers, while maintaining employee and customer safety and social distancing. First bank to establish consumer and business relief programs accessible online to clients affected by COVID-19 and the only bank in Puerto Rico and USVI facilitating scheduling appointments at most branches through its webpage.
Offering assistance to our commercial, consumer and small business clients affected by the COVID-19 pandemic, which includes payment deferrals, waive of certain fees, doubled amount that can be withdrawn or transferred via online banking and mobile check deposit, elimination of adverse credit reports, participation in the CARES Act and Federal Reserve lending programs for businesses, including the SBA PPP, and continuing to provide access to the important financial services on which our clients rely.
In connection with reviewing our financial condition in light of the pandemic, we evaluated our assets, including goodwill and other intangibles, for potential impairment. Based upon our review as of March 31, 2020, no impairments have been recorded and there have been no significant changes in fair value hierarchy classifications. We have also elected to delay for two years the phase-in of the capital impact from our adoption of the new accounting standard on credit losses. For more information, see Regulatory Capital section in the MD&A. Oriental has implemented various consumer and commercial loan modification programs to provide its borrowers relief from the economic impacts of COVID-19. Based on guidance in the CARES Act that the Company adopted, COVID-19 related modifications to consumer and commercial loans that were current as of December 31, 2019 are exempt from troubled debt restructuring (TDR) classification under accounting principles generally accepted in the United States of America (GAAP). In addition, the bank regulatory agencies issued interagency guidance stating that COVID-19 related short-term modifications (i.e., six months or less) granted to consumer or commercial loans that were current as of the loan modification program implementation date are not TDRs. Under these terms, as of March 31, 2020, Oriental had processed payment deferrals for 2,226 loans with an aggregate loan balance of $132.7 million. Through April 27, 2020, the number of deferrals increased to 30,226 with an aggregate loan balance of $925 million, with substantially all considered performing at the time of deferral. These deferrals were generally no more than 120 days in duration.
Additionally, Oriental is a lender for the Small Business Administration's (“SBA”) Paycheck Protection Program ("PPP"), a program under the CARES Act, and other SBA, Federal Reserve or United States Treasury programs that have been created in response to the pandemic and may be a lender for programs created in the future. These programs are new and their effects on the Company’s business are uncertain. Through April 27, 2020, the Company had approved more than 900 PPP loans in excess of $140 million under the round one allocation approved by Congress, impacting more than 25,000 employees.
Given the unprecedented uncertainty and rapidly evolving economic effects and social impacts of the COVID-19 pandemic, the future direct and indirect impact on our business, results of operations and financial condition are highly uncertain. Should current economic conditions persist or continue to deteriorate, we expect that this macroeconomic environment will have a continued adverse effect on our business and results of operations, which could include, but not be limited to: decreased demand for our products and services, protracted periods of lower interest rates, lower asset management fees, lower sales and trading revenue due to decreased market liquidity resulting from heightened volatility, increased noninterest expenses, including operational losses, and increased credit losses due to deterioration in the financial condition of our consumer and commercial borrowers, including declining asset and collateral values, which may continue to increase our provision for credit losses and net charge-offs. Our provision for credit losses and net charge-offs could also be impacted by continued volatility in the hotels and restaurants, hospitals and retail shopping centers markets.
78

For more information on how the risks related to COVID-19 may adversely affect our business, results of operations and financial condition, see Part II, Item 1A. Risk Factors.

CRITICAL ACCOUNTING ~~POLICIES~~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 ~~2018~~2019 Form 10-K.

In the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” section of our ~~2018~~2019 Form 10-K, we identified several accounting policies as critical, including the following, because they require significant judgments and assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition:

·~~Interest on loans~~Business Combinations

Allowance for Loan and ~~allowance for loan and lease losses~~Lease Losses

·Acquisition Accounting for ~~purchased credit-impaired loans~~Loans

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary based on changing ~~conditions. Management has reviewed~~conditions and ~~approved these~~update them as necessary, based on changing conditions.

Allowance for Credit Losses

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

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

We have a governance framework intended to ensure that our estimate of the ~~Board~~allowance for credit losses is appropriate. Our governance framework provides for oversight of ~~Directors. As part~~methods, models, qualitative adjustments, process controls and results. At least quarterly, representatives from the Finance and Risk Management review and assess our allowance methodologies, key assumptions and the appropriateness of ~~Oriental’s continuous enhancement~~the allowance for credit losses.

In addition to the allowance for ~~loan~~credit losses, on a quarterly basis, we review and ~~lease~~assess our estimate of expected losses ~~methodology, during the quarter ended September 30, 2019, an assessment of environmental~~related to unfunded lending commitments that are not unconditionally cancellable. The factors was performed for auto, mortgage, consumer and commercial portfolios. As a result, the impact of each environmental factor was calibrated based on their correlation with each portfolio. Current environmental factors adjustments reflectimpacting our assessment ~~of the impact to~~generally align with those considered in our ~~portfolio, taking into consideration current evolution~~evaluation of ~~the portfolio, recent economic developments, changes in values of collateral and delinquencies, among others. These changes in~~ the allowance for ~~loan and lease losses’ environmental factors adjustments~~credit losses for the ~~auto, mortgage, consumer~~funded exposure and ~~commercial portfolios~~ are ~~considered~~reported as reserves for unfunded lending commitment. Changes to the reserve for losses on unfunded commitments are recorded through the provision for credit losses in the consolidated statements of income and to other liabilities on the consolidated balance sheets.

Although we examine a ~~change~~variety of externally available data, as well as our internal loan performance data, to determine our allowance for credit losses and reserve for unfunded lending commitments, our estimation process is subject to risks and uncertainties, including a reliance on historical loss and trend information that may not be representative of current conditions and indicative of future performance as well as economic forecasts that may not align with actual future economic conditions. Accordingly, our actual credit

loss experience may not be in line with our expectations. We provide additional information on the methodologies and key assumptions used in determining our allowance for credit losses for each of our loan portfolio segments in “Note 1—Summary of Significant Accounting Policies” and changes in our allowance in “Note 6—Allowance for Credit Losses”.

Acquisition Accounting for Loans

Oriental has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. CECL replaces the concept of purchased credit impaired loans with the concept of purchased financial assets with credit deterioration (PCD). PCD accounting is called ‘gross-up accounting’ because, at acquisition, an entity grosses up the amortized cost basis of the PCD asset for the initial estimate of credit losses. PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as ~~per~~other loans held for investment. These loans are not classified as nonperforming even though the customer may be contractually past due because we expect that we will fully collect the carrying value of these loans because the loan pool remains accruing.

Upon adoption of CECL, Oriental elected to maintain pools of loans that were previously accounted for under ASC ~~250-10 provisions, where adjustments should~~310-30 and will continue to account for these pools as a unit of account. Upon adoption of CECL, the allowance for credit losses was determined for each pool and added to the pool’s carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the pool and the new amortized cost basis is the non-credit premium or discount which will be ~~made prospectively.~~ amortized interest income over the remaining life of the pool. Changes to the allowance for credit losses after adoption are recorded through provision expense.

Apart from these changes, there have been no other material changes in the methods used to formulate these critical accounting estimates from those discussed in our ~~2018~~2019 Form 10-K.

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~SELECTED FINANCIAL DATA~~

Quarter Ended September 30,

Nine-Month Period Ended September 30,

Variance

Variance

2019

2018

%

2019

2018

%
EARNINGS DATA:
(In thousands, except per share data)
Interest income
$
93,655

$
94,137

-0.5%

$
282,620

$
265,313

6.5%
Interest expense

12,945

11,860

9.1%

39,036

31,454

24.1%
    Net interest income

80,710

82,277

-1.9%

243,584

233,859

4.2%
Provision for loan and lease losses, net

43,770

14,601

199.8%

73,724

44,808

64.5%
        Net interest income after provision for loan
            and lease losses

36,940

67,676

-45.4%

169,860

189,051

-10.2%
Non-interest income

22,178

18,620

19.1%

62,782

55,837

12.4%
Non-interest expenses

50,727

50,941

-0.4%

154,331

155,362

-0.7%
    Income before taxes

8,391

35,355

-76.3%

78,311

89,526

-12.5%
Income tax expense

1,008

12,255

-91.8%

23,479

29,860

-21.4%
    Net income

7,383

23,100

-68.0%

54,832

59,666

-8.1%
Less: dividends on preferred stock

(1,628)

(3,466)

53.0%

(4,884)

(10,396)

53.0%
    Income available to common shareholders
$
5,755

$
19,634

-70.7%

$
49,948

$
49,270

1.4%
PER SHARE DATA:

Basic
$
0.11

$
0.45

-75.6%

$
0.97

$
1.12

-13.4%
Diluted
$
0.11

$
0.42

-73.8%

$
0.97

$
1.07

-9.3%
Average common shares outstanding

51,345

43,996

16.7%

51,327

43,975

16.7%
Average common shares outstanding and equivalents

51,772

51,464

0.6%

51,695

51,344

0.7%
Cash dividends declared per common share
$
0.07

$
0.06

16.6%

$
0.21

$
0.18

16.6%
Cash dividends declared on common shares
$
3,596

$
2,641

36.2%

$
10,782

$
7,919

36.2%
PERFORMANCE RATIOS:

Return on average assets (ROA)

0.46%

1.42%

-67.6%

1.12%

1.25%

-10.4%
Return on average tangible common equity

2.58%

10.94%

-76.4%

7.67%

9.30%

-17.5%
Return on average common equity (ROE)

2.35%

9.72%

-75.8%

6.96%

8.25%

-15.6%
Efficiency ratio

51.11%

50.58%

1.0%

51.83%

53.77%

-3.6%
Interest rate spread

5.23%

5.29%

-1.1%

5.26%

5.20%

1.2%
Interest rate margin

5.35%

5.38%

-0.5%

5.38%

5.28%

1.9%

9580

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

SELECTED FINANCIAL DATA - (Continued)

September 30,

December 31,

Variance

2019

2018

%
PERIOD END BALANCES AND CAPITAL RATIOS:
(In thousands, except per share data)
Investments and loans

    Investment securities
$
529,718

$
1,279,604

-58.6%
    Loans and leases, net

4,407,190

4,431,594

-0.6%
        Total investments and loans
$
4,936,908

$
5,711,198

-13.6%
Deposits and borrowings

    Deposits
$
4,878,058

$
4,908,115

-0.6%
    Securities sold under agreements to repurchase

190,261

455,508

-58.2%
    Other borrowings

115,686

114,917

0.7%
        Total deposits and borrowings
$
5,184,005

$
5,478,540

-5.4%
Stockholders’ equity

    Preferred stock
$
92,000

$
92,000

0.0%
    Common stock

59,885

59,885

0.0%
    Additional paid-in capital

620,948

619,381

0.3%
    Legal surplus

95,783

90,167

6.2%
    Retained earnings

285,854

253,040

13.0%
    Treasury stock, at cost

(102,936)

(103,633)

0.7%
    Accumulated other comprehensive (loss)

(2,458)

(10,963)

-77.6%
        Total stockholders' equity
$
1,049,076

$
999,877

4.9%
Per share data

    Book value per common share
$
18.84

$
17.90

5.2%
    Tangible book value per common share
$
17.11

$
16.15

6.0%
    Market price at end of period
$
21.90

$
16.46

33.0%
Capital ratios

    Leverage capital

15.41%

14.22%

8.4%
    Common equity Tier 1 capital ratio

17.98%

16.78%

7.2%
    Tier 1 risk-based capital

20.43%

19.20%

6.4%
    Total risk-based capital

21.71%

20.48%

6.0%
Equity to assets ratio

16.56%

15.19%

9.0%
Financial assets managed

    Trust assets managed
$
2,980,319

$
2,771,462

7.5%
    Broker-dealer assets
$
2,349,369

$
2,116,035

11.0%

SELECTED FINANCIAL DATA

	Quarter Ended March 31,
					Variance
	2020		2019		%
EARNINGS DATA:	(In thousands, except per share data)
Interest income	$	123,764	$	94,710	30.7%
Interest expense		18,596		12,921	43.9%
Net interest income		105,168		81,789	28.6%
Provision for loan and lease losses, net		47,131		12,249	284.8%
Net interest income after provision for loan and lease losses		58,037		69,540	-16.5%
Non-interest income		31,383		17,656	77.7%
Non-interest expenses		87,322		52,152	67.4%
Income before taxes		2,098		35,044	-94.0%
Income tax expense		297		11,574	-97.4%
Net income		1,801		23,470	-92.3%
Less: dividends on preferred stock		(1,628)		(1,628)	0.0%
Income available to common shareholders	$	173	$	21,842	-99.2%
PER SHARE DATA:
Basic	$	-	$	0.43	-100.0%
Diluted	$	-	$	0.42	-100.0%
Average common shares outstanding		51,404		51,305	0.2%
Average common shares outstanding and equivalents		51,713		51,626	0.2%
Cash dividends declared per common share	$	0.07	$	0.07	0.3%
Cash dividends declared on common shares	$	3,602	$	3,591	0.3%
PERFORMANCE RATIOS:
Return on average assets (ROA)		0.08%		1.42%	-94.4%
Return on average tangible common equity		0.08%		10.32%	-99.2%
Return on average common equity (ROE)		0.07%		9.34%	-99.3%
Efficiency ratio		66.49%		52.50%	26.6%
Interest rate spread		4.89%		5.26%	-7.0%
Interest rate margin		4.94%		5.37%	-7.9%

9681

SELECTED FINANCIAL DATA - (Continued)

	March 31,		December 31,		Variance
	2020		2019		%
PERIOD END BALANCES AND CAPITAL RATIOS:	(In thousands, except per share data)
Cash, cash equivalents and restricted cash	$	1,325,941	$	852,757	55.5%
Investments and loans
Investment securities	$	668,763	$	1,087,814	-38.5%
Loans and leases, net		6,541,174		6,641,847	-1.5%
Total investments and loans	$	7,209,937	$	7,729,661	-6.7%
Deposits and borrowings
Deposits	$	7,819,271	$	7,698,610	1.6%
Securities sold under agreements to repurchase		50,103		190,274	-73.7%
Other borrowings		113,684		115,287	-1.4%
Total deposits and borrowings	$	7,983,058	$	8,004,171	-0.3%
Stockholders’ equity
Preferred stock	$	92,000	$	92,000	0.0%
Common stock		59,885		59,885	0.0%
Additional paid-in capital		621,206		621,515	0.0%
Legal surplus		95,945		95,779	0.2%
Retained earnings		250,557		279,646	-10.4%
Treasury stock, at cost		(103,289)		(102,339)	-0.9%
Accumulated other comprehensive (loss)		6,290		(1,008)	-724.0%
Total stockholders' equity	$	1,022,594	$	1,045,478	-2.2%
Per share data
Book value per common share	$	18.33	$	18.75	-2.3%
Tangible book value per common share	$	15.60	$	15.96	-2.3%
Market price at end of period	$	11.18	$	23.61	-52.6%
Capital ratios
Leverage capital		10.14%		9.24%	9.7%
Common equity Tier 1 capital ratio		11.69%		10.91%	7.1%
Tier 1 risk-based capital		13.36%		12.64%	5.7%
Total risk-based capital		14.62%		13.91%	5.1%
Equity-to-assets ratio		11.07%		11.24%	-1.5%
Financial assets managed
Trust assets managed	$	2,812,054	$	3,136,884	-10.4%
Broker-dealer assets	$	2,058,713	$	2,375,871	-13.3%

FINANCIAL HIGHLIGHTS

~~Oriental’s core operations continued~~Our first quarter performance confirms the strength of our business, balance sheet and franchise during this critical time. This is the direct result of the proactive and customer focused culture we have developed through the years, our ongoing technology investments, and the effective strategies we have put to ~~deliver excellent results during~~work.

We believe we are in a strong position going forward. In addition to closing the ~~third~~Scotiabank acquisition last year, we significantly reduced higher-cost non-core funding and sold a large portion of non-performing loans. During the first quarter, we increased our allowance for loan losses by $114 million, to a total of $231 million, equal to 3.41% of loans.

First quarter of ~~2019. We took advantage of market conditions and sold MBS and fully charged off loans at a profit and decided~~2020:

•Strong increase in core net revenues due to ~~sell a good portion of our remaining non-performing loans. This further strengthens our liquidity and balance sheet to continue our growth strategy and prefunds our $560 million~~the December 31, 2019 acquisition of ~~Scotiabank’s~~the Puerto Rico and U.S. Virgin Islands operations ~~in PR~~of The Bank of Nova Scotia (Scotiabank), and ~~USVI.~~

~~Our strategies are proving highly effective in capturing the positive economic shift taking place~~a major reserve build reflecting CECL as well as anticipated changes in Puerto ~~Rico. Our small business, auto~~Rico and ~~consumer loan production, core deposit growth, improved~~USVI macroeconomic scenarios due to the effect of the COVID-19.

•Core net revenues of $131.3 million, CECL “Day 1” allowance of $89.9 million, provision for credit ~~quality~~losses of $48.5 million, $4.7 million gain on sale of investment securities, and capital, and number of net new clients confirm the success of our customer focused approach to banking – Fácil, Rápido, Hecho (Easy, Fast, Done). As a result, we generated a 14% year over year increase in adjusted$0.00 earnings per share. With our NPL sales, we reduced 3Q19 non-performing loans 40% year over year, to 2% of originated loans, which will enable us to free up resources, reduce NPL related expenses, and increase operating flexibility. Combined with the sale of MBS, we have close to $1 billion in cash to fund our growth plans, including our acquisition of Scotiabank’s PR and USVI operations. The MBS sales also enabled us to reduce high cost brokered CDs and borrowings.

Looking ahead, Oriental will further consolidate its position as the premier retail bank on the island. Upon closing the Scotiabank Transaction, we become the second largest bank in Puerto Rico in core deposits, branches, automated and interactive teller machines, mortgage servicing, and insurance brokerage, and the third largest bankThis compares in the ~~U.S. Virgin Islands.~~

~~Comparison~~year-ago quarter to net core revenues of ~~the quarters ended September 30, 2019 versus 2018~~

·~~Net income available to shareholders~~$99.3 million, provision of ~~$5.8~~$12.2 million, ~~or $0.11~~no gain, and $0.42 earnings per share fully ~~diluted, reflects the impact~~diluted.

•All March 31, 2020 regulatory capital ratios increased from December 31, 2019 and continue to be significantly above requirements for a well-capitalized institution. CET1 capital ratio of ~~several strategic transactions, compared to $19.6~~11.69%. More than $1.6 billion available liquidity from cash and unencumbered securities.

•Our core operations performed well in what became a challenging and unique operating environment. Net interest margin was 4.94%, loan production totaled $280 million, ~~or $0.43 per share fully diluted. Book value per common share grew 3.1% to $18.84. Tangible Book Value per common share expanded 5.4% to $17.11.~~

·~~Third quarter of 2019 included $40.5 million pre-tax from items that negatively affected results, primarily~~and there was a large reduction in wholesale funding due to the ~~decision~~significant increase in client deposits from the acquisition.

•Following the implementation of local stay-at-home restrictions mid-March, Oriental has achieved uninterrupted and excellent levels of service through all channels while maintaining employee and customer safety and social distancing.

•Years of investments in first to ~~sell mostly non-performing loans, partially offset~~market customer-facing technology, some with unique features, is resulting in noticeable increases by ~~$13.0 million pre-tax from items that benefited results, such as the sale of available-for-sale mortgage-backed securities (MBS)~~retail and ~~of fully charged-off loans, and the adjustment to the qualitative factors of the allowance for loan and lease losses.~~

·~~Excluding the above items, the third quarter of 2019 adjusted net income available to shareholders was $26.5 million, or $0.48 per share fully diluted.~~

·Loans at September 30, 2019 increased 1.2% to $4.41 billion. Average core deposits rose 3.4% to $4.56 billion, while non-core funding was reduced 41.7% by quarter end. New loan origination of $291.4 million reflected Oriental Bank’s success in targeting small business customers ~~and our growing consumer banking business. Net Interest Margin remained strong at 5.35%, total delinquency rate improved, and capital metrics continued~~who want to ~~climb to new multi-year highs.~~get things done fácil, rápido, hecho.

Oriental prepared its consolidated financial statement using accounting principles generally accepted in the U.S. (“U.S. GAAP” or the ‘reported basis”). In addition to analyzing Oriental’s results on the reported basis, management monitors the “Adjusted net income” of Oriental and excludes the impact of certain transactions on the results of its operations. Management believes that “Adjusted net income” provides meaningful information to investors about the underlying performance of Oriental’s ongoing operations. “Adjusted net income” is a non-GAAP financial measure.

~~The table below describes adjustments to net income for the quarters ended September 30, 2019 and June 30, 2019.~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Quarter ended September 30, 2019

Quarter ended June 30, 2019

Income Tax

Impact on

Income Tax

Impact on
(Dollars in thousands) (unaudited)
Pre-tax

Effect (i)

Net Income

Pre-tax

Effect (i)

Net Income

U.S. GAAP net income

$
7,383

$
23,979
Non-GAAP adjustments:

     Sale of mortgage-backed securities available-for-sale (a)
$
(3,498)

$
1,067

(2,431)

$
(4,769)

$
1,532

(3,237)
    Non-performing loans transferred to held-for-sale or sold (b)(c)

38,958

(11,886)

27,072

8,803

(2,828)

5,975
     Sale of fully charged-off loans (d)

(2,382)

727

(1,655)

-

-

-
    Merger expenses (e)

1,556

(475)

1,081

1,000

(321)

679
     FDIC insurance assessment credit (f)

(1,534)

468

(1,066)

-

-

-
    Hacienda credit for hurricane Maria (g)

(1,010)

308

(702)

-

-

-
     Environmental factors adjustment (h)

(4,541)

1,385

(3,156)

-

-

-
Adjusted net income (Non-GAAP)

$
26,527

$
27,396
Less: dividends on preferred stoc

(1,628)

(1,628)
Adjusted net income available to common shareholders (Non-GAAP)

$
24,899

$
25,768

U.S. GAAP earnings per common share - diluted

$
0.11

$
0.43
   Non-GAAP adjustments:

    Sale of mortgage-backed securities available-for-sale
$
(0.07)

$
0.02

(0.05)

$
(0.09)

$
0.03

(0.06)
     Non-performing loans transferred to held-for-sale or sold (b)(c)

0.75

(0.23)

0.52

0.17

(0.05)

0.12
    Sale of fully charged-off loans (d)

(0.04)

0.01

(0.03)

-

-

-
     Merger expenses (e)

0.03

(0.01)

0.02

0.02

(0.01)

0.01
    FDIC insurance assessment credit (f)

(0.03)

0.01

(0.02)

-

-

-
     Hacienda credit for hurricane Maria (g)

(0.02)

0.01

(0.01)

-

-

-
    Environmental factors adjustment (h)

(0.09)

0.03

(0.06)

-

-

-
Adjusted earnings per common share - diluted (Non-GAAP)

$
0.48

$
0.50

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Adjusted Performance Metrics - Reconciliation to GAAP Financial Measures:

Quarter ended September 30, 2019

Quarter ended June 30, 2019
Net income

$
7,383

$
23,979
Non-GAAP adjustments (a)(b)(c)(d)(e)(f)(g)(h)

19,144

3,417
Adjusted net income (Non-GAAP)

26,527

27,396

Average assets

6,433,658

6,496,423

Return on average assets

0.46%

1.48%
Adjusted return on average assets (Non-GAAP)

1.65%

1.69%

Net income available to common shareholders

$
5,755

$
22,351
Non-GAAP adjustments (a)(b)(c)(d)(e)(f)(g)(h)

19,144

3,417
Adjusted net income available to common shareholders (Non-GAAP)

24,899

25,768

Average tangible common equity

890,970

866,192

Return on average tangible common stockholders' equity

2.58%

10.32%
Adjusted return on average tangible common stockholders' equity (Non-GAAP)

11.18%

11.90%

Total non-interest expense

$
50,727

$
51,452
Non-GAAP adjustments, pre-tax (e)(f)(g)

988

(1,000)
Adjusted total non-interest expense (Non-GAAP)

51,715

50,452

Net interest income

80,710

81,085
Total banking and financial service revenues

18,542

18,074

99,252

99,159

Efficiency ratio

51.11%

51.89%
Adjusted efficiency ratio (Non-GAAP)

52.10%

50.88%

(a) During the second and third quarter of 2019, the Company sold $350 million and $322 million available-for-sale mortgage-backed securities, respectively, and recognized a gain in the sale of $4.8 million and $3.5 million, respectively.
(b) During third quarter of 2019, the Company decided to sell mostly non-performing loans, which are expected to be sold during fourth quarter of 2019, increasing the provision by $37.4 million. Originated loans that were transferred to held-for-sale amounted to $25.3 million at September 30, 2019, the remaining were purchased credit impaired loans.
(c) During second quarter of 2019, the Company decided to sell mostly non-performing mortgage loans increasing the provision by $8.8 million. Most of these loans were sold in third quarter of 2019, increasing the provision by an additional $2.3 million.
(d) During third quarter of 2019, the Company received $2.4 million proceeds from the sale of fully charged-off originated auto and consumer loans.
(e) During second quarter of 2019, the Company entered into an agreement with BNS to acquire its Puerto Rico and US Virgin Islands operations, subject to customary closing conditions. During second quarter of 2019 and third quarter of 2019, $1.0 million and $1.6 million, respectively, were incurred in related expenses.
(f) During third quarter of 2019, the Company recognized an FDIC insurance assessment credit received amounting to $1.5 million.
(g) During third quarter of 2019, the Company received an additional $1 million credit from the Puerto Rico Treasury on employee retention during hurricane Maria.
(h) During third quarter of 2019, the Company had a reduction in provision for loan losses of $4.5 million as a result of the adjustment to the qualitative factor related to sustained favorable macroeconomic conditions in Puerto Rico.
(i) Income tax effect reflects estimated income tax annual rates at September 30, 2019 and June 30, 2019 of 30.51% and 32.12%, respectively.

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~Excluding the aforementioned impact (Non-GAAP):~~

·~~The following resulted in a net $32.0 million increase in the provision for loan losses:~~

•Increase of $39.0 million primarily from deciding to sell $95.0 million unpaid principal balance in non-performing commercial and mortgage loans, both acquired and originated. These are expected to be sold in the fourth quarter of 2019.

•~~Decrease of $2.4 million from the proceeds of the sale of $26.0 million of previously charged off auto and consumer loans.~~

•~~Decrease of $4.5 million from the adjustment to qualitative factors of the allowance for loan and lease losses, reflecting sustained favorable macroeconomic conditions in Puerto Rico.~~

·The sale of $322.0 million of low-yielding MBS available-for-sale investments resulted in a $3.5 million pre-tax gain in other income, and the continued reduction of higher cost brokered CDs and repurchase agreements funding.

·The following resulted in a net $1.0 million reduction in non-interest expenses: $1.5 million credit for FDIC insurance assessment, $1.0 million credit from Hacienda on employee retention during hurricane Maria, and $1.6 million in Scotiabank acquisition related expenses.

ANALYSIS OF RESULTS OF OPERATIONS

The following tables show major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for the quarters ended March 31, 2020 and ~~nine-month periods ended September 30, 2019 and 2018:~~2019:

~~100~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED SEPTEMBER 30, 2019 AND 2018


Interest

Average rate

Average balance

September

September

September

September

September

September

2019

2018

2019
2018

2019

2018

(Dollars in thousands)
A - TAX EQUIVALENT SPREAD

Interest-earning assets
$
93,655

$
94,137

6.21%

6.17%

$
5,981,757

$
6,055,085
Tax equivalent adjustment

2,629

1,934

0.17%

0.13%

-

-
Interest-earning assets - tax equivalent

96,284

96,071

6.38%

6.30%

5,981,757

6,055,085
Interest-bearing liabilities

12,945

11,860

0.98%

0.87%

5,261,453

5,437,736
Tax equivalent net interest income / spread

83,339

84,211

5.40%

5.43%

720,304

617,349
Tax equivalent interest rate margin

5.58%

5.56%

B - NORMAL SPREAD

Interest-earning assets:

Investments:

Investment securities

3,797

8,445

2.14%

2.55%

708,606

1,327,180
Interest bearing cash and money market investments

4,086

1,676

2.21%

2.03%

734,105

327,268
        Total investments

7,883

10,121

2.14%

2.55%

1,442,711

1,654,448
Non-acquired loans

Mortgage

8,427

8,808

5.40%

5.28%

623,772

667,372
Commercial

25,607

23,373

6.36%

6.13%

1,597,902

1,512,661
Consumer

11,449

10,857

11.99%

11.68%

378,967

363,884
Auto and leasing

28,820

25,349

9.09%

9.59%

1,258,394

1,057,232
        Total non-acquired loans

74,303

68,387

7.64%

7.53%

3,859,035

3,601,149
Acquired loans:

Acquired BBVAPR

Mortgage

5,876

6,722

5.33%

5.43%

440,954

495,454
Commercial

2,386

4,046

6.72%

9.29%

140,821

172,724
Consumer

667

586

20.52%

17.37%

12,894

13,381
Auto

161

790

20.55%

11.72%

3,108

26,747
        Total acquired BBVAPR loans

9,090

12,144

6.08%

6.86%

597,777

708,306
Acquired Eurobank

2,379

3,485

11.57%

15.29%

82,234

91,182
            Total loans

85,772

84,016

7.50%

7.57%

4,539,046

4,400,637
                Total interest-earning assets

93,655

94,137

6.21%

6.17%

5,981,757

6,055,085

TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED MARCH 31, 2020 AND 2019

	Interest				Average rate		Average balance
	March		March		March	March	March		March
	2020		2019		2020	2019	2020		2019
	(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets	$	123,764	$	94,710	5.82%	6.24%	$	8,556,533	$	6,152,202
Tax equivalent adjustment		3,080		2,338	0.14%	0.15%		-		-
Interest-earning assets - tax equivalent		126,844		97,048	5.96%	6.39%		8,556,533		6,152,202
Interest-bearing liabilities		18,596		12,922	0.93%	0.96%		8,024,244		5,452,780
Tax equivalent net interest income / spread		108,248		84,126	5.03%	5.43%		532,289		699,422
Tax equivalent interest rate margin					5.17%	5.58%
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities		4,474		8,223	1.91%	2.61%		924,965		1,258,899
Interest bearing cash and money market investments		2,788		2,368	1.19%	2.47%		943,581		388,578
Total investments		7,262		10,591	1.91%	2.61%		1,868,546		1,647,477
Non-PCD/Non-PCI loans
Mortgage		11,239		8,887	5.47%	5.55%		826,435		649,408
Commercial		29,759		25,152	6.50%	6.43%		1,841,715		1,585,352
Consumer		14,878		11,429	12.09%	12.12%		494,908		382,397
Auto		31,329		26,557	8.45%	9.24%		1,491,255		1,165,023
Total Non-PCD/Non-PCI loans		87,205		72,025	7.54%	7.72%		4,654,313		3,782,180

PCD/PCI loans
Mortgage		23,020		7,702	5.83%	5.87%		1,589,057		525,169
Commercial		5,244		3,820	5.33%	8.03%		395,396		190,207
Consumer		127		344	13.03%	170.30%		3,919		808
Auto		906		228	8.04%	14.34%		45,302		6,361
Total PCD/PCI loans		29,297		12,094	5.79%	6.70%		2,033,674		722,545
Total loans		116,502		84,119	7.01%	7.57%		6,687,987		4,504,725
Total interest-earning assets		123,764		94,710	5.82%	6.24%		8,556,533		6,152,202

~~101~~84

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

	Interest					Average rate		Average balance				Interest					Average rate		Average balance
	September		September			September	September	September		September		March		March			March	March	March		March
	2019		2018			2019	2018	2019		2018		2020		2019			2020	2019	2020		2019
	(Dollars in thousands)											(Dollars in thousands)
Interest-bearing liabilities:
Deposits:
NOW Accounts		1,616		1,196		0.57%	0.43%		1,118,156		1,096,023		2,389		1,454		0.49%	0.53%		1,980,505		1,119,610
Savings and money market		2,012		1,571		0.67%	0.51%		1,199,678		1,211,693		2,440		1,615		0.55%	0.55%		1,797,658		1,181,024
Time deposits		4,427		2,896		1.53%	1.12%		1,151,248		1,027,424		8,131		2,944		1.60%	1.20%		2,039,311		992,331
Total core deposits		8,055		5,663		0.92%	0.67%		3,469,082		3,335,140		12,960		6,013		0.90%	0.74%		5,817,474		3,292,965
Brokered deposits		2,298		2,727		2.55%	2.08%		358,130		519,502		1,586		2,835		2.70%	2.31%		236,008		498,116
		10,353		8,390		1.07%	0.86%		3,827,212		3,854,642		14,546		8,848		0.95%	0.93%		6,053,482		3,791,081
Non-interest bearing deposits		-		-		0.00%	0.00%		1,094,047		1,079,826		-		-		0.00%	0.00%		1,698,964		1,099,547
Core deposit intangible amortization		201		215		0.00%	0.00%		-		-		2,074		201		0.00%	0.00%		-		-
Total deposits		10,554		8,605		0.85%	0.69%		4,921,259		4,934,468		16,620		9,049		0.86%	0.75%		7,752,446		4,890,628
Borrowings:
Securities sold under agreements to repurchase		1,342		2,242		2.37%	2.28%		224,783		390,225		1,002		2,785		2.54%	2.54%		158,462		444,843
Advances from FHLB and other borrowings		550		517		2.75%	2.67%		79,328		76,960		539		563		2.81%	2.81%		77,255		81,226
Subordinated capital notes		499		496		5.49%	5.45%		36,083		36,083		435		524		4.85%	5.88%		36,083		36,083
Total borrowings		2,391		3,255		2.79%	2.57%		340,194		503,268		1,976		3,872		2.92%	2.79%		271,800		562,152
Total interest bearing liabilities		12,945		11,860		0.98%	0.87%		5,261,453		5,437,736		18,596		12,921		0.93%	0.96%		8,024,246		5,452,780
Net interest income / spread	$	80,710	$	82,277		5.23%	5.30%					$	105,168	$	81,789		4.89%	5.28%
Interest rate margin						5.35%	5.39%										4.94%	5.39%
Excess of average interest-earning assets over average interest-bearing liabilities								$	720,304	$	617,350								$	532,287	$	699,422
Average interest-earning assets to average interest-bearing liabilities ratio									113.69%		111.35%									106.63%		112.83%

C - CHANGES IN NET INTEREST INCOME DUE TO:	C - CHANGES IN NET INTEREST INCOME DUE TO:											C - CHANGES IN NET INTEREST INCOME DUE TO:
	Volume		Rate		Total							Volume		Rate		Total
	(In thousands)											(In thousands)
Interest Income:
Investments	$	(1,295)	$	(943)	$	(2,238)						$	1,421	$	(4,750)	$	(3,329)
Loans		2,660		(904)		1,756							38,554		(6,171)		32,383
Total interest income		1,365		(1,847)		(482)							39,975		(10,921)		29,054
Interest Expense:
Deposits		(23)		1,972		1,949							5,295		2,276		7,571
Repurchase agreements		(951)		51		(900)							(1,793)		10		(1,783)
Other borrowings		21		15		36							(37)		(76)		(113)
Total interest expense		(953)		2,038		1,085							3,465		2,210		5,675
Net Interest Income	$	2,318	$	(3,885)	$	(1,567)						$	36,510	$	(13,131)	$	23,379

~~102~~85

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

TABLE 1A - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2019 AND 2018


Interest

Average rate

Average balance

September

September

September

September

September

September

2019

2018

2019
2018

2019

2018

(Dollars in thousands)
A - TAX EQUIVALENT SPREAD

Interest-earning assets
$
282,620

$
265,314

6.24%

6.01%

$
6,055,475

$
5,906,945
Tax equivalent adjustment

8,013

5,800

0.18%

0.13%

-

-
Interest-earning assets - tax equivalent

290,633

271,114

6.42%

6.14%

6,055,475

5,906,945
Interest-bearing liabilities

39,036

31,455

0.98%

0.79%

5,350,683

5,293,422
Tax equivalent net interest income / spread

251,597

239,659

5.44%

5.34%

704,792

613,523
Tax equivalent interest rate margin

5.62%

5.47%

B - NORMAL SPREAD

Interest-earning assets:

Investments:

Investment securities

18,292

24,131

2.44%

2.48%

1,000,217

1,299,357
Interest bearing cash and money market investments

9,357

4,126

2.33%

1.76%

535,865

313,410
        Total investments

27,649

28,257

2.44%

2.48%

1,536,082

1,612,767
Non-acquired loans

Mortgage

26,022

26,602

5.44%

5.25%

637,680

675,191
Commercial

76,383

62,119

6.43%

5.88%

1,588,887

1,411,413
Consumer

33,392

30,783

11.98%

11.42%

373,644

360,258
Auto and leasing

82,783

70,053

9.18%

9.39%

1,206,054

996,972
        Total non-acquired loans

218,580

189,557

7.68%

7.36%

3,806,265

3,443,834
Acquired loans:

Acquired BBVAPR

Mortgage

18,342

20,710

5.34%

5.46%

458,410

505,659
Commercial

7,539

11,297

6.69%

7.63%

150,776

197,934
Consumer

2,270

2,038

23.53%

19.60%

12,900

13,903
Auto

788

3,263

16.12%

11.30%

6,536

38,624
        Total acquired BBVAPR loans

28,939

37,308

6.14%

6.58%

628,622

756,120
Acquired Eurobank

7,452

10,192

11.76%

14.42%

84,506

94,224
            Total loans

254,971

237,057

7.54%

7.38%

4,519,393

4,294,178
                Total interest-earning assets

282,620

265,314

6.24%

6.01%

6,055,475

5,906,945

~~103~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Interest

Average rate

Average balance

September

September

September

September

September

September

2019

2018

2019

2018

2019

2018

(Dollars in thousands)
Interest-bearing liabilities:

Deposits:

NOW Accounts

4,800

3,064

0.57%

0.38%

1,120,807

1,069,341
Savings and money market

5,508

4,623

0.62%

0.51%

1,187,020

1,216,198
Time deposits

11,024

8,475

1.38%

1.11%

1,070,111

1,021,707
        Total core deposits

21,332

16,162

0.84%

0.65%

3,377,938

3,307,246
Brokered deposits

7,660

6,748

2.42%

1.86%

422,364

485,832

28,992

22,910

1.02%

0.81%

3,800,302

3,793,078
Non-interest bearing deposits

-

-

0.00%

0.00%

1,097,145

1,060,535
Core deposit intangible amortization

602

644

0.00%

0.00%

-

-
            Total deposits

29,594

23,554

0.81%

0.65%

4,897,447

4,853,613
Borrowings:

Securities sold under agreements to repurchase

6,234

5,160

2.47%

2.08%

336,859

332,215
Advances from FHLB and other borrowings

1,671

1,339

2.78%

2.50%

80,294

71,512
Subordinated capital notes

1,537

1,402

5.70%

5.19%

36,083

36,083
        Total borrowings

9,442

7,901

2.79%

2.40%

453,236

439,810
            Total interest-bearing liabilities

39,036

31,455

0.98%

0.79%

5,350,683

5,293,423
Net interest income / spread
$
243,584

$
233,859

5.26%

5.22%

Interest rate margin

5.38%

5.29%

Excess of average interest-earning assets over
    average interest-bearing liabilities

$
704,792

$
613,522
Average interest-earning assets to average
    interest-bearing liabilities ratio

113.17%

$
111.59%

C - CHANGES IN NET INTEREST INCOME DUE TO:

Volume

Rate

Total

(In thousands)

Interest Income:

Investments
$
(1,344)

$
737

$
(607)

Loans

11,639

6,274

17,913

        Total interest income

10,295

7,011

17,306

Interest Expense:

Deposits

213

5,827

6,040

Repurchase agreements

72

1,002

1,074

Other borrowings

224

243

467

        Total interest expense

509

7,072

7,581

Net Interest Income
$
9,786

$
(61)

$
9,725

~~104~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Net Interest Income

Net interest income is a function of the difference between rates earned on Oriental’s interest-earning assets and rates paid on its interest-bearing liabilities (interest rate spread) and the relative amounts of its interest earning assets and interest-bearing liabilities (interest rate margin). Oriental constantly monitors the composition and re-pricing of its assets and liabilities to maintain its net interest income at adequate levels.

Comparison of the quarters ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~

Net interest income of ~~$80.7~~$105.2 million ~~decreased $1.6~~increased $23.4 million from ~~$82.3 million.~~$81.8 million, mainly reflecting the Scotiabank PR & USVI Acquisition. Interest rate spread decreased 739 basis points to ~~5.23%~~4.89% from ~~5.30%~~5.28% and net interest margin decreased 445 basis points to ~~5.35%~~4.94% from 5.39%. These decreases are mainly due to the net effect of ~~an increase~~a decrease of 442 basis points in the average yield of total interest-earning assets and ~~an increase of 11 basis points in average cost of interest-bearing liabilities.~~

~~Net interest income was positively impacted by:~~

~~Increase in interest income from originated loans of $5.9 million, reflecting higher balances in commercial, consumer and auto loan portfolios.~~

Increase in interest income from cash and money markets instruments of $2.4 million reflecting the $322.4 million of available-for-sale mortgage-backed securities sale in the quarter ended September 30, 2019; and

~~Decrease of $864 thousand in the interest expense from borrowings mainly related to the sale of mortgage-backed securities which reduced the necessity of high cost repurchase agreements funding.~~

~~Net interest income was adversely impacted by:~~

·Decrease in interest income from investment securities of $4.6 million, or 41 basis points, due to a decrease in volume and yield of $3.4 million and $1.2 million, respectively, mainly reflecting the sale of $322.4 million of mortgage-backed securities in the quarter ended September 30, 2019;

·~~Decrease in interest income from acquired loans of $4.2 million, reflecting decrease in volume of $2.7 million and yield of $1.5 million as such loans continue to be repaid; and~~

·~~Increase in interest expense from deposits of $2.0 million, mainly from an increase in cost of customer deposits and brokered deposits of $1.9 million and $527 thousand, respectively.~~

~~Comparison of the nine-month period ended September 30, 2019 and 2018~~

Net interest income of $243.6 million increased $9.7 million from $233.9 million. Interest rate spread increased 4 basis points to 5.26% from 5.22% and net interest margin increased 9 basis points to 5.38% from 5.29%. These increases are mainly due to the net effect of an increase of 23 basis points in the average yield of total interest-earning assets and 193 basis points in the total average cost of interest-bearing liabilities.

~~Net~~Total interest income was ~~positively impacted by:~~

~~Increase in interest income from originated loans by $29.0~~$123.8 million, ~~reflecting higher balances in commercial, consumer and auto loan portfolios; and~~

~~Higher interest income from cash and money market of $5.2 million~~up 31%, due to increased interest earning assets partially offset by lower yield. Interest earning assets totaled $8.6 billion, up 39%. Yield was 5.82%, down 42 basis points.
Total interest expense was $18.6 million, up 44%, due to increased balances of lower-cost deposits partially offset by decreased balances of higher-cost borrowings. Cost of deposits was $16.6 million, up 84%, primarily reflecting a 59% increase in ~~price~~balances from the Scotiabank acquisition and ~~volume of $1.6 million and $3.6 million, respectively.~~

~~Net interest income was adversely impacted by:~~

·~~Decrease in the interest income from acquired loans of $11.1 million as such loans continue to be repaid;~~

~~105~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~Increase in interest expense from deposits of $6.0 million, mainly from an increase in customer and brokered deposit costs of $5.2 million and $912 thousand, respectively, and~~a 2 basis point increase in cost, before the deposit intangible amortization from the acquisition. Cost of ~~repurchase agreements~~borrowings was $2.0 million, down 49%, due to a 52% decrease in balances and a 13 basis point increase in cost.
Net Interest Margin declined 45 basis points mainly due to a higher proportion of ~~$1.0 million;~~30-year, fixed rate residential mortgages from the Scotiabank acquisition. The Net Interest Margin decline also reflected the full effect of Federal Reserve Bank’s second half 2019 rate cuts (75 basis points) and

~~Decrease in interest income from investment~~ the partial effect of ~~$5.8 million reflecting mortgage-backed securities sale in~~ the ~~second~~March 2020 rate cuts (150 basis points) on cash and ~~third quarter of 2019.~~

variable rate commercial loans.

TABLE 2 - NON-INTEREST INCOME SUMMARY

	Quarter Ended September 30,					Nine-Month Period Ended September 30,					Quarter Ended March 31,
	2019		2018		Variance	2019		2018		Variance	2020		2019		Variance
	(Dollars in thousands)										(Dollars in thousands)
Banking service revenue	$	10,813	$	10,797	0.1%	$	32,054	$	32,404	-1.1%	$	15,646	$	10,465	49.5%
Wealth management revenue		6,611		6,407	3.2%		19,162		18,688	2.5%		7,286		5,882	23.9%
Mortgage banking activities		1,118		1,242	-10.0%		2,953		3,987	-25.9%		3,234		1,206	168.2%
Total banking and financial service revenue		18,542		18,446	0.5%		54,169		55,079	-1.7%		26,166		17,553	49.1%
Net gain (loss) on:
Sale of securities available for sale		3,498		-	100.0%		8,274		-	100.0%		4,728		-	100.0%
Early extinguishment of debt		-		-	0.0%		(7)		-	-100.0%
Bargain purchase from Scotiabank PR & USVI acquisition												409		-	100.0%
Other non-interest income		138		174	-20.7%		346		758	-54.4%		80		103	-22.3%
Total non-interest income, net	$	22,178	$	18,620	19.1%	$	62,782	$	55,837	12.4%	$	31,383	$	17,656	77.7%

Non-Interest Income

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

Comparison of quarters ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~

Oriental recorded non-interest income, net, in the amount of ~~$22.2~~$31.4 million, compared to ~~$18.6~~$17.7 million, an increase of ~~19.1%~~77.7%, or ~~$3.6~~$13.7 million. The net increase in non-interest income was mainly due ~~to a gain on the sale of $322.4 million mortgage-backed securities during the quarter of $3.5 million.~~to:

~~Comparison of nine-month periods ended September 30, 2019 and 2018~~

~~Oriental recorded non-interest income, net, in the amount of $62.8 million, compared to $55.8 million, an~~An increase of ~~12.4%, or $7.0 million. The increase~~$5.2 million in ~~non-interest income was mainly~~banking service revenues reflecting Scotiabank PR & USVI Acquisition as electronic banking revenues and deposit fees increased $3.4 million and $1.5 million, respectively, due to ~~a gain on~~ the ~~sale~~Company’s larger customer base;

An increase of ~~$672.2~~$1.4 million ~~mortgage-backed securities during~~in wealth management revenue due to higher insurance income by $1.2 million mainly from Scotiabank PR & USVI Acquisition insurance transaction volume,

An increase of $2.0 million in mortgage-banking activities, also reflecting the ~~period of $8.3 million. The increase in non-interest income was~~Scotiabank PR & USVI Acquisition, as servicing revenues increased $3.7 million, partially offset by a decrease of $2.0 million from the quarterly mortgage-servicing rights valuation due to pricing; and

A gain of $4.7 million on the sale of $316.0 million in mortgage ~~banking activities~~backed securities during the first quarter of ~~$1.0 million, mainly reflecting lower mortgage servicing fees.~~2020.

TABLE 3 - NON-INTEREST EXPENSES SUMMARY

	Quarter Ended March 31,
	2020		2019		Variance %

Compensation and employee benefits	$	35,544	$	20,341	74.7%
Occupancy, equipment and infrastructure costs		11,439		7,746	47.7%
Electronic banking charges		9,588		5,065	89.3%
Information technology expenses		6,934		2,507	176.6%
Professional and service fees		5,789		3,208	80.5%
Insurance		3,478		1,146	203.5%
Taxes, other than payroll and income taxes		3,177		2,154	47.5%
Loss on sale of foreclosed real estate, other repossessed assets and credit related expenses		2,522		3,366	-25.1%
Advertising, business promotion, and strategic initiatives		1,629		1,211	34.5%
Loan servicing and clearing expenses		1,343		1,209	11.1%
Communication		971		741	31.0%
Printing, postage, stationery and supplies		722		578	24.9%
Director and investor relations		310		230	34.8%
Merger and restructuring charges		304		-	100.0%
Other		3,572		2,650	34.8%
Total non-interest expenses	$	87,322	$	52,152	67.4%
Relevant ratios and data:
Efficiency ratio		66.49%		52.50%
Compensation and benefits to non-interest expense		41.37%		39.00%
Compensation to average total assets owned		1.52%		1.23%
Average number of employees		2,460		1,394
Average compensation per employee	$	14.45	$	14.59
Average loans per average employee	$	2,719	$	3,245

~~106~~87

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

TABLE 3 - NON-INTEREST EXPENSES SUMMARY


Quarter Ended September 30,

Nine-Month Period Ended September 30,

2019

2018

Variance %

2019

2018

Variance %

(Dollars in thousands)
Compensation and employee benefits
$
20,500

$
18,495

10.8%

$
60,716

$
57,202

6.1%
Occupancy, equipment and infrastructure costs

7,307

8,388

-12.9%

22,564

25,322

-10.9%
Electronic banking charges

5,505

5,586

-1.5%

15,698

15,968

-1.7%
Professional and service fees

3,662

3,077

19.0%

10,297

8,917

15.5%
Loss on sale of foreclosed real estate, other repossessed assets and credit related expenses

2,889

3,946

-26.8%

8,839

9,880

-10.5%
Information technology expenses

2,247

2,056

9.3%

6,953

6,064

14.7%
Taxes, other than payroll and income taxes

2,235

2,175

2.8%

6,530

6,820

-4.3%
Advertising, business promotion, and strategic initiatives

1,333

1,329

0.3%

3,859

3,700

4.3%
Loan servicing and clearing expenses

1,194

1,251

-4.6%

3,562

3,639

-2.1%
Merger and restructuring charges

1,556

-

100.0%

2,556

-

100.0%
Communication

956

927

3.1%

2,556

2,627

-2.7%
Printing, postage, stationery and supplies

672

499

34.7%

1,885

1,748

7.8%
Insurance

(366)

1,620

-122.6%

2,057

4,580

-55.1%
Director and investor relations

374

223

67.7%

934

800

16.8%
Other

663

1,369

-51.6%

5,325

8,095

-34.2%
Total non-interest expenses
$
50,727

$
50,941

-0.4%

$
154,331

$
155,362

-0.7%
Relevant ratios and data:

    Efficiency ratio

51.11%

50.58%

51.83%

53.77%

    Compensation and benefits to
        non-interest expense

40.41%

36.31%

39.34%

36.82%

    Compensation to average total assets owned

1.27%

1.14%

1.24%

1.20%

    Average number of employees

1,436

1,365

1,436

1,365

    Average compensation per employee
$
14.28

$
13.55

$
42.28

$
41.91

    Average loans per average employee
$
3,161

$
3,234

$
3,147

$
3,155

~~107~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Non-Interest Expenses

Comparison of quarters ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~

Non-interest expense was ~~$50.7~~$85.9 million, representing ~~a decrease~~an increase of ~~.0.4%~~64.8%, or $33.8 million, compared to ~~$50.9 million.~~$52.2 million, when compared with the first quarter ended 2019.

The ~~decrease~~increase in non-interest expenses was driven by:

~~Lower insurance expenses~~
Higher compensation and employee benefits by ~~$2.0~~$15.2 million, reflecting higher employees from the Scotiabank PR & USVI Acquisition;
Increase in electronic banking charges of $4.5 million mainly driven by $1.9 million increase in credit card merchant fees, $1.2 million increase in debit cards interchange fees, and $1.0 million increase in debit card billing fees, as level of transactions increased due to a ~~$1.5~~larger customer base;
Increase in information technology expenses by $4.4 million ~~insurance assessment credit~~related to the Scotiabank PR & USVI Acquisition system integrations;
Increase in occupancy and equipment by $3.7 million mainly driven by $2.7 million increase in facilities, including branches, from the ~~savings association insurance fund (SAIF);~~

~~Lower occupancy, equipment~~Scotiabank PR & USVI Acquisition and ~~infrastructure costs by~~to $1.1 million ~~mainly attributed lower rent expenses due to the termination of several lease contracts~~increase in information technology infrastructure; and ~~the closure of branches~~
Increase in ~~2018~~;

~~Lower other non-interest expense~~professional and service fees by ~~$705~~$2.6 million from higher supervisory examination fees by $786 thousand, ~~mainly related to lower claims~~consulting and ~~settlement accruals and lower allowances than prior year quarter; and~~

~~Lower credit related~~advisory expenses by ~~$641~~$502 thousand, ~~mainly attributed to lower foreclosure~~audit fees by $460 thousand and ~~repossession expenses.~~

legal expenses by $349 thousand.

The ~~decreases~~increases in the foregoing non-interest expenses were offset ~~by:~~by lower markdowns in foreclosed real estate and other repossessed assets resulting in a decrease of $1.2 million compared to prior year.

~~Higher compensation and employee benefits by $2.0 million, mainly due to an increase in average employees; and~~

~~Merger and restructuring charges incurred in the quarter amounting to $1.6 million related to the agreements with the Bank Nova Scotia to acquire its Puerto Rico and US Virgin Islands operations.~~

The efficiency ratio was ~~51.11%~~65.42%, up from ~~50.58%~~52.50%. The efficiency ratio measures how much of Oriental’s revenues is used to pay operating expenses. Oriental computes its efficiency ratio by dividing non-interest expenses by the sum of its net interest income and non-interest income, but excluding gains on the sale of investment securities, derivatives gains or losses, other gains and losses, and other income that may be considered volatile in nature. Management believes that the exclusion of those items permits consistent comparability. Amounts presented as part of non-interest income that are excluded from the efficiency ratio computation for the quarters ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ amounted to ~~$3.6~~$5.2 million and ~~$174~~$103 thousand, respectively.

~~Comparison of nine-month periods ended September 30, 2019 and 2018~~

~~Non-interest expense was $154.3 million, representing a decrease of 0.7% compared to $155.4 million.~~

~~The decrease in non-interest expenses was driven by:~~

Lower other operating expenses by $2.8 million, mainly attributed to higher claims and settlements accruals and other losses, and to minor repairs to physical assets related to the impact of hurricanes during the year ago period, which were not present in 2019;

~~Lower occupancy, equipment and infrastructure costs by $2.8 million,~~ mainly attributed lower rent expenses due to the termination of several lease contracts and the closure of branches in 2018, partially offset by $478 thousand received in the prior year period as an early termination from one of our former tenants~~; and~~

~~Lower insurance expenses by $2.5 million, mainly driven by a $1.5 million SAIF insurance assessment credit and lower assessment rate.~~

~~The decreases in the foregoing non-interest expenses were partially offset by:~~

~~Higher compensation and employee benefits by $3.5 million, mainly due to an increase in average employees;~~

Merger and restructuring charges incurred amounting to $2.6 million related to the agreements with The Bank Nova Scotia on June 26, 2019 to acquire its Puerto Rico and US Virgin Islands operations; and

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~Higher professional and service fees by $1.4 million, mainly consulting and advisory fees.~~

The efficiency ratio improved to 51.83% from 53.77%. Amounts presented as part of non-interest income that are excluded from efficiency ratio computation for the nine-month periods ended September 30, 2019 and 2018 amounted to $8.6 million and $758 thousand, respectively.

Provision for ~~Loan and Lease~~Credit Losses

Comparison of quarters ended ~~September 30,~~March 31, 2020 and 2019

Provision for credit losses increased $36.3 million from $12.2 million to $48.5 million. This included a $34.1 million provision to incorporate changes in the macro-economic scenario and ~~2018~~

~~Based on an analysis~~qualitative adjustments as a result of the credit quality and the composition of Oriental’s loan portfolio, management determined that the provision for the quarters was adequate to maintain the allowance for loan and lease losses at an appropriate level to provide for probable losses based upon an evaluation of known and inherent risks.Covid-19 pandemic.

~~Provision for loan and lease losses, net increased $29.2 million from $14.6 million to $43.8 million, resulting from:~~

~~Increase of $39.0 million primarily from deciding to sell $95.0 million in unpaid principal balance of non-performing commercial and mortgage loans, both acquired and originated;~~

~~Decrease of $2.4 million from the proceeds of the sale of $26.0 million of previously charged off auto and consumer loans;~~

~~Decrease of $4.5 million from the adjustment to qualitative factors of the allowance for loan and lease losses, reflecting sustained favorable macroeconomic conditions in Puerto Rico; and~~

~~Decrease of $2.9 million reflecting improved asset quality.~~

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

~~Comparison of nine-month periods ended September 30, 2019 and 2018~~

Based on an analysis of the credit quality and the composition of Oriental’s loan portfolio, management determined that the provision for the nine-month period was adequate to maintain the allowance for loan and lease losses at an appropriate level to provide for probable losses based upon an evaluation of known and inherent risks.

~~Provision for loan and lease losses increased $28.9 million to $73.7 million reflecting:~~

~~Increase of $39.0 million primarily from deciding to sell $95.0 million in unpaid principal balance of non-performing commercial and mortgage loans, both acquired and originated;~~

~~Decrease of $2.4 million from the proceeds of the sale of $26.0 million of previously charged off auto and consumer loans; and~~

~~Decrease of $4.5 million from the adjustment to qualitative factors of the allowance for loan and lease losses, reflecting sustained favorable macroeconomic conditions in Puerto Rico.~~

~~Decrease of $3.2 million reflecting improved asset quality.~~

~~Please refer to the "Allowance for Loan and Lease Losses" in the "Credit Risk Management" section of this MD&A for a more detailed analysis of the allowance for loan and lease losses.~~

Income Taxes

~~109~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Comparison of quarters ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~

~~Income tax expense was $1.0 million, compared to $12.3 million, reflecting a decrease in the effective income~~Effective tax rate ~~to 12.0% for~~was 14.2% in the quarter ended ~~September 30, 2019 as a result of a decrease~~March 31, 2020 compared to 33.0% in the ~~estimated annual~~same quarter of 2019. First quarter of 2020 reflected an effective ~~income~~ tax rate ~~to 30.5%.~~

~~Comparison~~ of ~~nine-month periods ended September 30, 2019 and 2018~~

~~Income tax expense was $23.5 million, compared to $29.9 million, reflecting a decrease in the~~26.0% offset by non-recurring items. Such effective ~~income~~ tax rate ~~to 30.5%, mainly due to~~is based on a higher proportion of exempt income and income ~~subject to~~taxed at preferential rates.

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Quarter Ended September 30, 2019


Wealth

Total Major



Consolidated

Banking

Management

Treasury

Segments

Eliminations

Total

(In thousands)
Interest income
$
85,147

$
16

$
8,492

$
93,655

$
-

$
93,655
Interest expense

(9,260)

-

(3,685)

(12,945)

-

(12,945)
Net interest income

75,887

16

4,807

80,710

-

80,710
Provision for loan and lease losses

(43,678)

-

(92)

(43,770)

-

(43,770)
Non-interest income

11,946

6,719

3,513

22,178

-

22,178
Non-interest expenses

(46,555)

(3,450)

(722)

(50,727)

-

(50,727)
Intersegment revenue

507

-

-

507

(507)

-
Intersegment expenses

-

(141)

(366)

(507)

507

-
Income before income taxes
$
(1,893)

$
3,144

$
7,140

$
8,391

$
-

$
8,391
Income tax expense

(738)

1,226

520

1,008

-

1,008
Net income
$
(1,155)

$
1,918

$
6,620

$
7,383

$
-

$
7,383
Total assets
$
5,919,877

$
26,596

$
1,465,329

$
7,411,802

$
(1,078,297)

$
6,333,505

Nine-Month Period Ended September 30, 2019


Wealth

Total Major



Consolidated

Banking

Management

Treasury

Segments

Eliminations

Total

(In thousands)
Interest income
$
253,138

$
53

$
29,429

$
282,620

$
-

$
282,620
Interest expense

(27,083)

-

(11,953)

(39,036)

-

(39,036)
Net interest income

226,055

53

17,476

243,584

-

243,584
Provision for loan and lease losses

(73,560)

-

(164)

(73,724)

-

(73,724)
Non-interest income

34,932

19,537

8,313

62,782

-

62,782
Non-interest expenses

(139,384)

(11,675)

(3,272)

(154,331)

-

(154,331)
Intersegment revenue

1,648

-

-

1,648

(1,648)

-
Intersegment expenses

-

(480)

(1,168)

(1,648)

1,648

-
Income before income taxes
$
49,691

$
7,435

21,185

$
78,311

$
-

$
78,311
Income tax expense (benefit)

18,634

2,788

2,057

23,479

-

23,479
Net income
$
31,057

$
4,647

$
19,128

$
54,832

$
-

$
54,832
Total assets
$
5,919,877

$
26,596

$
1,465,329

$
7,411,802

$
(1,078,297)

$
6,333,505

~~111~~

Quarter Ended September 30, 2018




Wealth



Total Major



Consolidated

Banking

Management

Treasury

Segments

Eliminations

Total

(In thousands)
Interest income
$
83,664

$
9

$
10,464

$
94,137

$
-

$
94,137
Interest expense

(7,701)

-

(4,159)

(11,860)

-

(11,860)
Net interest income

75,963

9

6,305

82,277

-

82,277
Provision for
   loan and lease losses

(14,478)

-

(123)

(14,601)

-

(14,601)
Non-interest income

12,157

6,463

-

18,620

-

18,620
Non-interest expenses

(46,049)

(3,720)

(1,172)

(50,941)

-

(50,941)
Intersegment revenue

616

-

-

616

(616)

-
Intersegment expenses

-

(273)

(343)

(616)

616

-
Income before income taxes
$
28,209

$
2,479

$
4,667

$
35,355

$
-

$
35,355
Income tax expense

11,001

967

287

12,255

-

12,255
Net income
$
17,208

$
1,512

$
4,380

$
23,100

$
-

$
23,100
Total assets
$
6,156,500

$
25,243

$
1,459,682

$
7,641,425

$
(984,751)

$
6,656,674

Nine-Month Period Ended September 30, 2018




Wealth



Total Major



Consolidated

Banking

Management

Treasury

Segments

Eliminations

Total

(In thousands)
Interest income
$
236,171

$
35

$
29,107

$
265,313

$
-

$
265,313
Interest expense

(21,123)

-

(10,331)

(31,454)

-

(31,454)
Net interest income

215,048

35

18,776

233,859

-

233,859
Provision for loan and lease losses

(44,677)

-

(131)

(44,808)

-

(44,808)
Non-interest income

36,590

19,219

28

55,837

-

55,837
Non-interest expenses

(140,239)

(12,288)

(2,835)

(155,362)

-

(155,362)
Intersegment revenue

1,519

-

-

1,519

(1,519)

-
Intersegment expenses

-

(660)

(859)

(1,519)

1,519

-
Income before income taxes
$
68,241

$
6,306

$
14,979

$
89,526

$
-

$
89,526
Income tax expense

26,614

2,459

787

29,860

-

29,860
Net income
$
41,627

$
3,847

$
14,192

$
59,666

$
-

$
59,666
Total assets
$
6,156,500

$
25,243

$
1,459,682

$
7,641,425

$
(984,751)

$
6,656,674

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Comparison of quarters ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~

Banking

Oriental's banking segment net income before taxes decreased ~~$30.1~~$34.6 million from ~~$28.2~~$28.4 million to a loss of ~~$1.9~~$6.2 million, mainly reflecting:

·Higher interest income from loans of $35.9 million reflecting the Scotiabank PR & USVI Acquisition;

Increase in core deposits cost by $6.9 million mainly related to new deposits from the Scotiabank PR & USVI Acquisition and $2.1 million amortization of core deposit intangibles, partially offset by a $1.2 million decrease in brokered deposits cost;

Increase in provision for ~~loan~~credit losses by $36.3 million which included a $34.1 million provision to incorporate changes in the macro-economic scenario and ~~lease losses of $29.2 million related to~~qualitative adjustments as a ~~$39.0 million increase primarily from deciding to sell non-performing commercial and mortgage loans, $2.4 million decrease from the proceeds~~result of the ~~sale~~Covid-19 pandemic;

An increase of ~~previously charged off auto~~$5.2 million and ~~consumer loans, $4.5~~$2.0 million ~~decrease~~ in banking service revenues and mortgage-banking activities, respectively, reflecting Scotiabank PR & USVI Acquisition from ~~the adjustment to qualitative factors of the allowance for loan~~a higher customers base and ~~lease losses,~~serving fees; and ~~$2.9 million decrease to reflecting improved asset quality;~~

·~~Increase~~ ~~in interest expense of $1.6 million, mainly from an increase in the cost deposits by $1.9 million; and~~

·Increase in ~~interest income of $1.5~~non-interest expense by $34.7 million reflecting the Scotiabank PR & USVI Acquisition, mainly ~~due to $5.9 million increase from originated loans reflecting higher balances~~ in ~~commercial, consumer~~compensation and ~~auto portfolios~~employee benefits, electronic banking charges, occupancy and ~~a $4.2 million decrease from acquired loans as such loans continue to be repaid~~.equipment, information technology, and professional services.

Wealth Management

Wealth management segment revenue ~~which~~ consists of commissions and fees from fiduciary activities, and securities brokerage and insurance ~~activities, increased $665 thousand to $3.1~~activities. Net income before taxes from this segment increase $2.0 million mainly from ~~a decrease in non-interest expenses of $270 thousand and~~ an increase in ~~non-interest~~insurance income by $1.2 million as a result of ~~$256 thousand.~~increased activity from the Scotiabank PR & USVI Acquisition.

Treasury

Treasury segment net income before taxes ~~increased $2.5~~remains stable at $4.8 million. Results reflects:

Decrease in investment securities interest income of $6.9 million mainly due to sales of mortgage backed securities in late 2019 and during the first quarter of 2020, and the full effect of Federal Reserve Bank’s second half 2019 rate cuts (75 basis points) and the partial effect of the March 2020 rate cuts (150 basis points) on cash;

Lower borrowing mainly from maturities of higher cost repurchases agreements not renewed; and

A gain of $4.7 million ~~to $7.1 million, reflecting:~~

~~An increase of $3.5 million from a gain~~ on the sale of ~~$322.4 million~~ mortgage-backed securities during the ~~quarter; and~~

~~Decrease in net interest income~~first quarter of ~~$1.5 million due to a decrease in investments volume by $1.3 million and rate by $943 thousand, partially offset by $1.0 million decrease in repurchase agreements volume.~~

2020.

~~Comparison of nine-month periods ended September 30, 2019 and 2018~~

~~Banking~~

~~Oriental's banking segment net income before taxes decreased $18.6 million to $49.7 million, reflecting:~~

·Increase in provision for loan and lease losses of $28.9 million related to a $39.0 million increase primarily from deciding to sell non-performing commercial and mortgage loans, $2.4 million decrease from the proceeds of the sale of previously charged off auto and consumer loans, $4.5 million decrease from the adjustment to qualitative factors of the allowance for loan and lease losses, and $3.2 million decrease to reflecting improved asset quality;

·~~Increase in interest expense of $6.0 million, mainly from an increase in the cost of customer deposits by $6.0 million;~~

·Increase in interest income of $17.0 million, mainly due to a $29.0 million increase from originated loans reflecting higher balances in commercial, consumer and auto portfolios and a $11.1 million decrease from acquired loans as such loans continue to be repaid; and

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Oriental’s financial assets include those managed by Oriental’s trust division, retirement plan administration subsidiary, and assets gathered by its broker-dealer and insurance subsidiaries. Oriental’s trust division offers various types of individual retirement accounts ("IRAs") and manages 401(k) and Keogh retirement plans and custodian and corporate trust accounts, while the retirement plan administration subsidiary, OPC, manages private retirement plans. At ~~September 30, 2019,~~March 31, 2020, total assets managed by Oriental’s trust division and OPC amounted to ~~$2.980~~$2.812 billion, compared to ~~$2.771~~$3.137 billion at December 31, ~~2018.~~2019. Oriental Financial Services offers a wide array of investment alternatives to its client base, such as tax-advantaged fixed income securities, mutual funds, stocks, bonds and money management wrap-fee programs. At ~~September 30, 2019,~~March 31, 2020, total assets gathered by Oriental Financial Services and Oriental Insurance from its customer investment accounts amounted to ~~$2.349~~$2.059 billion, compared to ~~$2.116~~$2.376 billion at December 31, ~~2018. Changes in trust and broker-dealer related assets primarily reflect changes in portfolio balances and differences~~2019. Decrease was mainly due to decrease in market ~~values.~~interest rates.

Goodwill

Goodwill recorded in connection with the BBVAPR Acquisition and the FDIC-assisted Eurobank Acquisition is not amortized to expense but is tested at least annually for impairment. No goodwill was recorded in connection with the recent Scotiabank PR & USVI Acquisition. A quantitative annual impairment test is not required if, based on a qualitative analysis, Oriental determines that the existence of events and circumstances indicate that it is more likely than not that goodwill is not impaired. Oriental completes its annual goodwill impairment test as of October 31 of each year. Oriental tests for impairment by first allocating its goodwill and other assets and liabilities, as necessary, to defined reporting units. A fair value is then determined for each reporting unit. If the fair values of the reporting units exceed their book values, no write-down of the recorded goodwill is necessary. ~~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.~~

Reporting unit valuation is inherently subjective, with a number of factors based on assumptions and management judgments or estimates. Actual values may differ significantly from such estimates. Among these are future growth rates for the reporting units, selection of comparable market transactions, discount rates and earnings capitalization rates. Changes in assumptions and results due to economic conditions, industry factors, and reporting unit performance and cash flow projections could result in different assessments of the fair values of reporting units and could result in impairment charges. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, an interim impairment test is required.

Relevant events and circumstances for evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount may include macroeconomic conditions (such as a further deterioration of the Puerto Rico economy or the liquidity for Puerto Rico securities or loans secured by assets in Puerto Rico), adverse changes in legal factors or in the business climate, adverse actions by a regulator, unanticipated competition, the loss of key employees, natural disasters, or similar events. ~~Oriental’s loan portfolio, which is~~

In connection with reviewing our financial condition in light of the ~~largest component~~pandemic, we evaluated our assets, including goodwill and other intangibles, for potential impairment. Based upon our review as of ~~its interest-earning assets, is concentrated in Puerto Rico and is directly affected by adverse local economic and fiscal conditions. Such conditions~~March 31, 2020, no impairments have ~~generally affected the market demand for non-conforming loans secured by assets in Puerto Rico and, therefore, affect the valuation of Oriental’s assets.~~ been recorded.

As of ~~September 30, 2019,~~March 31, 2020, Oriental had $86.1 million of goodwill allocated as follows: $84.1 million to the Banking unit and $2.0 million to the Wealth Management unit. ~~During the last quarter of 2018, based on its annual goodwill impairment test, Oriental determined that both units passed step one of the two-step impairment test. As a result of step one, the~~ ~~fair value~~ of both units exceeded its adjusted net book value. Accordingly, Oriental determined that the carrying value of the goodwill allocated to the Banking unit and Wealth Management was not impaired as of the valuation date. ~~There were no events that caused Oriental to perform interim testing in the quarter ended September 30, 2019.~~

~~115~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

TABLE 4 - ASSETS SUMMARY AND COMPOSITION



September 30

December 31,

Variance

2019

2018

%

(Dollars in thousands)

Investments:

    FNMA and FHLMC certificates
$
424,169

$
978,071

-56.6%
    Obligations of US government-sponsored agencies

2,028

2,265

-10.5%
    US Treasury securities

10,939

10,805

1.2%
    CMOs issued by US government-sponsored agencies

55,103

64,064

-14.0%
    GNMA certificates

25,831

210,169

-87.7%
    FHLB stock

10,525

12,644

-16.8%
    Other debt securities

1,025

1,222

-16.1%
    Other investments

98

364

-73.1%
        Total investments

529,718

1,279,604

-58.6%
Loans

4,407,190

4,431,594

-0.6%
Total investments and loans

4,936,908

5,711,198

-13.6%
Other assets:

    Cash and due from banks (including restricted cash)

954,852

445,133

114.5%
    Money market investments

8,035

4,930

63.0%
    Foreclosed real estate

26,952

33,768

-20.2%
    Accrued interest receivable

30,470

34,254

-11.0%
    Deferred tax asset, net

112,602

113,763

-1.0%
    Premises and equipment, net

69,754

68,892

1.3%
    Servicing assets

10,125

10,716

-5.5%
    Derivative assets

13

347

-96.3%
    Goodwill

86,069

86,069

0.0%
    Right of use assets

19,318

-

100.0%
    Other assets and customers' liability on acceptances

78,407

74,282

5.6%
        Total other assets

1,396,597

872,154

60.1%
        Total assets
$
6,333,505

$
6,583,352

-3.8%
Investment portfolio composition:

    FNMA and FHLMC certificates

80.0%

76.5%

    Obligations of US government-sponsored agencies

0.4%

0.2%

    US Treasury securities

2.1%

0.8%

    CMOs issued by US government-sponsored agencies

10.4%

5.0%

    GNMA certificates

4.9%

16.4%

    FHLB stock

2.0%

1.0%

    Other debt securities and other investments

0.2%

0.1%

100.0%

100.0%

TABLE 4 - ASSETS SUMMARY AND COMPOSITION

	March 31		December 31,		Variance
	2020		2019		%
	(Dollars in thousands)
Investments:
FNMA and FHLMC certificates	$	158,219	$	402,656	-60.7%
Obligations of US government-sponsored agencies		1,917		1,961	-2.2%
US Treasury securities		298,987		397,184	-24.7%
CMOs issued by US government-sponsored agencies		52,131		54,760	-4.8%
GNMA certificates		145,288		216,470	-32.9%
FHLB stock		10,301		13,048	-21.1%
Other debt securities		918		1,138	-19.3%
Other investments		1,002		597	67.8%
Total investments		668,763		1,087,814	-38.5%
Loans		6,541,174		6,641,847	-1.5%
Total investments and loans		7,209,937		7,729,661	-6.7%
Other assets:
Cash and due from banks (including restricted cash)		1,315,738		845,982	55.5%
Money market investments		10,203		6,775	50.6%
Foreclosed real estate		27,292		29,909	-8.7%
Accrued interest receivable		40,181		36,781	9.2%
Deferred tax asset, net		196,129		176,740	11.0%
Premises and equipment, net		81,834		81,105	0.9%
Servicing assets		49,287		50,779	-2.9%
Goodwill		86,069		86,069	0.0%
Right of use assets		36,844		39,112	-5.8%
Core deposit, customer relationship and other intangibles		54,174		56,965	-4.9%
Other assets and customers' liability on acceptances		130,883		157,783	-17.0%
Total other assets		2,028,634		1,568,000	29.4%
Total assets	$	9,238,571	$	9,297,661	-0.6%
Investment portfolio composition:
FNMA and FHLMC certificates		23.7%		37.0%
Obligations of US government-sponsored agencies		0.3%		0.2%
US Treasury securities		44.7%		36.5%
CMOs issued by US government-sponsored agencies		7.8%		5.0%
GNMA certificates		21.7%		19.9%
FHLB stock		1.5%		1.2%
Other debt securities and other investments		0.3%		0.2%
		100.0%		100.0%

~~116~~92

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

TABLE 5 — LOANS RECEIVABLE COMPOSITION

September 30

December 31,

Variance

2019

2018

%

(In thousands)

Originated and other loans and leases held for investment:

        Mortgage
$
589,383

$
668,809

-11.9%
        Commercial

1,573,629

1,597,588

-1.5%
        Consumer

362,358

348,980

3.8%
        Auto and leasing

1,266,066

1,129,695

12.1%

3,791,436

3,745,072

1.2%
        Allowance for loan and lease losses on originated and other loans and leases

(79,089)

(95,188)

-16.9%

3,712,347

3,649,884

1.7%
        Deferred loan costs, net

9,608

7,740

24.1%
    Total originated and other loans held for investment, net

3,721,955

3,657,624

1.8%
Acquired loans:

    Acquired BBVAPR loans:

     Accounted for under ASC 310-20 (Loans with revolving feature and/or

        acquired at a premium)

        Commercial

2,217

2,546

-12.9%
        Consumer

21,461

23,988

-10.5%
        Auto

237

4,435

-94.7%

23,915

30,969

-22.8%
        Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-20

(1,490)

(2,062)

-27.7%

22,425

28,907

-22.4%
     Accounted for under ASC 310-30 (Loans acquired with deteriorated

         credit quality, including those by analogy)

        Mortgage

439,675

492,890

-10.8%
        Commercial

155,653

182,319

-14.6%
        Auto

3,883

14,403

-73.0%

599,211

689,612

-13.1%
         Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-30

(51,394)

(42,010)

22.3%

547,817

647,602

-15.4%
    Total acquired BBVAPR loans, net

570,242

676,509

-15.7%
Acquired Eurobank loans:

    Loans secured by 1-4 family residential properties

54,603

63,392

-13.9%
    Commercial

46,412

47,826

-3.0%
    Consumer

802

846

-5.2%

101,817

112,064

-9.1%
        Allowance for loan and lease losses on Eurobank loans

(22,370)

(24,971)

-10.4%
    Total acquired Eurobank loans, net

79,447

87,093

-8.8%
    Total acquired loans, net

649,689

763,602

-14.9%
Total held for investment, net

4,371,644

4,421,226

-1.1%
Mortgage loans held for sale

23,504

10,368

126.7%
Other loans held for sale

12,042

-

100.0%
Total loans, net
$
4,407,190

$
4,431,594

-0.6%

TABLE 5 - LOAN PORTFOLIO COMPOSITON

	March 31,		December 31,
	2020		2019
	(In thousands)
Loans held for investment:
Commercial	$	2,301,350	$	2,222,085
Mortgage		2,449,538		2,489,230
Consumer		485,060		504,507
Auto		1,530,166		1,522,973
		6,766,114		6,738,795
Allowance for credit losses		(230,755)		(116,539)
Total loans held for investment		6,535,359		6,622,256
Mortgage loans held for sale		5,815		19,591
Total loans, net	$	6,541,174	$	6,641,847

~~117~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Oriental’s loan portfolio is composed of ~~two segments,~~mortgage, commercial, consumer, and auto loans initially accounted for under the amortized cost method (referred to as "originated and other" loans) and loans acquired (referred to as "acquired" loans). Acquired loans are further segregated between acquired BBVAPR loans and acquired Eurobank loans. Acquired Eurobank loans were purchased subject to loss-sharing agreements with the FDIC, which were terminated by the first quarter of 2017.

business products. As shown in Table 5 above, total loans, net, amounted to ~~$4.407~~$6.541 billion at ~~September 30, 2019~~March 31, 2020 and ~~$4.432~~$6.642 billion at December 31, ~~2018.~~2019. Oriental’s ~~originated and other~~ loans held-for-investment portfolio composition and trends were as follows:

·Mortgage loan portfolio amounted to ~~$589.4 million (15.5%~~$2.450 billion (36.2% of the gross ~~originated~~ loan portfolio) compared to ~~$668.8~~$2.489 million ~~(17.9%~~(36.9% of the gross originated loan portfolio) at December 31, ~~2018.~~2019. Mortgage loan production totaled ~~$23.8 million and $69.1~~$30.8 million for the quarter ~~and nine-month period~~ ended ~~September 30, 2019,~~March 31, 2020, which represents ~~a decrease~~an increase of ~~14.6% and 20.0%~~33.2% from ~~$27.9~~$23.1 million ~~and $86.3 million, respectively,~~ for the same ~~periods~~period in ~~2018.~~2019. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to ~~$11.4~~$75.3 million and ~~$19.7~~$75.2 million at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option.

·Commercial loan portfolio amounted to ~~$1.574~~$2,302 billion ~~(41.5%~~(34.0% of the gross ~~originated~~ loan portfolio) compared to ~~$1.598~~$2.222 billion ~~(42.7%~~(33.0% of the gross loan portfolio) at December 31, 2019. Commercial production, including the U.S. loan program production of $47.1 million increased 9.8% to $101.2 million for the quarter ended March 31, 2020, from $92.2 million for the same period in 2019.

Consumer loan portfolio amounted to $485.1 million (7.2% of the gross loan portfolio) compared to $504.5 million (7.5% of the gross loan portfolio) at December 31, 2019. Consumer loan production decreased 4.1% to $39.2 million for the quarter ended March 31, 2020 from $40.9 million for the same period in 2019.

Auto and leasing portfolio amounted to $1.530 billion (22.6% of the gross loan portfolio) compared to $1.523 billion (22.6% of the gross originated loan portfolio) at December 31, ~~2018. Commercial loan~~2019. Auto production ~~including the U.S. loan program production of $12.2~~decreased 9.9% to $109.3 million ~~and $100.3 million, respectively, decreased 45.4% and 40.3% to $77.9 million and $290.5 million, respectively,~~ for the quarter ~~and nine-month period~~ ended ~~September 30, 2019, from $142.7 million and $486.7~~March 31, 2020, compared to $120.2 million for the same ~~periods~~period in ~~2018.~~

·Consumer loan portfolio amounted to $362.4 million (9.6% of the gross originated loan portfolio) compared to $349.0 million (9.3% of the gross originated loan portfolio) at December 31, 2018. Consumer loan production increased 12.2% and 11.4% to $48.3 million and $136.8 million, respectively, for the quarter and nine-month period ended September 30, 2019 from $43.0 million and $122.8 million, respectively, for the same periods in 2018.

·Auto and leasing portfolio amounted to $1.266 billion (33.4% of the gross originated loan portfolio) compared to $1.130 million (30.1 of the gross originated loan portfolio) at December 31, 2018. Auto production continued strong at $141.5 million and $398.0 million, respectively for the quarter and nine-month period ended September 30, 2019, compared to $140.4 million and $399.6 million for the same periods in 2018.

~~118~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

2019.

TABLE 6 — HIGHER RISK RESIDENTIAL MORTGAGE LOANS

September 30, 2019

Higher-Risk Residential Mortgage Loans*

High Loan-to-Value Ratio Mortgages

Junior Lien Mortgages

Interest Only Loans

LTV 90% and over

Carrying

Carrying

Carrying

Value

Allowance

Coverage

Value

Allowance

Coverage

Value

Allowance

Coverage

(In thousands)
Delinquency:

0 - 89 days
$
7,702

$
210

2.73%

$
7,452

$
173

2.32%

$
66,198

$
1,695

2.56%
90 - 119 days

302

23

7.62%

-

-

0.00%

1,917

88

4.59%
120 - 179 days

93

-

0.00%

-

-

0.00%

902

28

3.10%
180 - 364 days

30

-

0.00%

46

-

0.00%

2,151

47

2.19%
365+ days

98

3

3.06%

743

28

3.77%

12,381

247

1.99%
Total
$
8,225

$
236

2.87%

$
8,241

$
201

2.44%

$
83,549

$
2,105

2.52%
Percentage of total loans excluding
    acquired loans accounted for under ASC 310-30

0.22%

0.22%

2.19%

Refinanced or Modified Loans:

Amount
$
2,140

$
201

9.39%

$
578

$
55

9.52%

$
30,747

$
1,795

5.84%
Percentage of Higher-Risk Loan
    Category

26.02%

7.01%

36.80%

Loan-to-Value Ratio:

Under 70%
$
5,456

$
140

2.57%

$
1,037

$
18

1.74%

$
-

$
-

-
70% - 79%

697

35

5.02%

1,712

29

1.69%

-

-

-
80% - 89%

1,447

45

3.11%

3,424

59

1.72%

-

-

-
90% and over

625

16

2.56%

2,068

95

4.59%

83,549

2,105

2.52%

$
8,225

$
236

2.87%

$
8,241

$
201

2.44%

$
83,549

$
2,105

2.52%

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

TABLE 6 — HIGHER RISK RESIDENTIAL MORTGAGE LOANS

	March 31, 2020
	Higher-Risk Residential Mortgage Loans*
											High Loan-to-Value Ratio Mortgages
	Junior Lien Mortgages					Interest Only Loans					LTV 90% and over
	Carrying					Carrying					Carrying
	Value		Allowance		Coverage	Value		Allowance		Coverage	Value		Allowance		Coverage
	(In thousands)
Delinquency:
0 - 89 days	$	7,277	$	228	3.13%	$	7,332	$	485	6.61%	$	61,015	$	1,510	2.47%
90 - 119 days		166		35	21.08%		-		-	0.00%		1,951		365	18.71%
120 - 179 days		147		33	22.45%		-		-	0.00%		1,449		211	14.56%
180 - 364 days		65		2	3.08%		-		-	0.00%		1,463		283	19.34%
365+ days		24		1	4.17%		280		19	6.79%		7,903		376	4.76%
Total	$	7,679	$	299	3.89%	$	7,612	$	504	6.62%	$	73,781	$	2,745	3.72%
Percentage of total loans excluding acquired loans accounted for under ASC 310-30		0.20%					0.19%					1.89%
Refinanced or Modified Loans:
Amount	$	2,109	$	159	7.54%	$	592	$	30	5.07%	$	27,602	$	2,026	7.34%
Percentage of Higher-Risk Loan Category		27.46%					7.78%					37.41%
Loan-to-Value Ratio:
Under 70%	$	5,058	$	183	3.62%	$	1,481	$	100	6.75%	$	-	$	-	-
70% - 79%		594		27	4.55%		1,421		96	6.76%		-		-	-
80% - 89%		1,740		33	1.90%		3,318		224	6.75%		-		-	-
90% and over		287		56	19.51%		1,392		84	6.03%		73,781		2,745	3.72%
	$	7,679	$	299	3.89%	$	7,612	$	504	6.62%	$	73,781	$	2,745	3.72%

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

~~119~~94

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Deposits from the Puerto Rico government totaled $250.1 million at September 30, 2019. The following table includes the maturities of Oriental's lending and investment exposure to the Puerto Rico government, which is limited solely to loans to municipalities secured by ad valorem taxation, without limitation as to rate or amount, on all taxable property within the issuing municipalities. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations.

TABLE 7 - PUERTO RICO GOVERNMENT RELATED LOANS AND SECURITIES

September 30, 2019

Maturity

Loans and Securities:

Carrying Value

Less than 1 Year

1 to 3 Years

More than 3 Years

(In thousands)
Municipalities

$
125,618

$
64,970

$
107

$
60,541

The following table includes the maturities of Oriental's lending exposure to the Puerto Rico government, which is limited solely to loans to municipalities secured by ad valorem taxation, without limitation as to rate or amount, on all taxable property within the issuing municipalities. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations. Deposits from the Puerto Rico government totaled $264.4 million at March 31, 2020.

TABLE 7 - PUERTO RICO GOVERNMENT RELATED LOANS AND SECURITIES

March 31, 2020
						Maturity
		Carrying Value		Less than 1 Year		1 to 3 Years		More than 3 Years
Loans:	(In thousands)
Public corporations	$	24,141	$	24,141	$	-	$	-
Municipalities		133,218		64,970		36,245		32,003
Total	$	157,359	$	89,111	$	36,245	$	32,003

~~120~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Credit Risk Management

Allowance for ~~Loan and Lease~~Credit Losses

Oriental maintains an allowance for ~~loan and lease~~credit losses at a level that management considers adequate to provide for probable losses based upon an evaluation of known and inherent risks. Oriental’s allowance for ~~loan and lease~~credit losses ("~~ALLL"~~ACL") policy provides for a detailed quarterly analysis of ~~probable~~lifetime expected credit losses.

On January 1, 2020, Oriental adopted the new accounting standard that requires the measurement of the allowance for credit losses to be based on management’s best estimate of lifetime expected credit losses inherent in the Company’s relevant financial assets. Upon adoption of the new accounting standard, Oriental recorded a net increase of $89.7 million in the allowance for credit losses on January 1, 2020 which was comprised of a net increase of $39.2 million allowance for credit losses for Non-PCD loans decreasing retained earnings and $50.5 million for PCD loans, made through the allowance and loan balances with no impact in capital. The ~~analysis includes~~allowance for credit losses further increased by $24.5 million at March 31, 2020, which included a review of historical loan loss experience, value of underlying collateral, current economic conditions, financial condition of borrowers and other pertinent factors. While management uses available information in estimating probable loan losses, future additions$34.1 million increase primarily due to the ~~allowance may be required based on factors beyond Oriental’s control. We also maintain an allowance for loan losses on acquired loans when: (i) for loans accounted for under ASC 310-30, there is~~ deterioration in ~~credit quality subsequent to~~ the ~~acquisition, and (ii) for loans accounted for under ASC 310-20,~~economic outlook resulting from the ~~inherent losses in the loans exceed the remaining credit discount recorded at the time~~impact of ~~acquisition.~~COVID-19.

~~At September 30, 2019, Oriental’s allowance for loan and lease losses amounted to $154.3 million, a $9.9 million decrease from $164.2 million at December 31, 2018.~~

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

Please refer to the “Provision for ~~Loan and Lease~~Credit Losses” section in ~~this~~the MD&A for a more detailed analysis of provisions for ~~loan and lease~~credit losses.

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Oriental follows a conservative residential mortgage lending policy, with more than 90% of its residential mortgage portfolio consisting of fixed-rate, fully amortizing, fully documented loans that do not have the level of risk associated with subprime loans offered by certain major U.S. mortgage loan originators. Furthermore, Oriental has never been active in negative amortization loans or adjustable rate mortgage loans, including those with teaser rates.

The following items comprise non-performing ~~assets:~~

·~~Originated and other~~ loans held for ~~investment:~~investment, Non-PCD and PCDs:

Commercial loans —At March 31, 2020, Oriental’s non-performing commercial loans amounted to $113.5 million (62.2 % of Oriental’s non-performing loans), a 165.0% increase from $42.8 million at December 31, 2019 (50.1% of Oriental’s non-performing loans). Increase was mainly due to PCD loan pools in nonaccrual amounting to $82.4 million from the Scotiabank PR & USVI Acquisition. Non-PCD commercial loans are placed on non-accrual status when they become 90 days or more past due and are written-down, if necessary, based on the specific evaluation of the underlying collateral, if any.

Residential mortgage loans — —At March 31, 2020, Oriental’s non-performing mortgage loans totaled $44.0 million (24.1% of Oriental’s non-performing loans), a 95.1% increase from $22.6 million (26.4% of Oriental’s non-performing loans) at December 31, 2019. Non-PCD residential mortgage loans are placed on non-accrual status when they become 90 days or more past due and are written-down, if necessary, based on the specific evaluation of the collateral underlying the loan, except for FHA and VA insured mortgage loans which are placed in non-accrual when they become 12 months or more past due. ~~At September 30, 2019,~~

Consumer loans —At March 31, 2020, Oriental’s ~~originated~~ non-performing ~~mortgage~~consumer loans ~~totaled $21.1~~amounted to $3.7 million ~~(27.5%~~(2.0% of Oriental’s non-performing loans), a ~~66.8%~~36.1% decrease from ~~$63.7~~$5.8 million ~~(51.1%~~at December 31, 2019 (6.8% of Oriental’s non-performing loans) ~~at December 31, 2018.~~

~~Commercial~~. Non-PCD consumer 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. At September 30, 2019, Oriental’s originated non-performing commercial loans amounted to $35.6 million (46.2% of Oriental’s non-performing loans), a 16.1% decrease from $42.5 million at December 31, 2018 (34.1% of Oriental’s non-performing loans).

~~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. ~~At September 30, 2019,~~

Auto loans and leases —At March 31, 2020, Oriental’s ~~originated~~ non-performing ~~consumer~~auto loans and leases amounted to ~~$4.0~~$21.1 million ~~(5.2%~~(11.6% of Oriental’s total non-performing loans), ~~a 19.5%~~an increase of 47.9% from ~~$3.4~~$14.3 million at December 31, ~~2018 (2.7%~~2019 (16.7% of Oriental’s total non-performing loans).

~~Auto~~ Non-PCD auto loans and leases — are placed on non-accrual status when they become 90 days past due, partially written-off to collateral value when payments are delinquent 120 days, and fully written-off when payments are delinquent 180 days. At September 30, 2019, Oriental’s originated non-performing auto loans and leases amounted to $15.0 million (19.6% of Oriental’s total non-performing loans), an increase of 11.3% from $13.5 million at December 31, 2018 (10.8% of Oriental’s total non-performing loans).

Oriental has two mortgage loan modification programs. These are the Loss Mitigation Program and the Non-traditional Mortgage Loan Program. Both programs are intended to help responsible homeowners to remain in their homes and avoid foreclosure, while also reducing Oriental’s losses on non-performing mortgage loans.

The Loss Mitigation Program helps mortgage borrowers who are or will become financially unable to meet the current or scheduled mortgage payments. Loans that qualify under this program are those guaranteed by FHA, VA, RURAL, PRHFA, conventional loans guaranteed by Mortgage Guaranty Insurance Corporation (MGIC), conventional loans sold to FNMA and FHLMC, and conventional loans retained by Oriental. The program offers diversified alternatives such as regular or reduced payment plans, payment moratorium, mortgage loan modification, partial claims (only FHA), short sale, and ~~payment in lieu of foreclosure.~~Deed In Lieu.

The Non-traditional Mortgage Loan Program is for non-traditional mortgages, including balloon payment, interest only/interest first, variable interest rate, adjustable interest rate and other qualified loans. Non-traditional mortgage loan portfolios are segregated into the following categories: performing loans that meet secondary market requirement and are refinanced under the credit underwriting guidelines of FHA/VA/FNMA/ FHLMC, and performing loans not meeting secondary market guidelines processed pursuant Oriental’s current credit and underwriting guidelines. Oriental achieved an affordable and sustainable monthly payment by taking specific, sequential, and necessary steps such as reducing the interest rate, extending the loan term, capitalizing arrearages, deferring the payment of principal or, if the borrower qualifies, refinancing the loan.

In order to apply for any of the loan modification programs, if the borrower is active in Chapter 13 bankruptcy, it must request an authorization from the bankruptcy trustee to allow for the loan modification. Borrowers with discharged Chapter 7 bankruptcies may also apply. Loans in these programs are evaluated by designated underwriters for troubled-debt restructuring classification if Oriental grants a concession for legal or economic reasons due to the debtor’s financial difficulties.

~~122~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN

September 30,

December 31,

Variance


2019

2018

%

(Dollars in thousands)

Originated and other loans held for investment

Allowance balance:

    Mortgage
$
8,391

$
19,783

-57.6%
    Commercial

22,323

30,326

-26.4%
    Consumer

15,328

15,571

-1.6%
    Auto and leasing

33,047

29,508

12.0%
        Total allowance balance
$
79,089

$
95,188

-16.9%
Allowance composition:

    Mortgage

10.6%

20.8%

    Commercial

28.2%

31.9%

    Consumer

19.4%

16.4%

    Auto and leasing

41.8%

31.0%

100.0%

100.0%

Allowance coverage ratio at end of period applicable to:

    Mortgage

1.42%

2.96%

-52.0%
    Commercial

1.42%

1.90%

-25.3%
    Consumer

4.23%

4.46%

-5.2%
    Auto and leasing

2.61%

2.61%

0.0%
        Total allowance to total originated loans

2.09%

2.54%

-17.7%
Allowance coverage ratio to non-performing loans:

    Mortgage

39.70%

31.05%

27.9%
    Commercial

62.70%

71.43%

-12.2%
    Consumer

382.44%

464.25%

-17.6%
    Auto and leasing

220.03%

218.67%

0.6%
        Total

104.39%

77.38%

34.9%

~~123~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN (CONTINUED)

September 30,

December 31,
Variance


2019

2018

%

(Dollars in thousands)

Acquired BBVAPR loans accounted for under ASC 310-20

Allowance balance:

    Commercial
$
20

$
22

-9.1%
    Consumer

1,448

1,905

-24.0%
    Auto

22

135

-83.7%
        Total allowance balance
$
1,490

$
2,062

-27.7%
Allowance composition:

    Commercial

1.3%

1.1%

    Consumer

97.2%

92.4%

    Auto

1.5%

6.6%

100.0%

100.00%

Allowance coverage ratio at end of period applicable to:

    Commercial

0.90%

0.86%

4.7%
    Consumer

6.75%

7.94%

-15.0%
    Auto

9.28%

3.04%

205.3%
        Total allowance to total acquired loans

6.23%

6.66%

-6.5%
Allowance coverage ratio to non-performing loans:

    Commercial

2.48%

2.32%

6.9%
    Consumer

706.34%

478.64%

47.6%
    Auto

50.00%

67.50%

-25.9%
        Total

140.96%

133.20%

5.8%

TABLE 8 - ALLOWANCE FOR CREDIT LOSSES BREAKDOWN

	March 31,		December 31,		Variance
	2020		2019		%
	(In thousands)
Allowance for credit losses:
Non-PCD/Non-PCI
Commercial	$	49,196	$	25,993		89.3%
Mortgage		19,694		8,727		125.7%
Consumer		27,763		18,446		50.5%
Auto and leases		53,308		31,878		67.2%
Total allowance for credit losses	$	149,961	$	85,044	$	76.3%

PCD/PCI
Commercial	$	48,836		8,893		449.2%
Mortgage		30,603		21,655		41.3%
Consumer		177		-		100.0%
Auto and leases		1,178		947		24.4%
Total allowance for credit losses	$	80,794		31,495		156.5%

Allowance for credit losses summary
Commercial	$	98,032	$	34,886		181.0%
Mortgage		50,297		30,382		65.5%
Consumer		27,940		18,446		51.5%
Auto and leases		54,486		32,825		66.0%
Total allowance for credit losses	$	230,755	$	116,539	$	98.0%

Allowance composition:
Commercial		42.5%		29.9%
Mortgage		21.8%		26.1%
Consumer		12.1%		15.8%
Auto and leases		23.6%		28.2%
		100.0%		100.0%

Allowance coverage ratio at end of period:
Commercial		4.3%		1.6%		171.3%
Mortgage		2.1%		1.2%		68.0%
Consumer		5.8%		3.7%		57.5%
Auto and leases		3.6%		2.2%		65.2%
		3.4%		1.7%		97.2%

Allowance coverage ratio to non-performing loans:
Commercial		86.4%		81.5%		6.1%
Mortgage		114.3%		134.7%		-15.2%
Consumer		755.1%		318.8%		136.9%
Auto and leases		257.7%		229.6%		12.2%
		126.6%		136.4%		-7.2%

~~124~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN (CONTINUED)

September 30,

December 31,
Variance


2019

2018

%

(Dollars in thousands)

Acquired BBVAPR loans accounted for under ASC 310-30

Allowance balance:

    Mortgage
$
20,458

$
15,225

34.4%
    Commercial

28,647

20,641

38.8%
    Auto

2,289

6,144

-62.7%
        Total allowance balance
$
51,394

$
42,010

22.3%
Allowance composition:

    Mortgage

39.8%

36.2%

    Commercial

55.8%

49.1%

    Auto

4.5%

14.6%

100.0%

100.0%

Acquired Eurobank loans accounted for under ASC 310-30

Allowance balance:

    Mortgage
$
13,809

$
15,382

-10.2%
    Commercial

8,561

9,585

-10.7%
    Consumer

-

4

-100.0%
        Total allowance balance
$
22,370

$
24,971

-10.4%
Allowance composition:

    Mortgage

61.7%

61.6%

    Commercial

38.3%

38.4%

100.0%

100.0%

TABLE 9 - ALLOWANCE FOR CREDIT LOSSES SUMMARY
	Quarter Ended March 31,
						Variance
	2020		2019		%
	(In thousands)
Allowance for credit losses:
Balance at beginning of period	$	116,539	$	164,231		-29.0%
Impact of ASC 326 adoption		89,720		-		100.0%
Provision for credit losses		48,530		12,249		296.2%
Charge-offs		(31,563)		(17,690)		78.4%
Allowance derecognition		-		(1,114)		-100.0%
Recoveries		7,529		4,812		56.5%
Balance at end of period	$	230,755	$	162,488	$	42.0%

~~125~~99

TABLE 9 — ALLOWANCE FOR LOAN AND LEASE LOSSES SUMMARY

Quarter Ended September 30,

Nine-Month Period Ended September 30,


Variance

Variance

2019

2018

%

2019

2018

%

(Dollars in thousands)
Originated and other loans:

    Balance at beginning of period
$
89,952

$
94,218

-4.5%

$
95,188

$
92,718

2.7%
      Charge-offs

(42,078)

(18,380)

128.9%

(77,503)

(55,403)

39.9%
      Recoveries

7,651

5,978

28.0%

18,026

16,702

7.9%
      Provision for loan and lease losses

23,564

13,420

75.6%

43,378

41,219

5.2%
    Balance at end of period
$
79,089

$
95,236

-17.0%

$
79,089

$
95,236

-17.0%
Acquired loans:

BBVAPR loans

Acquired loans accounted for
   under ASC 310-20:

    Balance at beginning of period
$
1,685

$
2,726

-38.2%

$
2,062

$
3,862

-46.6%
      Charge-offs

(341)

(711)

-52.0%

(1,435)

(2,371)

-39.5%
      Recoveries

282

267

5.6%

566

902

-37.3%
      Provision (recapture) for loan and lease losses

(136)

68

-300.0%

297

(43)

-790.7%
    Balance at end of period
$
1,490

$
2,350

-36.6%

$
1,490

$
2,350

-36.6%
Acquired loans accounted for
   under ASC 310-30:

    Balance at beginning of period
$
45,427

$
44,176

2.8%

$
42,010

$
45,755

-8.2%
      Provision for loan and lease losses

19,271

807

2288.0%

27,852

2,528

1001.7%
      Allowance de-recognition

(13,304)

(1,108)

1100.7%

(18,468)

(4,408)

319.0%
    Balance at end of period
$
51,394

$
43,875

17.1%

$
51,394

$
43,875

17.1%

Eurobank loans

    Balance at beginning of period
$
25,578

$
24,314

5.2%

$
24,971

$
25,174

-0.8%
      Provision for loan and lease losses

1,071

306

250.0%

2,197

1,110

97.9%
      Allowance de-recognition

(4,279)

(339)

1162.2%

(4,798)

(2,003)

139.5%
    Balance at end of period
$
22,370

$
24,281

-7.9%

$
22,370

$
24,281

-7.9%

TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES

	Quarter Ended March 31,
					Variance
	2020		2019		%
	(Dollars in thousands)
Non-PCD/Non-PCI Loans:
Mortgage
Charge-offs	$	(418)	$	(587)		-28.8%
Recoveries		249		287		-13.2%
Total		(169)		(300)		-42.0%
Commercial
Charge-offs		(3,771)		(1,086)		247.2%
Recoveries		1,522		150		914.7%
Total		(2,249)		(936)		1161.9%
Consumer
Charge-offs		(6,015)		(4,561)		31.9%
Recoveries		644		303		112.5%
Total		(5,371)		(4,258)		144.4%
Auto and leases
Charge-offs		(13,053)		(11,456)		13.9%
Recoveries		4,211		4,072		3.4%
Total		(8,842)		(7,384)		17.4%

PCD Loans:
Mortgage
Charge-offs	$	(5,143)	$	-		100.0%
Recoveries		122		-		100.0%
Total		(5,021)		-		100.0%
Commercial
Charge-offs		(2,357)		-		100.0%
Recoveries		375		-		100.0%
Total		(1,982)		-		100.0%
Consumer
Charge-offs		(431)		-		100.0%
Recoveries		63		-		100.0%
Total		(368)		-		100.0%
Auto and leases
Charge-offs		(375)		-		100.0%
Recoveries		343		-		100.0%
Total		(32)		-		100.0%

Total charge-offs		(31,563)		(17,690)		78.4%
Total recoveries		7,529		4,812		56.5%
Total	$	(24,034)	$	(12,878)		86.6%

Net credit losses to average loans outstanding:
Mortgage		0.84%		0.18%		356.71%

~~126~~100

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING LOANS ACCOUNTED FOR UNDER ASC 310-30

Quarter Ended September 30,

Nine-Month Period Ended September 30,

Variance

Variance

2019

2018

%

2019

2018

%

(Dollars in thousands)
Originated and other loans and leases:

Mortgage

    Charge-offs
$
(16,299)

$
(1,429)

1040.6%

$
(17,490)

$
(3,727)

369.3%
    Recoveries

493

139

254.7%

1,096

919

19.3%
        Total

(15,806)

(1,290)

1125.3%

(16,394)

(2,808)

483.8%
Commercial

    Charge-offs

(8,402)

(3,249)

158.6%

(11,634)

(6,396)

81.9%
    Recoveries

174

119

46.2%

497

528

-5.9%
        Total

(8,228)

(3,130)

162.9%

(11,137)

(5,868)

89.8%
Consumer

    Charge-offs

(5,046)

(4,591)

9.9%

(14,005)

(13,438)

4.2%
    Recoveries

1,260

278

353.2%

1,850

757

144.4%
        Total

(3,786)

(4,313)

-12.2%

(12,155)

(12,681)

-4.1%
Auto

    Charge-offs

(12,331)

(9,111)

35.3%

(34,374)

(31,842)

8.0%
    Recoveries

5,724

5,442

5.2%

14,583

14,498

0.6%
        Total

(6,607)

(3,669)

80.1%

(19,791)

(17,344)

14.1%
Net credit losses

    Total charge-offs

(42,078)

(18,380)

128.9%

(77,503)

(55,403)

39.9%
    Total recoveries

7,651

5,978

28.0%

18,026

16,702

7.9%
        Total
$
(34,427)

$
(12,402)

177.6%

$
(59,477)

$
(38,701)

53.7%
Net credit losses to average
    loans outstanding:

    Mortgage

10.14%

0.77%

1216.9%

3.43%

0.55%

523.6%
    Commercial

2.06%

0.83%

148.2%

0.93%

0.55%

69.1%
    Consumer

4.00%

4.74%

-15.6%

4.34%

4.69%

-7.5%
    Auto

2.10%

1.39%

51.1%

2.19%

2.32%

-5.6%
        Total

3.57%

1.38%

158.7%

1.75%

1.20%

46.0%
Recoveries to charge-offs

18.18%

32.52%

-44.1%

23.26%

30.15%

-22.9%
Average originated loans:

    Mortgage
$
623,772

667,372

-6.5%

$
637,680

675,191

-5.6%
    Commercial

1,597,902

1,512,661

5.6%

1,588,887

1,411,414

12.6%
    Consumer

378,967

363,884

4.1%

373,644

360,258

3.7%
    Auto

1,258,394

1,057,232

19.0%

1,206,054

996,972

21.0%
        Total
$
3,859,035

$
3,601,149

7.2%

$
3,806,265

$
3,443,835

10.5%

Commercial		0.77%		0.24%	226.83%
Consumer		4.60%		4.45%	3.32%
Auto and leases		2.31%		2.54%	-8.88%
Total		1.44%		1.36%	5.54%
Recoveries to charge-offs		23.85%		27.20%	-12.31%
Average Loans Held for Investment (a)
Mortgage	$	2,459,920	$	649,408	278.8%
Commercial		2,192,683		1,585,352	38.3%
Consumer		498,827		382,397	30.4%
Auto and leases		1,536,557		1,165,023	31.9%
Total	$	6,687,987	$	3,782,180	76.8%


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

101

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING LOANS ACCOUNTED FOR UNDER ASC 310-30 (CONTINUED)

Quarter Ended September 30,

Nine-Month Period Ended September 30,

Variance

Variance

2019

2018

%

2019

2018

%

(Dollars in thousands)
Acquired loans accounted for under ASC 310-20:

Commercial

    Charge-offs
$
(19)

$
(1)

1800.0%

$
(99)

$
(6)

1550.0%
    Recoveries

1

3

-66.7%

6

18

-66.7%
        Total

(18)

2

-1000.0%

(93)

12

-875.0%
Consumer

    Charge-offs

(270)

(638)

-57.7%

(1,143)

(2,080)

-45.0%
    Recoveries

203

95

113.7%

321

243

32.1%
        Total

(67)

(543)

-87.7%

(822)

(1,837)

-55.3%
Auto

    Charge-offs

(52)

(72)

-27.8%

(193)

(285)

-32.3%
    Recoveries

78

169

-53.8%

239

641

-62.7%
        Total

26

97

-73.2%

46

356

-87.1%
Net credit losses

    Total charge-offs

(341)

(711)

-52.0%

(1,435)

(2,371)

-39.5%
    Total recoveries

282

267

5.6%

566

902

-37.3%
        Total
$
(59)

$
(444)

-86.7%

$
(869)

$
(1,469)

-40.8%
Net credit losses to average
    loans outstanding:

    Commercial

7.52%

-0.59%

-1374.6%

11.98%

-1.10%

-1189.1%
    Consumer

2.07%

16.57%

-87.5%

8.47%

18.55%

-54.4%
    Auto

-12.68%

-4.08%

211.1%

-2.96%

-3.35%

-11.5%
        Total

1.60%

7.41%

-78.3%

7.22%

6.79%

6.3%
Recoveries to charge-offs

82.70%

37.55%

120.2%

39.44%

38.04%

3.7%
Average loans accounted for under ASC 310-20:

    Commercial
$
958

1,353

-29.2%

$
1,035

1,457

-29.0%
    Consumer

12,931

13,105

-1.3%

12,941

13,202

-2.0%
    Auto

820

9,516

-91.4%

2,071

14,180

-85.4%
        Total
$
14,709

$
23,974

-38.6%

$
16,047

$
28,839

-44.4%

TABLE 11 — NON-PERFORMING ASSETS

	March 31,		December 31,		Variance
	2020		2019		(%)
	(Dollars in thousands)
Non-performing assets:
Non-PCD/Non-PCI
Non-accruing loans
Troubled-Debt Restructuring loans	$	21,283	$	23,587	-9.8%
Other loans		71,790		57,336	25.2%
Accruing loans
Troubled-Debt Restructuring loans		5,045		3,317	52.1%
Other loans		460		500	-8.0%
Total	$	98,578	$	84,740	16.3%
PCD/PCI loan pools		83,762		724	11469.3%
Total non-performing loans	$	182,340	$	85,464	113.4%
Foreclosed real estate		27,292		29,909	-8.7%
Other repossessed assets		3,096		3,327	-6.9%
	$	212,728	$	118,700	79.2%

Non-performing assets to total assets		2.30%		1.28%	79.7%
Non-performing assets to total capital		20.80%		11.35%	83.3%

	Quarter Ended March 31,
	2020		2019
	(In thousands)
Interest that would have been recorded in the period if the loans had not been classified as non-accruing loans	$	607	$	1,107

~~128~~102

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

TABLE 11 — NON-PERFORMING ASSETS


September 30,

December 31,

Variance

2019

2018

(%)

(Dollars in thousands)

Non-performing assets:

    Non-accruing loans

        Troubled-Debt Restructuring loans
$
22,057

$
41,679

-47.1%
        Other loans

51,341

78,047

-34.2%
    Accruing loans

        Troubled-Debt Restructuring loans

2,779

4,302

-35.4%
        Other loans

646

541

19.4%
            Total non-performing loans
$
76,823

$
124,569

-38.3%
   Foreclosed real estate

26,952

33,768

-20.2%
   Other repossessed assets

3,537

2,986

18.5%

$
107,312

$
161,323

-33.5%
Non-performing assets to total assets, excluding acquired loans with deteriorated credit quality (including those by analogy)

1.93%

2.76%

-30.1%
Non-performing assets to total capital

11.81%

16.13%

-26.8%

Quarter Ended September 30,

Nine-Month Period Ended September 30,

2019

2018

2019

2018

(In thousands)
Interest that would have been recorded in the period if the
    loans had not been classified as non-accruing loans
$
590

$
1,101

$
1,180

$
2,652

TABLE 12 - NON-PERFORMING LOANS

	March 31,		December 31,		Variance
	2020		2019		%
	(In thousands)
Non-performing loans
Non-PCD/Non-PCI
Commercial	$	31,073	$	42,606	-27.1%
Mortgage		42,668		22,552	89.2%
Consumer		3,690		5,287	-30.2%
Auto and leases		21,147		14,295	47.9%
Total	$	98,578	$	84,740	16.3%

PCD/PCI
Commercial	$	82,411	$	225	36527.1%
Mortgage		1,341		-	100.0%
Consumer		10		499	-98.0%
Total	$	83,762	$	724	11469.3%
Total non-performing loans	$	182,340	$	85,464	113.4%

Non-performing loans composition percentages:
Commercial		62.2%		50.1%
Mortgage		24.1%		26.4%
Consumer		2.0%		6.8%
Auto and leases		11.6%		16.7%
		100.0%		100.0%

Non-performing loans to:
Total loans		2.7%		1.8%	50.3%
Total assets		2.0%		0.9%	116.5%
Total capital		17.8%		8.1%	119.9%

Non-performing loans with partial charge-offs to:
Total loans		1.2%		0.5%	132.7%
Non-performing loans		44.9%		29.3%	53.4%

Other non-performing loans ratios:
Charge-off rate on non-performing loans to non-performing loans on which charge-offs have been taken		81.3%		123.0%	-33.9%
Allowance for credit losses to non-performing loans on which no charge-offs have been taken		229.6%		141.9%	61.9%

~~129~~103

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

TABLE 12 — NON-PERFORMING LOANS

September 30,

December 31,

Variance

2019

2018

%

(Dollars in thousands)

Non-performing loans:

Originated and other loans held for investment

    Mortgage
$
21,138

$
63,717

-66.8%
    Commercial

35,601

42,456

-16.1%
    Consumer

4,008

3,354

19.5%
    Auto and leasing

15,019

13,494

11.3%

75,766

123,021

-38.4%
    Acquired loans accounted for under ASC 310-20 (Loans with
        revolving feature and/or acquired at a premium)

    Commercial

808

950

-14.9%
    Consumer

205

398

-48.5%
    Auto

44

200

-78.0%

1,057

1,548

-31.7%
        Total
$
76,823

$
124,569

-38.3%
Non-performing loans composition percentages:

Originated loans

    Mortgage

27.5%

51.1%

    Commercial

46.2%

34.1%

    Consumer

5.2%

2.7%

    Auto and leasing

19.6%

10.8%

    Acquired loans accounted for under ASC 310-20 (Loans with
        revolving feature and/or acquired at a premium)

    Commercial

1.1%

0.8%

    Consumer

0.3%

0.3%

    Auto

0.1%

0.2%

        Total

100.0%

100.0%

Non-performing loans to:

    Total loans, excluding loans accounted for
        under ASC 310-30 (including those by analogy)

2.01%

3.30%

-39.1%
    Total assets, excluding loans accounted for
        under ASC 310-30 (including those by analogy)

1.19%

2.13%

-44.1%
    Total capital

7.32%

12.46%

-41.3%
Non-performing loans with partial charge-offs to:

    Total loans, excluding loans accounted for
        under ASC 310-30 (including those by analogy)

0.63%

1.16%

-45.69%
    Non-performing loans

31.19%

35.30%

-11.6%
Other non-performing loans ratios:

    Charge-off rate on non-performing loans to non-performing loans
        on which charge-offs have been taken

80.22%

59.20%

35.5%
    Allowance for loan and lease losses to non-performing
        loans on which no charge-offs have been taken

149.05%

120.67%

23.5%

TABLE 13 - LIABILITIES SUMMARY AND COMPOSITION
	March 31,		December 31,		Variance
	2020		2019		%
	(Dollars in thousands)
Deposits:
Non-interest bearing deposits	$	1,712,943	$	1,675,315	2.2%
NOW accounts		1,998,503		1,903,757	5.0%
Savings and money market accounts		1,871,719		1,836,480	1.9%
Certificates of deposit		2,225,278		2,271,286	-2.0%
Total deposits		7,808,443		7,686,838	1.6%
Accrued interest payable		10,828		11,772	-8.0%
Total deposits and accrued interest payable		7,819,271		7,698,610	1.6%
Borrowings:
Securities sold under agreements to repurchase		50,103		190,274	-73.7%
Advances from FHLB		76,961		78,009	-1.3%
Subordinated capital notes		36,083		36,083	0.0%
Other term notes		640		1,195	-46.4%
Total borrowings		163,787		305,561	-46.4%
Total deposits and borrowings		7,983,058		8,004,171	-0.3%

Other Liabilities:
Derivative liabilities		2,059		913	125.5%
Acceptances outstanding		11,763		21,599	-45.5%
Lease liability		37,702		39,840	-5.4%
Other liabilities		181,395		185,660	-2.3%
Total liabilities	$	8,215,977	$	8,252,183	-0.4%
Deposits portfolio composition percentages:
Non-interest bearing deposits		21.9%		21.8%
NOW accounts		25.6%		24.8%
Savings and money market accounts		24.0%		23.9%
Certificates of deposit		28.5%		29.5%
		100.0%		100.0%
Borrowings portfolio composition percentages:
Securities sold under agreements to repurchase		30.6%		62.3%
Advances from FHLB		47.0%		25.5%
Other term notes		0.4%		0.4%
Subordinated capital notes		22.0%		11.8%
		100.0%		100.0%
Securities sold under agreements to repurchase (excluding accrued interest)
Amount outstanding at period-end	$	50,000	$	190,000
Daily average outstanding balance	$	158,462	$	299,842
Maximum outstanding balance at any month-end	$	190,000	$	461,954

~~130~~104

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

TABLE 13 - LIABILITIES SUMMARY AND COMPOSITION

September 30,

December 31,

Variance

2019

2018

%

(Dollars in thousands)

Deposits:

    Non-interest bearing deposits
$
1,100,235

$
1,105,324

-0.5%
    NOW accounts

1,127,978

1,086,447

3.8%
    Savings and money market accounts

1,225,654

1,212,260

1.1%
    Certificates of deposit

1,422,374

1,501,002

-5.2%
        Total deposits

4,876,241

4,905,033

-0.6%
    Accrued interest payable

1,817

3,082

-41.0%
        Total deposits and accrued interest payable

4,878,058

4,908,115

-0.6%
Borrowings:

    Securities sold under agreements to repurchase

190,261

455,508

-58.2%
    Advances from FHLB

79,052

77,620

1.8%
    Subordinated capital notes

36,083

36,083

0.0%
    Other term notes

551

1,214

-54.6%
        Total borrowings

305,947

570,425

-46.4%
            Total deposits and borrowings

5,184,005

5,478,540

-5.4%

Other Liabilities:

Derivative liabilities

1,159

333

248.0%
Acceptances outstanding

21,796

16,937

28.7%
Lease liability

21,081

-

100.0%
Other liabilities

56,388

87,665

-35.7%
            Total liabilities
$
5,284,429

$
5,583,475

-5.4%
Deposits portfolio composition percentages:

    Non-interest bearing deposits

22.6%

22.5%

    NOW accounts

23.1%

22.1%

    Savings and money market accounts

25.1%

24.7%

    Certificates of deposit

29.2%

30.7%

100.0%

100.0%

Borrowings portfolio composition percentages:

    Securities sold under agreements to repurchase

62.2%

79.9%

    Advances from FHLB

25.8%

13.6%

    Other term notes

0.2%

0.2%

    Subordinated capital notes

11.8%

6.3%

100.0%

100.0%

Securities sold under agreements to repurchase (excluding accrued interest)

    Amount outstanding at period-end
$
190,000

$
454,723

    Daily average outstanding balance
$
336,859

$
357,086

    Maximum outstanding balance at any month-end
$
461,954

$
457,053

~~131~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Liabilities and Funding Sources

As shown in Table 1513 above, at ~~September 30, 2019~~,March 31, 2020, Oriental’s total liabilities were ~~$5.284~~$8.216 billion, ~~5.4%~~0.4% less than the ~~$5.583~~$8.252 billion reported at December 31, ~~2018~~.2019. Deposits and borrowings, Oriental’s funding sources, amounted to ~~$5.184~~$7.983 billion at ~~September 30, 2019~~March 31, 2020 versus ~~$5.479~~$8.004 billion at December 31, ~~2018~~,2019, a ~~5.4% decrease.~~0.3% decrease, mainly from a decrease of $141.8 million in borrowings. The overall declines in brokered deposits and borrowings are part of the strategy to replace higher cost funding with lower cost core deposits.

Borrowings consist mainly of repurchase agreements, FHLB-NY advances and subordinated capital notes. At ~~September 30, 2019~~,March 31, 2020, borrowings amounted to ~~$305.9~~$163.8 million, representing a decrease of 46.4% when compared with the ~~$570.4~~$305.6 million reported at December 31, ~~2018~~.2019. The decrease in borrowings ~~reflect the reduction~~reflects a decrease of ~~$241.0~~$140.0 million in short-term repurchase agreements ~~with the proceeds from the sale of $672.1 million of mortgage-backed securities~~that matured during the ~~second~~quarter and ~~third quarter of 2019.~~ were not renewed.

On January 1, 2019, Oriental adopted the Accounting Standard Update (“ASU”) No. 2016-02, under the effective date method, which requires lessees to recognize a right-of-use asset and related lease liability for leases classified as operating leases prospectively. At ~~September 30, 2019, the lease liability amounted to $21.1 million.~~

At ~~September 30, 2019~~,March 31, 2020, deposits represented ~~94%~~98% and borrowings represented 6%2% of interest-bearing liabilities. At ~~September 30, 2019~~,March 31, 2020, deposits, the largest category of Oriental’s interest-bearing liabilities, were ~~$4.878~~$7.819 billion, ~~a slight decrease~~an increase of ~~0.6%~~1.6% from ~~$4.908~~$7.699 billion at December 31, ~~2018. Such decrease reflects a reduction of $62.8~~2019. Customer deposits increased $108.6 million ~~in brokered CD’s, mainly~~ as ~~a result of the sale of mortgage-backed securities during the nine-month period ended September 30, 2019.~~both retail and commercial clients retained higher balances.

Stockholders’ Equity

At ~~September 30, 2019~~,March 31, 2020, Oriental’s total stockholders’ equity was ~~$1.049~~$1.023 billion, a ~~4.9% increase~~2.2% decrease when compared to ~~$999.9~~$1.045 million at December 31, ~~2018~~.2019. This ~~increase~~decrease in stockholders’ equity reflects ~~increases~~decreases in retained earnings of ~~$32.8~~$29.1 million and ~~legal surplus~~in additional paid-in capital of ~~$5.6 million;~~$309 thousand; and ~~decreases~~increases in accumulated other comprehensive ~~loss,~~income, net of tax of ~~$8.5~~$7.3 million, ~~and~~in treasury stock, at cost, of ~~$697~~$950 thousand and in legal surplus of $166 thousand. Decrease in retained earnings was mainly due to the $25.5 million net impact of CECL implementation. Book value per share was ~~$18.84~~$18.33 at ~~September 30, 2019~~March 31, 2020 compared to ~~$17.90~~$18.75 at December 31, ~~2018~~.2019.

From December 31, ~~2018~~2019 to ~~September 30, 2019~~,March 31, 2020, tangible common equity to total assets ~~increased~~decreased from ~~12.59%~~8.83% to ~~13.87%~~8.66%, leverage capital ratio increased from ~~14.22%~~9.24% to ~~15.41%~~10.14%, common equity tier 1 capital ratio increased from ~~16.78%~~10.91% to ~~17.98%~~11.69%, tier 1 risk-based capital ratio increased from ~~19.20%~~12.64% to ~~20.43%~~13.36%, and total risk-based capital ratio increased from ~~20.48%~~13.91% to ~~21.71%~~14.62%. ~~The increase in these ratios reflect an increase of $49.2 million in total capital.~~

On October 22, 2018, Oriental completed the conversion of all 84,000 shares of its Series C Preferred Stock into common stock. Each share of Series C Preferred Stock was converted into 86.4225 shares of common stock. Upon conversion, the Series C Preferred Stock is no longer outstanding and all rights with respect to the Series C Preferred Stock have ceased and terminated, except the right to receive the number of whole shares of common stock issuable upon conversion of the Series C Preferred Stock and any required cash-in-lieu of fractional shares.

Regulatory Capital

~~Capital Rules to Implement Basel III Capital Requirements~~

Oriental and the Bank are subject to regulatory capital requirements established by the Federal Reserve Board and the FDIC. The current risk-based capital standards applicable to Oriental and the Bank (“Basel III capital rules”), which have been effective since January 1, 2015, are based on the final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision. As of ~~September 30, 2019,~~March 31, 2020, the capital ratios of Oriental and the Bank continue to exceed the minimum requirements for being “well-capitalized” under the Basel III capital rules.

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

In July 2019, the federal banking agencies adopted a final rule, pursuant to the Economic Growth and Regulatory Paperwork Reduction Act of 1996, that simplifies for non-advanced approaches banking organizations. It simplifies the regulatory capital treatment for mortgage servicing assets (MSA) and certain deferred tax assets arising from temporary differences (temporary difference DTAs). It increases common equity tier 1 (CET1) capital threshold deductions from 10 percent to 25 percent and removes the aggregate 15 percent CET1 threshold deduction. However, it retains the 250 percent risk weight applicable to non-deducted amounts of MSAs and temporary difference DTAs. In November 2019, the agencies jointly issued a final rule that permits insured depository institutions and depository institution holding companies to implement the simplifications to the capital rule on January 1,

105

2020, rather than April 1, 2020. These banking organizations may elect to use the revised effective date of January 1, 2020 or wait until the quarter beginning April 1, 2020. During 1Q 2020, the Company elected to early implement the simplifications to the capital rule. As a result, capital ratios increased.

The risk-based capital ratios presented in Table 14, which include common equity tier 1, tier 1 capital, total capital and leverage capital as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, are calculated based on the Basel III capital rules related to the measurement of capital, risk-weighted assets and average assets.

~~132~~106

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

The following are the consolidated capital ratios of Oriental under the Basel III capital rules at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:

TABLE 14 — CAPITAL, DIVIDENDS AND STOCK DATA	TABLE 14 — CAPITAL, DIVIDENDS AND STOCK DATA					TABLE 14 — CAPITAL, DIVIDENDS AND STOCK DATA
	September 30,		December 31,		Variance	March 31,		December 31,		Variance
	2019		2018		%	2020		2019		%
	(Dollars in thousands, except per share data)					(Dollars in thousands, except per share data)
Capital data:
Stockholders’ equity	$	1,049,076	$	999,877	4.9%	$	1,022,594	$	1,045,478	-2.2%
Regulatory Capital Ratios data:
Common equity tier 1 capital ratio		17.98%		16.78%	7.2%		11.69%		10.91%	7.1%
Minimum common equity tier 1 capital ratio required		4.50%		4.50%	0.0%		4.50%		4.50%	0.0%
Actual common equity tier 1 capital	$	858,092		811,707	5.7%	$	816,356		735,442	11.0%
Minimum common equity tier 1 capital required	$	214,702		217,675	-1.4%	$	314,263		303,338	3.6%
Minimum capital conservation buffer required	$	119,279		90,698	31.5%	$	174,591		168,521	3.6%
Excess over regulatory requirement	$	524,111		503,334	4.1%	$	327,502		263,582	24.3%
Risk-weighted assets	$	4,771,165		4,837,214	-1.4%	$	6,983,626		6,740,846	3.6%
Tier 1 risk-based capital ratio		20.43%		19.20%	6.4%		13.36%		12.64%	5.7%
Minimum tier 1 risk-based capital ratio required		6.00%		6.00%	0.0%		6.00%		6.00%	0.0%
Actual tier 1 risk-based capital	$	974,962	$	928,577	5.0%	$	933,226	$	852,312	9.5%
Minimum tier 1 risk-based capital required	$	286,270	$	290,233	-1.4%	$	419,018	$	404,451	3.6%
Excess over regulatory requirement	$	688,692	$	638,344	7.9%	$	514,208	$	447,861	14.8%
Risk-weighted assets	$	4,771,165	$	4,837,214	-1.4%	$	6,983,626	$	6,740,846	3.6%
Total risk-based capital ratio		21.71%		20.48%	6.0%		14.62%		13.91%	5.1%
Minimum total risk-based capital ratio required		8.00%		8.00%	0.0%		8.00%		8.00%	0.0%
Actual total risk-based capital	$	1,035,910	$	990,499	4.6%	$	1,020,748	$	937,963	8.8%
Minimum total risk-based capital required	$	381,693	$	386,977	-1.4%	$	558,690	$	539,268	3.6%
Excess over regulatory requirement	$	654,217	$	603,522	8.4%	$	462,058	$	398,695	15.9%
Risk-weighted assets	$	4,771,165	$	4,837,214	-1.4%	$	6,983,626	$	6,740,846	3.6%
Leverage capital ratio		15.41%		14.22%	8.4%		10.14%		9.24%	9.8%
Minimum leverage capital ratio required		4.00%		4.00%	0.0%		4.00%		4.00%	0.0%
Actual tier 1 capital	$	974,962	$	928,577	5.0%	$	933,226	$	852,312	9.5%
Minimum tier 1 capital required	$	253,010	$	261,125	-3.1%	$	368,210	$	369,151	-0.3%
Excess over regulatory requirement	$	721,952	$	667,452	8.2%	$	565,016	$	483,161	16.9%
Tangible common equity to total assets		13.87%		12.59%	10.2%		8.66%		8.83%	-1.9%
Tangible common equity to risk-weighted assets		18.42%		17.13%	7.5%		11.46%		12.17%	-5.8%
Total equity to total assets		16.56%		15.19%	9.0%		11.07%		11.24%	-1.6%
Total equity to risk-weighted assets		21.99%		20.67%	6.4%		14.64%		15.51%	-5.6%
Stock data:
Outstanding common shares		51,347,056		51,293,924	0.1%		51,326,998		51,398,956	-0.1%
Book value per common share	$	18.84	$	17.90	5.2%	$	18.33	$	18.75	-2.2%
Tangible book value per common share	$	17.11	$	16.15	6.0%	$	15.60	$	15.96	-2.3%
Market price at end of period	$	21.90	$	16.46	33.0%	$	11.18	$	23.61	-52.6%
Market capitalization at end of period	$	1,124,501	$	844,298	33.2%	$	573,836	$	1,213,529	-52.7%

~~133~~107

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

The following table presents a reconciliation of Oriental’s total stockholders’ equity to tangible common equity and total assets to tangible assets at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:

	September 30,		December 31,		March 31,		December 31,
	2019		2018		2020		2019
	(In thousands, except share or per share information)				(In thousands, except share or per share information)
Total stockholders' equity	$	1,049,076	$	999,877	$	1,022,594	$	1,045,478
Preferred stock		(92,000)		(92,000)		(92,000)		(92,000)
Preferred stock issuance costs		10,130		10,130		10,130		10,130
Goodwill		(86,069)		(86,069)		(86,069)		(86,069)
Core deposit intangible		(1,880)		(2,480)		(41,111)		(43,185)
Customer relationship intangible		(611)		(888)		(12,567)		(13,213)
Other intangibles						(496)		(567)
Total tangible common equity (non-GAAP)	$	878,646	$	828,570	$	800,481	$	820,574
Total assets		6,333,505		6,583,352		9,238,571		9,297,661
Goodwill		(86,069)		(86,069)		(86,069)		(86,069)
Core deposit intangible		(1,880)		(2,480)		(41,111)		(43,185)
Customer relationship intangible		(611)		(888)		(12,567)		(13,213)
Other intangibles						(496)		(567)
Total tangible assets	$	6,244,945	$	6,493,915	$	9,098,328	$	9,154,627
Tangible common equity to tangible assets		14.07%		12.76%		8.80%		8.96%
Common shares outstanding at end of period		51,347,056		51,293,924		51,326,998		51,398,956
Tangible book value per common share	$	17.11	$	16.15	$	15.60	$	15.96

The tangible common equity ratio and tangible book value per common share are non-GAAP measures and, unlike tier 1 capital and common equity tier 1 capital, are not codified in the federal banking regulations. Management and many stock analysts use the tangible common equity ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations. Neither tangible common equity nor tangible assets or related measures should be considered in isolation or as a substitute for stockholders’ equity, total assets or any other measure calculated in accordance with GAAP. Moreover, the manner in which Oriental calculates its tangible common equity, tangible assets and any other related measures may differ from that of other companies reporting measures with similar names.

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

~~134~~108

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

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

	September 30,		December 31,		Variance	March 31,		December 31,		Variance
	2019		2018		%	2020		2019		%
	(Dollars in thousands)					(Dollars in thousands)
Risk-based capital:
Common equity tier 1 capital	$	858,092	$	811,707	5.7%	$	816,356	$	735,442	11.0%
Additional tier 1 capital		116,870		116,870	0.0%		116,870		116,870	0.0%
Tier 1 capital		974,962		928,577	5.0%		933,226		852,312	9.5%
Additional Tier 2 capital		60,948		61,922	-1.6%		87,522		85,651	2.2%
Total risk-based capital	$	1,035,910	$	990,499	4.6%	$	1,020,748	$	937,963	8.8%
Risk-weighted assets:
Balance sheet items	$	4,539,290	$	4,641,998	-2.2%	$	6,614,729	$	6,321,472	4.6%
Off-balance sheet items		231,875		195,216	18.8%		368,897		419,374	-12.0%
Total risk-weighted assets	$	4,771,165	$	4,837,214	-1.4%	$	6,983,626	$	6,740,846	3.6%
Ratios:
Common equity tier 1 capital (minimum required - 4.5%)		17.98%		16.78%	7.2%		11.69%		10.91%	7.1%
Tier 1 capital (minimum required - 6%)		20.43%		19.20%	6.4%		13.36%		12.64%	5.7%
Total capital (minimum required - 8%)		21.71%		20.48%	6.0%		14.62%		13.91%	5.1%
Leverage ratio (minimum required - 4%)		15.41%		14.22%	8.4%		10.14%		9.24%	9.8%
Equity to assets		16.56%		15.19%	9.0%		11.07%		11.24%	-1.6%
Tangible common equity to assets		13.87%		12.59%	10.2%		8.66%		8.83%	-1.9%

~~135~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

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, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:


	September 30,		December 31,		Variance	March 31,		December 31,		Variance
	2019		2018		%	2020		2019		%
	(Dollars in thousands)					(Dollars in thousands)
Oriental Bank Regulatory Capital Ratios:
Common Equity Tier 1 Capital to Risk-Weighted Assets		19.55%		18.40%	6.3%		12.81%		12.09%	6.0%
Actual common equity tier 1 capital	$	930,216	$	887,918	4.8%	$	891,285	$	813,444	9.6%
Minimum capital requirement (4.5%)	$	214,087	$	217,120	-1.4%	$	313,209	$	302,782	3.4%
Minimum capital conservation buffer requirement (1.875%)	$	118,937	$	90,467	31.5%	$	174,005	$	168,212	3.4%
Minimum to be well capitalized (6.5%)	$	309,237	$	313,618	-1.4%	$	452,413	$	437,351	3.4%
Tier 1 Capital to Risk-Weighted Assets		19.55%		18.40%	6.3%		12.81%		12.09%	6.0%
Actual tier 1 risk-based capital	$	930,216	$	887,918	4.8%	$	891,285	$	813,444	9.6%
Minimum capital requirement (6%)	$	285,449	$	289,494	-1.4%	$	417,612	$	403,709	3.4%
Minimum to be well capitalized (8%)	$	380,599	$	385,992	-1.4%	$	556,816	$	538,279	3.4%
Total Capital to Risk-Weighted Assets		20.83%		19.68%	5.8%		14.06%		13.36%	5.3%
Actual total risk-based capital	$	990,903	$	949,596	4.3%	$	978,518	$	898,812	8.9%
Minimum capital requirement (8%)	$	380,599	$	385,992	-1.4%	$	556,816	$	538,279	3.4%
Minimum to be well capitalized (10%)	$	475,749	$	482,490	-1.4%	$	696,020	$	672,848	3.4%
Total Tier 1 Capital to Average Total Assets		14.83%		13.68%	8.4%		9.68%		8.85%	9.3%
Actual tier 1 capital	$	930,216	$	887,918	4.8%	$	891,285	$	813,444	9.6%
Minimum capital requirement (4%)	$	250,964	$	259,547	-3.3%	$	368,376	$	367,537	0.2%
Minimum to be well capitalized (5%)	$	313,705	$	324,434	-3.3%	$	460,470	$	459,421	0.2%

~~136~~109

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


	Nine-Month Period Ended September 30, 2018
			Book Value
Description	Sale Price		at Sale		Gross Gains		Gross Losses
	(In thousands)
Sale of securities available-for-sale
Mortgage-backed securities
GNMA certificates	$	14,746	$	14,746	$	-	$	-
Total	$	14,746	$	14,746	$	-	$	-

Cash flows from financing activities:
Net increase (decrease) in:
Deposits		145,096		12,850
Securities sold under agreements to repurchase		(140,000)		(23,766)
FHLB advances, federal funds purchased, and other borrowings		(1,598)		2,547
Exercise of stock options with treasury shares		466		437
Purchase of treasury stock		(2,226)		-
Dividends paid on preferred stock		(1,628)		(1,229)
Dividends paid on common stock		(3,598)		(3,590)
Net cash (used in) financing activities	$	(3,488)	$	(12,751)
Net change in cash, cash equivalents and restricted cash		473,184		58,960
Cash, cash equivalents and restricted cash at beginning of period		852,757		450,063
Cash, cash equivalents and restricted cash at end of period	$	1,325,941	$	509,023
Reconciliation of the Consolidated Statements of Cash Flows to the Consolidated Balance Sheets:
Cash and due from banks	$	1,314,688	$	498,328
Money market investments		10,203		7,665
Restricted cash		1,050		3,030
Total cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	1,325,941	$	509,023
Supplemental Cash Flow Disclosure and Schedule of Non-cash Activities:
Interest paid	$	15,584	$	13,513
Income taxes paid	$	5,000	$	-
Operating lease liabilities paid	$	3,208	$	1,519
Mortgage loans securitized into mortgage-backed securities	$	26,783	$	15,163
Transfer from held-to-maturity securities to available-for-sale securities	$	-	$	424,740
Transfer from loans to foreclosed real estate and other repossessed assets	$	8,716	$	10,995
Reclassification of loans held-for-investment portfolio to held-for-sale portfolio	$	261	$	-
Reclassification of loans held-for-sale portfolio to held-for-investment portfolio	$	-	$	49
Financed sales of foreclosed real estate	$	-	$	186
Loans booked under the GNMA buy-back option	$	75,314	$	12,942
Initial recognition of operating lease right-of-use assets	$	-	$	21,930
Initial recognition of operating lease liabilities	$	-	$	23,689
See notes to unaudited consolidated financial statements

	Quarter Ended March 31, 2020
			Book Value
Description	Sale Price		at Sale		Gross Gains		Gross Losses
	(In thousands)
Sale of securities available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates	$	229,571	$	227,213	$	2,358	$	-
GNMA certificates		91,413		89,043		2,370		-
Total	$	320,984	$	316,256	$	4,728	$	-

	September 30, 2019
	12 months or more
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies	$	38,170	$	336	$	37,834
FNMA and FHLMC certificates		343,004		2,582		340,422
Obligations of US Government and sponsored agencies		2,040		10		2,030
GNMA certificates		19		-		19
US Treasury Securities		9,997		10		9,987
	$	393,230	$	2,938	$	390,292

	Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies		12,081		35		12,046
FNMA and FHLMC certificates		3,578		4		3,574
US Treasury Securities		322		-		322
	$	15,981	$	39	$	15,942

	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US government-sponsored agencies	$	50,251	$	371	$	49,880
FNMA and FHLMC certificates		346,582		2,586		343,996
Obligations of US government and sponsored agencies		2,040		10		2,030
GNMA certificates		19		-		19
US Treasury Securities		10,319		10		10,309
	$	409,211	$	2,977	$	406,234

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

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

	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies		46,920		490		46,430
FNMA and FHLMC certificates		264,018		1,417		262,601

Credit cards		477		99		350		926		17,888		18,814		-
Auto		20		21		30		71		64		135		-
		519		120		402		1,041		19,888		20,929		-
Total acquired BBVAPR non-PCI loans		567		138		1,192		1,897		21,173		23,070		-
Total non-PCI loans	$	97,199	$	48,394	$	131,286	$	276,879	$	4,449,614	$	4,726,493	$	2,418

	Quarter Ended September 30, 2018
	Mortgage		Commercial		Auto		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	243,903	$	42,521	$	1,071	$	497	$	287,992
Accretion		(6,722)		(3,977)		(466)		(88)		(11,253)
Change in expected cash flows		-		1,334		3		25		1,362
Transfer from (to) non-accretable discount		1,456		(1,140)		3		(26)		293
Balance at end of period	$	238,637	$	38,738	$	611	$	408	$	278,394

Non-Accretable Discount Activity:
Balance at beginning of period	$	296,137	$	11,143	$	23,645	$	19,332	$	350,257
Change in actual and expected losses		(1,860)		(1,125)		181		13		(2,791)
Transfer (to) from accretable yield		(1,456)		1,140		(3)		26		(293)
Balance at end of period	$	292,821	$	11,158	$	23,823	$	19,371	$	347,173

	September 30		December 31,
	2019		2018
	(In thousands)
Contractual required payments receivable	$	139,119	$	156,722
Less: Non-accretable discount		1,714		2,959
Cash expected to be collected		137,405		153,763
Less: Accretable yield		35,588		41,699
Carrying amount, gross		101,817		112,064
Less: Allowance for loan and lease losses		22,370		24,971
Carrying amount, net	$	79,447	$	87,093

	September 30,		December 31
	2019		2018
	(In thousands)
Originated and other loans and leases held for investment
Mortgage
Traditional (by origination year):
Up to the year 2002	$	916	$	2,538
Years 2003 and 2004		1,529		5,818
Year 2005		1,151		3,600
Year 2006		1,227		5,140
Years 2007, 2008 and 2009		1,075		6,697
Years 2010, 2011, 2012, 2013		2,540		8,427
Years 2014, 2015, 2016, 2017 and 2018		208		1,462
		8,646		33,682
Non-traditional		1,072		3,085
Loss mitigation program		7,995		22,107
		17,713		58,874
Commercial
Commercial secured by real estate
Corporate		7,264		-
Institutional		9,295		9,911
Middle market		5,860		7,266
Retail		7,824		16,123
		30,243		33,300
Other commercial and industrial
Middle market		4,841		6,481
Retail		514		2,629
Floor plan		3		46
		5,358		9,156
		35,601		42,456
Consumer
Credit cards		592		411
Overdrafts		-		-
Personal lines of credit		82		31
Personal loans		3,027		2,909
Cash collateral personal loans		307		3
		4,008		3,354
Auto and leasing		15,019		13,494
Total non-accrual originated loans	$	72,341	$	118,178

	December 31 , 2018
							Coverage
	Unpaid		Recorded				to Recorded
	Principal		Investment		Allowance		Investment
	(In thousands)
Impaired loan pools with specific allowance:
Mortgage	$	498,537	$	492,890	$	15,225	3%
Commercial		188,413		180,790		20,641	11%
Auto		14,551		14,403		6,144	43%
Total investment in impaired loan pools	$	701,501	$	688,083	$	42,010	6%

	Quarter Ended March 31, 2020
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate	Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate	Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Mortgage	26	$	3,093	5.14%	359	$	3,046	4.29%	360
Commercial	1		281	8.00%	105		281	6.00%	240
Consumer	15		199	13.70%	67		204	11.05%	82
Auto	1		14	18.95%	60		17	13.95%	84

	Quarter Ended March 31, 2019
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate	Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate	Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Mortgage	38	$	4,494	5.52%	387	$	4,242	4.60%	353
Commercial	1		7	11.50%	36		7	11.50%	24
Consumer	71		963	15.20%	65		967	11.86%	73

	Quarter Ended September 30, 2019
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate	Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate	Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Mortgage	21	$	2,446	5.97%	358	$	2,307	5.25%	345
Commercial	1		81	8.50%	60		81	8.50%	95
Consumer	124		1,818	16.50%	65		1,776	11.68%	75
Auto	8		112	6.96%	71		112	8.60%	43


	Nine-Month Period Ended September 30, 2019
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate	Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate	Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Mortgage	109	$	13,940	5.91%	383	$	12,893	5.14%	346
Commercial	3		1,245	7.12%	55		1,245	5.96%	86
Consumer	265		3,833	15.92%	66		3,825	11.69%	75
Auto	21		305	7.35%	70		313	8.97%	45

	September 30, 2019
	Risk Ratings

	Balance				Special
	Outstanding		Pass		Mention		Substandard		Doubtful		Loss
	(In thousands)
Commercial - originated and other loans held for investment
Commercial secured by real estate:
Corporate	$	242,849	$	218,501	$	17,084	$	7,264	$	-	$	-
Institutional		76,055		66,405		355		9,295		-		-
Middle market		204,882		157,063		27,901		19,918		-		-
Retail		224,625		209,961		3,777		10,887		-		-
Floor plan		3,136		3,136		-		-		-		-
Real estate		17,966		17,966		-		-		-		-
US Loan Program		16,782		16,782		-		-		-		-
		786,295		689,814		49,117		47,364		-		-
Other commercial and industrial:
Corporate		160,222		157,655		2,567		-		-		-
Institutional		153,981		153,981		-		-		-		-
Middle market		77,581		69,263		2,706		5,612		-		-
Retail		110,204		109,689		96		419		-		-
Floor plan		38,570		36,440		2,127		3		-		-
US Loan Program		246,776		246,776		-		-		-		-
		787,334		773,804		7,496		6,034		-		-
Total		1,573,629		1,463,618		56,613		53,398		-		-

Commercial - acquired loans (under ASC 310-20)
Commercial secured by real estate:
Retail		-		-		-		-		-		-
Floor plan		820		33		-		787		-		-
		820		33		-		787		-		-
Other commercial and industrial:
Retail		1,397		1,397		-		-		-		-
Floor plan		-		-		-		-		-		-
		1,397		1,397		-		-		-		-
Total		2,217		1,430		-		787		-		-

	Quarter Ended September 30, 2019
	Originated and other loans and leases held for investment		Acquired BBVAPR loans		Acquired Eurobank loans		Total
		(In thousands)

Balance at beginning of period	$	10,953	$	11,240	$	7,316	$	29,509
Decline in value		(526)		(334)		(233)		(1,093)
Additions		2,501		1,472		599		4,572
Sales		(1,718)		(2,644)		(1,674)		(6,036)
Balance at end of period	$	11,210	$	9,734	$	6,008	$	26,952


	Nine-Month Period Ended September 30, 2019
	Originated and other loans and leases held for investment		Acquired BBVAPR loans		Acquired Eurobank loans		Total
		(In thousands)

Balance at beginning of period	$	9,571	$	14,617		9,580	$	33,768
Decline in value		(1,116)		(2,123)		(1,177)		(4,416)
Additions		7,319		4,203		1,346		12,868
Sales		(4,564)		(6,963)		(3,741)		(15,268)
Balance at end of period	$	11,210	$	9,734	$	6,008	$	26,952

	September 30, 2019
	Amortized				Approximate		Weighted
	Cost of				Fair Value		Average
	Underlying		Balance of		of Underlying		Interest Rate
Underlying Securities	Securities		Borrowing		Securities		of Security
	(Dollars in thousands)
FNMA and FHLMC Certificates	$	206,567	$	190,000	$	205,662		2.98%
Total	$	206,567	$	190,000	$	205,662		2.98%


	December 31, 2018
	Amortized				Approximate		Weighted
	Cost of				Fair Value		Average
	Underlying		Balance of		of Underlying		Interest Rate
Underlying Securities	Securities		Borrowing		Securities		of Security
	(Dollars in thousands)
FNMA and FHLMC Certificates	$	496,814	$	454,723	$	487,181		3.01%
Total	$	496,814	$	454,723	$	487,181		3.01%

September 30, 2019
							Gross Amounts Not Offset in the Statement of Financial Condition
					Net Amount of
			Gross Amounts		Liabilities
			Offset in the		Presented
	Gross Amount		Statement of		in Statement				Cash
	of Recognized		Financial		of Financial		Financial		Collateral		Net
	Liabilities		Condition		Condition		Instruments		Provided		Amount
	(In thousands)
Derivatives	$	1,159	$	-	$	1,159	$	-	$	-	$	1,159
Securities sold under agreements to repurchase		190,000		-		190,000		205,662		-		(15,662)
Total	$	191,159	$	-	$	191,159	$	205,662	$	-	$	(14,503)


December 31, 2018
							Gross Amounts Not Offset in the Statement of Financial Condition
					Net Amount of
			Gross Amounts		Liabilities
			Offset in the		Presented
	Gross Amount		Statement of		in Statement				Cash
	of Recognized		Financial		of Financial		Financial		Collateral		Net
	Liabilities		Condition		Condition		Instruments		Provided		Amount
	(In thousands)
Derivatives	$	333	$	-	$	333	$	-		1,980	$	(1,647)
Securities sold under agreements to repurchase		454,723		-		454,723		487,181		-		(32,458)
Total	$	455,056	$	-	$	455,056	$	487,181	$	1,980	$	(34,105)

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

	Quarter Ended September 30,
		2019		2018
	(In thousands)
Cash flow hedges:
Interest-rate contracts	$	549	$	517	Net interest expense
Available-for-sale securities:
Gain on sale of investments		3,498		-	Net gain on sale of securities
Tax effect from changes in tax rates		(10)		(63)	Income tax expense
	$	4,037	$	454


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

	Nine-Month Period Ended September 30,
		2019		2018
	(In thousands)
Cash flow hedges:
Interest-rate contracts	$	1,325	$	1,339	Net interest expense
Available-for-sale securities:
Gain on sale of investments		8,274		-	Net gain on sale of securities
Residual tax effect from OIB's change in applicable tax rate		-		5	Income tax expense
Tax effect from changes in tax rates		(38)		(194)	Income tax expense
	$	9,561	$	1,150

Level 3 Instruments Only	Servicing Assets
	(In thousands)
	Quarter Ended September 30,
	2019		2018
Balance at beginning of period	$	10,134	$	10,829
New instruments acquired		352		417
Principal repayments		(243)		(184)
Changes in fair value of servicing assets		(118)		(196)
Balance at end of period	$	10,125	$	10,866


Level 3 Instruments Only	Servicing Assets
	(In thousands)
	Nine-Month Period Ended September 30,
	2019		2018
	(In thousands)
Balance at beginning of period	$	10,716	$	9,821
New instruments acquired		860		1,158
Principal repayments		(694)		(593)
Changes in fair value of servicing assets		(757)		480
Balance at end of period	$	10,125	$	10,866

	September 30, 2019
	Fair Value		Valuation Technique	Unobservable Input	Range
	(In thousands)

Servicing assets	$	10,125	Cash flow valuation	Constant prepayment rate	4.38% -9.44%
				Discount rate	10.00% - 12.00%
Collateral dependent impaired loans	$	31,564	Fair value of property or collateral	Appraised value less disposition costs	15.20% - 36.20%


Other non-collateral dependent impaired loans	$	27,943	Cash flow valuation	Discount rate	4.25% - 12.25%

Foreclosed real estate	$	26,952	Fair value of property or collateral	Appraised value less disposition costs	15.20% - 36.20%

Other repossessed assets	$	3,537	Fair value of property or collateral	Estimated net realizable value less disposition costs	28.00% - 72.00%

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

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

	Quarter ended September 30, 2019						Quarter ended June 30, 2019

			Income Tax		Impact on				Income Tax		Impact on
(Dollars in thousands) (unaudited)	Pre-tax		Effect (i)		Net Income		Pre-tax		Effect (i)		Net Income

U.S. GAAP net income					$	7,383					$	23,979
Non-GAAP adjustments:
Sale of mortgage-backed securities available-for-sale (a)	$	(3,498)	$	1,067		(2,431)	$	(4,769)	$	1,532		(3,237)
Non-performing loans transferred to held-for-sale or sold (b)(c)		38,958		(11,886)		27,072		8,803		(2,828)		5,975
Sale of fully charged-off loans (d)		(2,382)		727		(1,655)		-		-		-
Merger expenses (e)		1,556		(475)		1,081		1,000		(321)		679
FDIC insurance assessment credit (f)		(1,534)		468		(1,066)		-		-		-
Hacienda credit for hurricane Maria (g)		(1,010)		308		(702)		-		-		-
Environmental factors adjustment (h)		(4,541)		1,385		(3,156)		-		-		-
Adjusted net income (Non-GAAP)					$	26,527					$	27,396
Less: dividends on preferred stoc						(1,628)						(1,628)
Adjusted net income available to common shareholders (Non-GAAP)					$	24,899					$	25,768

U.S. GAAP earnings per common share - diluted					$	0.11					$	0.43
Non-GAAP adjustments:
Sale of mortgage-backed securities available-for-sale	$	(0.07)	$	0.02		(0.05)	$	(0.09)	$	0.03		(0.06)
Non-performing loans transferred to held-for-sale or sold (b)(c)		0.75		(0.23)		0.52		0.17		(0.05)		0.12
Sale of fully charged-off loans (d)		(0.04)		0.01		(0.03)		-		-		-
Merger expenses (e)		0.03		(0.01)		0.02		0.02		(0.01)		0.01
FDIC insurance assessment credit (f)		(0.03)		0.01		(0.02)		-		-		-
Hacienda credit for hurricane Maria (g)		(0.02)		0.01		(0.01)		-		-		-
Environmental factors adjustment (h)		(0.09)		0.03		(0.06)		-		-		-
Adjusted earnings per common share - diluted (Non-GAAP)					$	0.48					$	0.50

TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED SEPTEMBER 30, 2019 AND 2018

	Interest				Average rate		Average balance
	September		September		September	September	September		September
	2019		2018		2019	2018	2019		2018
	(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets	$	93,655	$	94,137	6.21%	6.17%	$	5,981,757	$	6,055,085
Tax equivalent adjustment		2,629		1,934	0.17%	0.13%		-		-
Interest-earning assets - tax equivalent		96,284		96,071	6.38%	6.30%		5,981,757		6,055,085
Interest-bearing liabilities		12,945		11,860	0.98%	0.87%		5,261,453		5,437,736
Tax equivalent net interest income / spread		83,339		84,211	5.40%	5.43%		720,304		617,349
Tax equivalent interest rate margin					5.58%	5.56%
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities		3,797		8,445	2.14%	2.55%		708,606		1,327,180
Interest bearing cash and money market investments		4,086		1,676	2.21%	2.03%		734,105		327,268
Total investments		7,883		10,121	2.14%	2.55%		1,442,711		1,654,448
Non-acquired loans
Mortgage		8,427		8,808	5.40%	5.28%		623,772		667,372
Commercial		25,607		23,373	6.36%	6.13%		1,597,902		1,512,661
Consumer		11,449		10,857	11.99%	11.68%		378,967		363,884
Auto and leasing		28,820		25,349	9.09%	9.59%		1,258,394		1,057,232
Total non-acquired loans		74,303		68,387	7.64%	7.53%		3,859,035		3,601,149
Acquired loans:
Acquired BBVAPR
Mortgage		5,876		6,722	5.33%	5.43%		440,954		495,454
Commercial		2,386		4,046	6.72%	9.29%		140,821		172,724
Consumer		667		586	20.52%	17.37%		12,894		13,381
Auto		161		790	20.55%	11.72%		3,108		26,747
Total acquired BBVAPR loans		9,090		12,144	6.08%	6.86%		597,777		708,306
Acquired Eurobank		2,379		3,485	11.57%	15.29%		82,234		91,182
Total loans		85,772		84,016	7.50%	7.57%		4,539,046		4,400,637
Total interest-earning assets		93,655		94,137	6.21%	6.17%		5,981,757		6,055,085

TABLE 1A - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2019 AND 2018

	Interest				Average rate		Average balance
	September		September		September	September	September		September
	2019		2018		2019	2018	2019		2018
	(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets	$	282,620	$	265,314	6.24%	6.01%	$	6,055,475	$	5,906,945
Tax equivalent adjustment		8,013		5,800	0.18%	0.13%		-		-
Interest-earning assets - tax equivalent		290,633		271,114	6.42%	6.14%		6,055,475		5,906,945
Interest-bearing liabilities		39,036		31,455	0.98%	0.79%		5,350,683		5,293,422
Tax equivalent net interest income / spread		251,597		239,659	5.44%	5.34%		704,792		613,523
Tax equivalent interest rate margin					5.62%	5.47%
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities		18,292		24,131	2.44%	2.48%		1,000,217		1,299,357
Interest bearing cash and money market investments		9,357		4,126	2.33%	1.76%		535,865		313,410
Total investments		27,649		28,257	2.44%	2.48%		1,536,082		1,612,767
Non-acquired loans
Mortgage		26,022		26,602	5.44%	5.25%		637,680		675,191
Commercial		76,383		62,119	6.43%	5.88%		1,588,887		1,411,413
Consumer		33,392		30,783	11.98%	11.42%		373,644		360,258
Auto and leasing		82,783		70,053	9.18%	9.39%		1,206,054		996,972
Total non-acquired loans		218,580		189,557	7.68%	7.36%		3,806,265		3,443,834
Acquired loans:
Acquired BBVAPR
Mortgage		18,342		20,710	5.34%	5.46%		458,410		505,659
Commercial		7,539		11,297	6.69%	7.63%		150,776		197,934
Consumer		2,270		2,038	23.53%	19.60%		12,900		13,903
Auto		788		3,263	16.12%	11.30%		6,536		38,624
Total acquired BBVAPR loans		28,939		37,308	6.14%	6.58%		628,622		756,120
Acquired Eurobank		7,452		10,192	11.76%	14.42%		84,506		94,224
Total loans		254,971		237,057	7.54%	7.38%		4,519,393		4,294,178
Total interest-earning assets		282,620		265,314	6.24%	6.01%		6,055,475		5,906,945

TABLE 11 — NON-PERFORMING ASSETS

	September 30,		December 31,		Variance
	2019		2018		(%)
	(Dollars in thousands)
Non-performing assets:
Non-accruing loans
Troubled-Debt Restructuring loans	$	22,057	$	41,679	-47.1%
Other loans		51,341		78,047	-34.2%
Accruing loans
Troubled-Debt Restructuring loans		2,779		4,302	-35.4%
Other loans		646		541	19.4%
Total non-performing loans	$	76,823	$	124,569	-38.3%
Foreclosed real estate		26,952		33,768	-20.2%
Other repossessed assets		3,537		2,986	18.5%
	$	107,312	$	161,323	-33.5%
Non-performing assets to total assets, excluding acquired loans with deteriorated credit quality (including those by analogy)		1.93%		2.76%	-30.1%
Non-performing assets to total capital		11.81%		16.13%	-26.8%

TABLE 12 — NON-PERFORMING LOANS

	September 30,		December 31,		Variance
	2019		2018		%
	(Dollars in thousands)
Non-performing loans:
Originated and other loans held for investment
Mortgage	$	21,138	$	63,717	-66.8%
Commercial		35,601		42,456	-16.1%
Consumer		4,008		3,354	19.5%
Auto and leasing		15,019		13,494	11.3%
		75,766		123,021	-38.4%
Acquired loans accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)
Commercial		808		950	-14.9%
Consumer		205		398	-48.5%
Auto		44		200	-78.0%
		1,057		1,548	-31.7%
Total	$	76,823	$	124,569	-38.3%
Non-performing loans composition percentages:
Originated loans
Mortgage		27.5%		51.1%
Commercial		46.2%		34.1%
Consumer		5.2%		2.7%
Auto and leasing		19.6%		10.8%
Acquired loans accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)
Commercial		1.1%		0.8%
Consumer		0.3%		0.3%
Auto		0.1%		0.2%
Total		100.0%		100.0%
Non-performing loans to:
Total loans, excluding loans accounted for under ASC 310-30 (including those by analogy)		2.01%		3.30%	-39.1%
Total assets, excluding loans accounted for under ASC 310-30 (including those by analogy)		1.19%		2.13%	-44.1%
Total capital		7.32%		12.46%	-41.3%
Non-performing loans with partial charge-offs to:
Total loans, excluding loans accounted for under ASC 310-30 (including those by analogy)		0.63%		1.16%	-45.69%
Non-performing loans		31.19%		35.30%	-11.6%
Other non-performing loans ratios:
Charge-off rate on non-performing loans to non-performing loans on which charge-offs have been taken		80.22%		59.20%	35.5%
Allowance for loan and lease losses to non-performing loans on which no charge-offs have been taken		149.05%		120.67%	23.5%

					Cash						Cash
	Price				Dividend		Price				Dividend
	High		Low		Per share		High		Low		Per share
2020
March 31, 2020							$	23.50	$	9.32	$	0.07
2019
December 31, 2019							$	23.61	$	20.00	$	0.07
September 30, 2019	$	24.20	$	19.84	$	0.07	$	24.20	$	19.84	$	0.07
June 30, 2019		23.77	$	18.78	$	0.07	$	23.77	$	18.78	$	0.07
March 31, 2019	$	21.24	$	16.37	$	0.07	$	21.24	$	16.37	$	0.07
2018
December 31, 2018	$	18.56	$	14.93	$	0.07	$	18.56	$	14.93	$	0.07
September 30, 2018	$	17.60	$	14.45	$	0.06	$	17.60	$	14.45	$	0.06
June 30, 2018	$	14.75	$	10.60	$	0.06	$	14.75	$	10.60	$	0.06
March 31, 2018	$	12.05	$	8.60	$	0.06	$	12.05	$	8.60	$	0.06
2017
December 31, 2017	$	10.25	$	7.90	$	0.06
September 30, 2017	$	10.40	$	8.40	$	0.06
June 30, 2017	$	12.03	$	9.19	$	0.06
March 31, 2017	$	13.80	$	10.90	$	0.06

	Net Interest Income Risk (one-year projection)						Net Interest Income Risk (one-year projection)
	Static Balance Sheet			Growing Simulation			Static Balance Sheet			Growing Simulation
	Amount		Percent	Amount		Percent	Amount		Percent	Amount		Percent
	Change		Change	Change		Change	Change		Change	Change		Change
Change in interest rate	(Dollars in thousands)						(Dollars in thousands)
+ 200 Basis points	$	19,660	6.29%	$	20,378	6.34%	$	28,247	7.08%	$	24,885	6.01%
+ 100 Basis points	$	9,879	3.16%	$	10,238	3.18%	$	13,302	3.33%	$	11,552	2.79%
- 100 Basis points	$	(9,908)	-3.17%	$	(10,251)	-3.19%	$	(8,623)	-2.16%	$	(6,072)	-1.47%
- 200 Basis points	$	(18,703)	-5.99%	$	(19,305)	-6.00%	$	(9,956)	-2.49%	$	(6,527)	-1.58%

				Total number of		Maximum approximate
				shares purchased		dollar value of shares
	Total number of	Average price paid		as part of publicly		that may yet be purchased
Period	shares purchased	per share		announced programs		under the programs
						(In thousands)
March 1-31, 2020	175,000	$	12.69	175,000	$	5,322
Quarter ended March 31, 2020	175,000	$	12.69	175,000	$	5,322


By:	/s/ José Rafael Fernández	Date: ~~November 7, 2019~~May 11, 2020
	José Rafael Fernández
	President and Chief Executive Officer

By:	/s/ Maritza Arizmendi	Date: ~~November 7, 2019~~May 11, 2020
	Maritza Arizmendi
	Executive Vice President, Chief Financial Officer and Chief Accounting Officer
By:	/s/ Krisen Aguirre Torres	Date: ~~November 7, 2019~~May 11, 2020
	Krisen Aguirre Torres
	Vice President Financial Reporting and Accounting Control