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~~June 30, ~~2019~~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~~51,342,232 common shares ($1.00 par value per share) outstanding as of ~~October~~July 31, ~~2019~~2020

~~OFG BANCORP~~

~~UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION~~

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

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION			Page
Item 1.	Financial Statements
	Unaudited Consolidated Statements of Financial Condition		13
	Unaudited Consolidated Statements of Operations		35
	Unaudited Consolidated Statements of Comprehensive Income		57
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity		68
	Unaudited Consolidated Statements of Cash Flows		79
	Notes to Unaudited Consolidated Financial Statements

		Note 1 – ~~Organization, Consolidation and Basis of Presentation~~Significant Accounting Policies	912
		Note 2 – ~~Significant Events~~Business Combinations	1219
		Note 3 – Restricted Cash	1522
		Note 4 – Investment Securities	1722
		Note 5 – Loans	2227
		Note 6 – Allowance for ~~Loan and Lease~~Credit Losses	5042
		Note 7 – Foreclosed Real Estate	6045
		Note 8 – ~~Derivatives~~Servicing Assets	6145
		Note 9 – Derivatives	47
		Note 10 – Core Deposit, customer relationship intangible and other intangibles	48
		Note 11 – Accrued Interest Receivable and Other Assets	6248
		Note 1012 – Deposits and Related Interest	6349
		Note 1113 – Borrowings and Related Interest	6550
		Note 1214 – Offsetting of Financial Assets and Liabilities	6752
		Note 1315 – Income Taxes	6954
		Note 1416 – Regulatory Capital Requirements	7055
		Note 1517 – Stockholders’ Equity	7258
		Note 1618 – Accumulated Other Comprehensive Income	7459
		Note 1719 – Earnings per Common Share	7762
		Note 1820 – Guarantees	7862
		Note 1921 – Commitments and Contingencies	7964
		Note 2022 – Operating Leases	8065
		Note 2123 – Fair Value of Financial Instruments	8368
		Note 2224 – Banking and Financial Service Revenues	8974
		Note 2325 – Business Segments	9176

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9479
		Critical Accounting Policies and Estimates	9481
		Selected Financial Data	9583
		Financial Highlights of the ~~Third~~First Quarter of ~~2019~~2020	9785
		Analysis of Results of Operations	~~101~~86
		Analysis of Financial Condition	~~114~~99
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		~~138~~121
Item 4.	Controls and Procedures		~~142~~125
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings		~~143~~126
Item 1A.	Risk Factors		~~143~~126
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		~~144~~127
Item 3.	Default upon Senior Securities		~~144~~127
Item 4.	Mine Safety Disclosures		~~144~~127
Item 5.	Other Information		~~144~~127
Item 6.	Exhibits		~~145~~128
Signatures			~~146~~
			129

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;

·unforeseen or catastrophic events, including extreme weather events, other natural disasters, man-made disasters or the emergence of pandemics, which could cause a disruption in our operations or other adverse consequences for our business;

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

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

·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;

·difficulties in integrating the ~~receipt and timing of regulatory approvals required to consummate the acquisition~~acquired Puerto Rico operations of Scotiabank de Puerto Rico (“SBPR”) and certain branch assets and liabilities of The Bank of Nova Scotia (“BNS”) in Puerto Rico and ~~its~~the U.S. Virgin Islands ~~operations~~ (the “Scotiabank ~~Transaction”~~PR & USVI Acquisition”)~~; and~~ into the Company’s operations;

·~~difficulties in integrating~~ the emergence of widespread health emergencies or pandemics, including the magnitude and duration of the COVID-19 pandemic and its impact on the U.S., P.R., and/or global economy, financial market conditions and our business, results of operations ~~expected~~and financial condition; and

the impact of the actions taken by federal and local governmental authorities to ~~be acquired in~~try and contain the ~~Scotiabank Transaction.~~virus or address the impact of the virus on the United States and Puerto Rico economy (including, without limitation, the CARES Act), and the resulting effect of all of such items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;

Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-looking statements include the following: negative economic conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense; changes in interest rates and market liquidity which may reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets; adverse movements and volatility in debt and equity capital markets; changes in market rates and prices which may adversely impact the value of financial assets and liabilities; risk of impairment of investment securities, goodwill, other intangible assets or deferred tax assets; liabilities resulting from litigation and regulatory investigations; changes in accounting standards, rules and interpretations; increased competition; 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.

Other factors not identified above, including those described under the headings “Risk Factors”, "Quantitative and Qualitative Disclosures about Market Risk" and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 and 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.

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~~JUNE 30, ~~2019~~2020 AND DECEMBER 31, ~~2018~~2019

	June 30,		December 31,
	2020		2019
	(In thousands)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	1,888,965	$	844,532
Money market investments		10,022		6,775
Total cash and cash equivalents		1,898,987		851,307
Restricted cash		1,050		1,450
Investments:
Trading securities, at fair value, with amortized cost of $162 (December 31, 2019 - $182)		22		37
Investment securities available-for-sale, at fair value, with amortized cost of $529,985
and allowance for credit losses of $0 (December 31, 2019, amortized cost $1,074,475)		540,239		1,074,169
Federal Home Loan Bank (FHLB) stock, at cost		8,366		13,048
Other investments		1,076		560
Total investments		549,703		1,087,814
Loans:
Loans held-for-sale, at lower of cost or fair value		19,432		19,591
Loans held for investment, net of allowance for credit losses of $232,701 (December 31, 2019 - $116,539)		6,719,811		6,622,256
Total loans		6,739,243		6,641,847
Other assets:
Foreclosed real estate		24,792		29,909
Accrued interest receivable		82,483		37,120
Deferred tax asset, net		186,730		176,740
Premises and equipment, net		82,234		81,105
Customers' liability on acceptances		20,034		21,599
Core deposit, customer relationship and other intangibles		51,406		56,965
Servicing assets		47,926		50,779
Goodwill		86,069		86,069
Operating lease right-of-use assets		34,692		39,112
Other assets		127,370		135,845
Total assets	$	9,932,719	$	9,297,661

See notes to unaudited consolidated financial statements

September 30,

December 31,

2019

2018

(In thousands)
ASSETS

Cash and cash equivalents:

    Cash and due from banks

$
953,802

$
442,103
    Money market investments

8,035

4,930
        Total cash and cash equivalents

961,837

447,033
Restricted cash

1,050

3,030
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
    Federal Home Loan Bank (FHLB) stock, at cost

10,525

12,644
    Other investments

57

3
        Total investments

529,718

1,279,604
Loans:

    Loans held-for-sale, at lower of cost or fair value

35,546

10,368
    Loans held for investment, net of allowance for loan losses of $154,343 (December 31, 2018 - $164,231)

4,371,644

4,421,226
        Total loans

4,407,190

4,431,594
Other assets:

    Foreclosed real estate

26,952

33,768
    Accrued interest receivable

30,470

34,254
    Deferred tax asset, net

112,602

113,763
    Premises and equipment, net

69,754

68,892
    Customers' liability on acceptances

21,796

16,937
    Servicing assets

10,125

10,716
    Derivative assets

13

347
    Goodwill

86,069

86,069
    Operating lease right-of-use assets

19,318

-
    Other assets

56,611

57,345
                Total assets

$
6,333,505

$
6,583,352

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

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

	June 30,		December 31,
	2020		2019
	(In thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits	$	4,370,419	$	3,579,115
Savings accounts		2,017,180		1,836,480
Time deposits		2,154,327		2,283,015
Total deposits		8,541,926		7,698,610
Borrowings:
Securities sold under agreements to repurchase		-		190,274
Advances from FHLB		67,518		78,009
Subordinated capital notes		36,083		36,083
Other borrowings		822		1,195
Total borrowings		104,423		305,561
Other liabilities:
Derivative liabilities		2,078		913
Acceptances executed and outstanding		20,034		21,599
Operating lease liabilities		35,694		39,840
Accrued expenses and other liabilities		187,280		185,660
Total liabilities		8,891,435		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, 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: 51,342,232 shares outstanding (December 31, 2019 - 59,885,234;
51,398,956 )		59,885		59,885
Additional paid-in capital		621,860		621,515
Legal surplus		98,347		95,779
Retained earnings		264,725		279,646
Treasury stock, at cost, 8,543,002 shares (December 31, 2019 - 8,486,278 shares)		(103,121)		(102,339)
Accumulated other comprehensive income (loss), net of tax of $-590 (December 31, 2019 - $206)		7,588		(1,008)
Total stockholders’ equity		1,041,284		1,045,478
Total liabilities and stockholders’ equity	$	9,932,719	$	9,297,661

See notes to unaudited consolidated financial statements

September 30,

December 31,

2019

2018

(In thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits:

    Demand deposits

$
2,228,256

$
2,191,802
    Savings accounts

1,225,654

1,212,259
    Time deposits

1,424,148

1,504,054
        Total deposits

4,878,058

4,908,115
Borrowings:

    Securities sold under agreements to repurchase

190,261

455,508
    Advances from FHLB

79,052

77,620
    Subordinated capital notes

36,083

36,083
    Other borrowings

551

1,214
        Total borrowings

305,947

570,425
Other liabilities:

    Derivative liabilities

1,159

333
    Acceptances executed and outstanding

21,796

16,937
    Operating lease liabilities

21,081

-
    Accrued expenses and other liabilities

56,388

87,665
            Total liabilities

5,284,429

5,583,475
Commitments and contingencies (See Note 18)

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
    Additional paid-in capital

620,948

619,381
    Legal surplus

95,783

90,167
    Retained earnings

285,854

253,040
    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)
            Total stockholders’ equity

1,049,076

999,877
                Total liabilities and stockholders’ equity

$
6,333,505

$
6,583,352

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 AND ~~NINE-MONTH~~SIX-MONTH PERIODS ENDED ~~SEPTEMBER~~JUNE 30, ~~2019~~2020 AND ~~2018 (CONTINUED)~~2019

	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2020		2019		2020		2019
	(In thousands, except per share data)
Interest income:
Loans	$	118,532	$	85,080	$	234,967	$	169,199
Mortgage-backed securities		1,619		5,987		4,392		13,912
Investment securities and other		1,541		3,188		6,030		5,854
Total interest income		121,692		94,255		245,389		188,965
Interest expense:
Deposits		15,445		9,991		32,065		19,040
Securities sold under agreements to repurchase		335		2,106		1,335		4,892
Advances from FHLB and other borrowings		505		559		1,045		1,121
Subordinated capital notes		347		514		783		1,038
Total interest expense		16,632		13,170		35,228		26,091
Net interest income		105,060		81,085		210,161		162,874
Provision for credit losses		17,696		17,705		64,827		29,954
Net interest income after provision for credit losses		87,364		63,380		145,334		132,920
Non-interest income:
Banking service revenue		13,668		10,776		29,381		21,241
Wealth management revenue		6,366		6,669		13,652		12,551
Mortgage banking activities		3,072		629		6,306		1,835
Total banking and financial service revenues		23,106		18,074		49,339		35,627

Net gain on:
Sale of securities		-		4,776		4,728		4,776
Early extinguishment of debt		(63)		(7)		(63)		(7)
Bargain purchase from Scotiabank PR & USVI acquisition		3,462		-		3,872		-
Other non-interest income		647		105		726		208
Total non-interest income, net		27,152		22,948		58,602		40,604

See notes to unaudited consolidated financial statements

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

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2020 AND 2019 (CONTINUED)

	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2020		2019		2020		2019
	(In thousands, except per share data)
Non-interest expense:
Compensation and employee benefits		34,506		19,875		70,050		40,216
Occupancy, equipment and infrastructure costs		11,837		7,511		23,276		15,257
Electronic banking charges		7,962		5,128		17,550		10,193
Information technology expenses		3,944		2,200		10,878		4,707
Professional and service fees		3,475		3,427		9,264		6,635
Insurance		2,761		1,277		6,239		2,423
Taxes, other than payroll and income taxes		3,171		2,142		6,349		4,295
Loss on sale of foreclosed real estate, other repossessed assets and credit related expenses		2,918		2,584		5,440		5,950
Advertising, business promotion, and strategic initiatives		1,533		1,315		3,163		2,526
Loan servicing and clearing expenses		1,148		1,160		2,491		2,368
Communication		905		859		1,876		1,599
Printing, postage, stationary and supplies		951		636		1,673		1,214
Director and investor relations		316		330		626		560
Merger and restructuring charges		3,006		1,000		3,310		1,000
Other		7,048		2,008		10,618		4,661
Total non-interest expense		85,481		51,452		172,803		103,604
Income before income taxes		29,035		34,876		31,133		69,920
Income tax expense		7,248		10,897		7,545		22,471
Net income		21,787		23,979		23,588		47,449
Less: dividends on preferred stock		(1,628)		(1,628)		(3,256)		(3,256)
Income available to common shareholders	$	20,159	$	22,351	$	20,332	$	44,193
Earnings per common share:
Basic	$	0.39	$	0.44	$	0.40	$	0.86
Diluted	$	0.39	$	0.43	$	0.39	$	0.86
Average common shares outstanding and equivalents		51,470		51,680		51,584		51,652
Cash dividends per share of common stock	$	0.07	$	0.07	$	0.14	$	0.14

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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


	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2020		2019		2020		2019
	(In thousands)

Net income	$	21,787	$	23,979	$	23,588	$	47,449
Other comprehensive income (loss) before tax:
Unrealized gain (loss) on securities available-for-sale		1,359		10,578		15,288		13,952
Realized gain on sale of securities available-for-sale		-		(4,776)		(4,728)		(4,776)
Unrealized (loss) gain on cash flow hedges		(19)		(629)		(1,169)		(972)
Other comprehensive income before taxes		1,340		5,173		9,391		8,204
Income tax effect		(42)		(812)		(795)		(927)
Other comprehensive income after taxes		1,298		4,361		8,596		7,277
Comprehensive income	$	23,085	$	28,340	$	32,184	$	54,726

See notes to unaudited consolidated financial statements

Quarter Ended September 30,

Nine-Month Period Ended September 30,

2019

2018

2019

2018

(In thousands)

Net income
$
7,383

$
23,100

$
54,832

$
59,666
Other comprehensive income (loss) before tax:

     Unrealized gain (loss) on securities available-for-sale

5,111

(6,375)

19,063

(21,340)
     Realized gain on sale of securities available-for-sale

(3,498)

-

(8,274)

-
     Unrealized (loss) gain on cash flow hedges

(188)

223

(1,160)

1,153
Other comprehensive income (loss) before taxes

1,425

(6,152)

9,629

(20,187)
     Income tax effect

(197)

619

(1,124)

2,341
Other comprehensive income (loss) after taxes

1,228

(5,533)

8,505

(17,846)
Comprehensive income
$
8,611

$
17,567

$
63,337

$
41,820

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY

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


	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Preferred stock:
Balance at beginning of period	$	92,000	$	92,000	$	92,000	$	92,000
Balance at end of period		92,000		92,000		92,000		92,000
Common stock:
Balance at beginning of period		59,885		59,885		59,885		59,885
Balance at end of period		59,885		59,885		59,885		59,885
Additional paid-in capital:
Balance at beginning of period		621,206		619,828		621,515		619,381
Stock-based compensation expense		822		540		1,323		987
Lapsed restricted stock units		(168)		-		(978)		-
Balance at end of period		621,860		620,368		621,860		620,368
Legal surplus:
Balance at beginning of period		95,945		92,621		95,779		90,167
Transfer from retained earnings		2,402		2,398		2,568		4,852
Balance at end of period		98,347		95,019		98,347		95,019
Retained earnings:
Balance at beginning of period		250,557		268,101		279,646		253,040
Topic 326 adoption		-		-		(25,494)		-
Topic 842 adoption		-		-		-		(736)
Balance at beginning of period (as adjusted for change in accounting principle)		250,557		268,101		254,152		252,304
Net income		21,787		23,979		23,588		47,449
Cash dividends declared on common stock		(3,588)		(3,595)		(7,191)		(7,186)
Cash dividends declared on preferred stock		(1,628)		(1,628)		(3,256)		(3,256)
Transfer to legal surplus		(2,403)		(2,398)		(2,568)		(4,852)
Balance at end of period		264,725		284,459		264,725		284,459
Treasury stock:
Balance at beginning of period		(103,289)		(103,196)		(102,339)		(103,633)
Stock repurchased		-		-		(2,226)		-
Lapsed restricted stock units and options		168		25		1,444		462
Balance at end of period		(103,121)		(103,171)		(103,121)		(103,171)
Accumulated other comprehensive income (loss), net of tax:
Balance at beginning of period		6,290		(8,047)		(1,008)		(10,963)
Other comprehensive income, net of tax		1,298		4,361		8,596		7,277
Balance at end of period		7,588		(3,686)		7,588		(3,686)
Total stockholders’ equity	$	1,041,284	$	1,044,874	$	1,041,284	$	1,044,874

See notes to unaudited consolidated financial statements

Quarter Ended September 30,

Nine-Month Period Ended September 30,

2019

2018

2019

2018

(In thousands)
Preferred stock:

Balance at beginning of period
$
92,000

$
176,000

$
92,000

$
176,000
       Balance at end of period

92,000

176,000

92,000

176,000
Common stock:

Balance at beginning of period

59,885

52,626

59,885

52,626
       Balance at end of period

59,885

52,626

59,885

52,626
Additional paid-in capital:

Balance at beginning of period

620,368

541,734

619,381

541,600
Stock-based compensation expense

580

344

1,567

978
Stock-based compensation excess tax benefit recognized in income

-

-

-

(140)
Lapsed restricted stock units

-

-

-

(360)
       Balance at end of period

620,948

542,078

620,948

542,078
Legal surplus:

Balance at beginning of period

95,019

85,249

90,167

81,454
Transfer from retained earnings

764

2,314

5,616

6,109
       Balance at end of period

95,783

87,563

95,783

87,563
Retained earnings:

Balance at beginning of period

284,459

221,441

253,040

200,878
Lease standard initial adoption

-

-

(736)

-
Net income

7,383

23,100

54,832

59,666
Cash dividends declared on common stock

(3,596)

(2,642)

(10,782)

(7,919)
Cash dividends declared on preferred stock

(1,628)

(3,465)

(4,884)

(10,396)
Transfer to legal surplus

(764)

(2,314)

(5,616)

(6,109)
       Balance at end of period

285,854

236,120

285,854

236,120
Treasury stock:

Balance at beginning of period

(103,171)

(103,969)

(103,633)

(104,502)
Lapsed restricted stock units and options

235

263

697

796
       Balance at end of period

(102,936)

(103,706)

(102,936)

(103,706)
Accumulated other comprehensive loss, net of tax:

Balance at beginning of period

(3,686)

(15,262)

(10,963)

(2,949)
Other comprehensive income (loss), net of tax:

1,228

(5,533)

8,505

(17,846)
       Balance at end of period

(2,458)

(20,795)

(2,458)

(20,795)
Total stockholders’ equity
$
1,049,076

$
969,886

$
1,049,076

$
969,886

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

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


	Six-Month Period Ended June 30,
	2020		2019
	(In thousands)
Cash flows from operating activities:
Net income	$	23,588	$	47,449
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred loan origination fees and fair value (discounts) premiums on loans		(5,267)		1,951
Amortization of fair value premiums on acquired deposits		(1,303)		-
Amortization of investment securities premiums, net of accretion of discounts		3,099		2,602
Amortization of core deposit, customer relationships and other intangibles		5,559		585
Net change in operating leases		274		12
Depreciation and amortization of premises and equipment		6,190		4,209
Deferred income tax expense, net		1,053		1,689
Provision for credit losses		64,827		29,954
Stock-based compensation		1,323		987
(Gain) loss on:
Sale of securities		(4,728)		(4,776)
Sale of loans		(819)		(256)
Derivatives		-		1
Early extinguishment of debt		63		7
Foreclosed real estate and other repossessed assets		1,343		1,766
Sale of other assets		(7)		(29)
Originations and purchases of loans held-for-sale		(55,198)		(38,290)
Proceeds from sale of loans held-for-sale		819		9,735
Net (increase) decrease in:
Trading securities		15		(52)
Accrued interest receivable		(45,363)		345
Servicing assets		2,853		582
Other assets		8,540		958
Net increase (decrease) in:
Accrued interest on deposits and borrowings		(1,292)		(1,034)
Accrued expenses and other liabilities		15,985		(24,027)
Net cash provided by operating activities		21,554		34,368

See notes to unaudited consolidated financial statements

Nine-Month Period Ended September 30,

2019

2018

(In thousands)
Cash flows from operating activities:

Net income
$
54,832

$
59,666
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 investment securities premiums, net of accretion of discounts

3,905

4,426
Amortization of core deposit and customer relationship intangibles

877

989
Net change in operating leases

(95)

-
Depreciation and amortization of premises and equipment

6,265

6,642
Deferred income tax expense, net

476

6,827
Provision for loan losses, net

73,724

44,808
Stock-based compensation

1,567

978
Stock-based compensation excess tax benefit recognized in income

-

(140)
(Gain) loss on:

   Sale of securities

(8,274)

-
   Sale of loans

(380)

(275)
   Derivatives

-

1
   Early extinguishment of repurchase agreements

7

-
   Foreclosed real estate and other repossessed assets

2,666

2,828
   Sale of other assets

(80)

(107)
Originations of loans held-for-sale

(59,879)

(72,512)
Proceeds from sale of loans held-for-sale

15,208

21,593
Net (increase) decrease in:

   Trading securities

319

(214)
   Other investments

(54)

-
   Accrued interest receivable

3,784

16,517
   Servicing assets

591

(1,045)
   Other assets

463

2,405
Net (decrease) increase in:

   Accrued interest on deposits and borrowings

(1,875)

643
   Accrued expenses and other liabilities

(56,288)

(23,836)
Net cash provided by operating activities

41,009

73,627

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 2020 AND 2019 (CONTINUED)

	Six-Month Period Ended June 30,
	2020		2019
	(In thousands)
Cash flows from investing activities:
Purchases of:
Investment securities available-for-sale		23,469		(784)
FHLB stock		-		(1,167)
Other investments		(516)		-
Maturities and redemptions of:
Investment securities available-for-sale		257,278		92,634
FHLB stock		4,682		990
Proceeds from sales of:
Investment securities available-for-sale		320,984		354,501
Foreclosed real estate and other repossessed assets, including write-offs		14,824		24,452
Premises and equipment		32		42
Origination and purchase of loans, excluding loans held-for-sale		(733,161)		(564,647)
Principal repayment of loans		527,250		463,287
Additions to premises and equipment		(7,344)		(6,331)
Net cash provided by investing activities	$	407,498	$	362,977

Cash flows from financing activities:
Net increase (decrease) in:
Deposits		831,303		52,745
Securities sold under agreements to repurchase		(190,063)		(214,730)
FHLB advances, federal funds purchased, and other borrowings		(10,805)		1,585
Exercise of stock options with treasury shares		466		462
Purchase of treasury stock		(2,226)		-
Dividends paid on preferred stock		(3,256)		(2,855)
Dividends paid on common stock		(7,191)		(7,185)
Net cash provided by (used in) financing activities	$	618,228	$	(169,978)
Net change in cash, cash equivalents and restricted cash		1,047,280		227,367
Cash, cash equivalents and restricted cash at beginning of period		852,757		450,063
Cash, cash equivalents and restricted cash at end of period	$	1,900,037	$	677,430
Reconciliation of the Consolidated Statements of Cash Flows to the Consolidated Balance Sheets:
Cash and due from banks	$	1,888,965	$	668,896
Money market investments		10,022		7,485
Restricted cash		1,050		1,049
Total cash, cash equivalents, restricted cash and restricted cash equivalents at end of period	$	1,900,037	$	677,430
Supplemental Cash Flow Disclosure and Schedule of Non-cash Activities:
Interest paid	$	26,966	$	26,324
Income taxes paid	$	5,628	$	29,371
Operating lease liabilities paid	$	6,614	$	3,329
Mortgage loans securitized into mortgage-backed securities	$	55,612	$	25,837
Transfer from held-to-maturity securities to available-for-sale securities	$	-	$	424,740
Transfer from loans to foreclosed real estate and other repossessed assets	$	9,083	$	22,183
Reclassification of loans held-for-investment portfolio to held-for-sale portfolio	$	261	$	1,389
Reclassification of loans held-for-sale portfolio to held-for-investment portfolio	$	-	$	49
Financed sales of foreclosed real estate	$	-	$	703

710

Loans booked under the GNMA buy-back option	$	75,091	$	11,675
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

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

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.~~LLC (“Oriental Financial Services”), an insurance agency, Oriental Insurance, ~~LLC.~~LLC (“Oriental Insurance”), and a retirement plan administrator, Oriental Pension Consultants, Inc. (“OPC”), and ~~two operating subsidiaries of the Bank,~~ OFG ~~USA~~Ventures LLC ("(“OFG ~~USA") and Oriental International Bank Inc. (“OIB”~~Ventures”). Oriental also has a special purpose entity, Oriental Financial (PR) Statutory Trust II (the “Statutory Trust II”) through which it issued trust preferred securities. Through ~~these~~its operating 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 SBPR with and into Oriental Bank, with Oriental Bank continuing as the surviving entity. As part of this transaction, Oriental Bank also acquired the U.S. Virgin Islands banking operations of BNS through an acquisition of certain assets and an assumption of certain liabilities, and certain loans and assumed certain liabilities from BNS’s Puerto Rico branch. This transaction is referred to as the “Scotiabank PR & USVI Acquisition.” These acquired businesses have been integrated for financial reporting purposes.

During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of Coronavirus (Covid-19). The pandemic has significantly impacted economic conditions in P.R. and the U.S., creating significant uncertainties. After recent disruptions in economic conditions caused by Covid-19, Oriental offered several deferral programs for the payment of principal and interest for all of its loan portfolios for customers whose payments were not over 89 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 quarter and six months ended June 30, 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 has 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 – (Continued)

New Accounting Updates Adopted in ~~2019~~2020

~~Leases.~~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 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.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 ~~February 2016,~~connection with the ~~FASB issued ASU No. 2016-02 (Topic 842),~~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 ~~FASB issued ASU No. 2016-02, under~~positive intent and ability to hold them until maturity. Oriental had no securities classified as held to maturity on June 30, 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 ~~new guidance, lessees~~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. The cost of securities sold is determined by the specific identification method.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 ~~recognize~~sell the ~~following for all leases (with~~security before recovery of its amortized cost basis. If either of the ~~exception~~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 ~~short-term leases): 1)~~the security by a ~~lease liability, which is~~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 ~~lessee’s obligation to make lease payments,~~credit loss exists and ~~2) a right-of-use asset, which~~an allowance for credit losses is ~~an asset that represents the lessee’s right to use, or control the use of, a specified asset~~recorded for the ~~lease term. Lessor~~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 $2.2 million and $4.1 million on June 30, 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 $80.3 million and $32.7 million on June 30, 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 ~~new guidance remains largely unchanged~~contractual terms of the loans. Loans for which the recognition of interest income has been discontinued are designated as itnon-accruing. Collections are accounted for on the cash method thereafter, until qualifying to return to accrual status. Such loans are not reinstated to accrual status until interest is ~~substantially equivalent~~received on a current basis and other factors indicative of doubtful collection cease to ~~existing guidance~~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 ~~sales-type leases, direct financing leases,~~repayment. Interest income is based on contractual yield on the Non-PCD loans.

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 ~~operating leases. Leveraged leases have~~loans that had been ~~eliminated, although lessors can~~previously modified in a troubled debt restructuring. As such, our PCD loans are recorded at the purchase price plus the allowance for credit losses expected at the time of acquisition or implementation of the standard. An allowance for credit losses is determined using an undiscounted cashflow methodology.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 ~~existing leveraged leases using~~these pools as a unit of account. As such, for these loans the ~~current accounting guidance. Other limited changes were~~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 ~~align lessor accounting with~~ the ~~lessee accounting model~~pool’s carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the pool and the new ~~revenue recognition standard. All entities~~amortized cost basis is the non-credit premium or discount which will ~~classify leases to determine how to recognize lease-related revenue~~be amortized interest income over the remaining life of the pool. On a quarterly basis, management will monitor the composition and ~~expense. Quantitative and qualitative disclosures are required by lessees and lessors to meet~~behavior of the ~~objective of enabling users of financial statements~~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 the 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 ~~timing,~~expected to be collected on the loans. Determining the amount of the ACL is complex and ~~uncertainty~~requires extensive judgment by management about matters that are inherently uncertain. Re-evaluation 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, ~~arising~~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 – (Continued)

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, commercial loans, mortgage loans, consumer loans, and auto loans and leases, and measures the allowance for credit losses using the methods described below for each.

Commercial Loans – The segmentation of commercial loans was established by business line, collateral type, and size, delinquency or risk rating/classification to assess the loans based on common risk characteristics. The 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, considering that all our lines of credit are unconditionally cancellable. 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 gross state product (P.R. projections) 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 – (Continued)

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 unemployment rate 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 ~~intention~~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 ~~require enough information~~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 ~~supplement~~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 ~~amounts~~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 ~~so that users can understand more about~~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 factors 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 ~~an entity’s leasing activities. All entities~~the receivables.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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. The majority of Oriental’s Covid-19 related loan modifications have not been considered TDRs as:

they represent short-term or other insignificant modifications, whether under Oriental’s regular loan modification assessments or the Inter Agency Statement guidance; or Oriental has elected to apply the option to suspend the application of accounting guidance for TDRs as provided under section 4013 of the CARES Act. To the extent that certain modifications do not meet any of the above criteria, Oriental accounts for them as TDRs. For loan modifications that include a payment deferral and are ~~required to use a modified retrospective approach for leases that exist or~~not TDRs, the borrower’s past due and nonaccrual status will not be impacted during the deferral period. These loans are ~~entered into~~not considered past due until after the ~~beginning~~deferral period is over and scheduled payments resume. Accrued interest on these Covid-19 modified loans is due when the deferral period ends. The credit quality of these loans will be re-evaluated after the deferral period ends. Nonaccrual loans are generally loans placed on a nonaccrual basis when they become 90 days past due or when there are otherwise serious doubts about the collectability of principal or interest within the existing terms 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~~loan. Oriental's policy is to write-off all accrued interest 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 hindsightloans when ~~determining lease term and impairment of right-of-use assets. Oriental has several lease agreements, mainly branch locations, which~~they are ~~considered operating leases, and therefore, were not previously recognized~~placed on ~~Oriental’s consolidated statements of financial condition. The new guidance requires these lease agreements~~nonaccrual status. 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 statements~~Consolidated Financial Statements of ~~financial condition as a right-of-use asset and a corresponding lease liability. The new guidance did not have a material impact~~Oriental’s 2019 Annual Report on ~~the consolidated statements of operations or the consolidated statements of cash flows. See Note 19 Leases for more information.~~Form 10-K.

~~Leases - Targeted Improvements~~. Cloud computing arrangements

In ~~July~~August 2018, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ~~ASU No. 2018-11~~updated guidance that is intended to ~~provide entities with relief from~~reduce potential diversity in practice in accounting for 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.

~~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 costscloud computing arrangements (i.e., hosting arrangements) 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 recognitionservice contracts. The updated 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 for lessors that are not manufacturers or dealers, the fair value 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 transition 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. Oriental elected 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 the consolidated statements of operations or the consolidated statement of cash flows.

~~New Accounting Updates Not Yet Adopted~~

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 (a consensus of the FASB Emerging Issues Task Force). ~~In August 2018, the FASB issued~~ ~~Accounting Standards Update (“ASU”) 2018-15, which~~ 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 – (Continued)

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 six-month period ended June 30, 2020, the Company recorded remeasurement adjustments to the preliminary estimated fair values of certain accrued interest receivable that have not been received and 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 accrued interest receivable, deferred tax asset, and other assets acquired. The adjustment resulted from the fair value determination of certain accrued interest receivable of loans accounted for under ASC 310-30 and from the receipt of funds from BNS for certain intercompany transactions.

	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		5,540		10,310
Foreclosed real estate		8,636		(352)		8,284		-		8,284
Deferred tax asset, net		37,606		22,335		59,941		(2,078)		57,863
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		410		79,919
Total identifiable assets acquired		3,512,724		49,204		3,561,928		3,872		3,565,800

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	$	3,872	$	434,624
Bargain purchase gain						315		3,872		4,187
Total consideration					$	430,437	$	-	$	430,437

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 and six-month period ended June 30, 2020:

	Quarter ended June 30,		Six-Month period ended June 30,
	2020		2020
	(In thousands)		(In thousands)
Severance and employee-related charges	$	(104)	$	33
Systems integrations and related charges		3,056		3,142
Other		54		135
Total merger and restructuring charges	$	3,006	$	3,310

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 and six-month period ended June 30, 2020:

	Quarter ended June 30,		Six-Month period ended June 30,
	2020		2020
	(In thousands)		(In thousands)
Balance at the beginning of the period	$	14,948	$	17,491
Merger and restructuring charges		3,006		3,310
Cash payments		(1,566)		(4,413)
Balance at the end of the period	$	16,388	$	16,388

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.

1421

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,		June 30,		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~~June 30, ~~2019~~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. As of June 30, 2020, the entity held a $325 thousand in short term high liquidity securities. 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 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~~both, June 30, ~~2019~~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~~June 30, ~~2019~~2020 was ~~$210.4~~$408.7 million (December 31, ~~2018~~2019 - ~~$211.6~~ $289.3 million). At ~~September~~June 30, ~~2019~~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~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, money market instruments included as part of cash and cash equivalents amounted to ~~$8.0~~$10.0 million and ~~$4.9~~$6.8 million, respectively.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Investment Securities

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

	September 30, 2019									June 30, 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%	$	145,405	$	4,412	$	-	$	149,817	1.97%
GNMA certificates		25,329		502		-		25,831	2.87%		138,084		3,681		-		141,765	2.30%
CMOs issued by US government-sponsored agencies		55,457		17		371		55,103	1.90%		47,498		1,114		-		48,612	1.97%
Total mortgage-backed securities		506,978		1,082		2,957		505,103	2.04%		330,987		9,207		-		340,194	2.11%
Investment securities
US Treasury securities		10,947		-		10		10,937	1.33%		196,358		982		-		197,340	1.63%
Obligations of US government-sponsored agencies		2,040		-		10		2,030	1.38%		1,796		28		-		1,824	1.39%
Other debt securities		995		30		-		1,025	2.99%		844		37		-		881	2.99%
Total investment securities		13,982		30		20		13,992	1.45%		198,998		1,047		-		200,045	1.63%
Total securities available for sale	$	520,960	$	1,112	$	2,977	$	519,095	2.02%	$	529,985	$	10,254	$	-	$	540,239	1.93%

	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%

1723

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 – (Continued)

The amortized cost and fair value of Oriental’s investment securities at ~~September~~June 30, ~~2019,~~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				June 30, 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	$	905	$	947
GNMA certificates						622		628
Total due from 1 to 5 years		2,041		2,070		1,527		1,575
Due after 5 to 10 years
CMOs issued by US government-sponsored agencies	$	48,756	$	48,401	$	39,142	$	40,046
FNMA and FHLMC certificates		108,573		108,256		108,476		112,013
GNMA certificates						65,902		67,185
Total due after 5 to 10 years		157,329		156,657		213,520		219,244
Due after 10 years
FNMA and FHLMC certificates	$	315,578	$	313,843	$	36,024	$	36,857
GNMA certificates		25,329		25,831		71,560		73,952
CMOs issued by US government-sponsored agencies		6,701		6,702		8,356		8,566
Total due after 10 years		347,608		346,376		115,940		119,375
Total mortgage-backed securities		506,978		505,103		330,987		340,194
Investment securities
Due less than one year
US Treasury securities	$	10,947	$	10,937	$	186,351	$	187,026
Other debt securities						100		100
Total due in less than one year		10,947		10,937		186,451		187,126
Due from 1 to 5 years
Obligations of US government-sponsored agencies	$	2,040	$	2,030	$	1,796	$	1,824
Other debt securities		100		100
US Treasury securities						10,007		10,314
Total due from 1 to 5 years		2,140		2,130		11,803		12,138
Due from 5 to 10 years
Other debt securities		895		925		744		781
Total due after 5 to 10 years		895		925		744		781
Total investment securities		13,982		13,992		198,998		200,045
Total	$	520,960	$	519,095	$	529,985	$	540,239

1824

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

During the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2019,~~2020, Oriental retained securitized GNMA pools totaling ~~$45.7~~$31.1 million amortized cost, at a yield of ~~3.42~~%2.81% from its own originations, ~~and~~while during the ~~nine-month~~six-month period ended ~~September~~on June 30, ~~2018, Oriental did not retain any securitized GNMA pools.~~2019 that amount totaled $25.7 million amortized cost, at a yield of 3.69%.

During the ~~nine-month~~six-month period ended ~~September~~June 30, 2020, Oriental sold $316.3 million available-for-sale-mortgage-backed securities and recorded a net gain on sale of securities of $4.7 million. During the six-month period ended June 30, 2019 Oriental sold ~~$680.5~~$349.7 million available-for-sale mortgage-backed securities and recognized a gain in the sale of ~~$8.3~~$4.8 million. ~~During the nine-month period ended September~~

	Six-Month Period Ended June 30, 2020
			Book Value
Description	Sale Price		at Sale		Gross Gains		Gross Losses
	(In thousands)
Sale of securities available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates	$	229,571	$	227,213	$	2,358	$	-
GNMA certificates		91,413		89,043		2,370		-
Total	$	320,984	$	316,256	$	4,728	$	-


	Six-Month Period Ended June 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	$	213,376	$	211,549	$	1,827	$	-
GNMA certificates		141,125		138,177		2,949		-
Total	$	354,501	$	349,726	$	4,776	$	-

At June 30, ~~2018, Oriental sold $14.7 million of available-for-sale Government National Mortgage Association (“GNMA”) certificates from its recurring mortgage loan origination and securitization activities.~~2020, Oriental did not ~~realize~~have investment securities in unrealized loss position. Effective January 1, 2020, Oriental adopted the new accounting standard for credit losses that requires evaluation of available-for-sale debt securities for any ~~gains or~~expected losses ~~these sales during such period.~~ with recognition of an allowance for credit losses, when applicable. For more information, see Note 1 – Significant Accounting Policies. At June 30, 2020, all securities held by Oriental are issued by U.S. government entities and agencies that have a zero credit loss assumption.

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

$
-

$
-

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following ~~tables~~table 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,~~2019, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:

	September 30, 2019						December 31, 2019
	12 months or more						12 months or more
	Amortized		Unrealized		Fair		Amortized		Unrealized		Fair
	Cost		Loss		Value		Cost		Loss		Value
	(In thousands)						(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies	$	38,170	$	336	$	37,834	$	35,417	$	387	$	35,030
FNMA and FHLMC certificates		343,004		2,582		340,422		259,099		1,415		257,684
Obligations of US Government and sponsored agencies		2,040		10		2,030		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		19		-		19		3,549		4		3,545
US Treasury Securities		9,997		10		9,987		627		-		627
	$	393,230	$	2,938	$	390,292	$	20,598	$	109	$	20,489

	Less than 12 months						Total
	Amortized		Unrealized		Fair		Amortized		Unrealized		Fair
	Cost		Loss		Value		Cost		Loss		Value
	(In thousands)						(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies		12,081		35		12,046		46,920		490		46,430
FNMA and FHLMC certificates		3,578		4		3,574		264,018		1,417		262,601
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		1,967		6		1,961
GNMA certificates		19		-		19		3,568		4		3,564
US Treasury Securities		10,319		10		10,309		627		-		627
	$	409,211	$	2,977	$	406,234	$	317,100	$	1,917	$	315,183

2026

20OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

NOTE 5 - LOANS

Oriental’s loan portfolio is composed of ~~two~~four segments, ~~loans initially accounted for under~~commercial, mortgage, consumer, and auto. Loans are further segregated into classes which Oriental uses when assessing and monitoring the risk and performance of the portfolio.

The composition of 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.

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

	June 30, 2020
	Non-PCD		PCD		Total
	(In thousands)
Commercial loans:
Commercial secured by real estate	$	857,552	$	270,555	$	1,128,107
Other commercial and industrial		735,511		115,234		850,745
Commercial Paycheck Protection Program (PPP Loans)		278,059		-		278,059
US Loan Program		325,358		-		325,358
		2,196,480		385,789		2,582,269
Mortgage		874,292		1,541,902		2,416,194
Consumer
Personal loans		344,568		2,456		347,024
Credit lines		48,826		489		49,315
Credit cards		65,198		-		65,198
Overdraft		116		-		116
Auto		1,454,987		37,409		1,492,396
		1,913,695		40,354		1,954,049
		4,984,467		1,968,045		6,952,512
Allowance for credit losses		(151,531)		(81,170)		(232,701)
Total loans held for investment		4,832,936		1,886,875		6,719,811
Mortgage loans held for sale		19,432		-		19,432
Total loans, net	$	4,852,368	$	1,886,875	$	6,739,243

At June 30, 2020, and December 31, ~~2018~~ ~~was~~2019, Oriental had a carrying balance of $157.4 million and $134.0 million, respectively, in current status, in loans held for investment granted to the Puerto Rico government, including its instrumentalities, public corporations and municipalities, as ~~follows:~~part of the institutional commercial loan segment. All 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 and one loan to a public corporation acquired in the Scotiabank PR & USVI Acquisition. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations.

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

2327

OFG BANCORP

NOTES TO UNAUDITED 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~~amortized cost of loans held for investment at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, by class of loans. Mortgage loans past due include $75.1 million of delinquent loans in the GNMA buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option.

	June 30, 2020
													Loans 90+
													Days Past
													Due and
	30-59 Days		60-89 Days		90+ Days		Total Past						Still
	Past Due		Past Due		Past Due		Due		Current		Total Loans		Accruing
	(In thousands)
Commercial
Commercial secured by real estate	$	4,052	$	1,446	$	24,748	$	30,246	$	827,306	$	857,552	$	-
Other commercial and industrial		824		1,382		5,803		8,009		1,005,561		1,013,570		-
US Loan Program		-		-		-		-		325,358		325,358		-
		4,876		2,828		30,551		38,255		2,158,225		2,196,480		-
Mortgage		5,413		10,253		100,143		115,809		758,483		874,292		1,704
Consumer
Personal loans		7,829		3,316		1,350		12,495		332,073		344,568		-
Credit lines		1,480		994		818		3,292		45,534		48,826		-
Credit cards		1,256		3,374		2,372		7,002		58,196		65,198		-
Overdraft		-		-		-		-		116		116		-
Auto		51,255		38,570		10,200		100,025		1,354,962		1,454,987		-
		61,820		46,254		14,740		122,814		1,790,881		1,913,695		-
Total loans	$	72,109	$	59,335	$	145,434	$	276,878	$	4,707,589	$	4,984,467	$	1,704

Upon adoption of CECL, Oriental elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. As such, PCD loans are not included in the table above.

2428

OFG BANCORP

NOTES TO UNAUDITED 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

-

	December 31, 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)
Commercial
Commercial secured by real estate	$	994	$	946	$	17,495	$	19,435	$	847,271	$	866,706	$	-
Other commercial and industrial		7,584		371		2,716		10,671		712,855		723,526		-
US Loan Program		-		-		-		-		272,595		272,595		-
		8,578		1,317		20,211		30,106		1,832,721		1,862,827		-
Mortgage		9,285		13,105		94,109		116,499		783,096		899,595		2,418
Consumer
Personal loans		4,978		2,123		1,579		8,680		358,477		367,157		-
Credit lines		533		20		221		774		51,840		52,614		-
Credit cards		1,438		417		896		2,751		72,451		75,202		-
Overdraft		51		-		-		51		165		216		-
Auto		72,336		31,412		14,270		118,018		1,350,864		1,468,882		-
		79,336		33,972		16,966		130,274		1,833,797		1,964,071		-
Total loans	$	97,199	$	48,394	$	131,286	$	276,879	$	4,449,614	$	4,726,493	$	2,418

~~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~~ ~~million and $91.4~~ ~~million, respectively, in current status, in originated and other loans held for investment granted to~~Before 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~~CECL implementation, certain 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 CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~The following tables present the aging of the recorded investment in gross acquired BBVAPR loans accounted for under ASC 310-20 as of September 30, 2019 and December 31, 2018, by class of loans:~~

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)

Commercial

    Commercial secured by real estate

        Retail
$
-

$
-

$
-

$
-

$
-

$
-

$
-
        Floor plan

-

-

787

787

33

820

-

-

-

787

787

33

820

-
    Other commercial and industrial

        Retail

29

35

21

85

1,312

1,397

-

29

35

21

85

1,312

1,397

-

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

$
-

~~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 accounted for under ASC 310-30 by analogy)~~

~~Acquired BBVAPR loans, except for 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 by Oriental in accordance with ASC 310-30.

The carrying amount corresponding to acquired ~~BBVAPR~~ loans with deteriorated credit quality, including those accounted under ASC 310-30 by analogy, in the statements of financial condition at ~~September 30, 2019 and~~ December 31, ~~2018 is~~2019 was as follows:

	December 31, 2019
		Scotiabank PR & USVI		BBVAPR		Eurobank
	(In thousands)
Contractual required payments receivable:	$	2,147,249	$	1,086,367	$	117,107
Less: Non-accretable discount		294,424		340,466		4,285
Cash expected to be collected		1,852,825		745,901		112,822
Less: Accretable yield		458,885		214,886		34,441
Carrying amount, gross		1,393,940		531,015		78,381
Less: allowance for loan and lease losses		-		17,036		14,458
Carrying amount, net	$	1,393,940	$	513,979	$	63,923

September 30,

December 31,

2019

2018

(In thousands)
Contractual required payments receivable:
$
1,168,109

$
1,304,545
Less: Non-accretable discount

347,726

345,423
Cash expected to be collected

820,383

959,122
Less: Accretable yield

221,172

269,510
Carrying amount, gross

599,211

689,612
Less: allowance for loan and lease losses

51,394

42,010
Carrying amount, net
$
547,817

$
647,602

OFG BANCORP

NOTES TO UNAUDITED 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~~quarter and ~~nine-month periods~~six-month period ended ~~September~~June 30, ~~2019 and 2018:~~2019:

	Quarter Ended September 30, 2019										Quarter Ended June 30, 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	$	226,907	$	37,379	$	180	$	427	$	264,893
Accretion		(5,876)		(2,379)		(77)		(151)		(8,483)		(6,115)		(2,488)		(139)		(190)		(8,932)
Change in expected cash flows		-		3,995		5		151		4,151		-		1,375		8		190		1,573
Transfer (to) from non-accretable discount		(9,849)		(17,128)		57		(94)		(27,014)
Transfer from (to) non-accretable discount												(3,243)		(1,628)		(6)		(139)		(5,016)
Balance at end of period	$	201,824	$	19,126	$	28	$	194	$	221,172	$	217,549	$	34,638	$	43	$	288	$	252,518

Non-Accretable Discount Activity:
Balance at beginning of period	$	292,258	$	10,904	$	24,083	$	18,810	$	346,055	$	290,100	$	9,911	$	24,056	$	18,835	$	342,902
Change in actual and expected losses		(21,356)		(3,913)		44		(118)		(25,343)		(1,085)		(635)		21		(164)		(1,863)
Transfer from (to) accretable yield		9,849		17,128		(57)		94		27,014
Transfer (to) from accretable yield												3,243		1,628		6		139		5,016
Balance at end of period	$	280,751	$	24,119	$	24,070	$	18,786	$	347,726	$	292,258	$	10,904	$	24,083	$	18,810	$	346,055

											Six-Month Period Ended June 30, 2019
											Mortgage		Commercial		Auto		Consumer		Total
											(In thousands)
Accretable Yield Activity:
Balance at beginning of period											$	232,199	$	36,508	$	243	$	560	$	269,510
Accretion												(12,465)		(5,144)		(355)		(488)		(18,452)
Change in expected cash flows												-		4,640		11		488		5,139
Transfer from (to) non-accretable discount												(2,185)		(1,366)		144		(272)		(3,679)
Balance at end of period											$	217,549	$	34,638	$	43	$	288	$	252,518

Non-Accretable Discount Activity:
Balance at beginning of period											$	291,887	$	10,346	$	24,245	$	18,945	$	345,423
Change in actual and expected losses												(1,814)		(808)		(18)		(407)		(3,047)
Transfer (to) from accretable yield												2,185		1,366		(144)		272		3,679
Balance at end of period											$	292,258	$	10,904	$	24,083	$	18,810	$	346,055

Nine-Month Period Ended September 30, 2019

Mortgage

Commercial

Auto

Consumer

Total

(In thousands)
Accretable Yield Activity:

Balance at beginning of period
$
232,199

$
36,508

$
243

$
560

$
269,510
    Accretion

(18,342)

(7,523)

(432)

(639)

(26,936)
    Change in expected cash flows

-

8,635

16

639

9,290
    Transfer (to) from non-accretable discount

(12,033)

(18,494)

201

(366)

(30,692)
Balance at end of period
$
201,824

$
19,126

$
28

$
194

$
221,172

Non-Accretable Discount Activity:

Balance at beginning of period
$
291,887

$
10,346

$
24,245

$
18,945

$
345,423
    Change in actual and expected losses

(23,169)

(4,721)

26

(525)

(28,389)
    Transfer from (to) accretable yield

12,033

18,494

(201)

366

30,692
Balance at end of period
$
280,751

$
24,119

$
24,070

$
18,786

$
347,726

3130

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~~quarter and ~~nine-months periods~~six-month period ended ~~September~~June 30, ~~2019 and 2018:~~2019:

	Quarter Ended September 30, 2019												Quarter Ended June 30, 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	$	37,022	$	2,260		-	$	-	$	39,282
Accretion		(1,218)		(1,075)		-		3		(89)		(2,379)		(1,280)		(1,199)		(3)		(17)		(2,499)
Change in expected cash flows		1,917		550		-		(93)		132		2,506		30		910		(10)		31		961
Transfer (to) from non-accretable discount		(2,518)		(438)		(24)		90		(43)		(2,933)
Transfer from (to) non-accretable discount														766		(115)		13		(14)		650
Balance at end of period	$	34,116	$	893	$	579	$	-	$	-	$	35,588	$	36,538	$	1,856	$	-	$	-	$	38,394

Non-Accretable Discount Activity:
Balance at beginning of period	$	79		-		1,602		-		118		1,799	$	2,426	$	-	$	-	$	116	$	2,542
Change in actual and expected losses		(2,597)		(438)		-		90		(73)		(3,018)		21		159		13		(12)		181
Transfer from (to) accretable yield		2,518		438		24		(90)		43		2,933
Transfer (to) from accretable yield														(766)		(159)		(13)		14		(924)
Balance at end of period	$	-	$	-	$	1,626	$	-	$	88	$	1,714	$	1,681	$	-	$	-	$	118	$	1,799


													Six-Month Period Ended June 30, 2019
													Mortgage		Commercial		Leasing		Consumer		Total
													(In thousands)
Accretable Yield Activity:
Balance at beginning of period													$	38,389	$	3,310		-	$	-	$	41,699
Accretion														(2,631)		(2,364)		(15)		(63)		(5,073)
Change in expected cash flows														(393)		866		(41)		118		550
Transfer from (to) non-accretable discount														1,173		44		56		(55)		1,218
Balance at end of period													$	36,538	$	1,856	$	-	$	-	$	38,394

Non-Accretable Discount Activity:
Balance at beginning of period													$	2,826	$	-	$	-	$	133	$	2,959
Change in actual and expected losses														28		44		56		(70)		58
Transfer (to) from accretable yield														(1,173)		(44)		(56)		55		(1,218)
Balance at end of period													$	1,681	$	-	$	-	$	118	$	1,799

3331

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 June 30, 2020:


	June 30, 2020
	Nonaccrual with		Nonaccrual with no
	Allowance		Allowance
	for Credit Loss		for Credit Loss
	(In thousands)
Non-PCD:
Commercial
Commercial secured by real estate	$	11,092	$	26,850
Other commercial and industrial		3,056		3,191
		14,148		30,041
Mortgage		18,142		8,739
Consumer
Personal loans		1,167		570
Personal lines of credit		823		-
Credit cards		2,373		-
Auto and leasing		10,540		-
		14,903		570
Total non-accrual loans	$	47,193	$	39,350

PCD:
Commercial
Commercial secured by real estate	$	12,188	$	3,077
Other commercial and industrial		65,797		-
		77,985		3,077
Mortgage		1,375		-
Consumer
Personal loans		12		-
		12		-
Total non-accrual loans	$	79,372	$	3,077

3532

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)
Commercial
Commercial secured by real estate	$	32,720
Other commercial and industrial		9,886
		42,606
Mortgage		18,735
Consumer
Personal loans		4,164
Personal lines of credit		227
Credit cards		896
Auto and leasing		14,295
		19,582
Total non-accrual loans	$	80,923

~~OFG BANCORP~~

~~NOTES TO 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~~June 30, ~~2019~~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.~~

3833

OFG BANCORP

NOTES TO UNAUDITED 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.~~ ~~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. The allowance for loan and lease losses for these impaired commercial loans amounted to $4.9~~ ~~million and $8.4~~ ~~million at September 30, 2019 and~~ ~~December 31, 2018, respectively. The total investment in impaired mortgage loans that were individually evaluated for impairment was $71.7~~ ~~million and $84.2~~ ~~million at September 30, 2019 and~~ ~~December 31, 2018~~, respectively. 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~~ ~~million at September 30, 2019 and~~ ~~December 31, 2018, respectively.~~

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

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 as follows:~~

September 30, 2019


Unpaid

Recorded

Related




Principal

Investment

Allowance

Coverage

(In thousands)

Impaired loans with specific allowance:

        Commercial
$
34,590

$
30,813

$
4,849

16%

        Residential impaired and troubled-debt restructuring

78,836

71,658

6,816

10%

Impaired loans with no specific allowance:

        Commercial

36,139

28,016

N/A

0%

            Total investment in impaired loans
$
149,565

$
130,487

$
11,665

9%

December 31, 2018


Unpaid

Recorded

Related




Principal

Investment

Allowance

Coverage

(In thousands)

Impaired loans with specific allowance:

        Commercial
$
54,636

$
49,092

$
8,434

17%

        Residential impaired and troubled-debt restructuring

95,659

84,174

10,186

12%

Impaired loans with no specific allowance

        Commercial

38,241

32,137

N/A

0%

            Total investment in impaired loans
$
188,536

$
165,403

$
18,620

11%

~~OFG BANCORP~~

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

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

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 as follows:

September 30, 2019

Unpaid

Recorded

Related



Principal

Investment

Allowance

Coverage

(In thousands)
Impaired loans with specific allowance

        Commercial
$
926

$
678

$
19

3%
Impaired loans with no specific allowance

        Commercial
$
-

$
-

N/A

0%
            Total investment in impaired loans
$
926

$
678

$
19

3%

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)~~

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 as follows:~~

September 30, 2019

Coverage

Unpaid

Recorded

to Recorded

Principal

Investment

Allowance

Investment

(In thousands)
Impaired loan pools with specific allowance:

        Mortgage
$
433,079

$
439,676

$
20,458

5%
        Commercial

105,331

103,667

28,647

28%
        Auto

5,347

3,882

2,289

59%
            Total investment in impaired loan pools
$
543,757

$
547,225

$
51,394

9%

~~OFG BANCORP~~Modifications

~~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.

~~Acquired Eurobank Loans~~

~~Oriental’s recorded investment in acquired Eurobank loan pools that have recorded impairments and their related allowance for loan and lease losses as of September 30, 2019 and December 31, 2018~~ ~~are as follows:~~

September 30, 2019

Coverage

Unpaid

Recorded

to Recorded

Principal

Investment

Allowance

Investment

(In thousands)
Impaired loan pools with specific allowance:

        Loans secured by 1-4 family residential properties
$
57,217

$
52,677

$
13,809

26%
        Commercial

36,094

38,383

8,561

22%
            Total investment in impaired loan pools
$
93,311

$
91,060

$
22,370

25%

December 31, 2018

Coverage

Unpaid

Recorded

Specific

to Recorded

Principal

Investment

Allowance

Investment

(In thousands)
Impaired loan pools with specific allowance

        Loans secured by 1-4 family residential properties
$
70,153

$
63,406

$
15,382

24%
        Commercial

47,342

47,820

9,585

20%
        Consumer

15

4

4

100%
            Total investment in impaired loan pools
$
117,510

$
111,230

$
24,971

22%

The tables above only present information with respect to acquired Eurobank 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 ended September 30, 2019 and 2018:

Quarter Ended September 30,

2019

2018

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

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

Impaired loans with specific allowance

        Commercial
$
131

$
37,855

$
150

$
35,765
        Residential troubled-debt restructuring

713

78,370

695

84,787
Impaired loans with no specific allowance

        Commercial

305

30,673

271

31,315

1,149

146,898

1,116

151,867
Acquired loans accounted for under ASC 310-20:

Impaired loans with specific allowance

        Commercial

-

678

-

747
            Total interest income from impaired loans
$
1,149

$
147,576

$
1,116

$
152,614

Nine-Month Period Ended September 30,

2019

2018

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

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

Impaired loans with specific allowance

        Commercial
$
394

$
47,379

$
432

$
44,691
         Residential troubled-debt restructuring

2,080

81,741

2,028

84,671
Impaired loans with no specific allowance

         Commercial

896

31,640

812

23,736
            Total interest income from impaired loans
$
3,370

$
160,760

$
3,272

$
153,098

Acquired loans accounted for under ASC 310-20:

Impaired loans with specific allowance

        Commercial
$
-

$
708

$
-

$
747
Impaired loans with no specific allowance

            Total interest income from impaired loans
$
3,370

$
161,468

$
3,272

$
153,845

~~Modifications~~

The following tables present the troubled-debt restructurings in all loan portfolios during the quarters and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019.

	Quarter Ended June 30, 2020
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate	Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate	Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Consumer	1		21	5.99%	60		20	6.50%	72

	Six-Month Period Ended June 30, 2020
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate	Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate	Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Mortgage	26	$	3,093	5.14%	359	$	3,046	4.29%	360
Commercial	1		281	8.00%	105		281	6.00%	240
Consumer	16		220	12.95%	67		225	10.63%	81

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 June 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	50	$	7,000	6.14%	388	$	6,345	5.45%	341
Commercial	1		1,157	7.00%	55		1,157	5.75%	86
Consumer	70		1,052	15.57%	69		1,082	11.56%	74
Auto	13		193	7.58%	70		200	9.18%	46

	Six-Month Period Ended June 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	88		11,494	5.90%	388	$	10,586	5.11%	346
Commercial	2		1,164	7.03%	55		1,164	5.78%	86
Consumer	141		2,015	15.39%	67		2,049	1.70%	74
Auto	13		193	7.58%	70		200	9.18%	46

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

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

	Twelve-month Period Ended June 30,
	2020			2019
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in thousands)
Mortgage	17	$	2,267	22	$	2,830
Commercial	-	$	-	3	$	1,935
Consumer	90	$	1,231	66	$	928
Auto	3	$	32	1	$	27

Oriental offers various types of concessions when modifying a loan. Concessions made to the original contractual terms of the loan typically consists of the deferral of interest and/or principal payments due to deterioration in the borrowers' financial condition. In these cases, the principal balance on the TDR had matured and/or was in default at the time of restructure, and there were 0 commitments to lend additional funds to the borrower during the quarters and six-month periods ended June 30, 2020 and 2019.

TDRs disclosed above were not related to COVID-19 modifications. As discussed in Note 1 to these financial statements, Section 4013 of CARES Act and the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" provided banks an option to elect to not account for certain loan modifications related to COVID-19 as TDRs as long as the borrowers were not more than 30 days past due as of December 31, 2019 and ~~2018:~~at the time of modification program implementation, respectively, and meets other applicable criteria. Oriental executed loan deferrals on outstanding balances of approximately $2.1 billion resulting from the COVID-19 pandemic that were not classified as a TDR at June 30, 2020.

��
Twelve month Period Ended September 30,

2019

2018

Number of Contracts

Recorded Investment

Number of Contracts

Recorded Investment

(Dollars in thousands)
Mortgage
32

$
4,065

19

$
2,756
Commercial
2

$
350

2

$
281
Consumer
61

$
710

11

$
107
Auto
3

$
51

-

$
-

Collateral-dependent Loans

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

	June 30, 2020
	Real Estate		Equipment		Total
	(In thousands)
Commercial loans:
Commercial secured by real estate	$	29,656	$	-	$	29,656
Other commercial and industrial		3,108		-		3,108
Total loans	$	32,764	$	-	$	32,764

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

4436

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.

4537

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of ~~September~~June 30, ~~2019 and December 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	$	28,681	$	128,098	$	123,096	$	89,243	$	61,494	$	266,311	$	57,162	$	754,085
Special Mention		10,218		3,065		2,109		17,481		115		22,188		1,539		56,715
Substandard		-		338		893		8,644		609		27,376		8,859		46,719
Doubtful		-		-		-		-		-		-		33		33
Loss		-		-		-		-		-		-		-		-
Total commercial secured by real estate		38,899		131,501		126,098		115,368		62,218		315,875		67,593		857,552
Other commercial and industrial:
Loan grade:
Pass		288,156		104,225		100,426		16,379		9,764		81,412		397,183		997,545
Special Mention		-		59		-		-		6		5,726		3,286		9,077
Substandard		-		811		32		219		2,952		106		2,756		6,876
Doubtful		-		-		-		-		-		-		72		72
Loss		-		-		-		-		-		-		-		-
Total other commercial and industrial:		288,156		105,095		100,458		16,598		12,722		87,244		403,297		1,013,570
US Loan Program:
Loan grade:
Pass		47,733		67,272		118,108		7,211		-		-		44,478		284,802
Special Mention		-		-		35,973		-		-		-		1,250		37,223
Substandard		-		-		-		-		-		-		3,333		3,333
Doubtful		-		-		-		-		-		-		-		-
Loss		-		-		-		-		-		-		-		-
Total US loan program:		47,733		67,272		154,081		7,211		-		-		49,061		325,358
Total commercial loans	$	374,788	$	303,868	$	380,637	$	139,177	$	74,940	$	403,119	$	519,951	$	2,196,480

At June 30, 2020, the balance of revolving loans converted to term loans was $25.0 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:

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

$
-

$
-

															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	$	704	$	22,423	$	34,414	$	36,355	$	42,626	$	707,282	$	-	$	-	$	843,804
Nonperforming		-		150		-		190		566		29,582		-		-		30,488
Total mortgage loans:		704		22,573		34,414		36,545		43,192		736,864		-		-		874,292
Consumer:
Personal loans:
Payment performance:
Performing		51,866		143,803		75,192		39,144		20,273		12,552		-		-		342,830
Nonperforming		184		336		472		124		116		506		-		-		1,738
Total personal loans		52,050		144,139		75,664		39,268		20,389		13,058		-		-		344,568
Credit lines:
Payment performance:
Performing		-		-		-		-		-		-		48,003		-		48,003
Nonperforming		-		-		-		-		-		-		823		-		823
Total credit lines		-		-		-		-		-		-		48,826		-		48,826
Credit cards:
Payment performance:
Performing		-		-		-		-		-		-		62,825		-		62,825
Nonperforming		-		-		-		-		-		-		2,373		-		2,373
Total credit cards		-		-		-		-		-		-		65,198		-		65,198
Overdrafts:
Payment performance:
Performing		-		-		-		-		-		-		116		-		116

4739

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

-

-

Nonperforming		-		-		-		-		-		-		-		-		-
Total overdrafts		-		-		-		-		-		-		116		-		116
Total consumer loans		52,050		144,139		75,664		39,268		20,389		13,058		114,140		-		458,708
Total mortgage and consumer loans	$	52,754	$	166,712	$	110,078	$	75,813	$	63,581	$	749,922	$	114,140	$	-	$	1,333,000

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

$
-

$
-

~~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:

	Term Loans
	Amortized Cost Basis by Origination Year

	2020		2019		2018		2017		2016		Prior		Total
	(In thousands)
Auto:
FICO score:
1-660		41,285		151,696		131,984		78,483		44,457		41,277		489,182
661-699		22,439		94,226		61,715		31,054		17,607		16,402		243,443
700+		50,281		204,107		187,230		101,256		57,571		53,383		653,828
No FICO		9,851		37,871		8,883		5,704		3,391		2,834		68,534
Total auto:	$	123,856	$	487,900	$	389,812	$	216,497	$	123,026	$	113,896	$	1,454,987

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.

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
Commercial secured by real estate	$	866,706	$	762,443	$	55,870	$	48,357	$	36	$	-
Other commercial and industrial		723,526		706,831		6,634		9,960		101		-
US Loan Program		272,595		262,745		9,850		-		-		-
Total Commercial	$	1,862,827	$	1,732,019	$	72,354	$	58,317	$	137	$	-

	December 31, 2019
	Loan Grades

	Balance				Special
	Outstanding		Pass		Mention		Substandard		Doubtful		Loss

Retail
Mortgage	$	899,595	$	805,486	$	-	$	94,109	$	-	$	-
Consumer:
Personal loans		367,157		365,579		-		1,578		-		-
Personal lines of credit		52,614		52,393		-		221		-		-
Credit cards		75,202		74,306		-		896		-		-
Overdrafts		216		165		-		51		-		-
Auto		1,468,882		1,454,612		-		14,270		-		-
Total consumer loans		1,964,071		1,947,055		-		17,016		-		-
Total retail loans	$	2,863,666	$	2,752,541	$	-	$	111,125	$	-	$	-

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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, which represents the middle of all projections, and ~~Other Loan and Lease Losses Held for Investment~~

a moderate recession, which places itself in the downside alternative. During the quarter ended ~~September~~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, Oriental is now effectively fully weighted to a moderate recessionary economic environment within our forecast period. In addition, the allowance for credit losses at June 30, ~~2019,~~2020 included additional qualitative reserves for certain segments that Oriental ~~transferred to held-for-sale $25.9~~ ~~million~~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 ~~mostly non-performing loans, increasing~~these developments, Oriental increased the provision for credit losses in the six-month period ended June 30, 2020 by ~~$15.9~~$39.1 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, which included the impact of expected credit losses, and therefore, no allowance for credit losses was recorded at acquisition date.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

	Six-Month Period Ended June 30, 2020
	Commercial		Mortgage		Consumer		Auto		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	25,993	$	8,727	$	18,446	$	31,878	$	85,044
Impact of ASC 326 adoption		3,562		10,980		8,418		16,238		39,198
Provision for credit losses		15,571		611		14,205		27,190		57,577
Charge-offs		(4,268)		(603)		(10,202)		(26,353)		(41,426)
Recoveries		2,153		258		1,087		7,616		11,114
Balance at end of period	$	43,011	$	19,973	$	31,954	$	56,569	$	151,507
PCD:
Balance at beginning of period	$	8,893	$	21,655	$	-	$	947	$	31,495
Impact of ASC 326 adoption		42,143		7,830		181		368		50,522
Provision for credit losses		(41)		8,054		356		280		8,649
Charge-offs		(2,743)		(7,321)		(461)		(975)		(11,500)
Recoveries		661		702		93		572		2,028
Balance at end of period	$	48,913	$	30,920	$	169	$	1,192	$	81,194
Total allowance for credit losses at end of period	$	91,924	$	50,893	$	32,123	$	57,761	$	232,701

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 June 30, 2019
	Mortgage		Commercial		Consumer		Auto and Leasing		Total
	(In thousands)
Allowance for loan and lease losses, excluding loans accounted for under ASC 310-30:
Balance at beginning of period	$	16,689	$	32,186	$	17,954	$	29,174	$	96,003
Provision (recapture) for credit losses		(1,040)		(874)		4,361		6,169		8,616
Charge-offs		(604)		(2,226)		(5,272)		(10,728)		(18,830)
Recoveries		316		179		405		4,948		5,848
Balance at end of period	$	15,361	$	29,265	$	17,448	$	29,563	$	91,637
Allowance for loan and lease losses for acquired loans accounted for under ASC 310-30:
Balance at beginning of period	$	33,011	$	29,975	$	-	$	3,499	$	66,485
Provision (recapture) for credit losses		9,892		(803)		-		-		9,089
Allowance de-recognition		(482)		(3,724)		-		(363)		(4,569)
Balance at end of period	$	42,421	$	25,448	$	-	$	3,136	$	71,005
Total allowance for loan and lease losses at end of period	$	57,782	$	54,713	$	17,448	$	32,699	$	162,642

	Six-Month Period Ended June 30, 2019
	Mortgage		Commercial		Consumer		Auto and Leasing		Total
	(In thousands)
Allowance for loan and lease losses, excluding loans accounted for under ASC 310-30:
Balance at beginning of period	$	19,783	$	30,348	$	17,476	$	29,643	$	97,250
Provision (recapture) for credit losses		(3,834)		1,901		9,095		13,086		20,248
Charge-offs		(1,191)		(3,312)		(9,831)		(22,185)		(36,519)
Recoveries		603		328		708		9,019		10,658
Balance at end of period	$	15,361	$	29,265	$	17,448	$	29,563	$	91,637
Allowance for loan and lease losses for acquired loans accounted for under ASC 310-30:
Balance at beginning of period	$	30,607	$	30,226	$	4	$	6,144	$	66,981
Provision (recapture) for credit losses		12,423		(403)		-		(2,314)		9,706
Allowance de-recognition		(609)		(4,375)		(4)		(694)		(5,682)
Balance at end of period	$	42,421	$	25,448	$	-	$	3,136	$	71,005
Total allowance for loan and lease losses at end of period	$	57,782	$	54,713	$	17,448	$	32,699	$	162,642

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										December 31, 2019
	Mortgage		Commercial		Consumer		Auto and Leasing		Total		Mortgage		Commercial		Consumer		Auto and Leasing		Total
	(In thousands)										(In thousands)
Allowance for loan and lease losses on originated and other loans:
Allowance for loan and lease losses, excluding loans accounted for under ASC 310-30:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	10,186	$	8,434	$	-	$	-	$	18,620	$	6,874	$	8,217	$	-	$	-	$	15,091
Collectively evaluated for impairment		9,597		21,892		15,571		29,508		76,568		1,853		17,776		18,446		31,878		69,953
Total ending allowance balance	$	19,783	$	30,326	$	15,571	$	29,508	$	95,188	$	8,727	$	25,993	$	18,446	$	31,878	$	85,044
Loans:
Individually evaluated for impairment	$	84,174	$	81,229	$	-	$	-	$	165,403	$	71,196	$	61,128	$	-	$	-	$	132,324
Collectively evaluated for impairment		584,635		1,516,359		348,980		1,129,695		3,579,669		506,220		1,608,507		382,432		1,277,867		3,775,026
Total ending loan balance	$	668,809	$	1,597,588	$	348,980	$	1,129,695	$	3,745,072	$	577,416	$	1,669,635	$	382,432	$	1,277,867	$	3,907,350

~~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 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

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 and ~~nine-month~~six-month periods ended ~~September~~June 30, 2020 and 2019:

	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2020		2019		2020		2019
		(In thousands)

Balance at beginning of period	$	27,292	$	30,865	$	29,909	$	33,768
Decline in value		(473)		(1,421)		(1,023)		(3,321)
Additions		47		4,340		1,946		8,294
Sales		(2,074)		(4,275)		(6,040)		(9,232)
Balance at end of period	$	24,792	$	29,509	$	24,792	$	29,509

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 its 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 ~~2018~~: 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 and six-month period ended June 30, 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

6045

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 June 30, 2020, the servicing asset amounted to $47.9 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 the quarters and six-month periods ended June 30, 2020 and 2019:

	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Fair value at beginning of period	$	49,287	$	10,623	$	50,779	$	10,716
Servicing from mortgage securitizations or asset transfers		124		206		580		508
Changes due to payments on loans		(678)		(250)		(1,445)		(451)
Changes in fair value due to changes in valuation model inputs or assumptions		(807)		(445)		(1,988)		(639)
Fair value at end of period	$	47,926	$	10,134	$	47,926	$	10,134

The following table presents key economic assumption ranges used in measuring the mortgage-related servicing asset fair value for the six-month periods ended June 30, 2020 and 2019:

	Six-Month Period Ended June 30,
	2020	2019
Constant prepayment rate	5.61% - 20.80%	4.72% - 9.49%
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:

	June 30, 2020
	(In thousands)
Mortgage-related servicing asset
Carrying value of mortgage servicing asset	$	47,926
Constant prepayment rate
Decrease in fair value due to 10% adverse change	$	(1,096)
Decrease in fair value due to 20% adverse change	$	(2,151)
Discount rate
Decrease in fair value due to 10% adverse change	$	(1,908)
Decrease in fair value due to 20% adverse change	$	(3,686)

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

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

changes in discount rates and prepayment speed assumptions) and other changes, including changes due to collection/realization of expected cash flows.

Servicing fee income is based on a contractual percentage of the outstanding principal balance and is recorded as income when earned. Servicing fees on mortgage loans for the quarters ended June 30, 2020 and 2019 totaled $4.2 million and $1.1 million, respectively. Servicing fees on mortgage loans for the six-month periods ended June 30, 2020 and 2019 totaled $8.9 million and $2.1 million, respectively.

NOTE 8 9 —DERIVATIVES

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

	September 30,		December 31,		June 30,		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	$	-	$	2,076	$	907
Interest rate swaps not designated as hedges		-		126
Interest rate caps		13		207		2		6
	$	1,159	$	333	$	2,078	$	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~~June 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

2020:

~~An accumulated~~

Notional

Fixed

Variable

Trade

Settlement

Maturity

Type

Amount

Rate

Rate Index

Date

(In thousands)

Interest Rate Swaps

31,117

2.4210%

1-Month LIBOR

07/03/13

08/01/23

31,117

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~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, and the related ~~asset or~~ liability is being reflected in the consolidated statements of financial condition.

~~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.~~

OFG BANCORP
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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~~June 30, ~~2019~~2020 and December 31, ~~2018, t~~he2019, the outstanding total notional amount of interest rate caps was $~~41.8~~ $41.0 million and ~~$150.9~~ $41.5 million, respectively. At ~~September~~June 30, ~~2019~~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~~June 30, ~~2019~~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~~June 30, ~~2019~~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

	June 30,		December 31
	2020		2019
	(In thousands)
Core deposit intangibles	$	39,060	$	43,185
Customer relationship intangibles		11,921		13,213
Other intangibles		425		567
	$	51,406	$	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~~June 30, ~~2019 and December 31, 2018~~2020, this core deposit intangible amounted to ~~$1.9~~ $39.1 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~~a securities broker-dealer and insurance agency in the BBVAPR ~~Acquisition.~~Acquisition and an insurance agency in the Scotiabank PR & USVI Acquisitions. At ~~September~~June 30, ~~2019 and December 31, 2018~~,2020 this customer relationship intangible amounted to ~~$612~~ $11.9 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 $425 thousand and ~~$888~~ $567 thousand ~~respectively.~~

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

NOTE 11 — ACCRUED INTEREST RECEIVABLE ANDOTHER ASSETS

Accrued interest receivable at June 30, 2020 and December 31, 2019 consists of the following:

	June 30,		December 31,
	2020		2019
	(In thousands)
Loans, excluding acquired loans	$	80,330	$	32,728
Investments		2,153		4,053
	$	82,483	$	36,781

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Other assets at June 30, 2020 and December 31, 2019 consist of the following:

	June 30,		December 31,
	2020		2019
	(In thousands)
Prepaid expenses	$	40,082	$	52,558
Other repossessed assets		1,360		3,327
Tax credits		-		277
Investment in Statutory Trust		1,083		1,083
Accounts receivable and other assets		84,845		78,600
	$	127,370	$	135,845

Prepaid expenses amounting to $40.1 million at June 30, 2020, include prepaid municipal, property and income taxes aggregating to $36.2 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~~$1.4 million and ~~$2.3~~$3.3 million ~~respectively. These tax credits do not have an expiration date.~~at June 30, 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~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 consist of the following:

	September 30,		December 31,		June 30,		December 31,
	2019		2018		2020		2019
	(In thousands)				(In thousands)
Non-interest bearing demand deposits	$	1,100,235	$	1,105,324	$	2,216,306	$	1,675,315
Interest-bearing savings and demand deposits		2,334,591		2,274,423		4,132,228		3,718,846
Retail certificates of deposit		933,308		805,712		1,705,236		1,781,237
Institutional certificates of deposit		221,562		197,559		269,990		279,714
Total core deposits		4,589,696		4,383,018		8,323,760		7,455,112
Brokered deposits		288,362		525,097		218,166		243,498
Total deposits	$	4,878,058	$	4,908,115	$	8,541,926	$	7,698,610

~~OFG BANCORP~~

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

Brokered deposits include ~~$269.3~~$179.1 million in certificates of deposits and ~~$19.1~~$39.1 million in money market accounts at ~~September~~June 30, ~~2019,~~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~~%0.82% and ~~0.67~~%0.86%, respectively, at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018.~~2019. Interest expense for the quarters and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 was as follows:

	Quarter Ended September 30,				Nine-Month Period Ended September 30,				Quarter Ended June 30,				Six-Month Period Ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
	(In thousands)								(In thousands)
Demand and savings deposits	$	3,949	$	3,157	$	11,308	$	8,924	$	6,224	$	3,948	$	13,208	$	7,359
Certificates of deposit		6,605		5,448		18,286		14,630		9,221		6,043		18,857		11,681
	$	10,554	$	8,605	$	29,594	$	23,554	$	15,445	$	9,991	$	32,065	$	19,040

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At ~~September~~June 30, ~~2019~~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~~ $672.9 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~~ ~~million and $19.6~~ ~~million at a weighted average rate of 150.0% and 116.4% at~~ ~~September~~

At June 30, ~~2019~~2020 and December 31, ~~2018, respectively.~~

~~At September 30,~~ 2019, ~~and December 31, 2018,~~ total public fund deposits from various Puerto Rico government municipalities, agencies and corporations amounted to ~~$250.1~~$275.3 million and ~~$207.4~~$278.7 million, respectively. These public funds were collateralized with commercial loans and securities amounting to ~~$295.0~~ $314.2 million and ~~$281.2~~ $320.8 million at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

Excluding accrued interest of approximately ~~$1.8~~ $10.8 million and $11.7 million, the scheduled maturities of certificates of deposit at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 are as ~~follows~~:follows:

	September 30,		December 31,		June 30,		December 31,
		2019		2018		2020		2019
	(In thousands)				(In thousands)
Within one year:
Three (3) months or less	$	221,701	$	305,088	$	348,687	$	314,796
Over 3 months through 1 year		530,791		545,363		1,036,210		881,183
		752,492		850,451		1,384,897		1,195,979
Over 1 through 2 years		504,671		484,197		421,764		732,421
Over 2 through 3 years		89,787		89,340		184,688		175,032
Over 3 through 4 years		40,926		34,018		79,867		89,148
Over 4 through 5 years		34,496		42,998		72,346		78,706
	$	1,422,372	$	1,501,004	$	2,143,562	$	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~~$798 thousand and ~~$1.1~~ $1.0 million as of ~~September~~June 30, ~~2019~~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~~June 30, ~~2019,~~ 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.

At June 30, 2020, Oriental did 0t have repurchase agreements outstanding because $140 million matured and were not renewed, and $50 million were terminated early during the six-month period ended June 30, 2020.

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

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

		December 31,
		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)			50,000
Total assets sold under agreements to repurchase		$	190,000

Repurchase ~~agreements mature~~agreements’ maturities were 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 – (Continued)

~~During the nine-month period 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~~ ~~million of repurchase agreements matured and were not renewed.This sale provided opportunity to further reduce wholesale funding outstanding balances.~~

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

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



	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~~June 30, ~~2019~~2020 and December 31, ~~2018~~,2019, these advances were secured by mortgage and commercial loans amounting to ~~$823.1~~ ~~million~~$1.243 billion and ~~$847.3~~ ~~million,~~$1.060 billion, respectively. Also, at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~,2019, Oriental had an additional borrowing capacity with the FHLB-NY of ~~$744.2~~$859 million and ~~$762.0~~$983 million, respectively. At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~,2019, the weighted average remaining maturity of FHLB’s advances was ~~24.4~~21.4 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~~June 30, ~~2019.~~2020.

The following table shows a summary of the advances and their terms, excluding accrued interest in the amount of ~~$170~~$99 thousand and ~~$176~~$160 thousand at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively:

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


	June 30,		December 31
		2020		2019
		(In thousands)
Short-term fixed-rate advances from FHLB, with a weighted average interest rate of 0.44% (December 31, 2019 - 1.85% to 2.59%)	$	31,119	$	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% )		36,300		37,377
	$	67,419	$	77,849

Advances from FHLB mature as follows:

6651

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


		September 30,	June 30,		December 31,
		2019		2020		2019
		(In thousands)	(In thousands)
Under 90 days	$	32,367	$	31,119	$	31,955
Over one to three years		8,605		11,593		8,517
Over three to five years		33,520		20,410		33,018
Over five years		4,390		4,297		4,359
	$	78,882	$	67,419	$	77,849

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~~June 30, ~~2019~~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 – (Continued)

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

June 30, 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 – (Continued)

June 30, 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	$	2,078	$	-	$	2,078	$	-	$	-	$	2,078
Total	$	2,078	$	-	$	2,078	$	-	$	-	$	2,078


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 acquired as a result of the Scotiabank PR & USVI Acquisition. The United States subsidiaries are subject to federal income taxes at the corporate ~~level. In addition,~~level, while the USVI branch is subject to the federal income taxes under a mirror system and a 10% surtax included in the maximum tax rate. OPC is subject to Florida state taxes and OFG USA is subject to North Carolina state taxes.

At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, Oriental’s net deferred tax asset amounted to ~~$112.6~~$186.7 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

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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~~June 30, ~~2019~~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~~six-month periods ended ~~September~~June 30, 2020 and 2019 of 24.2% and ~~2018~~32.1%, respectively. The estimated annual effective tax rate was 24.7%; however, the current effective tax rate was 24.2% due to a discrete tax windfall on stock awards, compared to 32.1% 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~~income taxed at preferential tax rates. In addition, on June 30, 2020, Oriental Financial Services (a wholly owned subsidiary of OFG) made the election to be taxed as a ~~lower rate.~~partnership effective on January 1, 2019. As a result of this change in tax status, a valuation allowance of $1.3 million was recorded on certain deferred tax assets.

Oriental classifies unrecognized tax benefits in other liabilities. These gross unrecognized tax benefits would affect the effective tax rate if realized. At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, unrecognized tax benefits amounted ~~at $478~~ ~~thousand~~to $1.2 million and ~~$875~~ ~~thousand,~~$2.7 million, respectively. This decrease is related to new information that resulted in the reassessment of unrecognized tax benefits. Oriental had accrued ~~$42~~$21 thousand at ~~September~~June 30, ~~2019~~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~~June 30, 2020 and 2019, ~~and 2018,~~ was ~~$1.0~~$7.2 million and ~~$12.3~~$10.9 million, respectively. Income tax expense for the ~~nine-month~~six-month periods ended ~~September~~June 30, 2020 and 2019, ~~and 2018~~ was ~~$23.5~~$7.5 million and ~~$29.9~~$22.5 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~~OFG Bancorp 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”).

7055

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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. Oriental elected to early implement the simplifications to the capital rule on January 1, 2020. The simplification rule increased the capital ratios.

On January 1, 2020, Oriental adopted CECL with the initial implementation adjustment to Non-PCD loans and off-balance sheet instruments against retained earnings. On March 27, 2020, in response to the COVID-19 pandemic, U.S. banking regulators issued an interim final rule that 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. For more information, see Note 1 – Significant Accounting Policies.

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

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

OFG Bancorp’s and the Bank’s actual capital amounts and ratios as of ~~September~~June 30, ~~2019~~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 June 30, 2020
Total capital to risk-weighted assets	$	1,035,910	21.71%	$	381,693	8.00%	$	477,117	10.00%	$	1,040,987	14.96%	$	556,632	8.00%	$	695,791	10.00%
Tier 1 capital to risk-weighted assets	$	974,962	20.43%	$	286,270	6.00%	$	381,693	8.00%	$	953,769	13.71%	$	417,474	6.00%	$	556,632	8.00%
Common equity tier 1 capital to risk-weighted assets	$	858,092	17.98%	$	214,702	4.50%	$	310,126	6.50%	$	836,899	12.03%	$	313,106	4.50%	$	452,264	6.50%
Tier 1 capital to average total assets	$	974,962	15.41%	$	253,010	4.00%	$	316,262	5.00%	$	953,769	10.16%	$	375,475	4.00%	$	469,344	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%



				Minimum Capital			Minimum to be Well
	Actual			Requirement			Capitalized
	Amount		Ratio	Amount		Ratio	Amount		Ratio
	(Dollars in thousands)
Bank Ratios
As of June 30, 2020
Total capital to risk-weighted assets	$	998,432	14.41%	$	554,439	8.00%	$	693,049	10.00%
Tier 1 capital to risk-weighted assets	$	911,553	13.15%	$	415,829	6.00%	$	554,439	8.00%
Common equity tier 1 capital to risk-weighted assets	$	911,553	13.15%	$	311,872	4.50%	$	450,482	6.50%
Tier 1 capital to average total assets	$	911,553	9.76%	$	373,487	4.00%	$	466,859	5.00%
As of December 31, 2019
Total capital to risk-weighted assets	$	898,812	13.36%	$	538,279	8.00%	$	672,848	10.00%
Tier 1 capital to risk-weighted assets	$	813,444	12.09%	$	403,709	6.00%	$	538,279	8.00%
Common equity tier 1 capital to risk-weighted assets	$	813,444	12.09%	$	302,782	4.50%	$	437,351	6.50%
Tier 1 capital to average total assets	$	813,444	8.85%	$	367,537	4.00%	$	459,421	5.00%

7157

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Minimum Capital

Minimum to be Well

Actual

Requirement

Capitalized

Amount

Ratio

Amount

Ratio

Amount

Ratio

(Dollars in thousands)
Bank Ratios

As of September 30, 2019

Total capital to risk-weighted assets
$
990,903

20.83%

$
380,599

8.00%

$
475,749

10.00%
Tier 1 capital to risk-weighted assets
$
930,216

19.55%

$
285,449

6.00%

$
380,599

8.00%
Common equity tier 1 capital to risk-weighted assets
$
930,216

19.55%

$
214,087

4.50%

$
309,237

6.50%
Tier 1 capital to average total assets
$
930,216

14.83%

$
250,964

4.00%

$
313,705

5.00%
As of December 31, 2018

Total capital to risk-weighted assets
$
949,596

19.68%

$
385,992

8.00%

$
482,490

10.00%
Tier 1 capital to risk-weighted assets
$
887,918

18.40%

$
289,494

6.00%

$
385,992

8.00%
Common equity tier 1 capital to risk-weighted assets
$
887,918

18.40%

$
217,120

4.50%

$
313,618

6.50%
Tier 1 capital to average total assets
$
887,918

13.68%

$
259,547

4.00%

$
324,434

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~~June 30, ~~2019~~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~~June 30, ~~2019~~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~~June 30, ~~2019~~2020 and December 31, ~~2018,~~ 2019, the Bank’s legal surplus amounted to ~~$95.8~~$98.3 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~~six-month period ended ~~September~~June 30, 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 six-month period ended June 30, 2019, ~~and 2018,~~ Oriental did ~~not~~0t repurchase any shares under the program.

At ~~September~~June 30, ~~2019~~2020 the number of shares that may yet be purchased under the $70 million program is estimated at ~~353,007,~~412,150, and was calculated by dividing the remaining balance of ~~$7.7~~$5.5 million by ~~$21.90~~$13.37 (closing price of Oriental's common stock at ~~September~~June 30, ~~2019)~~2020). Oriental did 0t purchase any shares of its common stock during the six-month periods ended June 30, 2020, other than through its publicly announced stock repurchase program.

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

Nine-Month Period Ended September 30,


2019

2018

Dollar

Dollar


Shares

Amount

Shares

Amount

(In thousands, except shares data)
Beginning of period
$
8,591,310

$
103,633

8,678,427

$
104,502
Common shares used upon lapse of restricted stock units and options

(53,132)

(697)

(58,424)

(796)
End of period
$
8,538,178

$
102,936

8,620,003

$
103,706

		Six-Month Period Ended June 30,
		2020			2019
			Dollar			Dollar
		Shares	Amount		Shares	Amount
		(In thousands, except shares data)
Beginning of period	$	8,486,278	$	102,339	8,591,310	$	103,633
Common shares used upon lapse of restricted stock units and options		(118,276)		(1,444)	(36,107)		(462)
Common shares repurchased as part of the stock repurchase program		175,000		2,226	-		-
End of period	$	8,543,002	$	103,121	8,555,203	$	103,171

7358

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 1618 - ACCUMULATED OTHER COMPREHENSIVE INCOME

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

	June 30,		December 31,
	2020		2019
	(In thousands)
Unrealized loss on securities available-for-sale which are not other-than-temporarily impaired	$	10,254	$	(306)
Income tax effect of unrealized loss on securities available-for-sale		(1,369)		(135)
Net unrealized gain on securities available-for-sale which are not other-than-temporarily impaired		8,885		(441)
Unrealized (loss) gain on cash flow hedges		(2,076)		(907)
Income tax effect of unrealized (loss) gain on cash flow hedges		779		340
Net unrealized (loss) gain on cash flow hedges		(1,297)		(567)
Accumulated other comprehensive (loss), net of income taxes	$	7,588	$	(1,008)

September 30,

December 31,

2019

2018

(In thousands)
Unrealized loss on securities available-for-sale which are not
    other-than-temporarily impaired
$
(1,865)

$
(12,654)
Income tax effect of unrealized loss on securities available-for-sale

123

1,682
    Net unrealized gain on securities available-for-sale which are not
        other-than-temporarily impaired

(1,742)

(10,972)
Unrealized (loss) gain on cash flow hedges

(1,146)

14
Income tax effect of unrealized (loss) gain on cash flow hedges

430

(5)
    Net unrealized (loss) gain on cash flow hedges

(716)

9
Accumulated other comprehensive (loss), net of income taxes
$
(2,458)

$
(10,963)

OFG BANCORP

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

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

	Quarter Ended June 30,
	2020						2019
	Net unrealized		Net unrealized		Accumulated		Net unrealized		Net unrealized		Accumulated
	gains on		loss on		other		gains on		loss on		other
	securities		cash flow		comprehensive		securities		cash flow		comprehensive
	available-for-sale		hedges		(loss) income		available-for-sale		hedges		(loss) income
	(In thousands)
Beginning balance	$	7,575	$	(1,285)	$	6,290	$	(7,841)	$	(206)	$	(8,047)
Other comprehensive income (loss) before reclassifications		1,310		(517)		793		(10)		(952)		(962)
Amounts reclassified out of accumulated other comprehensive income (loss)		-		505		505		4,764		559		5,323
Other comprehensive income (loss)		1,310		(12)		1,298		4,754		(393)		4,361
Ending balance	$	8,885	$	(1,297)	$	7,588	$	(3,087)	$	(599)	$	(3,686)

	Six-Month Period Ended June 30,
	2020						2019
	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	$	(441)	$	(567)	$	(1,008)	$	(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		4,598		(1,775)		2,823		15,178		(1,384)		13,794
Amounts reclassified out of accumulated other comprehensive (loss) income		4,728		1,045		5,773		4,748		776		5,524
Other comprehensive income (loss)		9,326		(730)		8,596		7,885		(608)		7,277
Ending balance	$	8,885	$	(1,297)	$	7,588	$	(3,087)	$	(599)	$	(3,686)

7460

OFG BANCORP

NOTES TO UNAUDITED 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 and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018:~~ 2019:

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

	Quarter Ended June 30,
		2020		2019
	(In thousands)
Cash flow hedges:
Interest-rate contracts	$	505	$	559	Net interest expense
Available-for-sale securities:
Gain on sale of investments		-		4,776	Net gain on sale of securities
Tax effect from changes in tax rates		-		(13)	Income tax expense
	$	505	$	5,322


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

	Six-Month Period Ended June 30,
		2020		2019
	(In thousands)
Cash flow hedges:
Interest-rate contracts	$	1,045	$	776	Net interest expense
Available-for-sale securities:
Gain on sale of investments		4,728		4,776	Net gain on sale of securities
Tax effect from changes in tax rates		-		(29)	Income tax expense
	$	5,773	$	5,523

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 and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 is as follows:

	Quarter Ended September 30,				Nine-Month Period Ended September 30,				Quarter Ended June 30,				Six-Month Period Ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
	(In thousands, except per share data)								(In thousands, except per share data)
Net income	$	7,383	$	23,100	$	54,832	$	59,666	$	21,787	$	23,979	$	23,588	$	47,449
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)		(3,256)		(3,256)
Convertible preferred stock (Series C)		-		(1,838)		-		(5,513)
Income available to common shareholders	$	5,755	$	19,634	$	49,948	$	49,270	$	20,159	$	22,351	$	20,332	$	44,193
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

Weighted average common shares and share equivalents:
Average common shares outstanding		51,345		43,996		51,327		43,975		51,336		51,330		51,370		51,317
Effect of dilutive securities:
Average potential common shares-options		427		209		368		110		134		350		214		335
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		51,470		51,680		51,584		51,652
Earnings per common share - basic	$	0.11	$	0.45	$	0.97	$	1.12	$	0.39	$	0.44	$	0.40	$	0.86
Earnings per common share - diluted	$	0.11	$	0.42	$	0.97	$	1.07	$	0.39	$	0.43	$	0.39	$	0.86

~~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~~June 30, ~~2019, Oriental did not have weighted-average stock options with an anti-dilutive effect on earnings per share. For the quarter and nine-month periods ended September 30, 2018,~~2020, weighted-average stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to ~~307,925~~6,164. For the quarter ended June 30, 2019, Oriental did not have weighted-average stock options with an anti-dilutive effect on earnings per share. For the six-month periods ended June 30, 2020 and ~~435,950~~,2019, weighted-average stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to 2,688 and 47,420, respectively.

~~OFG BANCORP~~

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

NOTE 1820 – GUARANTEES

At ~~September~~June 30, ~~2019~~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~~ $19.0 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~~June 30, ~~2019 and December 31, 2018,~~2020, the unpaid principal balance of residential mortgage loans sold subject to credit recourse was ~~$5.0~~ $138.7 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 and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~ 2019.

	Quarter Ended September 30,				Nine-Month Period Ended September 30,				Quarter Ended June 30,				Six-Month Period Ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
	(In thousands)								(In thousands)
Balance at beginning of period	$	225	$	264	$	346	$	358	$	906	$	214	$	985	$	346
Net (charge-offs/terminations) recoveries		20		(60)		(101)		(154)		(12)		11		(91)		(121)
Balance at end of period	$	245	$	204	$	245	$	204	$	894	$	225	$	894	$	225

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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~~June 30, 2020, Oriental repurchased $1 thousand in mortgage loans subject to credit recourse. During the quarter ended June 30, 2019, Oriental did ~~not~~not repurchase any mortgage loans subject to the credit recourse provision. During the ~~quarter and nine-month period~~six-month periods ended ~~September~~June 30, ~~2018,~~2020, Oriental repurchased ~~approximately $234~~$480 thousand ~~and $569~~ ~~thousand, respectively, of unpaid principal balance~~ in mortgage loans subject to credit recourse. During the six-month periods ended June 30, 2019, Oriental did not repurchase any mortgage loans subject to the credit recourse ~~provisions.~~provision. 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~~June 30, ~~2019,~~2020, Oriental’s liability for estimated credit losses related to loans sold with credit recourse amounted to ~~$245~~$894 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~~June 30, ~~2019~~ 2020, Oriental repurchased ~~$528~~ $225 thousand (~~September~~June 30, ~~2018~~2019 – ~~$1.6~~ $8.1 million) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to credit recourse provision referred above. During the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~ 2020, Oriental repurchased ~~$10.5~~$8.6 million (~~September~~June 30, ~~2018~~2019 – ~~$5.9~~$10.0 million) of unpaid principal balance in mortgage loans, excluding mortgage loans subject to credit recourse provision referred above.At June 30, 2020 and December 31, 2019, Oriental had a $2.6 million and a $4.6 million liability, respectively, for the estimated credit losses related to these loans.

~~OFG BANCORP~~

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

During the quarters ended ~~September~~June 30,~~2019~~ 2020 and ~~2018,~~2019, Oriental recognized ~~$20~~$44 thousand and ~~$30~~$48 thousand, respectively, in losses from the repurchase of residential mortgage loans sold subject to credit recourse, and ~~$19~~$117 thousand in gain and $25 thousand in losses, respectively, from the repurchase of residential mortgage loans as a result of breaches of customary representations and warranties. During the six-month periods ended June 30, 2020 and 2019, Oriental recognized $58 thousand and ~~$41~~$68 thousand, respectively, in losses from the repurchase of residential mortgage loans sold subject to credit recourse, and $288 thousand and $42 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~~June 30, ~~2019~~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~~June 30, ~~2019~~2020, the outstanding balance of funds advanced by Oriental under such mortgage loan servicing agreements was approximately ~~$616~~ ~~thousand~~ $3.9 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.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

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~~ June 30, ~~2019~~2020 and December 31, ~~2018~~2019 were as follows:

	September 30,		December 31,		June 30,		December 31,
	2019		2018		2020		2019
	(In thousands)				(In thousands)
Commitments to extend credit	$	610,516	$	541,423	$	846,873	$	853,148
Commercial letters of credit		459		340		102		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~~June 30, ~~2019~~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~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, is as follows:

	June 30,		December 31,
	2020		2019
	(In thousands)
Standby letters of credit and financial guarantees	$	18,964	$	47,251
Loans sold with recourse		138,715		147,399

September 30,

December 31,

2019

2018

(In thousands)
Standby letters of credit and financial guarantees
$
12,884

$
23,889
Loans sold with recourse

4,962

5,414

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

~~Contingencies~~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 June 30, 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 $1.4 million and $2.7 million, respectively, and is included in other liabilities in the statement of financial condition.

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.

In accordance with applicable accounting guidance, Oriental establishes an accrued liability when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As a matter develops, Oriental, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, Oriental will establish an accrued liability and record a corresponding amount of expense. At June 30, 2020 and December 31, 2019, this accrued liability amounted to $8.7 million and $6.8 million, respectively. Oriental continues to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established.

Subject to the accounting and disclosure framework under the provisions of ASC 450, it is the opinion of 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.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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. Oriental’s leases do not contain residual value guarantees or material variable lease payments. 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~~included 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.

Operating Lease Cost

	Quarter Ended September 30, 2019		Nine-Month Period Ended September 30, 2019			Quarter Ended June 30,				Six-Month Period Ended June 30,
	Quarter Ended September 30, 2019		Nine-Month Period Ended September 30, 2019		Statement of Operations Classification	2020		2019		2020		2019		Statement of Operations Classification
	(In thousands)					(In thousands)				(In thousands)
Lease costs	$	1,608	$	4,949	Occupancy and equipment	$	3,550	$	1,812	$	6,888	$	3,341	Occupancy and equipment
Variable lease costs		350		1,699	Occupancy and equipment		583		665		1,171		1,349	Occupancy and equipment
Short-term lease cost		81		104	Occupancy and equipment
Short-term lease cost (benefit)							185		(133)		28		23	Occupancy and equipment
Lease income		(135)		(431)	Occupancy and equipment		(125)		(141)		(248)		(296)	Occupancy and equipment
Total lease cost	$	1,904	$	6,321		$	4,193	$	2,203	$	7,839	$	4,417

~~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			June 30,	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	$	34,692	$	39,112	Operating lease right-of-use assets
Lease Liabilities	$	21,081	Operating leases liabilities	$	35,694	$	39,840	Operating leases liabilities

	~~September~~June 30, ~~2019~~2020
	~~September~~June 30, ~~2019~~2020
	(In thousands)
Weighted-average remaining lease term		~~6.2~~6.3 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~~June 30, ~~2019~~2020 were as follows:

Minimum Rent
Year Ending December 31,
(In thousands)
2019
$
1,596
2020

5,716
2021

4,717
2022

3,843
2023

2,991
Thereafter

8,954
Total lease payments
$
27,817
Less imputed interest

6,736
Present value of lease liabilities
$
21,081

~~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)

	Minimum Rent
Year Ending December 31,	(In thousands)
2020	$	5,210
2021		8,676
2022		7,312
2023		6,156
2024		4,105
Thereafter		13,356
Total lease payments	$	44,815
Less imputed interest		9,121
Present value of lease liabilities	$	35,694

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~~June 30, ~~2019~~2020 and ~~December 31, 2018,~~2019, 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 – (Continued)

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

	September 30, 2019								June 30, 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	$	197,340	$	342,899	$	-	$	540,239
Trading securities		-		41		-		41		-		22		-		22
Money market investments		8,035		-		-		8,035		10,022		-		-		10,022
Derivative assets		-		13		-		13		-		2		-		2
Servicing assets		-		-		10,125		10,125		-		-		47,926		47,926
Derivative liabilities		-		(1,159)		-		(1,159)		-		(2,078)		-		(2,078)
	$	8,035	$	517,990	$	10,125	$	536,150	$	207,362	$	340,845	$	47,926	$	596,133
Non-recurring fair value measurements:
Impaired commercial loans	$	-	$	-	$	59,507	$	59,507
Collateral dependent loans										-		-		32,764		32,764
Foreclosed real estate		-		-		26,952		26,952		-		-		24,792		24,792
Other repossessed assets		-		-		3,537		3,537		-		-		1,360		1,360
	$	-	$	-	$	89,996	$	89,996	$	-	$	-	$	58,916	$	58,916

	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 and ~~nine-month~~six-month periods ended ~~September~~June 30, 2020 and 2019:

Level 3 Instruments Only
	Servicing Assets
	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Balance at beginning period	$	49,287	$	10,623	$	50,779	$	10,716
New instruments acquired		124		206		580		508
Principal repayments		(678)		(250)		(1,445)		(451)
Changes in fair value of servicing assets		(807)		(445)		(1,988)		(639)
Balance at end of period	$	47,926	$	10,134	$	47,926	$	10,134

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 June 30, 2020 and 2019 during the quarters and ~~2018:~~six-month periods then ended included in other comprehensive income. For more information on the qualitative information about level 3 fair value measurements, see Note 8 – 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 and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019,~~2020 and ~~2018,~~2019, 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~~June 30, ~~2019:~~2020:

	June 30, 2020
	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average
	(In thousands)

Servicing assets	$	47,926	Cash flow valuation	Constant prepayment rate	5.61% - 20.8%	6.52%
				Discount rate	10.00% - 15.50%	11.52%

Collateral dependent loans	$	32,764	Fair value of property or collateral	Appraised value less disposition costs	11.20% - 44.20%	19.73%

Foreclosed real estate	$	24,792	Fair value of property or collateral	Appraised value less disposition costs	11.20% - 42.20%	16.11%

Other repossessed assets	$	1,360	Fair value of property or collateral	Estimated net realizable value less disposition costs	36.00% - 64.00%	52.0%

8570

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 – (Continued)

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.

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

	September 30,				December 31,				June 30,				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	$	1,898,987	$	1,898,987	$	851,307	$	851,307
Restricted cash	$	1,050	$	1,050	$	3,030	$	3,030	$	1,050	$	1,050	$	1,450	$	1,450
Investment securities available-for-sale									$	197,340	$	197,340	$	397,183	$	397,183
Level 2
Financial Assets:
Trading securities	$	41	$	41	$	360	$	360	$	22	$	22	$	37	$	37
Investment securities available-for-sale	$	519,095	$	519,095	$	841,857	$	841,857	$	342,899	$	342,899	$	676,986	$	676,986
Investment securities held-to-maturity	$	-	$	-	$	410,353	$	424,740
Federal Home Loan Bank (FHLB) stock	$	10,525	$	10,525	$	12,644	$	12,644	$	8,366	$	8,366	$	13,048	$	13,048
Other investments	$	57	$	57	$	3	$	3	$	1,076	$	1,076	$	560	$	560
Derivative assets	$	13	$	13	$	347	$	347	$	2	$	2	$	6	$	6
Financial Liabilities:
Derivative liabilities	$	1,159	$	1,159	$	333	$	333	$	2,078	$	2,078	$	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	$	6,414,762	$	6,739,243	$	5,894,745	$	6,641,847
Accrued interest receivable	$	30,470	$	30,470	$	34,254	$	34,254	$	82,483	$	82,483	$	36,781	$	36,781
Servicing assets	$	10,125	$	10,125	$	10,716	$	10,716	$	47,926	$	47,926	$	50,779	$	50,779
Accounts receivable and other assets	$	35,140	$	35,140	$	37,842	$	37,842	$	84,845	$	84,845	$	78,600	$	78,600
Financial Liabilities:
Deposits	$	4,888,607	$	4,878,058	$	4,881,903	$	4,908,115	$	8,498,899	$	8,541,926	$	7,679,685	$	7,698,610
Securities sold under agreements to repurchase	$	190,322	$	190,261	$	453,135	$	455,508	$	-	$	-	$	190,345	$	190,274
Advances from FHLB	$	81,075	$	79,052	$	78,503	$	77,620	$	70,670	$	67,518	$	79,620	$	78,009
Other borrowings	$	551	$	551	$	1,214	$	1,214	$	822	$	822	$	1,195	$	1,195
Subordinated capital notes	$	37,830	$	36,083	$	36,184	$	36,083	$	34,580	$	36,083	$	35,886	$	36,083
Accrued expenses and other liabilities	$	56,388	$	56,388	$	87,665	$	87,665	$	187,280	$	187,280	$	185,661	$	185,661

8772

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~~June 30, ~~2019~~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.

8873

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 and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~:2019:

	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Banking service revenues:
Checking accounts fees	$	1,971	$	1,476	$	4,631	$	2,949
Savings accounts fees		397		141		838		297
Electronic banking fees		10,574		8,211		21,822		16,103
Credit life commissions		13		151		142		268
Branch service commissions		216		345		727		718
Servicing and other loan fees		299		320		809		636
International fees		141		129		297		266
Miscellaneous income		57		3		115		4
Total banking service revenues		13,668		10,776		29,381		21,241

Wealth management revenue:
Insurance income		2,412		1,648		4,821		2,929
Broker fees		1,467		1,966		3,382		3,723
Trust fees		2,276		2,808		5,029		5,412
Retirement plan and administration fees		211		247		420		487
Total wealth management revenue		6,366		6,669		13,652		12,551

Mortgage banking activities:
Net servicing fees		2,676		615		5,366		1,559
Net gains on sale of mortgage loans and valuation		254		88		819		250
Other		142		(74)		121		26
Total mortgage banking activities		3,072		629		6,306		1,835
Total banking and financial service revenues	$	23,106	$	18,074	$	49,339	$	35,627

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.74

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~~ASC 606 ~~guidelines.~~– Revenue from Contracts with Customers.

Wealth Management Revenue

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

Brokers fees consist of two categories:

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

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

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

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

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

Mortgage Banking Activities

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

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.

9176

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Quarter Ended June 30, 2019
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	84,475	$	19	$	9,761	$	94,255	$	-	$	94,255
Interest expense		(9,187)		-		(3,983)		(13,170)		-		(13,170)
Net interest income		75,288		19		5,778		81,085		-		81,085
Provision for loan and lease losses, net		(17,675)		-		(30)		(17,705)		-		(17,705)
Non-interest income		11,330		6,834		4,784		22,948		-		22,948
Non-interest expenses		(46,346)		(3,898)		(1,208)		(51,452)		-		(51,452)
Intersegment revenue		587		-		-		587		(587)		-
Intersegment expenses		-		(165)		(422)		(587)		587		-
Income before income taxes	$	23,184	$	2,790	$	8,902	$	34,876	$	-	$	34,876
Income tax expense		9,042		1,088		767		10,897		-		10,897
Net income	$	14,142	$	1,702	$	8,135	$	23,979	$	-	$	23,979
Total assets	$	5,951,860	$	27,067	$	1,532,053	$	7,510,980	$	(1,046,853)	$	6,464,127


	Six-Month Period Ended June 30, 2019
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	167,991	$	37	$	20,937	$	188,965	$	-	$	188,965
Interest expense		(17,823)		-		(8,268)		(26,091)		-		(26,091)
Net interest income		150,168		37		12,669		162,874		-		162,874
Provision for loan and lease losses, net		(29,882)		-		(72)		(29,954)		-		(29,954)
Non-interest income		22,986		12,818		4,800		40,604		-		40,604
Non-interest expenses		(92,829)		(8,225)		(2,550)		(103,604)		-		(103,604)
Intersegment revenue		1,141		-		-		1,141		(1,141)		-
Intersegment expenses		-		(339)		(802)		(1,141)		1,141		-
Income before income taxes	$	51,584	$	4,291	$	14,045	$	69,920	$	-	$	69,920
Income tax expense		19,344		1,609		1,518		22,471		-		22,471
Net income	$	32,240	$	2,682	$	12,527	$	47,449	$	-	$	47,449
Total assets	$	5,951,860	$	27,067	$	1,532,053	$	7,510,980	$	(1,046,853)	$	6,464,127

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”~~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 June 30, 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 severely restricting global economic activity, 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. 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. In March, governments in Puerto Rico and U.S. Virgin Islands (“USVI”) shut down non-essential businesses and imposed restrictions on individual’s activities. Puerto Rico-based claims for unemployment have risen considerably since March of 2020. The Puerto Rico and USVI "stay at home" directives excluded essential businesses, including banks, and Oriental remained open and fully operational as described below. These "stay at home" directives have, however, significantly reduced economic activity in the Puerto Rico and the USVI. The Puerto Rico government started easing restrictions in late May, but recent spikes in contagiousness have caused the government to increase restrictions again.

In response to the pandemic, Oriental has implemented protocols and processes to help protect our employees and clients. These measures included:
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 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. Oriental was the first bank to establish consumer and business relief programs accessible online to clients affected by Covid-19 and is 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, waivers of certain fees, doubling the 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 June 30, 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.
On April 7, 2020, the federal banking agencies along with the National Credit Union Administration, and the Consumer Financial Protection Bureau, in consultation with the state financial regulators, issued an interagency statement revising a March 22, 2020 interagency statement on loan modifications and the reporting for financial institutions working with customers affected by the Covid-19 pandemic (the “Inter Agency Statement”). The Inter Agency Statement reconfirmed that efforts to work with borrowers where the loans are prudently underwritten, and not considered past due or carried on nonaccrual status, should not result in the loans automatically being considered modified in a troubled debt restructuring (“TDR”) for accounting and financial reporting purposes, or for purposes of their respective risk-based capital rules, which would otherwise require financial institutions subject to the capital rules to hold more capital. The Inter Agency Statement also clarified the interaction between its previous guidance and Section 4013 of the CARES Act, which provides certain financial institutions with the option to suspend the application of accounting guidance for TDRs for a limited period of time for loan modifications made to address the effects of the Covid-19 pandemic.
Oriental has granted various forms of assistance to customers and clients impacted by the Covid-19 pandemic, including payment deferrals. The majority of Oriental’s Covid-19 related loan modifications have not been considered TDRs as:
•
they represent short-term or other insignificant modifications, whether under Oriental’s regular loan modification assessments or the Inter Agency Statement guidance, or
•
Oriental has elected to apply the option to suspend the application of accounting guidance for TDRs as provided under section 4013 of the CARES Act.
To the extent that certain modifications do not meet any of the above criteria, Oriental accounts for them as TDRs.
As of June 30, 2020, Oriental had processed Covid-19 payment deferrals as follows:
80

Covid-19 Moratoriums

% of Total Population

Amount

Count

(Dollars in thousands)

Mortgage

$
745,078

6,323

31%
Commercial

683,855

969

26%
Consumer

104,474

10,292

23%
Auto and leasing

544,699

27,513

36%
Total

$
2,078,106

45,097

30%
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 June 30, 2020, Oriental had approved 4,342 PPP loans amounting to $286 million, impacting more than 50,000 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. 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, 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 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%

9582

~~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 June 30,					Six-Month Period Ended June 30,
					Variance					Variance
	2020		2019		%	2020		2019		%
EARNINGS DATA:	(In thousands, except per share data)					(In thousands, except per share data)
Interest income	$	121,692	$	94,255	29.1%	$	245,389	$	188,965	29.9%
Interest expense		16,632		13,170	26.3%		35,228		26,091	35.0%
Net interest income		105,060		81,085	29.6%		210,161		162,874	29.0%
Provision for loan and lease losses, net		17,696		17,705	-0.1%		64,827		29,954	116.4%
Net interest income after provision for loan and lease losses		87,364		63,380	37.8%		145,334		132,920	9.3%
Non-interest income		27,152		22,948	18.3%		58,602		40,604	44.3%
Non-interest expenses		85,481		51,452	66.1%		172,803		103,604	66.8%
Income before taxes		29,035		34,876	-16.7%		31,133		69,920	-55.5%
Income tax expense		7,248		10,897	-33.5%		7,545		22,471	-66.4%
Net income		21,787		23,979	-9.1%		23,588		47,449	-50.3%
Less: dividends on preferred stock		(1,628)		(1,628)	0.0%		(3,256)		(3,256)	0.0%
Income available to common shareholders	$	20,159	$	22,351	-9.8%	$	20,332	$	44,193	-54.0%
PER SHARE DATA:
Basic	$	0.39	$	0.44	-11.4%	$	0.40	$	0.86	-53.5%
Diluted	$	0.39	$	0.43	-9.3%	$	0.39	$	0.86	-54.7%
Average common shares outstanding		51,336		51,330	0.0%		51,370		51,317	0.1%
Average common shares outstanding and equivalents		51,470		51,680	-0.4%		51,584		51,652	-0.1%
Cash dividends declared per common share	$	0.07	$	0.07	0.0%	$	0.14	$	0.14	0.1%
Cash dividends declared on common shares	$	3,588	$	3,595	-0.2%	$	7,191	$	7,186	0.1%
PERFORMANCE RATIOS:
Return on average assets (ROA)		0.92%		1.48%	-37.8%		0.50%		1.45%	-65.5%
Return on average tangible common equity		9.88%		10.32%	-4.3%		4.97%		10.32%	-51.8%
Return on average common equity (ROE)		8.44%		9.36%	-9.8%		4.24%		9.35%	-54.7%
Efficiency ratio		66.70%		51.89%	28.5%		66.59%		52.19%	27.6%
Interest rate spread		4.72%		5.25%	-10.1%		4.79%		5.26%	-8.9%
Interest rate margin		4.78%		5.37%	-11.0%		4.84%		5.38%	-10.0%

9683

SELECTED FINANCIAL DATA - (Continued)

	June 30,		December 31,		Variance
	2020		2019		%
PERIOD END BALANCES AND CAPITAL RATIOS:	(In thousands, except per share data)
Cash, cash equivalents and restricted cash	$	1,900,037	$	852,757	122.8%
Investments and loans
Investment securities	$	549,703	$	1,087,814	-49.5%
Loans and leases, net		6,739,243		6,641,847	1.5%
Total investments and loans	$	7,288,946	$	7,729,661	-5.7%
Deposits and borrowings
Deposits	$	8,541,926	$	7,698,610	11.0%
Securities sold under agreements to repurchase		-		190,274	-100.0%
Other borrowings		104,423		115,287	-9.4%
Total deposits and borrowings	$	8,646,349	$	8,004,171	8.0%
Stockholders’ equity
Preferred stock	$	92,000	$	92,000	0.0%
Common stock		59,885		59,885	0.0%
Additional paid-in capital		621,860		621,515	0.1%
Legal surplus		98,347		95,779	2.7%
Retained earnings		264,725		279,646	-5.3%
Treasury stock, at cost		(103,121)		(102,339)	-0.8%
Accumulated other comprehensive (loss)		7,588		(1,008)	-852.8%
Total stockholders' equity	$	1,041,284	$	1,045,478	-0.4%
Per share data
Book value per common share	$	18.69	$	18.75	-0.3%
Tangible book value per common share	$	16.01	$	15.96	0.3%
Market price at end of period	$	13.37	$	23.61	-43.4%
Capital ratios
Leverage capital		10.16%		9.24%	10.0%
Common equity Tier 1 capital ratio		12.03%		10.78%	11.6%
Tier 1 risk-based capital		13.71%		12.49%	9.8%
Total risk-based capital		14.96%		13.76%	8.7%
Equity-to-assets ratio		10.48%		11.24%	-6.7%
Financial assets managed
Trust assets managed	$	3,048,513	$	3,136,884	-2.8%
Broker-dealer assets	$	2,220,992	$	2,375,871	-6.5%

FINANCIAL HIGHLIGHTS

~~Oriental’s core operations continued to deliver excellent results~~As other banks did, we faced a number of Covid-19 pandemic related challenges during the ~~third~~second quarter, ~~of 2019.~~but acting promptly and with foresight, we generated excellent results. We ~~took advantage of market conditions~~are extremely proud and ~~sold MBS and fully charged off loans at a profit and decided to sell a good portion~~thankful of our remaining non-performing loans. This further strengthens our liquidity and balance sheet to continue our growth strategy and prefunds our $560 million acquisition of Scotiabank’s operations in PR and USVI.team’s accomplishments.

~~Our strategies are proving highly effective in capturing the positive economic shift taking place~~Governments in Puerto ~~Rico.~~ Rico and U.S. Virgin Islands shut down their respective economies in mid-March. Restrictions eased in late May, but recent spikes in contagiousness have forced Puerto Rico to stop reopening the economy and begin increasing restrictions again. Results were also impacted by the Federal Reserve Bank 150 bps rate cut in March. All of this happened shortly after a series of earthquakes in southern Puerto Rico in January and occurred while we are in the process of integrating the acquired Scotiabank business.

Our ~~small business, auto~~commitment and consumer loan production, core deposit growth, improved credit quality 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 earnings per share. With our NPL sales, we reduced 3Q19 non-performing loans 40% year over year, to 2% of originated loans, which will enablepreparation enabled us to ~~free up resources, reduce NPL related expenses,~~successfully manage these challenges “fácil, rápido, hecho.” During the quarter, our team mostly worked remotely. Branches operated safely assisted by our enhanced technology platform. Full-service ATMs and ~~increase operating flexibility. Combined~~ITMs, mobile app, and online bill paying tools facilitated routine transactions in a contactless manner. Online/mobile appointment scheduling helped make possible Covid-19 safe meetings with ~~the sale of MBS, we have close~~customers at branches.

Loan production totaled more than $500 million, including $286 million in PPP loans, exceeding our Puerto Rico market share. We deployed a 100% digital, client-friendly application and funds disbursement process for PPP loans. Our PPP results enabled us to ~~$1 billion in cash to fund our growth plans, including our acquisition of Scotiabank’s PR and USVI operations. The MBS sales~~help more than 4,000 small businesses maintain more than 50,000 jobs. It also enabled us to ~~reduce high cost brokered CDs~~attract new accounts in this strategically important customer base. Our online loan deferral tool and ~~borrowings.~~call centers processed relief for more than 44,000 retail customers. During the quarter, we also maintained a strong level of net interest margin, added to our Covid-19 related provisioning, reduced higher-cost wholesale funding, and increased liquidity and capital.

Looking ahead, ~~Oriental will~~we expect to complete the integration of Scotiabank operations as planned by the end of the year, improve efficiencies, and continue to invest for the future to further ~~consolidate~~simplify our operations and enhance our ability to serve customers. While we still face much uncertainty regarding Covid-19 and its ~~position as the premier retail bank~~impact on the ~~island. Upon closing~~economy, we are in a strong financial position, ready to assist our customers during these trying times.

Second quarter of 2020:

Net income available to common shareholders totaled $20.2 million or $0.39 per share fully diluted. This compares to the ~~Scotiabank Transaction, we become~~first quarter of 2020 net income available to common shareholders of $173 thousand or break-even per share and to 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 bank in the U.S. Virgin Islands.~~

~~Comparison~~quarter of ~~the quarters ended September 30,~~ 2019 ~~versus 2018~~

·~~Net~~net income available to shareholders of ~~$5.8 million, or $0.11 per share fully diluted, reflects the impact of several strategic transactions, compared to $19.6~~$22.4 million or $0.43 per share fully diluted. ~~Book value per common share grew 3.1%~~

Total core revenues were $128.2 million compared to ~~$18.84. Tangible Book Value per common share expanded 5.4% to $17.11.~~

·~~Third~~$131.3 million in the first quarter of ~~2019~~2020 and $99.2 million in the second quarter of 2019. The second quarter of 2020 revenues included ~~$40.5~~$6.0 million ~~pre-tax~~in one-time interest recoveries from ~~items that negatively affected results,~~acquired PCI Scotiabank loans.

Provision of $17.7 million included $5.0 million related to the pandemic in addition to the $34.1 million provision in first quarter of 2020 based on additional data available to forecast the effects of the pandemic.

Net interest margin was 4.78%. Loan production totaled $503.4 million, including $286.4 million in Paycheck Protection Plan (PPP) commercial loans.

Total assets of $9.93 million increased 7.5% from the first quarter of 2020 primarily due to the decision to sell mostly non-performing loans, partially offset by $13.0 million pre-tax from items that benefited results, such as the sale of available-for-sale mortgage-backed securities (MBS) 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 to climb to new multi-year highs.

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~~$574.1 million increase in cash and a $198.1 million increase in loans. Customer deposits of $8.32 billion increased $760.0 million or 10.0% from the ~~provision for loan losses:~~first quarter of 2020.

•~~Increase of $39.0 million primarily from deciding to sell $95.0 million unpaid principal balance in non-performing commercial~~

All regulatory capital ratios increased and ~~mortgage loans, both acquired and originated. These are expected~~continue to be ~~sold in~~significantly above requirements for a well-capitalized institution with the ~~fourth quarter of 2019.~~CET1 ratio at 12.03% on June 30, 2020.

•~~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.~~85

·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 and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018:~~2019:

TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED JUNE 30, 2020 AND 2019

	Interest				Average rate		Average balance
	June		June		June	June	June		June
	2020		2019		2020	2019	2020		2019
	(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets	$	121,692	$	94,255	5.53%	6.27%	$	8,845,745	$	6,034,337
Tax equivalent adjustment		2,361		3,046	0.11%	0.20%		-		-
Interest-earning assets - tax equivalent		124,053		97,301	5.64%	6.47%		8,845,745		6,034,337
Interest-bearing liabilities		16,632		13,170	0.81%	0.99%		8,245,775		5,339,914
Tax equivalent net interest income / spread		107,421		84,131	4.83%	5.48%		599,970		694,423
Tax equivalent interest rate margin					4.94%	5.68%
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities		2,801		6,271	1.83%	2.41%		611,907		1,039,193
Interest bearing cash and money market investments		359		2,904	0.10%	2.42%		1,393,187		481,115
Total investments		3,160		9,175	1.83%	2.41%		2,005,094		1,520,308
Non-PCD/Non-PCI loans
Mortgage		10,746		8,708	5.31%	5.46%		814,514		640,140
Commercial		28,030		25,633	5.38%	6.49%		2,096,651		1,585,405
Consumer		14,044		11,629	11.86%	12.10%		476,446		385,356
Auto		31,012		27,678	8.49%	9.26%		1,469,671		1,199,104
Total Non-PCD/Non-PCI loans		83,832		73,648	6.94%	7.75%		4,857,282		3,810,005

PCD/PCI loans
Mortgage		28,052		7,395	7.27%	5.78%		1,552,087		513,216
Commercial		5,536		3,687	5.74%	7.99%		387,883		185,196
Consumer		163		207	18.47%	101.13%		3,550		821
Auto		949		143	9.58%	11.97%		39,849		4,791
Total PCD/PCI loans		34,700		11,432	7.00%	6.50%		1,983,369		704,024
Total loans		118,532		85,080	6.97%	7.56%		6,840,651		4,514,029
Total interest-earning assets		121,692		94,255	5.53%	6.27%		8,845,745		6,034,337

~~100~~86

~~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

	Interest					Average rate		Average balance
	June		June			June	June	June		June
	2020		2019			2020	2019	2020		2019
	(Dollars in thousands)
Interest-bearing liabilities:
Deposits:
NOW Accounts		2,138		1,730		0.42%	0.62%		2,069,247		1,124,668
Savings and money market		1,976		1,882		0.44%	0.64%		1,809,517		1,180,153
Time deposits		7,834		3,652		1.58%	1.38%		1,990,639		1,065,005
Total core deposits		11,948		7,264		0.82%	0.86%		5,869,403		3,369,826
Brokered deposits		1,446		2,526		2.47%	2.46%		235,611		412,383
		13,394		9,790		0.88%	1.04%		6,105,014		3,782,209
Non-interest bearing deposits		-		-		0.00%	0.00%		1,983,092		1,097,903
Core deposit intangible amortization		2,051		201		0.00%	0.00%		-		-
Total deposits		15,445		9,991		0.77%	0.82%		8,088,106		4,880,112
Borrowings:
Securities sold under agreements to repurchase		335		2,106		2.91%	2.46%		46,154		343,370
Advances from FHLB and other borrowings		505		559		2.69%	2.79%		75,432		80,349
Subordinated capital notes		347		514		3.88%	5.71%		36,083		36,083
Total borrowings		1,187		3,179		3.03%	2.77%		157,669		459,802
Total interest bearing liabilities		16,632		13,170		0.81%	0.99%		8,245,775		5,339,914
Net interest income / spread	$	105,060	$	81,085		4.72%	5.28%
Interest rate margin						4.78%	5.39%
Excess of average interest-earning assets over average interest-bearing liabilities								$	599,970	$	694,424
Average interest-earning assets to average interest-bearing liabilities ratio									107.28%		113.00%

C - CHANGES IN NET INTEREST INCOME DUE TO:
	Volume		Rate		Total
	(In thousands)
Interest Income:
Investments	$	2,926	$	(8,941)	$	(6,015)
Loans		41,018		(7,566)		33,452
Total interest income		43,944		(16,507)		27,437
Interest Expense:
Deposits		6,568		(1,114)		5,454
Repurchase agreements		(1,824)		52		(1,772)
Other borrowings		(45)		(175)		(220)
Total interest expense		4,699		(1,237)		3,462
Net Interest Income	$	39,245	$	(15,270)	$	23,975

~~101~~87

~~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

1,616

1,196

0.57%

0.43%

1,118,156

1,096,023
Savings and money market

2,012

1,571

0.67%

0.51%

1,199,678

1,211,693
Time deposits

4,427

2,896

1.53%

1.12%

1,151,248

1,027,424
        Total core deposits

8,055

5,663

0.92%

0.67%

3,469,082

3,335,140
Brokered deposits

2,298

2,727

2.55%

2.08%

358,130

519,502

10,353

8,390

1.07%

0.86%

3,827,212

3,854,642
Non-interest bearing deposits

-

-

0.00%

0.00%

1,094,047

1,079,826
Core deposit intangible amortization

201

215

0.00%

0.00%

-

-
            Total deposits

10,554

8,605

0.85%

0.69%

4,921,259

4,934,468
Borrowings:

Securities sold under agreements to repurchase

1,342

2,242

2.37%

2.28%

224,783

390,225
Advances from FHLB and other borrowings

550

517

2.75%

2.67%

79,328

76,960
Subordinated capital notes

499

496

5.49%

5.45%

36,083

36,083
        Total borrowings

2,391

3,255

2.79%

2.57%

340,194

503,268
            Total interest bearing liabilities

12,945

11,860

0.98%

0.87%

5,261,453

5,437,736
Net interest income / spread
$
80,710

$
82,277

5.23%

5.30%

Interest rate margin

5.35%

5.39%

Excess of average interest-earning assets
    over average interest-bearing liabilities

$
720,304

$
617,350
Average interest-earning assets to average
    interest-bearing liabilities ratio

113.69%

111.35%

C - CHANGES IN NET INTEREST INCOME DUE TO:

Volume

Rate

Total

(In thousands)

Interest Income:

Investments
$
(1,295)

$
(943)

$
(2,238)

Loans

2,660

(904)

1,756

        Total interest income

1,365

(1,847)

(482)

Interest Expense:

Deposits

(23)

1,972

1,949

Repurchase agreements

(951)

51

(900)

Other borrowings

21

15

36

        Total interest expense

(953)

2,038

1,085

Net Interest Income
$
2,318

$
(3,885)

$
(1,567)

TABLE 1A - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2020 AND 2019

	Interest				Average rate		Average balance
	June		June		June	June	June		June
	2020		2019		2020	2019	2020		2019
	(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets	$	245,389	$	188,965	5.58%	6.17%	$	8,701,082	$	6,092,944
Tax equivalent adjustment		5,442		5,384	0.13%	0.18%		-		-
Interest-earning assets - tax equivalent		250,831		194,349	5.71%	6.35%		8,701,082		6,092,944
Interest-bearing liabilities		35,228		26,091	0.87%	0.98%		8,135,010		5,396,038
Tax equivalent net interest income / spread		215,603		168,258	4.84%	5.37%		566,072		696,906
Tax equivalent interest rate margin					4.97%	5.55%
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities		7,275		14,495	1.89%	2.52%		768,436		1,148,439
Interest bearing cash and money market investments		3,147		5,271	0.54%	2.44%		1,168,384		435,102
Total investments		10,422		19,766	1.06%	2.47%		1,936,820		1,583,541
Non-PCD/Non-PCI loans
Mortgage		21,988		17,595	5.50%	5.46%		799,906		644,749
Commercial		57,852		50,786	5.89%	6.46%		1,970,460		1,585,379
Consumer		29,136		23,058	12.06%	12.11%		484,432		383,884
Auto and leasing		62,339		54,234	8.33%	9.12%		1,480,781		1,182,157
Total Non-PCD/Non-PCI loans		171,315		145,673	7.26%	7.74%		4,735,579		3,796,169

PCD/PCI loans
Mortgage		50,575		15,097	6.36%	5.82%		1,590,737		519,160
Commercial		10,935		7,506	5.52%	7.95%		391,636		187,688
Consumer		288		552	15.44%	135.34%		3,735		815
Auto		1,854		371	8.62%	13.25%		42,575		5,571
Total PCD/PCI loans		63,652		23,526	6.28%	6.60%		2,028,683		713,234
Total loans		234,967		169,199	6.97%	7.57%		6,764,262		4,509,403
Total interest-earning assets		245,389		188,965	5.66%	6.25%		8,701,082		6,092,944

~~102~~88

~~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

	Interest					Average rate		Average balance
	June		June			June	June	June		June
	2020		2019			2020	2019	2020		2019
	(Dollars in thousands)
Interest-bearing liabilities:
Deposits:
NOW Accounts		4,525		3,183		0.45%	0.57%		2,024,876		1,122,155
Savings and money market		4,416		3,496		0.49%	0.60%		1,803,587		1,180,586
Time deposits		15,967		6,598		1.59%	1.29%		2,014,975		1,028,870
Total core deposits		24,908		13,277		0.85%	0.80%		5,843,438		3,331,611
Brokered deposits		3,032		5,362		2.58%	2.38%		235,809		455,013
		27,940		18,639		0.92%	0.99%		6,079,247		3,786,624
Non-interest bearing deposits		-		-		0.00%	0.00%		1,841,028		1,098,720
Core deposit intangible amortization		4,125		401		0.00%	0.00%		-		-
Total deposits		32,065		19,040		0.81%	0.79%		7,920,275		4,885,344
Borrowings:
Securities sold under agreements to repurchase		1,335		4,892		2.62%	2.50%		102,308		393,826
Advances from FHLB and other borrowings		1,045		1,121		2.74%	2.80%		76,344		80,785
Subordinated capital notes		783		1,038		4.35%	5.80%		36,083		36,083
Total borrowings		3,163		7,051		2.95%	2.78%		214,735		510,694
Total interest-bearing liabilities		35,228		26,091		0.87%	0.98%		8,135,010		5,396,038
Net interest income / spread	$	210,161	$	162,874		4.79%	5.27%
Interest rate margin						4.84%	5.39%
Excess of average interest-earning assets over average interest-bearing liabilities								$	566,073	$	696,910
Average interest-earning assets to average interest-bearing liabilities ratio									106.96%	$	112.92%

C - CHANGES IN NET INTEREST INCOME DUE TO:
	Volume		Rate		Total
	(In thousands)
Interest Income:
Investments	$	4,410	$	(13,753)	$	(9,343)
Loans		79,439		(13,671)		65,768
Total interest income		83,849		(27,424)		56,425
Interest Expense:
Deposits		11,828		1,197		13,025
Repurchase agreements		(3,621)		64		(3,557)
Other borrowings		(82)		(249)		(331)
Total interest expense		8,125		1,012		9,137
Net Interest Income	$	75,724	$	(28,436)	$	47,288

~~103~~89

~~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~~June 30, ~~2019~~2020 and ~~2018~~2019

Net interest income of ~~$80.7~~$105.1 million ~~decreased $1.6~~increased $24.0 million from ~~$82.3~~$81.1 million. Interest rate spread decreased 756 basis points to ~~5.23%~~4.72% from ~~5.30%~~5.28% and net interest margin decreased 461 basis points to ~~5.35%~~4.78% from 5.39%. These decreases are mainly due to the net effect of ~~an increase~~a decrease of 474 basis points in the average yield of total interest-earning assets and ~~an increase of 11~~18 basis points in the total average cost of interest-bearing liabilities.

Net interest income ~~was positively impacted by:~~increased as a result of:

~~Increase in~~
Higher interest income from ~~originated~~ loans ~~of $5.9~~by $33.5 million, reflecting higher balances as a result of the Scotiabank PR & USVI Acquisition and PPP loan originations, partially offset by a 59 basis point decline in yield from higher proportion of 30-year, fixed rate residential mortgages from the Scotiabank acquisition and the full effect of Federal Reserve Bank’s second half 2019 and 2020 rate cuts on variable rate commercial ~~consumer~~loans;
$6.0 million in one-time interest recoveries from acquired PCI Scotiabank loans; and ~~auto loan portfolios.~~

~~Increase~~
Lower interest expenses in borrowings by $2.0 million, reflecting the maturity and early extinguishment of repurchase agreements during the current quarter, as Oriental’s strategy to increase lower-cost core deposits and reduce higher-cost borrowings.
Such increases in net interest income were adversely impacted by:
Lower interest income from interest bearing cash and ~~money markets instruments of $2.4~~investment securities by $6.0 million, ~~reflecting~~mainly impacted by the ~~$322.4 million of available-for-sale mortgage-backed securities sale~~Federal Reserve Bank’s 150 bps rate cut in March following the 75 bps reduction in the ~~quarter ended September 30,~~second half of 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~~Higher interest expense from deposits ~~of $2.0~~by $5.5 million, mainly related to deposits from anthe Scotiabank PR & USVI Acquisition and to the increase in ~~cost of~~ customer deposits during the quarter ended June 30, 2020, reflecting commercial deposits from existing and ~~brokered~~new clients, and retail deposits ~~of $1.9 million and $527 thousand, respectively.~~from increased liquidity in the economy.

Comparison of the ~~nine-month period~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

Net interest income of ~~$243.6~~$210.2 million increased ~~$9.7~~$47.3 million from ~~$233.9~~$162.9 million. Interest rate spread ~~increased 4~~decreased 48 basis points to ~~5.26%~~4.79% from ~~5.22%~~5.27% and net interest margin ~~increased 9~~decreased 55 basis points to ~~5.38%~~4.84% from ~~5.29%~~5.39%. These ~~increases~~decreases are mainly due to the net effect of ~~an increase~~a decrease of 2359 basis points in the average yield of total interest-earning assets and 19a decrease of 11 basis points in the total average cost of interest-bearing liabilities.

Net interest income ~~was positively impacted by:~~increased as a result of:

~~Increase in~~
Higher interest income from ~~originated~~ loans by ~~$29.0~~$65.8 million, reflecting higher balances as a result of the Scotiabank PR & USVI Acquisition and PPP loan originations, partially offset by a 60 basis points decline in yield from higher proportion of 30-year, fixed rate residential mortgages from the Scotiabank acquisition and the full effect of Federal Reserve Bank’s second half 2019 and 2020 rate cuts on variable rate commercial ~~consumer~~loans;
$6.0 million in one-time interest recoveries from acquired PCI Scotiabank loans; and ~~auto loan portfolios~~;
Lower interest expenses in borrowings by $3.9 million, reflecting the maturity and

early extinguishment of repurchase agreements during the current period.

~~Higher~~

Such increases in net interest income were adversely impacted by:

Lower interest income from interest bearing cash and ~~money market of $5.2~~investment securities by $9.3 million, ~~due to increase in price~~mainly impacted by the Federal Reserve Bank’s second half 2019 and ~~volume of $1.6 million~~2020 rate cuts; 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~~Higher interest expense from deposits ~~of $6.0~~by $13.0 million, mainly related to deposits from anthe Scotiabank PR & USVI Acquisition and to the increase in customer deposits during the current period, reflecting commercial deposits from existing and ~~brokered deposit costs of $5.2 million~~new clients, and ~~$912 thousand, respectively, and increase in cost of repurchase agreements of $1.0 million; and~~

~~Decrease in interest income~~retail deposits from ~~investment of $5.8 million reflecting mortgage-backed securities sale~~increased liquidity in the ~~second and third quarter of 2019.~~

economy.

TABLE 2 - NON-INTEREST INCOME SUMMARY

Quarter Ended September 30,

Nine-Month Period Ended September 30,

2019

2018

Variance

2019

2018

Variance

(Dollars in thousands)
Banking service revenue
$
10,813

$
10,797

0.1%

$
32,054

$
32,404

-1.1%
Wealth management revenue

6,611

6,407

3.2%

19,162

18,688

2.5%
Mortgage banking activities

1,118

1,242

-10.0%

2,953

3,987

-25.9%
    Total banking and financial service revenue

18,542

18,446

0.5%

54,169

55,079

-1.7%
Net gain (loss) on:

    Sale of securities available for sale

3,498

-

100.0%

8,274

-

100.0%
    Early extinguishment of debt

-

-

0.0%

(7)

-

-100.0%
   Other non-interest income

138

174

-20.7%

346

758

-54.4%
Total non-interest income, net
$
22,178

$
18,620

19.1%

$
62,782

$
55,837

12.4%

TABLE 2 - NON-INTEREST INCOME SUMMARY

Quarter Ended June 30,

Six-Month Period Ended June 30,

2020

2019

Variance

2020

2019

Variance

(Dollars in thousands)
Banking service revenue
$
13,668

$
10,776

26.8%

$
29,381

$
21,241

38.3%
Wealth management revenue

6,366

6,669

-4.5%

13,652

12,551

8.8%
Mortgage banking activities

3,072

629

388.4%

6,306

1,835

243.7%
Total banking and financial service revenue

23,106

18,074

27.8%

49,339

35,627

38.5%
Net gain (loss) on:

Sale of securities available for sale

-

4,776

-100.0%

4,728

4,776

-1.0%
Bargain purchase from Scotiabank PR & USVI acquisition

3,462

-

100.0%

3,872

-

100.0%
Early extinguishment of debt

(63)

(7)

-800.0%

(63)

(7)

-800.0%
Other non-interest income

647

105

516.2%

726

208

249.0%
Total non-interest income, net
$
27,152

$
22,948

18.3%

$
58,602

$
40,604

44.3%

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~~June 30, ~~2019~~2020 and ~~2018~~2019

Oriental recorded non-interest income, net, in the amount of ~~$22.2~~$27.2 million, compared to ~~$18.6~~$22.9 million, an increase of ~~19.1%~~18.3%, or ~~$3.6~~$4.3 million. The net increase in non-interest income was mainly due to:

An increase of $2.9 million in banking service revenues as electronic banking revenues and deposit fees increased $2.4 million and $751 thousand, respectively, due to the Company’s larger customer base;

An increase of $2.4 million in mortgage-banking activities, reflecting the Scotiabank PR & USVI Acquisition, as servicing revenues increased $3.3 million, partially offset by a decrease of $1.2 million from the quarterly mortgage-servicing rights valuation due to pricing; and

A $3.5 million bargain purchase gain from the Scotiabank PR & USVI Acquisition to adjust the fair value of accrued interest receivable at closing, net of taxes.

The increase in non-interest income was offset by a gain of $4.8 million on ~~the sale~~gain of ~~$322.4 million mortgage-backed~~sales of securities recorded during the ~~quarter of $3.5 million.~~prior year quarter.

Comparison of ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

Oriental recorded non-interest income, net, in the amount of ~~$62.8~~$58.6 million, compared to ~~$55.8~~$40.6 million, an increase of ~~12.4%~~44.3%, or ~~$7.0~~$18.0 million. The increase in non-interest income was mainly due to:

An increase of $8.1 million in banking service revenues reflecting the Scotiabank PR & USVI Acquisition as electronic banking revenues and deposit fees increased $5.7 million and $3.9 million, respectively, due to the Company’s larger customer base;

An increase of $1.1 million in wealth management revenue due to higher insurance income by $1.9 million mainly from the Scotiabank PR & USVI Acquisition insurance transaction volume, offset by lower broker-dealer sales by $493 thousand and a ~~gain on~~decrease of $301 thousand in trust fees;

An increase of $4.5 million in mortgage-banking activities, also reflecting the ~~sale of $672.2~~Scotiabank PR & USVI Acquisition, as servicing revenues increased $7.0 million, ~~mortgage-backed securities during the period of $8.3 million. The increase in non-interest income was~~ partially offset by a decrease ~~in mortgage banking activities~~ of ~~$1.0~~$3.0 million ~~mainly reflecting lower mortgage servicing fees.~~from the quarterly mortgage-servicing rights valuation due to pricing; and

~~106~~

~~OFG BANCORP~~

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

A $3.5 million bargain purchase gain from the Scotiabank PR & USVI Acquisition to adjust the fair value of accrued interest receivable at the closing, net of taxes.

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~~

TABLE 3 - NON-INTEREST EXPENSES SUMMARY

	Quarter Ended June 30,					Six-Month Period Ended June 30,
	2020		2019		Variance %	2020		2019		Variance %
	(Dollars in thousands)
Compensation and employee benefits	$	34,506	$	19,875	73.6%	$	70,050	$	40,216	74.2%
Occupancy, equipment and infrastructure costs		11,837		7,511	57.6%		23,276		15,257	52.6%
Electronic banking charges		7,962		5,128	55.3%		17,550		10,193	72.2%
Information technology expenses		3,944		2,200	79.3%		10,878		4,707	131.1%
Professional and service fees		3,475		3,427	1.4%		9,264		6,635	39.6%
Insurance		2,761		1,277	116.2%		6,239		2,423	157.5%
Taxes, other than payroll and income taxes		3,171		2,142	48.0%		6,349		4,295	47.8%
Loss on sale of foreclosed real estate, other repossessed assets and credit related expenses		2,918		2,584	12.9%		5,440		5,950	-8.6%
Advertising, business promotion, and strategic initiatives		1,533		1,315	16.6%		3,163		2,526	25.2%
Loan servicing and clearing expenses		1,148		1,160	-1.0%		2,491		2,368	5.2%
Communication		905		859	5.4%		1,876		1,599	17.3%
Printing, postage, stationery and supplies		951		636	49.5%		1,673		1,214	37.8%
Director and investor relations		316		330	-4.2%		626		560	11.8%
Merger and restructuring charges		3,006		1,000	200.6%		3,310		1,000	231.0%
Other		7,048		2,008	251.0%		10,618		4,661	127.8%
Total non-interest expenses	$	85,481	$	51,452	66.1%	$	172,803	$	103,604	66.8%
Relevant ratios and data:
Efficiency ratio		66.70%		51.89%			66.59%		52.19%
Compensation and benefits to non-interest expense		40.37%		38.63%			40.54%		38.82%
Compensation to average total assets owned		1.45%		1.23%			1.49%		1.24%
Average number of employees		2,413		1,447			2,436		1,447
Average compensation per employee	$	14.30	$	13.73		$	28.75	$	27.79
Average loans per average employee	$	2,835	$	3,120		$	2,776	$	3,116

~~OFG BANCORP~~

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

Non-Interest Expenses

Comparison of quarters ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

Non-interest expense was ~~$50.7~~$85.5 million, representing ~~a decrease~~an increase of ~~.0.4%~~66.1%, or $34.0 million, compared to ~~$50.9~~$51.5 million.

The ~~decrease~~increase in non-interest expenses was driven by:

~~Lower insurance expenses by $2.0 million, mainly driven by a $1.5 million insurance assessment credit from the savings association insurance fund (SAIF);~~

~~Lower occupancy, equipment and infrastructure costs by $1.1 million,~~ ~~mainly attributed lower rent expenses due to the termination of several lease contracts and the closure of branches in 2018~~;

~~Lower other non-interest expense by $705 thousand mainly related to lower claims and settlement accruals and lower allowances than prior year quarter; and~~

~~Lower credit related expenses by $641 thousand, mainly attributed to lower foreclosure and repossession expenses.~~

~~The decreases in the foregoing non-interest expenses were offset by:~~

Higher compensation and employee benefits by ~~$2.0~~$14.6 million, reflecting higher employees from the Scotiabank PR & USVI Acquisition;
Increase in occupancy and equipment by $4.3 million mainly driven by $2.3 million increase in facilities, including branches, from the Scotiabank PR & USVI Acquisition and to $1.2 million increase in information technology infrastructure;
Increase in electronic banking charges of $2.8 million mainly driven by $720 thousand increase in credit card merchant fees, $333 thousand increase in debit cards interchange fees, and $1.8 million increase in debit card billing fees, as level of transactions increased due to ~~an increase in average employees; and~~

a larger customer base;

~~Merger~~
Increase of merger and restructuring charges ~~incurred~~of $2.0 million;
Increase in ~~the quarter amounting to $1.6~~information technology expenses by $1.7 million related to the ~~agreements with~~Scotiabank PR & USVI Acquisition system integrations; and
Other expenses increased by $5.0 million related to increases in the ~~Bank Nova Scotia to acquire its Puerto Rico~~broker-dealer claims and ~~US Virgin Islands operations.~~

settlement reserve of $2.2 million and Covid-19 pandemic expenses of $1.8 million.

The efficiency ratio was ~~51.11%~~66.7%, up from ~~50.58%~~51.89%. 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~~June 30, ~~2019~~2020 and ~~2018~~2019 amounted to ~~$3.6~~$4.0 million and ~~$174 thousand,~~$4.9 million, respectively.

Comparison of ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

Non-interest expense was ~~$154.3~~$172.8 million, representing ~~a decrease~~an increase of ~~0.7%~~66.8%, or $69.2 million, compared to ~~$155.4~~$103.6 million.

The ~~decrease~~increase 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~~$29.8 million, reflecting higher employees from the Scotiabank PR & USVI Acquisition;
Increase in occupancy and equipment by $8.0 million mainly driven by a $5.3 million increase in facilities, including branches, from the Scotiabank PR & USVI Acquisition and a $2.1 million increase in information technology infrastructure;
Increase in electronic banking charges of $7.4 million mainly driven by a $2.6 million increase in credit card merchant fees, $2.2 million increase in debit cards interchange fees, and $2.0 million increase in debit card billing fees, as level of transactions increased due to ~~an increase~~a larger customer base;
Increase in ~~average employees;~~

~~Merger and restructuring charges incurred amounting to $2.6~~information technology expenses by $6.2 million related to the ~~agreements with The Bank Nova Scotia on June 26, 2019~~Scotiabank PR & USVI Acquisition system integrations;
Increase in insurance expenses of $3.8 million mainly related to ~~acquire its Puerto Rico and US Virgin Islands operations; and~~

the FDIC annual assessment as a result of the increase in customer deposits;

~~OFG BANCORP~~

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

~~Higher~~Increase in professional and service fees by ~~$1.4~~$2.6 million ~~mainly~~from higher supervisory examination fees by $839 thousand, consulting and advisory ~~fees.~~

expenses by $923 thousand, audit fees by $424 thousand and legal expenses by $303 thousand;

Increase of merger and restructuring charges of $2.3 million;

Increase in municipal tax and property tax of $2.0 million; and

Increase in other expenses by $6.0 million related to Covid-19 pandemic expenses of $2.2 million, broker-dealer claims and settlement reserve of $1.4 million and to the amortization of intangibles of $1.2 million.

The efficiency ratio ~~improved~~was 66.59%, up from 52.19%. The efficiency ratio measures how much of Oriental’s revenues is used to ~~51.83% from 53.77%.~~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 ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 amounted to ~~$8.6~~$9.3 million and ~~$758 thousand,~~$4.9 million, respectively.

Provision for ~~Loan and Lease~~Credit Losses

Comparison of quarters ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

~~Based on an analysis~~Provision for credit losses remained at level at $17.7 million when compared with the last year quarter. This included a $5.0 million provision to incorporate the potential effects of the ~~credit quality~~Covid-19 pandemic, while the last year quarter included an additional $8.8 million for loans transferred to held for sale.

Comparison of six-month periods ended June 30, 2020 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.2019

Provision for ~~loan and lease~~credit losses ~~net~~ increased ~~$29.2~~$34.8 million from ~~$14.6~~$30.0 million to ~~$43.8~~$64.8 million. This included a $39.1 million ~~resulting from:~~

~~Increase of $39.0 million primarily from deciding~~provision to ~~sell $95.0 million~~incorporate changes in ~~unpaid principal balance of non-performing commercial~~the macro-economic scenario and ~~mortgage loans, both acquired and originated;~~

~~Decrease of $2.4 million from the proceeds~~qualitative adjustments as a result 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.~~

Covid-19 pandemic.

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~~June 30, ~~2019~~2020 and ~~2018~~2019

~~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 25.0% in the quarter ended ~~September~~June 30, ~~2019 as a result of a decrease~~2020 compared to 31.2% in the ~~estimated annual~~same quarter of 2019. 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 effective income tax rate to 30.5%, mainly due to~~is based on a higher proportion of exempt income and income ~~subject~~taxed at preferential rates.

Comparison of six-month periods ended June 30, 2020 and 2019

Income tax expense was $7.5 million, compared to ~~preferential rates.~~$22.5 million, reflecting the effective income tax rate of 24.2% and the net income before income taxes of $31.1 million compared to $69.9 million for the same period in 2019.

Business Segments

Oriental segregates its businesses into the following major reportable segments: Banking, Wealth Management, and Treasury. Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as Oriental’s organization, nature of its products, distribution channels and economic characteristics of its services 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. Following are the results of operations and the selected financial information by operating segment for the quarters and ~~nine-month~~six-month periods ended ~~September~~ June 30, ~~2019~~2020 and ~~2018.~~2019.

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


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

~~110~~

~~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

	Quarter Ended June 30, 2019
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	84,475	$	19	$	9,761	$	94,255	$	-	$	94,255
Interest expense		(9,187)		-		(3,983)		(13,170)		-		(13,170)
Net interest income		75,288		19		5,778		81,085		-		81,085
Provision for loan and lease losses		(17,675)		-		(30)		(17,705)		-		(17,705)
Non-interest income		11,330		6,834		4,784		22,948		-		22,948
Non-interest expenses		(46,346)		(3,898)		(1,208)		(51,452)		-		(51,452)
Intersegment revenue		587		-		-		587		(587)		-
Intersegment expenses		-		(165)		(422)		(587)		587		-
Income before income taxes	$	23,184	$	2,790	$	8,902	$	34,876	$	-	$	34,876
Income tax expense		9,042		1,088		767		10,897		-		10,897
Net income	$	14,142	$	1,702	$	8,135	$	23,979	$	-	$	23,979
Total assets	$	5,951,860	$	27,067	$	1,532,053	$	7,510,980	$	(1,046,853)	$	6,464,127

	Six-Month Period Ended June 30, 2019
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	167,991	$	37	$	20,937	$	188,965	$	-	$	188,965
Interest expense		(17,823)		-		(8,268)		(26,091)		-		(26,091)
Net interest income		150,168		37		12,669		162,874		-		162,874
Provision for loan and lease losses		(29,882)		-		(72)		(29,954)		-		(29,954)
Non-interest income		22,986		12,818		4,800		40,604		-		40,604
Non-interest expenses		(92,829)		(8,225)		(2,550)		(103,604)		-		(103,604)
Intersegment revenue		1,141		-		-		1,141		(1,141)		-
Intersegment expenses		-		(339)		(802)		(1,141)		1,141		-
Income before income taxes	$	51,584	$	4,291	$	14,045	$	69,920	$	-	$	69,920
Income tax expense		19,344		1,609		1,518		22,471		-		22,471
Net income	$	32,240	$	2,682	$	12,527	$	47,449	$	-	$	47,449
Total assets	$	5,951,860	$	27,067	$	1,532,053	$	7,510,980	$	(1,046,853)	$	6,464,127

~~OFG BANCORP~~

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

Comparison of quarters ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

Banking

Oriental's banking segment net income before taxes ~~decreased $30.1~~increased $9.1 million from ~~$28.2~~$23.2 million to ~~a loss of $1.9~~$32.3 million, mainly reflecting:

·~~Increase~~Higher interest income from loans by $33.5 million, reflecting higher balances as a result of the Scotiabank PR & USVI Acquisition and PPP loan originations and $6.0 million in ~~provision for loan and lease losses of $29.2~~one-time interest recoveries from acquired PCI Scotiabank loans, partially offset by a 59 basis points decline in yield;

Higher interest expense from deposits by $5.5 million, mainly 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 $2.9 million decrease to reflecting improved asset quality;

·~~Increase~~ ~~in interest expense of $1.6 million, mainly from~~ an increase in deposits from the ~~cost~~Scotiabank PR & USVI Acquisition and an increase in customer deposits ~~by $1.9 million;~~during the quarter ended June 30, 2020;

An increase of $2.9 million and $2.4 million in banking service revenues and mortgage-banking activities, respectively, reflecting the Scotiabank PR & USVI Acquisition from a larger customer base and servicing fees;

·A $3.5 million bargain purchase gain from the Scotiabank PR & USVI Acquisition to adjust the fair value of accrued interest receivable at closing, net of taxes; and

Increase in ~~interest income of $1.5~~non-interest expense by $32.1 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, insurance expense, merger and restructuring, Covid-19 related expenses, municipal taxes 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~~activities. Net income before taxes from this segment decreased $2.5 million as a result of lower income and higher expenses due to ~~$3.1 million, mainly from a decrease in non-interest expenses of $270 thousand and an increase in non-interest income of $256 thousand.~~the Covid-19 pandemic.

Treasury

Treasury segment net income before taxes ~~increased $2.5~~decreased $12.4 million, ~~from $4.7 million to $7.1 million,~~mainly reflecting:

~~An increase of $3.5 million from a~~
No gain on ~~the~~ sale of ~~$322.4~~securities in the current quarter, as compared to $4.8 million ~~mortgage-backed~~gain on sales of securities recorded during the ~~quarter; and~~

prior year quarter.

~~Decrease in net~~
Lower interest income from interest bearing cash and investment securities by $6.0 million, mainly impacted by the Federal Reserve Bank’s 150 bps rate cut in March following the 75 bps reduction in the second half of ~~$1.5~~2019.
Lower interest expenses in borrowings by $2.0 million, ~~due to a decrease in investments volume by $1.3 million~~reflecting the maturity and ~~rate by $943 thousand, partially offset by $1.0 million decrease in~~early extinguishment of repurchase agreements ~~volume.~~

during the current quarter.

Comparison of ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

Banking

Oriental's banking segment net income before taxes decreased ~~$18.6~~$25.5 million from $51.6 million to ~~$49.7~~a $26.1 million, mainly reflecting:

·Higher interest income from loans by $65.8 million, reflecting higher balances as a result of the Scotiabank PR & USVI Acquisition and PPP loan originations and $6.0 million in one-time interest recoveries from acquired PCI Scotiabank loans, partially offset by a 60 basis points decline in yield;

Higher interest expense from deposits by $13.0 million, mainly related to an increase in deposits from the Scotiabank PR & USVI Acquisition and an increase in customer deposits during the period;

Increase in provision for ~~loan~~credit losses by $33.5 million which included a $39.1 million provision to incorporate changes in the macro-economic scenario and ~~lease losses~~qualitative adjustments as a result of ~~$28.9~~the Covid-19 pandemic;

An increase of $8.1 million ~~related to~~and $4.5 million in banking service revenues and mortgage-banking activities, respectively, reflecting the Scotiabank PR & USVI Acquisition from a ~~$39.0~~larger customer base and servicing fees;

A $3.5 million ~~increase primarily from deciding to sell non-performing commercial and mortgage loans, $2.4 million decrease~~bargain purchase gain from the ~~proceeds~~Scotiabank PR & USVI Acquisition to adjust the fair value of ~~the sale~~accrued interest receivable at closing, net of ~~previously charged off auto~~taxes; 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~~non-interest expense ~~of $6.0~~by $68.1 million reflecting the Scotiabank PR & USVI Acquisition, 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~~compensation and ~~auto portfolios~~employee benefits, electronic banking charges, occupancy and ~~a $11.1 million decrease from acquired loans as such loans continue to be repaid;~~equipment, information technology, insurance expenses, merger and restructuring charges, Covid-19 pandemic related expenses, municipal taxes and professional services.

~~OFG BANCORP~~

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

·~~Decrease in mortgage banking activities of $1.0 million, mainly reflecting lower mortgage servicing fees.~~

Wealth Management

Wealth management segment revenue ~~which~~ consists of commissions and fees from fiduciary activities, and securities brokerage and insurance ~~activities, increased $1.1 million to $7.4 million, mainly~~activities. Net income before taxes from this segment decreased $529 thousand as a result of lower income and higher expenses due to ~~a decrease in non-interest expenses of $613 thousand mainly from lower legal expenses related to claims and settlement accruals, and an increase of $318 thousand in non-interest income.~~the Covid-19 pandemic.

Treasury

Treasury segment net income before taxes ~~which consists of Oriental's asset/liability management activities, such as purchase~~decreased by $12.8 million, mainly reflecting:

Lower interest income from interest bearing cash and ~~sale of~~ investment securities by $9.3 million, mainly impacted by the Federal Reserve Bank’s second half 2019 and 2020 rate cuts; and

Lower interest ~~rate risk management, derivatives,~~expenses in borrowings by $3.9 million, reflecting the maturity and ~~borrowings, increased to $21.2 million, compared to $15.0 million, reflecting:~~

·~~An increase~~early extinguishment of ~~$8.3 million from a gain on the sale of $672.2 million in mortgage-backed securities in 2019; and~~

~~Increase in interest expense of $1.6 million, $1.1 million corresponding to an increase in~~ repurchase agreements ~~rate.~~

during the current period.

ANALYSIS OF FINANCIAL CONDITION

Assets Owned

At ~~September~~June 30, ~~2019,~~2020, Oriental’s total assets amounted to ~~$6.334~~$9.933 billion representing ~~a decrease~~an increase of ~~3.8%~~6.8%, when compared to ~~$6.583~~$9.298 billion at December 31, ~~2018. Investments decreased $749.9 million, loans decreased $24.4~~2019. Loans portfolio increased $97.4 million and investments decreased $538.1 million, while cash increased ~~$514.8 million.~~$1.0 billion.

In January 1, 2019 Oriental reclassified $424.7 million of its held-to-maturity securities into available-for-sale securities as a result of the adoption of ASU 2017-12. During the nine-month period ended September 30, 2019 Oriental sold $672.2 million of its available for sale mortgage-backed securities at a gain of $8.3 million in order to fund Oriental’s growth plans, including the Scotiabank Transaction. As a result of these sales, cash increased 115.2% to $961.8 million.

Oriental’s loan portfolio is comprised of residential mortgage loans, commercial loans collateralized by mortgages on real estate, other commercial and industrial loans, consumer loans, and auto loans. At ~~September~~June 30, ~~2019,~~2020, Oriental’s loan portfolio ~~decreased 1.0%.~~increased 1.5%, which was partially offset by an increase of $39.2 million in the allowance for credit losses on Non-PCD loans as a result of CECL implementation and the $39.1 million provision to incorporate changes in the macro-economic scenario and qualitative adjustments as a result of the Covid-19 pandemic during the six-month period ended June 30, 2020. Loan production during the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2019,~~2020 reached ~~$894.4~~$784.0 million, compared to ~~$1.096~~$602.9 million in the year ago period, ~~a 18.4% decrease,~~ mainly from ~~lower~~$286.4 million PPP loan originations in response to the ~~commercial and~~Covid-19 pandemic under the ~~US loan program portfolios.~~CARES Act. The ~~non-acquired~~Non-PCD loan portfolio increased ~~$46.4~~$249.0 million from $4.735 billion at December 31, ~~2018~~2019 to ~~$3.791~~$4.984 billion at ~~September~~June 30, ~~2019. From December 31, 2018,~~2020.

During the ~~BBVAPR acquired loan portfolio decreased $106.3~~six-month period ended June 30, 2020, Oriental sold $316.3 million ~~to $570.2~~mortgage-backed securities at a gain of $4.7 million and had $100.0 million maturities in US treasury notes.

Cash and cash equivalents of $1.9 billion increased $1.0 billion primarily because of the Eurobank acquired loan portfolio decreased $7.6 million to $79.4 million at September 30, 2019. During the nine-month period ended September 30, 2019 Oriental decided to sell $168.8 million unpaid principal balance in non-performing mortgageinflux of both commercial and ~~commercial loans, both acquired and originated, and recognized them at their fair value. Some of these loans were sold during the quarter ended September 30, 2019 and the rest are expected to be sold~~retail deposits

from increased liquidity in the ~~last quarter of 2019.~~economy.

~~In addition, assets reflect the~~ adoption of 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 lease classified as operating leases, prospectively. At September 30, 2019, the right of use assets amounted to $19.3 million.

Financial Assets Managed

~~114~~

~~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~~June 30, ~~2019,~~2020, total assets managed by Oriental’s trust division and OPC amounted to ~~$2.980~~$3.049 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~~June 30, ~~2019,~~2020, total assets gathered by Oriental Financial Services and Oriental Insurance from its ~~customer~~customers’ investment accounts amounted to ~~$2.349~~$2.221 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~~

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~~June 30, 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~~June 30, ~~2019,~~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%

100

TABLE 4 - ASSETS SUMMARY AND COMPOSITION

	June 30		December 31,		Variance
	2020		2019		%
	(Dollars in thousands)
Investments:
FNMA and FHLMC certificates	$	149,817	$	402,656	-62.8%
Obligations of US government-sponsored agencies		1,824		1,961	-7.0%
US Treasury securities		197,340		397,184	-50.3%
CMOs issued by US government-sponsored agencies		48,612		54,760	-11.2%
GNMA certificates		141,765		216,470	-34.5%
FHLB stock		8,366		13,048	-35.9%
Other debt securities		881		1,138	-22.6%
Other investments		1,098		597	83.9%
Total investments		549,703		1,087,814	-49.5%
Loans		6,739,243		6,641,847	1.5%
Total investments and loans		7,288,946		7,729,661	-5.7%
Other assets:
Cash and due from banks (including restricted cash)		1,890,015		845,982	123.4%
Money market investments		10,022		6,775	47.9%
Foreclosed real estate		24,792		29,909	-17.1%
Accrued interest receivable		82,483		36,781	124.3%
Deferred tax asset, net		186,730		176,740	5.7%
Premises and equipment, net		82,234		81,105	1.4%
Servicing assets		47,926		50,779	-5.6%
Goodwill		86,069		86,069	0.0%
Right of use assets		34,692		39,112	-11.3%
Core deposit, customer relationship and other intangibles		51,406		56,965	-9.8%
Other assets and customers' liability on acceptances		147,404		157,783	-6.6%
Total other assets		2,643,773		1,568,000	68.6%
Total assets	$	9,932,719	$	9,297,661	6.8%
Investment portfolio composition:
FNMA and FHLMC certificates		27.3%		37.0%
Obligations of US government-sponsored agencies		0.3%		0.2%
US Treasury securities		35.9%		36.5%
CMOs issued by US government-sponsored agencies		8.8%		5.0%
GNMA certificates		25.8%		19.9%
FHLB stock		1.5%		1.2%
Other debt securities and other investments		0.4%		0.2%
		100.0%		100.0%

~~116~~101

~~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

	June 30,		December 31,
	2020		2019
	(In thousands)
Loans held for investment:
Commercial	$	2,582,269	$	2,301,350
Mortgage		2,416,194		2,449,538
Consumer		461,653		485,060
Auto		1,492,396		1,530,166
		6,952,512		6,766,114
Allowance for credit losses		(232,701)		(230,755)
Total loans held for investment		6,719,811		6,535,359
Mortgage loans held for sale		19,432		19,591
Total loans, net	$	6,739,243	$	6,554,950

~~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~~$6.739 billion at ~~September~~June 30, ~~2019~~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%~~$2.416 billion (34.8% of the gross ~~originated~~ loan portfolio) compared to ~~$668.8 million (17.9%~~$2.489 billion (36.9% of the gross originated loan portfolio) at December 31, ~~2018.~~2019. Mortgage loan production totaled ~~$23.8~~$21.1 million and ~~$69.1~~$51.9 million for the quarter and ~~nine-month~~six-month period ended ~~September~~June 30, ~~2019,~~2020, respectively, which represents a decrease of ~~14.6%~~4.8% and ~~20.0%~~an increase of 12.8% from ~~$27.9~~$22.2 million and ~~$86.3~~$45.3 million ~~respectively,~~ for the same periods in ~~2018.~~2019. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to ~~$11.4~~$75.1 million and ~~$19.7~~$75.2 million at ~~September~~June 30, ~~2019~~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~~$2.583 billion ~~(41.5%~~(37.1% 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 and PPP loans, increased 249.3% and 59.3% to $420.7 million and $521.9 million for the quarters and six-month periods ended June 30, 2020, respectively, from $120.4 million and $212.6 million for the same periods in 2019.

Consumer loan portfolio amounted to $461.7 million (6.6% 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 70.1% to $14.2 million and 6.6% to $53.4 million for the quarter and six-month period ended June 30, 2020, respectively, from $47.3 million and $88.2 million for the same periods in 2019.

Auto and leasing portfolio amounted to $1.492 billion (21.5% 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 6.5% to $47.4 million and ~~$100.3~~6.4% to $156.7 million ~~respectively, decreased 45.4% and 40.3% to $77.9 million and $290.5 million, respectively,~~ for the quarter and ~~nine-month~~six-month period ended ~~September~~June 30, ~~2019, from $142.7~~2020, respectively, compared to $136.3 million and ~~$486.7~~$256.5 million for the same periods in ~~2018.~~2019.

·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)~~

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.

102

TABLE 6 — HIGHER RISK RESIDENTIAL MORTGAGE LOANS

	June 30, 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	$	7,359	$	259	3.52%	$	7,251	$	442	6.10%	$	60,173	$	1,944	3.23%
90 - 119 days		62		2	3.23%		-		-	0.00%		907		131	14.44%
120 - 179 days		8		1	12.50%		-		-	0.00%		1,412		132	9.35%
180 - 364 days		-		-	0.00%		-		-	0.00%		1,848		315	17.05%
365+ days		89		3	3.37%		280		18	6.43%		8,509		402	4.72%
Total	$	7,518	$	265	3.52%	$	7,531	$	460	6.11%	$	72,849	$	2,924	4.01%
Percentage of total loans excluding acquired loans accounted for under ASC 310-30		0.19%					0.19%					1.86%
Refinanced or Modified Loans:
Amount	$	2,092	$	125	5.98%	$	583	$	23	3.95%	$	27,651	$	2,190	7.92%
Percentage of Higher-Risk Loan Category		27.83%					7.74%					37.96%
Loan-to-Value Ratio:
Under 70%	$	4,909	$	186	3.79%	$	1,913	$	120	6.27%	$	-	$	-	-
70% - 79%		592		23	3.89%		938		59	6.29%		-		-	-
80% - 89%		1,733		29	1.67%		3,298		208	6.31%		-		-	-
90% and over		284		27	9.51%		1,382		73	5.28%		72,849		2,924	4.01%
	$	7,518	$	265	3.52%	$	7,531	$	460	6.11%	$	72,849	$	2,924	4.01%

* Loans may be included in more than one higher-risk loan category and excludes acquired residential mortgage loans. Only Non-PCD loans.

~~119~~103

~~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 and one loan to a public corporation acquired in the Scotiabank PR & USVI Acquisition. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations. Deposits from the Puerto Rico government totaled $275.3 million at June 30, 2020.

TABLE 7 - PUERTO RICO GOVERNMENT RELATED LOANS AND SECURITIES

June 30, 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

Loans to municipalities referred to above amounting to $64.2 million matured in July 2020 and were renewed for seven years, net of a principal repayment of $26 million.

~~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 $26.5 million at June 30, 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$39.1 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 June 30, 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.

104

Non-performing Assets

Oriental’s non-performing assets include non-performing loans and foreclosed real estate (see Tables 11 and 12). At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, Oriental had ~~$73.4~~$82.4 million and ~~$119.7~~$80.9 million, respectively, of non-accrual loans, including ~~acquired BBVAPR~~non-PCD loans accounted for under ~~ASC 310-20 (loans with revolving feature and/or acquired at a premium).~~ASU 2016-13.

At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, loans whose terms have been extended and which are classified as troubled-debt restructurings that are not included in non-performing assets amounted to ~~$103.8~~$102.2 million and ~~$112.9~~$103.7 million, respectively.

At September 30, 2019 and December 31, 2018, loans that are current in their monthly payments, but placed in non-accrual amounted to $16.6 million and $21.2 million, respectively. During the nine-month period ended September 30, 2019, a $9.3 million loan that is current in its monthly payments was placed in non-accrual due to credit deterioration.

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

Acquired loans with credit deterioration are considered to be performing due to the application of the accretion method under ASC 310-30, in which these loans will accrete interest income over their remaining life using estimated cash flow analyses. Credit related decreases in expected cash flows, compared to those previously forecasted are recognized by recording a provision for credit losses on these loans when it is probable that all cash flows expected at acquisition will not be collected.

At ~~September~~June 30, ~~2019,~~2020, Oriental’s non-performing assets ~~decreased~~increased by ~~33.5%~~67.4% to ~~$107.3~~$198.8 million ~~(1.93%~~including PCD loans as a result of the new methodology (2.00% of total ~~assets, excluding acquired loans with deteriorated credit quality)~~assets) from ~~$161.3~~$118.7 million ~~(2.76%~~(1.28% of total ~~assets, excluding acquired loans with deteriorated credit quality)~~assets) at December 31, ~~2018, mainly from deciding to sell mortgage and commercial loans, both originated and acquired, during the nine-month period ended September 30,~~ 2019. Foreclosed real estate and other repossessed assets amounting to ~~$27.0~~$24.8 million and ~~$3.5~~$1.4 million, respectively, at ~~September~~June 30, ~~2019,~~2020, and ~~$33.8~~$29.9 million and ~~$3.0~~$3.3 million, respectively, at December 31, ~~2018,~~2019, were recorded at fair value. Oriental does not expect non-performing loans to result in significantly higher losses. At ~~September~~June 30, ~~2019,~~2020, the allowance coverage ratio ~~for originated loan and lease losses~~ to non-performing loans was ~~104.39% (77.38%~~134.8% (99.5% at December 31, ~~2018)~~2019).

~~121~~

~~OFG BANCORP~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~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 PCD loans the determination of nonaccrual or accrual status is made at the pool level, not the individual loan level. Upon adoption of CECL, the allowance for credit losses was determined for each pool and added to the pool’s carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the pool and the new amortized cost basis is the non-credit premium or discount which will be amortized interest income over the remaining life of the pool. On a quarterly basis, management will monitor the composition and behavior of the pools to assess the ability for cash flow estimation and timing. If based on the analysis performed, the pool is classified as non-accrual the accretion/amortization of the non-credit (discount) premium will cease.

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 June 30, 2020, Oriental’s non-performing commercial loans amounted to $111.6 million (64.6 % of Oriental’s non-performing loans), a 160.4% 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 $81.1 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 June 30, 2020, Oriental’s non-performing mortgage loans totaled $45.6 million (26.4% of Oriental’s non-performing loans), a 102.0% 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~~

105

Consumer loans —At June 30, ~~2019,~~2020, Oriental’s ~~originated~~ non-performing ~~mortgage~~consumer loans ~~totaled $21.1~~amounted to $4.9 million ~~(27.5%~~(2.9% of Oriental’s non-performing loans), a ~~66.8%~~14.5% 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~~

Auto loans and leases —At June 30, ~~2019,~~2020, Oriental’s ~~originated~~ non-performing ~~consumer~~auto loans and leases amounted to ~~$4.0~~$10.5 million ~~(5.2%~~(6.1% of Oriental’s total non-performing loans), a ~~19.5% increase~~decrease of 26.3% 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%

106

~~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

	June 30,		December 31,		Variance
	2020		2019		%
	(In thousands)
Allowance for credit losses:
Non-PCD
Commercial	$	43,011	$	25,993		65.5%
Mortgage		19,973		8,727		128.9%
Consumer		31,954		18,446		73.2%
Auto and leases		56,569		31,878		77.5%
Total allowance for credit losses	$	151,507	$	85,044	$	78.2%

PCD
Commercial	$	48,913		8,893		450.0%
Mortgage		30,920		21,655		42.8%
Consumer		169		-		100.0%
Auto and leases		1,192		947		25.9%
Total allowance for credit losses	$	81,194		31,495		157.8%

Allowance for credit losses summary
Commercial	$	91,924	$	34,886		163.5%
Mortgage		50,893		30,382		67.5%
Consumer		32,123		18,446		74.1%
Auto and leases		57,761		32,825		76.0%
Total allowance for credit losses	$	232,701	$	116,539	$	99.7%

Allowance composition:
Commercial		39.5%		29.9%
Mortgage		21.9%		26.1%
Consumer		13.8%		15.8%
Auto and leases		24.8%		28.2%
		100.0%		100.0%

Allowance coverage ratio at end of period:
Commercial		3.6%		1.6%		126.8%
Mortgage		2.1%		1.2%		72.9%
Consumer		7.0%		3.7%		90.4%
Auto and leases		3.9%		2.2%		79.6%
		3.4%		1.7%		93.7%

Allowance coverage ratio to non-performing loans:
Commercial		82.4%		81.5%		1.2%
Mortgage		111.7%		134.7%		-17.1%
Consumer		649.6%		318.8%		103.8%
Auto and leases		548.1%		229.6%		138.7%
		134.8%		136.4%		-1.1%

~~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%

107

TABLE 9 - ALLOWANCE FOR CREDIT LOSSES SUMMARY

	Quarter Ended June 30,						Six-Month Period Ended June 30,
						Variance						Variance
	2020		2019		%		2020		2019		%
	(In thousands)
Allowance for credit losses:
Balance at beginning of period	$	230,755	$	162,488		42.0%	$	116,539	$	164,231		-29.0%
Impact of ASC 326 adoption		-		-		100.0%		89,720		-		100.0%
Provision for credit losses		17,696		17,705		-0.1%		66,226		29,955		121.1%
Charge-offs		(21,363)		(18,830)		13.5%		(52,926)		(36,519)		44.9%
Allowance derecognition		-		(4,569)		-100.0%		-		(5,683)		-100.0%
Recoveries		5,613		5,848		-4.0%		13,142		10,658		23.3%
Balance at end of period	$	232,701	$	162,642	$	43.1%	$	232,701	$	162,642	$	43.1%

~~125~~108

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 June 30,						Six-Month Period Ended June 30,
					Variance						Variance
	2020		2019		%		2020		2019		%
	(Dollars in thousands)
Non-PCD
Mortgage
Charge-offs	$	(185)	$	(604)		-69.4%	$	(603)	$	(1,191)		-49.4%
Recoveries		9		316		-97.2%		258		603		-57.2%
Total		(176)		(288)		-38.9%		(345)		(588)		-41.3%
Commercial
Charge-offs		(497)		(2,226)		-77.7%		(4,268)		(3,312)		28.9%
Recoveries		631		179		252.5%		2,153		328		556.4%
Total		134		(2,047)		-106.5%		(2,115)		(2,984)		-29.1%
Consumer
Charge-offs		(4,187)		(5,272)		-20.6%		(10,202)		(9,831)		3.8%
Recoveries		443		405		9.4%		1,087		708		53.5%
Total		(3,744)		(4,867)		-23.1%		(9,115)		(9,123)		-0.1%
Auto and leases
Charge-offs		(13,300)		(10,728)		24.0%		(26,353)		(22,185)		18.8%
Recoveries		3,405		4,948		-31.2%		7,616		9,019		-15.6%
Total		(9,895)		(5,780)		71.2%		(18,737)		(13,166)		42.3%

PCD Loans:
Mortgage
Charge-offs	$	(2,178)	$	-		100.0%	$	(7,321)	$	-		100.0%
Recoveries		580		-		100.0%		702		-		100.0%
Total		(1,598)		-		100.0%		(6,619)		-		100.0%
Commercial
Charge-offs		(386)		-		100.0%		(2,743)		-		100.0%
Recoveries		286		-		100.0%		661		-		100.0%
Total		(100)		-		100.0%		(2,082)		-		100.0%
Consumer
Charge-offs		(30)		-		100.0%		(461)		-		100.0%
Recoveries		30		-		100.0%		93		-		100.0%
Total		-		-		100.0%		(368)		-		100.0%
Auto and leases
Charge-offs		(600)		-		100.0%		(975)		-		100.0%
Recoveries		229		-		100.0%		572		-		100.0%
Total		(371)		-		100.0%		(403)		-		100.0%

Total charge-offs		(21,363)		(18,830)		13.5%		(52,926)		(36,519)		44.9%
Total recoveries		5,613		5,848		-4.0%		13,142		10,658		23.3%
Net charge-offs	$	(15,750)	$	(12,982)		21.3%	$	(39,784)	$	(25,861)		53.8%

Net credit losses to average loans outstanding:

~~126~~109

~~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%

Mortgage		0.43%		0.18%	136.39%		0.68%		0.18%	273.99%
Commercial		-0.01%		0.52%	-101.53%		0.42%		0.38%	12.54%
Consumer		4.39%		5.05%	-13.13%		4.52%		4.75%	-5.00%
Auto and leases		3.85%		1.93%	99.84%		2.94%		2.23%	32.08%
Total		1.31%		1.36%	-3.71%		1.39%		1.36%	1.66%
Recoveries to charge-offs		26.27%		31.06%	-15.40%		24.83%		29.18%	-14.92%
Average Loans Held for Investment (a)
Mortgage	$	1,668,071	$	640,141	160.6%	$	2,041,782	$	644,749	216.7%
Commercial		1,725,648		1,585,404	8.8%		1,981,379		1,585,379	25.0%
Consumer		341,235		385,356	-11.4%		420,032		383,884	9.4%
Auto and leases		1,065,750		1,199,105	-11.1%		1,301,152		1,182,157	10.1%
Total	$	4,800,704	$	3,810,006	26.0%	$	5,744,345	$	3,796,169	51.3%


(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.

110

~~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

	June 30,		December 31,		Variance
	2020		2019		(%)
	(Dollars in thousands)
Non-performing assets:
Non-PCD
Non-accruing loans
Troubled-Debt Restructuring loans	$	22,369	$	23,587	-5.2%
Other loans		64,174		57,336	11.9%
Accruing loans
Troubled-Debt Restructuring loans		3,260		3,317	-1.7%
Other loans		347		500	-30.6%
Total	$	90,150	$	84,740	6.4%
PCD		82,449		724	11288.0%
Total non-performing loans	$	172,599	$	85,464	102.0%
Foreclosed real estate		24,792		29,909	-17.1%
Other repossessed assets		1,360		3,327	-59.1%
	$	198,751	$	118,700	67.4%

Non-performing assets to total assets		2.00%		1.28%	56.3%
Non-performing assets to total capital		19.09%		11.35%	68.2%

	Quarter Ended June 30,				Six-Month Period Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Interest that would have been recorded in the period if the loans had not been classified as non-accruing loans	$	686	$	937	$	1,102	$	1,644

~~128~~111

~~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

	June 30,		December 31,		Variance
	2020		2019		%
	(In thousands)
Non-performing loans
Non-PCD
Commercial	$	30,491	$	42,606	-28.4%
Mortgage		44,187		22,552	95.9%
Consumer		4,933		5,287	-6.7%
Auto and leases		10,539		14,295	-26.3%
Total	$	90,150	$	84,740	6.4%

PCD
Commercial	$	81,062	$	225	35927.6%
Mortgage		1,375		-	100.0%
Consumer		12		499	-97.6%
Total	$	82,449	$	724	11288.0%
Total non-performing loans	$	172,599	$	85,464	102.0%

Non-performing loans composition percentages:
Commercial		64.6%		50.1%
Mortgage		26.4%		26.4%
Consumer		2.9%		6.8%
Auto and leases		6.1%		16.7%
		100.0%		100.0%

Non-performing loans to:
Total loans		2.5%		1.8%	38.5%
Total assets		1.7%		0.9%	91.2%
Total capital		16.6%		8.1%	104.4%

Non-performing loans with partial charge-offs to:
Total loans		1.2%		0.5%	125.0%
Non-performing loans		47.2%		29.3%	61.4%

Other non-performing loans ratios:
Charge-off rate on non-performing loans to non-performing loans on which charge-offs have been taken		73.1%		123.0%	-40.6%
Allowance for credit losses to non-performing loans on which no charge-offs have been taken		255.6%		141.9%	80.1%

~~129~~112

~~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
	June 30,		December 31,		Variance
	2020		2019		%
	(Dollars in thousands)
Deposits:
Non-interest bearing deposits	$	2,216,306	$	1,675,315	32.3%
NOW accounts		2,154,065		1,903,757	13.1%
Savings and money market accounts		2,017,180		1,836,480	9.8%
Certificates of deposit		2,143,562		2,271,286	-5.6%
Total deposits		8,531,113		7,686,838	11.0%
Accrued interest payable		10,813		11,772	-8.1%
Total deposits and accrued interest payable		8,541,926		7,698,610	11.0%
Borrowings:
Securities sold under agreements to repurchase		-		190,274	-100.0%
Advances from FHLB		67,518		78,009	-13.4%
Subordinated capital notes		36,083		36,083	0.0%
Other term notes		822		1,195	-31.2%
Total borrowings		104,423		305,561	-65.8%
Total deposits and borrowings		8,646,349		8,004,171	8.0%

Other Liabilities:
Derivative liabilities		2,078		913	127.6%
Acceptances outstanding		20,034		21,599	-7.2%
Lease liability		35,694		39,840	-10.4%
Other liabilities		187,280		185,660	0.9%
Total liabilities	$	8,891,435	$	8,252,183	7.7%
Deposits portfolio composition percentages:
Non-interest bearing deposits		26.0%		21.8%
NOW accounts		25.2%		24.8%
Savings and money market accounts		23.7%		23.9%
Certificates of deposit		25.1%		29.5%
		100.0%		100.0%
Borrowings portfolio composition percentages:
Securities sold under agreements to repurchase		0.0%		62.3%
Advances from FHLB		64.7%		25.5%
Other term notes		0.8%		0.4%
Subordinated capital notes		34.5%		11.8%
		100.0%		100.0%
Securities sold under agreements to repurchase (excluding accrued interest)
Amount outstanding at period-end	$	-	$	190,000
Daily average outstanding balance	$	46,154	$	299,842
Maximum outstanding balance at any month-end	$	190,000	$	461,954

~~130~~113

~~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~~June 30, ~~2019~~,2020, Oriental’s total liabilities were ~~$5.284~~$8.891 billion, ~~5.4% less~~7.7% more than the ~~$5.583~~$8.252 billion reported at December 31, ~~2018~~.2019. Deposits and borrowings, Oriental’s funding sources, amounted to ~~$5.184~~$8.646 billion at ~~September~~June 30, ~~2019~~2020 versus ~~$5.479~~$8.004 billion at December 31, ~~2018, a 5.4% decrease.~~2019, an 8.0% increase, mainly from higher core deposits by $868.6 million, while brokered deposits and borrowings decreased $25.3 million and $201.1 million, respectively.

At June 30, 2020, deposits represented 99% and borrowings represented 1% of interest-bearing liabilities. At June 30, 2020, deposits, the largest category of Oriental’s interest-bearing liabilities, were $8.542 billion, an increase of 11.0% from $7.699 billion at December 31, 2019, reflecting higher commercial deposits from existing and new clients and in retail accounts from increased liquidity in the economy.

Borrowings consist mainly of repurchase agreements, FHLB-NY advances and subordinated capital notes. At ~~September 30, 2019, borrowings amounted to $305.9 million, representing a decrease of 46.4% when compared with the $570.4 million reported at~~ ~~December 31, 2018~~. The ~~decrease~~overall declines in ~~borrowings reflect the reduction of $241.0 million in repurchase agreements with the proceeds from the sale of $672.1 million of mortgage-backed securities during the second and third quarter of 2019.~~

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~~,brokered deposits ~~represented 94%~~ and borrowings ~~represented 6% of interest-bearing liabilities. At~~ ~~September 30, 2019, deposits, the largest category of Oriental’s interest-bearing liabilities, were $4.878 billion, a slight decrease of 0.6% from $4.908 billion at~~ ~~December 31, 2018. Such decrease reflects a reduction of $62.8 million in brokered CD’s, mainly as a result~~ are part of the ~~sale of mortgage-backed securities during the nine-month period ended September~~strategy to replace higher cost funding with lower cost core deposits.

Stockholders’ Equity

At June 30, ~~2019.~~

~~Stockholders’ Equity~~

At ~~September 30, 2019~~,2020, Oriental’s total stockholders’ equity was ~~$1.049~~$1.041 billion, a ~~4.9% increase~~0.4% decrease when compared to ~~$999.9 million~~$1.045 billion at December 31, ~~2018~~.2019. This ~~increase~~decrease in stockholders’ equity reflects ~~increases~~decreases in retained earnings of ~~$32.8~~$14.9 million and ~~legal surplus of $5.6 million; and decreases~~ in ~~accumulated other comprehensive loss, net of tax of $8.5 million and~~ treasury stock, at cost, of ~~$697~~$782 thousand; and increases in accumulated other comprehensive income, net of tax of $8.6 million, in legal surplus of $2.6 million, and in additional paid-in capital of $345 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~~$18.69 at ~~September~~June 30, ~~2019~~2020 compared to ~~$17.90~~$18.75 at December 31, ~~2018~~.2019.

From December 31, ~~2018~~2019 to ~~September~~June 30, ~~2019~~,2020, tangible common equity to total assets ~~increased~~decreased from ~~12.59%~~8.96% to ~~13.87%~~8.39%, leverage capital ratio increased from ~~14.22%~~9.24% to ~~15.41%~~10.16%, common equity tier 1 capital ratio increased from ~~16.78%~~10.91% to ~~17.98%~~12.03%, tier 1 risk-based capital ratio increased from ~~19.20%~~12.64% to ~~20.43%~~13.71%, and total risk-based capital ratio increased from ~~20.48%~~13.91% to ~~21.71%~~14.96%. ~~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~~June 30, ~~2019,~~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, 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. On January 1, 2020, the Company elected to early implement the simplifications to the capital rule. As a result, capital ratios increased.

114

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~~June 30, ~~2019~~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~~115

~~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~~June 30, ~~2019~~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	June 30,		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%	$	1,041,284	$	1,045,478	-0.4%
Regulatory Capital Ratios data:
Common equity tier 1 capital ratio		17.98%		16.78%	7.2%		12.03%		10.91%	10.3%
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%	$	836,899		735,441	13.8%
Minimum common equity tier 1 capital required	$	214,702		217,675	-1.4%	$	313,106		303,338	3.2%
Minimum capital conservation buffer required	$	119,279		90,698	31.5%	$	173,948		168,521	3.2%
Excess over regulatory requirement	$	524,111		503,334	4.1%	$	349,845		263,582	32.7%
Risk-weighted assets	$	4,771,165		4,837,214	-1.4%	$	6,957,906		6,740,846	3.2%
Tier 1 risk-based capital ratio		20.43%		19.20%	6.4%		13.71%		12.64%	8.5%
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%	$	953,769	$	852,311	11.9%
Minimum tier 1 risk-based capital required	$	286,270	$	290,233	-1.4%	$	417,474	$	404,451	3.2%
Excess over regulatory requirement	$	688,692	$	638,344	7.9%	$	536,295	$	447,860	19.7%
Risk-weighted assets	$	4,771,165	$	4,837,214	-1.4%	$	6,957,906	$	6,740,846	3.2%
Total risk-based capital ratio		21.71%		20.48%	6.0%		14.96%		13.91%	7.5%
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%	$	1,040,987	$	937,962	11.0%
Minimum total risk-based capital required	$	381,693	$	386,977	-1.4%	$	556,632	$	539,268	3.2%
Excess over regulatory requirement	$	654,217	$	603,522	8.4%	$	484,355	$	398,694	21.5%
Risk-weighted assets	$	4,771,165	$	4,837,214	-1.4%	$	6,957,906	$	6,740,846	3.2%
Leverage capital ratio		15.41%		14.22%	8.4%		10.16%		9.24%	10.0%
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%	$	953,769	$	852,311	11.9%
Minimum tier 1 capital required	$	253,010	$	261,125	-3.1%	$	375,475	$	369,151	1.7%
Excess over regulatory requirement	$	721,952	$	667,452	8.2%	$	578,294	$	483,160	19.7%
Tangible common equity to total assets		13.87%		12.59%	10.2%		8.28%		8.83%	-6.2%
Tangible common equity to risk-weighted assets		18.42%		17.13%	7.5%		11.81%		12.17%	-3.0%
Total equity to total assets		16.56%		15.19%	9.0%		10.48%		11.24%	-6.8%
Total equity to risk-weighted assets		21.99%		20.67%	6.4%		14.97%		15.51%	-3.5%
Stock data:
Outstanding common shares		51,347,056		51,293,924	0.1%		51,342,232		51,398,956	-0.1%
Book value per common share	$	18.84	$	17.90	5.2%	$	18.69	$	18.75	-0.3%
Tangible book value per common share	$	17.11	$	16.15	6.0%	$	16.01	$	15.96	0.3%
Market price at end of period	$	21.90	$	16.46	33.0%	$	13.37	$	23.61	-43.4%
Market capitalization at end of period	$	1,124,501	$	844,298	33.2%	$	686,446	$	1,213,529	-43.4%

~~133~~116

~~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~~June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

	September 30,		December 31,		June 30,		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	$	1,041,284	$	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)		(39,060)		(43,185)
Customer relationship intangible		(611)		(888)		(11,921)		(13,213)
Other intangibles						(425)		(567)
Total tangible common equity (non-GAAP)	$	878,646	$	828,570	$	821,939	$	820,574
Total assets		6,333,505		6,583,352		9,932,719		9,297,663
Goodwill		(86,069)		(86,069)		(86,069)		(86,069)
Core deposit intangible		(1,880)		(2,480)		(39,060)		(43,185)
Customer relationship intangible		(611)		(888)		(11,921)		(13,213)
Other intangibles						(425)		(567)
Total tangible assets	$	6,244,945	$	6,493,915	$	9,795,244	$	9,154,629
Tangible common equity to tangible assets		14.07%		12.76%		8.39%		8.96%
Common shares outstanding at end of period		51,347,056		51,293,924		51,342,232		51,398,956
Tangible book value per common share	$	17.11	$	16.15	$	16.01	$	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~~117

~~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	June 30,		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%	$	836,899	$	735,441	13.8%
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%		953,769		852,311	11.9%
Additional Tier 2 capital		60,948		61,922	-1.6%		87,218		85,652	1.8%
Total risk-based capital	$	1,035,910	$	990,499	4.6%	$	1,040,987	$	937,963	11.0%
Risk-weighted assets:
Balance sheet items	$	4,539,290	$	4,641,998	-2.2%	$	6,586,725	$	6,321,472	4.2%
Off-balance sheet items		231,875		195,216	18.8%		371,181		419,374	-11.5%
Total risk-weighted assets	$	4,771,165	$	4,837,214	-1.4%	$	6,957,906	$	6,740,846	3.2%
Ratios:
Common equity tier 1 capital (minimum required - 4.5%)		17.98%		16.78%	7.2%		12.03%		10.91%	10.3%
Tier 1 capital (minimum required - 6%)		20.43%		19.20%	6.4%		13.71%		12.64%	8.4%
Total capital (minimum required - 8%)		21.71%		20.48%	6.0%		14.96%		13.91%	7.5%
Leverage ratio (minimum required - 4%)		15.41%		14.22%	8.4%		10.16%		9.24%	10.0%
Equity to assets		16.56%		15.19%	9.0%		10.48%		11.24%	-6.8%
Tangible common equity to assets		13.87%		12.59%	10.2%		8.28%		8.83%	-6.2%

~~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~~June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

September 30,

December 31,

Variance

2019

2018

%

(Dollars in thousands)

Oriental Bank Regulatory Capital Ratios:

    Common Equity Tier 1 Capital to Risk-Weighted Assets

19.55%

18.40%

6.3%
    Actual common equity tier 1 capital
$
930,216

$
887,918

4.8%
    Minimum capital requirement (4.5%)
$
214,087

$
217,120

-1.4%
    Minimum capital conservation buffer requirement (1.875%)
$
118,937

$
90,467

31.5%
    Minimum to be well capitalized (6.5%)
$
309,237

$
313,618

-1.4%
    Tier 1 Capital to Risk-Weighted Assets

19.55%

18.40%

6.3%
    Actual tier 1 risk-based capital
$
930,216

$
887,918

4.8%
    Minimum capital requirement (6%)
$
285,449

$
289,494

-1.4%
    Minimum to be well capitalized (8%)
$
380,599

$
385,992

-1.4%
    Total Capital to Risk-Weighted Assets

20.83%

19.68%

5.8%
    Actual total risk-based capital
$
990,903

$
949,596

4.3%
    Minimum capital requirement (8%)
$
380,599

$
385,992

-1.4%
    Minimum to be well capitalized (10%)
$
475,749

$
482,490

-1.4%
    Total Tier 1 Capital to Average Total Assets

14.83%

13.68%

8.4%
    Actual tier 1 capital
$
930,216

$
887,918

4.8%
    Minimum capital requirement (4%)
$
250,964

$
259,547

-3.3%
    Minimum to be well capitalized (5%)
$
313,705

$
324,434

-3.3%

~~136~~118


	June 30,		December 31,		Variance
	2020		2019		%
	(Dollars in thousands)
Oriental Bank Regulatory Capital Ratios:
Common Equity Tier 1 Capital to Risk-Weighted Assets		13.15%		12.09%	8.8%
Actual common equity tier 1 capital	$	911,553	$	813,444	12.1%
Minimum capital requirement (4.5%)	$	311,872	$	302,782	3.0%
Minimum capital conservation buffer requirement (1.875%)	$	173,262	$	168,212	3.0%
Minimum to be well capitalized (6.5%)	$	450,482	$	437,351	3.0%
Tier 1 Capital to Risk-Weighted Assets		13.15%		12.09%	8.8%
Actual tier 1 risk-based capital	$	911,553	$	813,444	12.1%
Minimum capital requirement (6%)	$	415,829	$	403,709	3.0%
Minimum to be well capitalized (8%)	$	554,439	$	538,279	3.0%
Total Capital to Risk-Weighted Assets		14.41%		13.36%	7.9%
Actual total risk-based capital	$	998,432	$	898,812	11.1%
Minimum capital requirement (8%)	$	554,439	$	538,279	3.0%
Minimum to be well capitalized (10%)	$	693,049	$	672,848	3.0%
Total Tier 1 Capital to Average Total Assets		9.76%		8.85%	10.2%
Actual tier 1 capital	$	911,553	$	813,444	12.1%
Minimum capital requirement (4%)	$	373,487	$	367,537	1.6%
Minimum to be well capitalized (5%)	$	466,859	$	459,421	1.6%

119

~~OFG BANCORP~~

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

Oriental’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG.” At ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, Oriental’s market capitalization for its outstanding common stock was ~~$1.125 billion~~$686.4 million ($~~21.90~~13.37 per share) and ~~$844.3 million~~$1.214 billion ($~~16.46~~23.61 per share), respectively.

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

					Cash						Cash
	Price				Dividend		Price				Dividend
	High		Low		Per share		High		Low		Per share
2020
June 30, 2020							$	15.10	$	9.38	$	0.07
March 31, 2020							$	23.50	$	9.32	$	0.07
2019
December 31, 2019							$	23.61	$	20.00	$	0.07
September 30, 2019	$	24.20	$	19.84	$	0.07	$	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

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 six-month period ended June 30, 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. There were no repurchases during the ~~quarter and nine-month~~six-month period ended ~~September~~June 30, ~~2019~~.2019.

At ~~September~~June 30, ~~2019,~~2020, the number of shares that may yet be purchased under such program is estimated at ~~353,007~~412,150 and was calculated by dividing the remaining balance of ~~$7.7~~ $5.5 million by ~~$21.90~~ $13.37 (closing price of Oriental's common stock at ~~September~~June 30, ~~2019)~~2020). Oriental did not purchase any shares of its common stock during the six-month periods ended June 30, 2020, other than through its publicly announced stock repurchase program.

~~137~~120

~~OFG BANCORP~~

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Background

Oriental’s risk management policies are established by its Board of Directors (the “Board”) and implemented by management through the adoption of a risk management program, which is overseen and monitored by the Chief Risk and Compliance Officer, the Board’s Risk and Compliance Committee and the executive Risk and Compliance Team. Oriental has continued to refine and enhance its risk management program by strengthening policies, processes and procedures necessary to maintain effective risk management.

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

Market Risk

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

Interest Rate Risk

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

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

On a quarterly basis, Oriental performs a net interest income simulation analysis on a consolidated basis to estimate the potential change in future earnings from projected changes in interest rates. These simulations are carried out over a five-year time horizon, assuming certain gradual upward and downward interest rate movements, achieved during a twelve-month period. Instantaneous interest rate movements are also modeled. Simulations are carried out in two ways:

(i)using a static balance sheet as Oriental had on the simulation date, and

(ii)using a dynamic balance sheet based on recent organic growth patterns and core business strategies.

The balance sheet is divided into groups of assets and liabilities detailed by maturity or re-pricing and their corresponding interest yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future funding sources and costs, the possible exercise of options, changes in prepayment rates, deposits decay and other factors which may be important in projecting the future growth of net interest income.

Oriental uses a software application to project future movements in Oriental’s balance sheet and income statement. The starting point of the projections generally corresponds to the actual values of the balance sheet on the date of the simulations.

121

~~OFG BANCORP~~

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

These simulations are complex and use many assumptions that are intended to reflect the general behavior of Oriental over the period in question. There can be no assurance that actual events will match these assumptions in all cases. For this reason, the results of these simulations are only approximations of the true sensitivity of net interest income to changes in market interest rates. The following table presents the results of the simulations at ~~September~~June 30, ~~2019~~2020 for the most likely scenario, assuming a one-year time horizon:

	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%	$	27,976	7.11%	$	23,152	6.00%
+ 100 Basis points	$	9,879	3.16%	$	10,238	3.18%	$	14,948	3.80%	$	12,510	3.24%
- 100 Basis points	$	(9,908)	-3.17%	$	(10,251)	-3.19%	$	(1,946)	-0.49%	$	(1,787)	-0.46%
- 200 Basis points	$	(18,703)	-5.99%	$	(19,305)	-6.00%	$	(2,161)	-0.55%	$	(2,061)	-0.53%

Future net interest income could be affected by Oriental’s investments in callable securities, prepayment risk related to mortgage loans and mortgage-backed securities, and any structured repurchase agreements and advances from the FHLB-NY in which it may enter into from time to time. As part of the strategy to limit the interest rate risk and reduce the re-pricing gaps of Oriental’s assets and liabilities, Oriental has executed certain transactions which include extending the maturity and the re-pricing frequency of the liabilities to longer terms reducing the amounts of its structured repurchase agreements and entering into hedge-designated swaps to hedge the variability of future interest cash flows of forecasted wholesale borrowings that only consist of advances from the FHLB-NY as of ~~September~~June 30, ~~2019.~~2020.

Oriental maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. Oriental’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest margin is not, on a material basis, adversely affected by movements in interest rates. As a result of interest rate fluctuations, hedged fixed-rate assets and liabilities will appreciate or depreciate in market value. Also, for some fixed-rate assets or liabilities, the effect of this variability in earnings is expected to be substantially offset by Oriental’s gains and losses on the derivative instruments that are linked to the forecasted cash flows of these hedged assets and liabilities. Oriental considers its strategic use of derivatives to be a prudent method of managing interest-rate sensitivity as it reduces the exposure of earnings and the market value of its equity to undue risk posed by changes in interest rates. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by Oriental’s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. Another result of interest rate fluctuation is that the contractual interest income and interest expense of hedged variable-rate assets and liabilities, respectively, will increase or decrease.

Derivative instruments that are used as part of Oriental’s interest risk management strategy include interest rate swaps, forward-settlement swaps, futures contracts, and option contracts that have indices related to the pricing of specific balance sheet assets and liabilities. Interest rate swaps generally involve the exchange of fixed and variable-rate interest payments between two parties based on a common notional principal amount and maturity date. Interest rate futures generally involve exchanged-traded contracts to buy or sell U.S. Treasury bonds and notes in the future at specified prices. Interest rate options represent contracts that allow the holder of the option to (i) receive cash or (ii) purchase, sell, or enter into a financial instrument at a specified price within a specified period. Some purchased option contracts give Oriental the right to enter into interest rate swaps and cap and floor agreements with the writer of the option. In addition, Oriental enters into certain transactions that contain embedded derivatives. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated and carried at fair value. ~~Please refer to Note 8 to the accompanying consolidated financial statements for further information concerning Oriental’s derivative activities.~~

122

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

~~139~~

~~OFG BANCORP~~

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

Interest rate swaps — Oriental entered into hedge-designated swaps to hedge the variability of future interest cash flows of forecasted wholesale borrowings attributable to changes in the one-month LIBOR rate. Once the forecasted wholesale borrowing transactions occurred, the interest rate swap effectively fixes Oriental’s interest payments on an amount of forecasted interest expense attributable to the one-month LIBOR rate corresponding to the swap notional stated rate. A derivative liability of ~~$1.2~~$2.1 million (notional amount of ~~$32.4~~$31.1 million) was recognized at ~~September~~June 30, ~~2019~~2020 related to the valuation of these swaps.

In addition, Oriental has certain derivative contracts, including interest rate swaps not designated as hedging instruments, which are utilized to convert certain variable-rate loans to fixed-rate loans, and the mirror-images of these interest rate swaps in which Oriental enters into to minimize its interest rate risk exposure that results from offering the derivatives to clients. These interest rate swaps are marked to market through earnings. At September 30, 2019, Oriental did not have interest rate swaps offered to clients not designated as hedging instruments.

Wholesale borrowings — Oriental uses interest rate swaps to hedge the variability of interest cash flows of certain advances from the FHLB-NY that are tied to a variable rate index. The interest rate swaps effectively fix Oriental’s interest payments on these borrowings. As of ~~September~~June 30, ~~2019,~~2020, Oriental had ~~$32.4~~$31.1 million in interest rate swaps at an average rate of 2.42% designated as cash flow hedges for ~~$32.4~~$31.1 million in advances from the FHLB-NY that reprice or are being rolled over on a monthly basis.

Credit Risk

Credit risk is the possibility of loss arising from a borrower or counterparty in a credit-related contract failing to perform in accordance with its terms. The principal source of credit risk for Oriental is its lending activities. In Puerto Rico, Oriental’s principal market, economic conditions are very challenging, as they have been for the last twelve years, due to a shrinking population, a protracted economic recession, a housing sector that remains under pressure, the Puerto Rico government’s fiscal and liquidity crisis, and the payment defaults on various Puerto Rico government bonds, with severe austerity measures expected for the Puerto Rico government to be able to restructure its debts under the supervision of the federally-created Fiscal Oversight and Management Board for Puerto Rico. In addition, as was demonstrated ~~with~~by the January 2020 earthquakes and hurricanes Irma and Maria ~~during the month of~~in September 2017, Puerto Rico is susceptible to natural disasters, ~~such as hurricanes and earthquakes,~~ which can have a disproportionate impact ~~on Puerto Rico~~ because of the logistical difficulties of bringing relief to an island far from the United States mainland. Moreover, the Puerto Rico government's fiscal challenges and Puerto Rico's unique relationship with the United States also complicate any relief efforts after a natural disaster. These events increase credit risk as debtors may no longer be capable of operating their businesses and the collateral securing Oriental's loans may suffer significant damages.

Oriental manages its credit risk through a comprehensive credit policy which establishes sound underwriting standards by monitoring and evaluating loan portfolio quality, and by the constant assessment of reserves and loan concentrations. Oriental also employs proactive collection and loss mitigation practices.

Oriental may also encounter risk of default in relation to its securities portfolio. The securities held by Oriental are all agency mortgage-backed securities. Thus, these instruments are guaranteed by mortgages, a U.S. government-sponsored entity, or the full faith and credit of the U.S. government.

Oriental’s executive Credit Risk Team, composed of its Chief Operating Officer, Chief Risk and Compliance Officer, and other senior executives, has primary responsibility for setting strategies to achieve Oriental’s credit risk goals and objectives. Those goals and objectives are set forth in Oriental’s Credit Policy as approved by the Board.

During the six-month period ended June 30, 2020, the Covid-19 pandemic has negatively impacted economic activity in Puerto Rico, the U.S. and around the world. Nevertheless, we did not see meaningful impacts to loan portfolio delinquencies, nonperforming loans or charge-offs as of and during the six-month period ended June 30, 2020. To provide relief to individuals and businesses in the U.S., in March and April 2020, the President signed into law four economic stimulus packages, including the CARES Act. U.S. bank regulatory agencies also issued interagency guidance to financial institutions that are working with borrowers affected by Covid-19.

To support our customers, we have implemented various loan modification programs and other forms of support, including offering loan payment deferrals, waiver of certain fees and pausing foreclosure sales, evictions and repossessions. For a description of the loan modification programs that we have implemented, see Executive Summary - Recent Developments – Covid-19 Pandemic 2020 of the MD&A. For information on the accounting for loan modifications related to the Covid-19 pandemic, see Note 1 – Summary of Significant Accounting Policies to the Consolidated Financial Statements.

123

Liquidity Risk

Liquidity risk is the risk of Oriental not being able to generate sufficient cash from either assets or liabilities to meet obligations as they become due without incurring substantial losses. The Board has established a policy to manage this risk. Oriental’s cash requirements principally consist of deposit withdrawals, contractual loan funding, repayment of borrowings as these mature, and funding of new and existing investments as required.

~~140~~

~~OFG BANCORP~~

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

Oriental’s business requires continuous access to various funding sources. While Oriental is able to fund its operations through deposits as well as through advances from the FHLB-NY and other alternative sources, Oriental’s business is dependent upon other external wholesale funding sources. Oriental has selectively reduced its use of certain wholesale funding sources, such as repurchase agreements and brokered deposits. As of ~~September~~June 30, ~~2019,~~2020, Oriental had ~~$190.0 million in repurchase agreements, excluding accrued interest, and $288.4~~$218.2 million in brokered deposits.

Brokered deposits are typically offered through an intermediary to small retail investors. Oriental’s ability to continue to attract brokered deposits is subject to variability based upon a number of factors, including volume and volatility in the global securities markets, Oriental’s credit rating, and the relative interest rates that it is prepared to pay for these liabilities. Brokered deposits are generally considered a less stable source of funding than core deposits obtained through retail bank branches. Investors in brokered deposits are generally more sensitive to interest rates and will generally move funds from one depository institution to another based on small differences in interest rates offered on deposits.

These liquidity risk management practices have allowed us to effectively manage the market stress that began in the first quarter of 2020 from the Covid-19 pandemic. Nevertheless, Oriental’s liquidity will be impacted by loan principal and interest payment deferrals that are being granted for certain customers due to Covid-19. Cash flow from loan payments may be reduced due to the deferrals which have being granted for up to 120 days. Requests for loan payment deferrals rose in the second quarter of 2020. While some loan payment deferrals will end in the third quarter of 2020, we anticipate some borrowers may be requesting second deferrals for up to 60 additional days. In the case of loans serviced by Oriental for the Federal National Mortgage Association ("FNMA"), Oriental is required to advance to the owners the payment of principal and interest on a scheduled basis for four months even when such payment was not collected from the borrower due to payment forbearance granted or payment delinquency. Such amounts advanced are recorded as a receivable by Oriental and are expected to be collected from the borrower and/or government agency (FNMA). Additionally, liquidity could be adversely impacted if customers withdraw significant deposit balances due to Covid-19 concerns.

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

As of ~~September~~June 30, ~~2019,~~2020, Oriental had approximately ~~$961.8 million~~$1.899 billion in unrestricted cash and cash equivalents, ~~$140.9~~$353.7 million in investment securities that are not pledged as collateral, and ~~$744.2~~$859.0 million in borrowing capacity at the FHLB-NY.

Operational Risk

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

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

124

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

The Business Continuity Plan has allowed us to effectively manage the operational disruption that began in the first quarter of 2020 from the Covid-19 pandemic. For more information on the effects of the pandemic, see Executive Summary - Recent Developments – Covid-19 Pandemic 2020 of the MD&A.

Oriental is subject to extensive United States federal and Puerto Rico regulations, and this regulatory scrutiny has been significantly increasing over the last several years. Oriental has established and continues to enhance procedures based on legal and regulatory requirements that are reasonably designed to ensure compliance with all applicable statutory and regulatory requirements. Oriental has a corporate compliance function headed by a Chief Risk and Compliance Officer who reports to the Chief Executive Officer and supervises the BSA Officer and Regulatory Compliance Officer. The Chief Risk and Compliance Officer is responsible for the oversight of regulatory compliance and implementation of a company-wide compliance program, including the Bank Secrecy Act/Anti-Money Laundering compliance program.

~~141~~

~~OFG BANCORP~~

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

Concentration Risk

~~Substantially all~~Most of Oriental’s business activities and a significant portion of its credit exposure are concentrated in Puerto Rico. As a consequence, Oriental’s profitability and financial condition may be adversely affected by an extended economic slowdown, adverse political, fiscal or economic developments in Puerto Rico or the effects of a natural disaster, all of which could result in a reduction in loan originations, an increase in non-performing assets, an increase in foreclosure losses on mortgage loans, and a reduction in the value of its loans and loan servicing portfolio.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of Oriental’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of Oriental’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon such evaluation, the CEO and the CFO have concluded that, as of the end of such period, Oriental’s disclosure controls and procedures provided reasonable assurance of effectiveness in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by Oriental in the reports that it files or submits under the Exchange Act. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute assurance that it will detect or uncover failures within Oriental to disclose material information otherwise required to be set forth in Oriental’s periodic reports.

Internal Control over Financial Reporting

~~There have~~Effective January 1, 2020, Oriental adopted the CECL accounting standard. The Company designed new controls and modified existing controls as part of its adoption. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data. On December 31, 2019, Oriental closed the Scotiabank PR & USVI Acquisition as described elsewhere in this report. Oriental is still in the process of integrating policies, processes, internal controls, people, technology and operations relating to this transaction into our overall internal controls over financial reporting. As integration activities occur, management will modify existing internal controls and/or implement additional internal controls when necessary to appropriately address underlying risks. In addition, during this integration period, management has extended its oversight and monitoring processes that support internal control over financial reporting, and to-date, while this acquisition is considered a significant change to Oriental's internal control over financial reporting, management has not ~~been~~identified any other changes in Oriental’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended ~~September~~June 30, ~~2019,~~2020, that has materially affected, or is reasonably likely to materially affect, Oriental’s internal control over financial reporting.

125

PART - II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Oriental and its subsidiaries are defendants in a number of legal proceedings incidental to their business. Oriental is vigorously contesting such claims. Based upon a review by legal counsel and the development of these matters to date, management is of the opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on Oriental’s financial condition or results of operations.

ITEM 1A. RISK FACTORS

~~There have been no material changes to the risk factors previously disclosed in Oriental’s annual report~~Our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~ ~~except as described below. In addition~~2019 (2019 Form 10-K) describes market, credit, and

business operations risk factors that could affect our businesses, results of operations or financial condition. On March 11, 2020, the World Health Organization declared the outbreak of a strain of novel coronavirus disease, Covid-19, a global pandemic. As conditions and circumstances related to ~~other information set forth in this report, you should carefully consider~~the Covid-19 pandemic have evolved subsequent to our 2019 Form 10-K filing, the following supplements the risk factors ~~included~~described in ~~Oriental’s annual report on~~our 2019 Form ~~10-K, as updated by this report or other filings Oriental makes with~~10-K.

The Covid-19 pandemic has adversely impacted our business and financial results, and the ~~SEC under~~extent to which the ~~Exchange Act. Additional risks~~pandemic and ~~uncertainties not presently known~~measures taken in response to ~~Oriental at this time or that Oriental currently deems immaterial may also~~the pandemic could materially and adversely ~~affect Oriental’s~~impact our business, financial condition, orliquidity, capital and results of ~~operations.~~operations will depend on future developments, which are highly uncertain and are difficult to predict.

~~Oriental may fail~~Global health concerns relating to ~~successfully consummate~~ the ~~Scotiabank Transaction.~~

~~While Oriental intends~~Covid-19 pandemic and ~~expects~~related government actions taken to ~~meet all~~reduce the spread of the ~~conditions required~~virus have impacted the macroeconomic environment, significantly increased economic uncertainty and reduced economic activity. The pandemic has also caused governmental authorities to ~~consummate~~implement numerous measures to try to contain the ~~Scotiabank Transaction, there are certain closing conditions,~~virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. These measures have negatively impacted and may further negatively impact consumer and business payment and spending patterns.

The Covid-19 pandemic has adversely impacted, and may continue to adversely impact, our business, financial condition, capital and results of operations. The extent of these impacts depends on future developments, which are ~~beyond our control, required for~~highly uncertain and difficult to predict, including, but not limited to, the ~~consummation~~duration and magnitude of the ~~Purchase Agreements. These factors include~~pandemic, the ~~receipt of regulatory approvals from~~actions taken to contain the ~~FDIC, the Federal Reserve Board, the OCFI and the USVI Banking Board (the “Approvals”).~~

~~In determining whether to approve the Scotiabank Transaction, federal bank regulators will consider, among other factors,~~virus or treat its effect on our competitors, our financial condition and our future prospects. The regulators also review current and projected capital ratios and levels, the competence, experience, and integrity of management and its record of compliance with laws and regulations, the convenience and needs of the communities to be served (including the acquiring institution’s record of compliance under the Community Reinvestment Act) andimpact, the effectiveness of economic stimulus measures in Puerto Rico and the ~~acquiring institution~~United States, and how quickly and to what extent economic and operating conditions and consumer and business spending can return to their pre-pandemic levels. As a result, our loan growth and the overall demand for our products and services may be significantly impacted, which could adversely affect our revenue and other results of operations. In addition, we could experience higher credit losses in ~~combating money laundering activities. Such regulatory approvals may not~~our loan portfolios and increases in our allowance for credit losses. For example, as a result of the significant uncertainty due to the Covid-19 pandemic we realized a substantial build in our allowance for credit losses for the six-month period ended June 30, 2020. Oriental’s interest income could also be ~~granted~~reduced due to Covid-19. Oriental is continuing to grant or extend loan payment deferrals in the third quarter and therefore expects that the accrued interest receivable balance on ~~terms~~the deferred loans will continue to increase. Interest and fees still accrue on amounts that are ~~acceptable~~deemed collectible during the deferral period, however, should Oriental later determine that collection of payments is not expected and eventual credit losses on these deferred payments emerge, accrued and unpaid interest income and fees will need to ~~us, or at all. There can~~ be ~~no assurance~~reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, Oriental is unable to project the probability and materiality of such an impact to net income. We could also experience impairments of other financial assets and other negative impacts on our financial position, including possible constraints on liquidity and capital, as well as higher costs of capital. Even after the Covid-19 pandemic has subsided, we may continue to ~~when or whether these regulatory approvals will~~experience adverse impacts to our business and results of operations, which could be ~~received, or the conditions associated with any approval.~~

~~Oriental may fail to realize the anticipated benefits~~material, as a result of the ~~Scotiabank Transaction.~~macroeconomic impact and any recession that has occurred or may occur in the future.

The ~~success~~spread of ~~the Scotiabank Transaction will depend on, among other things,~~Covid-19 has caused us to modify our business practices and operations, including providing a range of forbearance options to our customers in certain circumstances. We may need to further modify our practices and operations as this event unfolds. We have also implemented work-from-home policies for over 50% of our employees, and social distancing plans for our employees who are working from Oriental’s facilities. These measures could impair our ability to ~~realize anticipated cost savings~~perform critical functions and to integrate the assets and operations to be acquired in a manner that permits growth opportunities and does not materially disrupt Oriental’s existing customer relationships or result in decreased revenues resulting from any lossmay adversely impact our results of ~~customers. If Oriental is not able to successfully achieve these objectives, the anticipated benefits of the Scotiabank Transaction may not be realized fully or at all or~~operations. We may take ~~longer~~further actions as required by government authorities or that we otherwise determine are in the best interests of our customers, employees and business partners.

126

Federal, state, and local governmental authorities have enacted, and may enact in the future, legislation, regulations and protocols in response to ~~realize than expected. Additionally, Oriental made assumptions~~the Covid-19 pandemic, including governmental programs intended to provide economic relief to businesses and ~~estimates concerning the fair value~~individuals. Our participation in and execution of ~~assets~~any such programs may cause operational, compliance, reputational and ~~liabilities to be acquired in evaluating the Scotiabank Transaction and the purchase price. Actual values of these assets and liabilities could differ from Oriental’s assumptions and estimates,~~credit risks, which could result in ~~not achieving~~litigation, governmental action or other forms of loss. The extent of these impacts, which may be substantial, will depend on the ~~anticipated benefits~~degree of our participation in these programs. There remains significant uncertainty regarding the measures that authorities will enact in the future and the ultimate impact of the ~~Scotiabank Transaction.~~

~~At Closing, BNS~~legislation, regulations and ~~Oriental~~protocols that have been and will ~~enter into a transition services agreement pursuant to which BNS will provide Oriental with services necessary to assist Oriental with~~be enacted. Moreover, we expect that the ~~day-to-day operations~~effects of the acquired companies and their transition to our infrastructure, and to provide data for the integration of information, for a period of up to eighteen months. The Purchase Agreements contains customary indemnification rights for each of BNS and Oriental, including with respect to breaches of representations, warranties or covenants and certain other specified matters. CertainCovid-19 pandemic will heighten many of the ~~indemnification obligations of each party are subject to a minimum claim size threshold, an aggregate claim threshold, a cap on indemnification and~~ other ~~limitations on liability.~~

~~143~~

~~OFG BANCORP~~

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

There can be no assurance that the Scotiabank Transaction will have positive results, including results relating to: correctly assessing the asset quality of the assets acquired; the total cost of integration, including management attention and resources; the time required to complete the integration successfully; the amount of longer-term cost savings; being able to profitably deploy funds acquiredknown risks described in the ~~transaction; or the overall performance~~“Risk Factors” section of the combined business. Oriental’s future growth and profitability depends, in part, on the ability to successfully manage the combined operations. Integration of an acquired business can be complex and costly, sometimes including combining relevant accounting and data processing systems and management controls, as well as managing relevant relationships with employees, clients, suppliers and other business partners. Integration efforts could divert management attention and resources, which could adversely affect Oriental’s operations or results. The loss of key employees in connection with the Scotiabank Transaction could adversely affect our ~~ability to successfully conduct the combined operations.~~2019 Form 10-K.

Greater than expected credit costs, markdowns and provisions for loan and lease losses concerning the assets to be acquired could adversely affect Oriental’s financial condition and results of operations in the future. There is no assurance that our integration efforts will not result in other unanticipated costs, including the diversion of personnel, or losses.

The Scotiabank Transaction may also result in business disruptions that cause us to lose customers or cause customers to move their accounts or business to competing financial institutions. It is possible that the integration process related to this acquisition could disrupt Oriental’s ongoing business or result in inconsistencies in customer service that could adversely affect Oriental’s ability to maintain relationships with clients, customers, depositors and employees. Our inability to overcome these risks could have a material adverse effect on our business, financial condition, results of operations and future prospects.

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

~~None~~On June 29, 2011, the Company announced the approval by the Board of Directors of a stock repurchase program to purchase an additional $70 million of the Company’s common stock in the open market.

Any shares of common stock repurchased are held by the Company as treasury shares. The Company records treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. During the six-month period ended June 30, 2020, the Company purchased 175,000 additional shares under this program for a total of $2.2 million, at an average price of $12.69 per share.

The following table presents the shares repurchased for each month during the six-month period ended June 30, 2020, excluding the months of January, February, April, May and June during which no shares were purchased as part of the stock repurchase program:

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

$
5,510
Six-month period ended June 30, 2020
175,000

$
12.69

175,000

$
5,510
The number of shares that may yet be purchased under the current $70 million program is estimated at 412,150 and was calculated by dividing the remaining balance of $5.5 million by $13.37 (closing price of the Company’s common stock at June 30, 2020). The Company did not purchase any shares of its common stock other than through its publicly announced stock repurchase program during the six-month period ended June 30, 2020.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

127

~~OFG BANCORP~~

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

ITEM 6. EXHIBITS

Exhibit No.Description of Document:

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

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

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

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

101 The following materials from ~~OFG Bancorp’s~~Oriental’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2019,~~2020, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Statements of Financial Condition, (ii) Unaudited Consolidated Statements of Operations, (iii) Unaudited Consolidated Statements of Comprehensive Income, (iv) Unaudited Consolidated Statements of Changes in Stockholders’ Equity, (v) Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements.

128

~~OFG BANCORP~~Signatures

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

~~Signatures~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

OFG Bancorp

(Registrant)


By:	/s/ José Rafael Fernández	Date: ~~November~~August 7, ~~2019~~2020
	José Rafael Fernández
	President and Chief Executive Officer

By:	/s/ Maritza Arizmendi	Date: ~~November~~August 7, ~~2019~~2020
	Maritza Arizmendi
	Executive Vice President, Chief Financial Officer and Chief Accounting Officer
By:	/s/ Krisen Aguirre Torres	Date: ~~November~~August 7, ~~2019~~2020
	Krisen Aguirre Torres
	Vice President Financial Reporting and Accounting Control

~~146~~129

	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	$	-	$	-

	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		-

	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

	September 30, 2019
	Unpaid		Recorded		Related
	Principal		Investment		Allowance		Coverage
	(In thousands)
Impaired loans with specific allowance:
Commercial	$	34,590	$	30,813	$	4,849	16%
Residential impaired and troubled-debt restructuring		78,836		71,658		6,816	10%
Impaired loans with no specific allowance:
Commercial		36,139		28,016		N/A	0%
Total investment in impaired loans	$	149,565	$	130,487	$	11,665	9%

	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 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

��	Twelve month Period Ended September 30,
	2019			2018
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in thousands)
Mortgage	32	$	4,065	19	$	2,756
Commercial	2	$	350	2	$	281
Consumer	61	$	710	11	$	107
Auto	3	$	51	-	$	-

	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

	Minimum Rent
Year Ending December 31,	(In thousands)
2019	$	1,596
2020		5,716
2021		4,717
2022		3,843
2023		2,991
Thereafter		8,954
Total lease payments	$	27,817
Less imputed interest		6,736
Present value of lease liabilities	$	21,081

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												Quarter Ended June 30, 2020
			Wealth				Total Major				Consolidated				Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total		Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)												(In thousands)
Interest income	$	85,147	$	16	$	8,492	$	93,655	$	-	$	93,655	$	119,722	$	14	$	1,956	$	121,692	$	-	$	121,692
Interest expense		(9,260)		-		(3,685)		(12,945)		-		(12,945)		(14,326)		-		(2,306)		(16,632)		-		(16,632)
Net interest income		75,887		16		4,807		80,710		-		80,710		105,396		14		(350)		105,060		-		105,060
Provision for loan and lease losses, net		(43,678)		-		(92)		(43,770)		-		(43,770)		(16,211)		-		(1,485)		(17,696)		-		(17,696)
Non-interest income		11,946		6,719		3,513		22,178		-		22,178		20,811		6,391		(50)		27,152		-		27,152
Non-interest expenses		(46,555)		(3,450)		(722)		(50,727)		-		(50,727)		(78,402)		(5,957)		(1,122)		(85,481)		-		(85,481)
Intersegment revenue		507		-		-		507		(507)		-		694		-		-		694		(694)		-
Intersegment expenses		-		(141)		(366)		(507)		507		-		-		(201)		(493)		(694)		694		-
(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
Income before income taxes													$	32,288	$	247	$	(3,500)	$	29,035	$	-	$	29,035
Income tax expense														5,316		3,201		(1,269)		7,248		-		7,248
Net income													$	26,972	$	(2,954)	$	(2,231)	$	21,787	$	-	$	21,787
Total assets	$	5,919,877	$	26,596	$	1,465,329	$	7,411,802	$	(1,078,297)	$	6,333,505	$	9,462,407	$	30,214	$	1,524,913	$	11,017,534	$	(1,084,815)	$	9,932,719

	Nine-Month Period Ended September 30, 2019												Six-Month Period Ended June 30, 2020
			Wealth				Total Major				Consolidated				Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total		Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)												(In thousands)
Interest income	$	253,138	$	53	$	29,429	$	282,620	$	-	$	282,620	$	239,101	$	32	$	6,256	$	245,389	$	-	$	245,389
Interest expense		(27,083)		-		(11,953)		(39,036)		-		(39,036)		(30,215)		-		(5,013)		(35,228)		-		(35,228)
Net interest income		226,055		53		17,476		243,584		-		243,584		208,886		32		1,243		210,161		-		210,161
Provision for loan and lease losses, net		(73,560)		-		(164)		(73,724)		-		(73,724)		(63,334)		-		(1,493)		(64,827)		-		(64,827)
Non-interest income		34,932		19,537		8,313		62,782		-		62,782		40,355		13,766		4,481		58,602		-		58,602
Non-interest expenses		(139,384)		(11,675)		(3,272)		(154,331)		-		(154,331)		(160,955)		(9,681)		(2,167)		(172,803)		-		(172,803)
Intersegment revenue		1,648		-		-		1,648		(1,648)		-		1,151		-		-		1,151		(1,151)		-
Intersegment expenses		-		(480)		(1,168)		(1,648)		1,648		-		-		(355)		(796)		(1,151)		1,151		-
Income before income taxes	$	49,691	$	7,435	$	21,185	$	78,311	$	-	$	78,311	$	26,103	$	3,762	$	1,268	$	31,133	$	-	$	31,133
Income tax expense		18,634		2,788		2,057		23,479		-		23,479		2,997		4,519		29		7,545		-		7,545
Net income	$	31,057	$	4,647	$	19,128	$	54,832	$	-	$	54,832	$	23,106	$	(757)	$	1,239	$	23,588	$	-	$	23,588
Total assets	$	5,919,877	$	26,596	$	1,465,329	$	7,411,802	$	(1,078,297)	$	6,333,505	$	9,462,407	$	30,214	$	1,524,913	$	11,017,534	$	(1,084,815)	$	9,932,719


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

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

		Covid-19 Moratoriums				% of Total Population
		Amount		Count		% of Total Population
	(Dollars in thousands)
Mortgage		$	745,078		6,323		31%
Commercial			683,855		969		26%
Consumer			104,474		10,292		23%
Auto and leasing			544,699		27,513		36%
Total		$	2,078,106		45,097		30%

	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 2 - NON-INTEREST INCOME SUMMARY

	Quarter Ended June 30,					Six-Month Period Ended June 30,
	2020		2019		Variance	2020		2019		Variance
	(Dollars in thousands)
Banking service revenue	$	13,668	$	10,776	26.8%	$	29,381	$	21,241	38.3%
Wealth management revenue		6,366		6,669	-4.5%		13,652		12,551	8.8%
Mortgage banking activities		3,072		629	388.4%		6,306		1,835	243.7%
Total banking and financial service revenue		23,106		18,074	27.8%		49,339		35,627	38.5%
Net gain (loss) on:
Sale of securities available for sale		-		4,776	-100.0%		4,728		4,776	-1.0%
Bargain purchase from Scotiabank PR & USVI acquisition		3,462		-	100.0%		3,872		-	100.0%
Early extinguishment of debt		(63)		(7)	-800.0%		(63)		(7)	-800.0%
Other non-interest income		647		105	516.2%		726		208	249.0%
Total non-interest income, net	$	27,152	$	22,948	18.3%	$	58,602	$	40,604	44.3%

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%

				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	$	5,510
Six-month period ended June 30, 2020	175,000	$	12.69	175,000	$	5,510