OFG Bancorp: Form 10-Q for the period ended Sep 30, 2023

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

Other factors not identified above, including those described under the headings in our 2022 Form 10-K and any subsequent quarterly reports on Form 10-Q may also cause actual results to differ materially from those described in our forward-looking statements.

INTRODUCTION

OFG is a publicly-owned financial holding company that provides wide range of banking and financial services such as commercial, consumer, auto, and mortgage lending, auto leasing and lending, financial planning, insurance sales, money management, investment banking and securities brokerage services, as well as corporate and individual trust services. OFG operates through three business segments: Banking, Wealth Management, and Treasury, and distinguishes itself based on quality service. OFG conducts its business through its main office in San Juan, Puerto Rico, forty-two branches in Puerto Rico and two branches in the U.S. Virgin Islands (the “USVI”). OFG has three subsidiaries with operations in Puerto Rico: the Bank, Oriental Financial Services and Oriental Insurance; three subsidiaries in the United States, OPC, OFG USA and OFG Ventures; and one subsidiary in the Cayman Islands, OFG Reinsurance. On December 31, 2022, OFG sold its retirement plan administration business which was operated under the OPC subsidiary and OPC thereafter ceased its operations. Comparative results for the quarter and nine-month period ended September 30, 2022 include these operations. OFG’s long-term goal is to strengthen its banking and financial services franchise by expanding its lending businesses, increasing the level of integration in the marketing and delivery of banking and financial services, continuously improving our already effective asset-liability management, growing non-interest revenue from banking and financial services, and achieving greater operating efficiencies.

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

RECENT DEVELOPMENTS

Economic Conditions

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

Industry Developments

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a summary of our significant accounting policies in “Note 1—Summary of Significant Accounting Policies” of our 2022 Form 10-K.

In the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” section of our 2022 Form 10-K, we identified the Allowance for Credit Losses related to loans collectively evaluated for impairment as a critical accounting policy and estimate because it involves significant estimation uncertainty that has or is reasonably likely to have a material impact on our financial condition or results of operations.

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

FINANCIAL HIGHLIGHTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(In thousands, except per share data)

74

ANALYSIS OF RESULTS OF OPERATIONS

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

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

(Dollars in thousands)

76

(Dollars in thousands)

C - CHANGES IN NET INTEREST INCOME DUE TO:

(In thousands)

77

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

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

(Dollars in thousands)

78

(Dollars in thousands)

79

C - CHANGES IN NET INTEREST INCOME DUE TO:

(In thousands)

Net Interest Income

Net interest income is a function of the difference between rates earned on OFG’s interest-earning assets and rates paid on its interest-bearing liabilities (interest rate spread) and the relative amounts of its interest earning assets and interest-bearing liabilities (interest rate margin). OFG constantly monitors the composition and re-pricing of its assets and liabilities to maintain its net interest income at adequate levels.

Comparison of quarters ended September 30, 2023 and 2022

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

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

Net interest income was positively impacted by:

• An increase of $25.9 million in interest income from loans, primarily driven by: (i) higher interest income from commercial loans by $17.2 million, reflecting the upward repricing of variable rate commercial loans and increased yields on new loans originated during 2023; (ii) higher interest income from auto loans by $8.1 million, mainly due to an increase in the average balance of this portfolio by approximately $331.6 million; and (iii) higher interest income from consumer loans by $2.8 million, mainly due to an increase in the average balance of this portfolio of approximately $91.6 million. These increases were partially offset by lower interest income from residential mortgage loans by $2.2 million, reflecting a decrease in the average balance of this portfolio by approximately $181.3 million;
• An increase of $3.4 million in interest income from a higher yield in lower balances of interest-bearing cash and money market investments related to increases in the FRB federal funds rate. The FRB federal funds target rates increased from a range of 3.00% to 3.25% in the third quarter of 2022 to a range of 5.25% to 5.50% in the third quarter of 2023; and
• An increase of $1.8 million in interest income from investments securities, primarily related to higher yield by 47 basis points, which contributed to an increase in interest income of approximately $2.3 million.

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

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

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

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

Net interest income was positively impacted by:

• A $70.8 million increase in interest income from loans driven by: (i) higher interest income from commercial loans of $48.6 million, primarily related to the upward repricing of variable rate commercial loans and increased yields on new loans originated during 2023; (ii) higher interest income from consumer loans of $9.3 million mainly due to an increase of $103.0 million in the average balance of this portfolio; and (iii) higher interest income from auto loans of $20.1 million reflecting higher originations during 2023, partially offset by a decrease of $7.2 million in interest income from mortgage loans due to a reduction of $201.6 million in the average balance of this portfolio;
• A $17.1 million increase in interest income from investment securities, primarily related to a higher average volume of $432.0 million, which resulted in an increase in interest income of approximately $9.5 million, and higher yield by 68 basis points, which contributed to the increase in net interest income by approximately $7.6 million; and
• A $14.9 million increase in interest income from higher yield in lower balances of interest-bearing cash and money market related to the increase in the FRB federal funds rate during 2022 and 2023.

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

TABLE 2 - NON-INTEREST INCOME SUMMARY

(In thousands)

(In thousands)

81

Non-Interest Income

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

Comparison of quarters ended September 30, 2023 and 2022

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

• An increase of $519 thousand in mortgage banking activities mainly from a $832 thousand negative valuation adjustment to loans held for sale in the prior year quarter, partially offset by lower gains on sales in the current quarter driven by lower sales volume; and
• A decrease of $482 thousand in wealth management revenue primarily reflecting: (i) a $262 thousand decrease in trust division fees from the discontinuation of personal trust services in 2022 and (ii) the sale of the retirement plan administration business in December 31, 2022, which resulted in a decrease of approximately $184 thousand.

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

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

• A decrease of $4.7 million in other non-interest income, primarily related to a $4.7 million gain recognized on the sale of a branch building during 2022;
• A $1.1 million loss associated with the sale of a $203.3 million short-term US treasury note available for sale during 2023;
• A decrease of $1.3 million in wealth management revenue, primarily reflecting: (i) a $1.5 million decrease in trust division fees from the discontinuation of personal trust services in 2022 and (ii) the sale of the retirement plan administration business in December 31, 2022, which resulted in a decrease of $507 thousand. This decrease was partially offset by higher insurance fees of $388 thousand from an increase in auto product commissions, institutional policies and reinsurance income, and higher broker-dealer fees of $321 thousand;
• A decrease of $943 thousand in mortgage banking activities due to: (i) a $292 thousand reduction in servicing fees as a result of the FNMA mortgage servicing transfer to a third party and a $359 thousand reduction in cash collections, (ii) an unfavorable impact of $295 thousand in mortgage servicing rights valuation and (iii) a $182 thousand net gain on sales driven by lower sales volume; and
• A decrease of $681 thousand in banking service revenues, primarily related to: (i) a $294 thousand reduction in prepayment loan fees, (ii) a $371 thousand reduction in credit life commissions, and (iii) a $205 thousand reduction in electronic banking charges of merchant-related income partially offset by higher debit card interchange fees.

TABLE 3 - NON-INTEREST EXPENSES SUMMARY

(In thousands)

(In thousands)

Comparison of quarters ended September 30, 2023 and 2022

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

• Increase in compensation and employee benefits of $2.8 million, as a result of higher salaries and benefits, including payroll taxes and connectivity expenses;
• Increase in occupancy, equipment and infrastructure costs of $2.2 million, primarily related to an increase of $1.8 million in depreciation and amortization expenses reflecting new digital projects placed in production since 2022; and
• Increase of $1.8 million in information technology expenses, primarily driven by higher design, development and operating support expenses incurred as part of OFG’s digital transformation strategy.

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

The efficiency ratio was 52.36%, an improvement from 55.80%. The efficiency ratio measures how much of OFG’s revenues is used to pay operating expenses. OFG computes its efficiency ratio by dividing non-interest expenses by the sum of its net interest income and non-interest income, but excluding gains on the sale of investment securities, other gains and losses, and other income that may be considered volatile in nature. Management believes that the exclusion of those items permits consistent comparability. Amounts presented as part of non-interest income that were excluded from the adjusted efficiency ratio computation for the quarters ended September 30, 2023 and 2022 amounted to $295 thousand and $322 thousand, respectively.

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

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

• Increase in compensation and employee benefits of $9.6 million due to higher salaries and benefits, including payroll taxes and connectivity expenses;
• Increase of $6.1 million in occupancy, equipment and infrastructure costs primary related to: (i) higher balances of $4.4 million in depreciation and amortization expenses reflecting new digital projects placed in production since 2022 and (ii) a $1.3 million increase in software maintenance expenses;
• Increase of $5.1 million in information technology expenses driven by higher design, development and operating support expenses incurred as part of OFG’s digital transformation strategy;
• Decrease of $759 thousand in foreclosed real estate and other repossessed assets income reflecting lower gain on sales of such assets; and
• Increase of $1.8 million in electronic banking charges mainly due to increases of $1.5 million in point-of-sale and merchant-related fees and $790 thousand in debit card billing fees from more transactions year over year.

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

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

Provision for Credit Losses

Comparison of quarters ended September 30, 2023 and 2022

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

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

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

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

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

Income Tax Expense

Comparison of quarters ended September 30, 2023 and 2022

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

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

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

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

Business Segments

OFG segregates its businesses into the following segments: Banking, Wealth Management, and Treasury. Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as OFG’s organization, nature of its products, distribution channels and economic characteristics of its services were also considered in the determination of the reportable segments. OFG measures the performance of these reportable segments based on pre-established goals of different financial parameters such as net income, net interest income, loan production, and fees generated. OFG’s methodology for allocating non-interest expenses among segments is based on several factors such as revenue, employee headcount, occupied space, dedicated services or time, among others. Following are the results of operations and the selected financial information by operating segment for the quarters and nine-month periods ended September 30, 2023 and 2022.

TABLE 4 - BUSINESS SEGMENTS

(In thousands)

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

(In thousands)

Comparison of quarters ended September 30, 2023 and 2022

Banking

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

• Increase of $25.9 million in interest income from loans, driven by increased yields on higher balances; and
• Increase of $1.8 million in interest income related to Oriental Overseas’ time deposit from the Bank to fund its operations, which is eliminated in the consolidation, mainly as a result of higher interest rates in the current period.

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

• Increase of $12.8 million in interest expense primarily related to an increase in the average cost of deposits and borrowings;
• Increase of $9.3 million in provision for credit losses. The third quarter of 2023 included $11.4 million related to the growth in loan balances and $4.1 million associated with qualitative adjustments; and
• Increase of $3.5 million in non-interest expenses, primarily reflecting higher compensation and employee benefits, occupancy and equipment, and information technology expenses by $3.1 million, $2.3 million and $1.8 million, respectively, partially offset by lower professional and service fees of $2.1 million and climate event expenses, related to 2022 Hurricane Fiona, by $1.4 million.

Wealth Management

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

Treasury

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

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

Banking

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

• Increase of $70.8 million in interest income from loans, driven by increased yields on higher loan balances; and
• Increase of $10.3 million in interest income related to Oriental Overseas’ time deposit from the Bank to fund its operations, which is eliminated in the consolidation, mainly as a result of higher average unpaid principal balance and interest rates in the current period.

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

• Increase of $25.4 million in provision for credit losses. The 2023 provision reflects $23.8 million related to the growth in loan balances, a provision of $14.7 million related to commercial-specific loan reserves, mainly in the US commercial loan portfolio, and $5.1 million associated with qualitative adjustments;
• Increase of $27.1 million in interest expense on deposits mainly related to higher costs of deposits and borrowings;
• Increase of $17.3 million in non-interest expenses, mainly due to increases of: (i) $10.5 million in compensation and employee benefits, (ii) $6.4 million in occupancy, equipment and infrastructure costs related to depreciation and amortization expenses reflecting new digital projects placed in production since 2022 and software maintenance expenses, and (iii) $5.1 million in information technology expenses related to digital transformation, partially offset by lower: (i) professional and service fees of $3.9 million, and (ii) climate event expenses of $1.4 million related to 2022 Hurricane Fiona; and
• Decrease of $5.5 million in non-interest income mainly due to the $4.7 million gain from the sale of a building in 2022.

Wealth Management

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

Treasury

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

• Increase of $32.1 million in interest income, reflecting the purchase of agency mortgage-backed securities and U.S. Treasury securities during the current period and higher yield in lower balances of interest-bearing cash and money market investments related to the increase in the federal funds rate;
• Increase of $15.6 million in interest expense, reflecting higher expenses of: (i) $10.3 million in inter-segment borrowing as a result of higher average balance and federal funds rate increases, (ii) $5.0 million in advances from FHLB and (iii) $728 thousand in repurchase agreements; and
• A loss of $1.1 million related to the sale of a short-term US treasury note during 2023.

ANALYSIS OF FINANCIAL CONDITION

Assets Owned

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

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

The investment portfolio increased by $103.0 million or 5.2% primarily related to the purchase of $492.2 million in mortgage-backed securities, $70.0 million in mortgage loan securitizations, partially offset by the sale of a $203.3 million US treasury note available for sale, the maturity of $111.5 million US treasury notes, principal paydowns on mortgage-backed securities amounting to $94.0 million, and unfavorable market value adjustments of $40.4 million. OFG’s strategy is to invest its liquidity in highly liquid securities after taking into account the investment’s characteristics with respect to yield and term and the current market environment.

OFG’s loan portfolio is comprised of commercial loans secured by real estate, other commercial and industrial loans, US commercial loans, residential mortgage loans, consumer loans, and auto loans. At September 30, 2023, OFG’s net loan portfolio increased by $406.8 million or 6.1% reflecting increases in commercial, auto and consumer loans, partially offset by a decrease in residential mortgage loans.

Financial Assets Managed

At September 30, 2023, OFG’s financial assets include those managed by OFG’s trust division, and its securities broker-dealer and insurance agency subsidiaries. OFG’s trust division offers various types of individual retirement accounts (“IRAs”) and manages Keogh retirement plans and custodian and corporate trust accounts. At September 30, 2023 and December 31, 2022, the total assets managed by OFG’s trust division amounted to $2.352 billion and $2.335 billion, respectively. OFG’s broker-dealer subsidiary offers a wide array of investment alternatives to its client base, such as tax-advantaged fixed income securities, mutual funds, stocks, bonds and money management wrap-fee programs. At September 30, 2023, total assets managed by the securities broker-dealer and insurance agency subsidiaries from their customers’ investment accounts amounted to $2.306 billion, compared to $2.172 billion at December 31, 2022.

Goodwill

OFG’s goodwill is not amortized to expense but is tested at least annually for impairment. A quantitative annual impairment test is not required if, based on a qualitative analysis, OFG determines that the existence of events and circumstances indicate that it is more likely than not that goodwill is not impaired. OFG completes its annual goodwill impairment test as of October 31 of each year. OFG tests for impairment by first allocating its goodwill and other assets and liabilities, as necessary, to defined reporting units. A fair value is then determined for each reporting unit. If the fair values of the reporting units exceed their book values, no write-down of the recorded goodwill is necessary. If the fair values are less than the book values, an additional valuation procedure is necessary to assess the proper carrying value of the goodwill. During the quarter ended September 30, 2023, OFG performed an assessment of events or circumstances that could trigger reductions in the book value of the goodwill. Based on this assessment, no impairments were identified at September 30, 2023.

As of both September 30, 2023 and December 31, 2022, OFG had $84.2 million of goodwill allocated as follows: $84.1 million to the banking segment and $100 thousand to the wealth management segment. Please refer to “Note 9 – Goodwill and Other Intangible Assets” to our consolidated financial statements for more information on the annual goodwill impairment test.

TABLE 5 - ASSETS SUMMARY AND COMPOSITION

(In thousands)

91

TABLE 6 - LOAN PORTFOLIO COMPOSITION

(In thousands)

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

• Commercial loan portfolio amounted to $2.833 billion (39.0% of the gross loan portfolio) compared to $2.630 billion (38.5% of the gross loan portfolio) at December 31, 2022. Commercial loans secured by non-owner occupied commercial real estate amounted to $620.1 million and $605.5 million at September 30, 2023 and December 31, 2022, respectively, which represented 8.5% and 8.9% of our total loan portfolio held for investment. US commercial loans amounted to $707.6 million and $642.1 million at September 30, 2023 and December 31, 2022, respectively, which represented 9.7% and 9.4% of our total loan portfolio held for investment. Commercial loan production increased by 20% or $36.0 million to $215.4 million in the third quarter of 2023 from $179.4 million in the prior year quarter, and increased 10%, or $72.3 million, to $770.4 million in the nine-month period ended September 30, 2023 from $698.1 million for the same period of 2022.
• Mortgage loan portfolio amounted to $1.604 billion (22.1% of the gross loan portfolio) compared to $1.704 billion (24.9% of the gross originated loan portfolio) at December 31, 2022. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to $18.2 million and $32.6 million at September 30, 2023 and December 31, 2022, respectively. Under the GNMA program, issuers such as OFG have the option but not the obligation to repurchase loans that are 90 days or more past due. For accounting purposes, these loans subject to the repurchase option are required to be reflected (rebooked) on our financial statements with an offsetting liability. Mortgage loan production totaled $33.3 million and $99.6 million in the quarter and nine-month period ended September 30, 2023, respectively, which represents a decrease of 14.4% and 40%, respectively, from $38.9 million and $165.7 million for the same periods in 2022. This decrease reflects the negative impact of the FRB federal funds rate increases during 2022 and 2023 in the Puerto Rico housing market. OFG follows a conservative residential mortgage lending policy with more than 90% of its residential mortgage portfolio consisting of fixed-rate, fully amortizing, fully documented loans that do not have the level of risk associated with subprime loans offered by certain major US mortgage loan originators. Furthermore, OFG has never been active in negative amortization loans or offered adjustable-rate mortgage loans with teaser rates.
• Consumer loan portfolio amounted to $613.2 million (8.4% of the gross loan portfolio) compared to $537.3 million (7.9% of the gross loan portfolio) at December 31, 2022. Consumer loan production increased by 4.7% to $76.5 million in the third quarter of 2023 from $73.0 million in prior year quarter, and decreased by 6%, or $16.9 million to $249.8 million in the nine-month period ended September 30, 2023 from $266.7 million in the same period in 2022.
• Auto loans portfolio amounted to $2.212 billion (30.5% of the gross loan portfolio) compared to $1.964 billion (28.7% of the gross originated loan portfolio) at December 31, 2022. Auto loans production increased by 7.9% to $237.3 million in the third quarter of 2023 compared to $236.3 million in the prior year quarter, and increased by 18%, or $104.7 million to $695.9 million in the nine-month period ended September 30, 2023 from $591.2 million in the same period of 2022.

TABLE 7 - PUERTO RICO GOVERNMENT RELATED LOANS

September 30, 2023

(In thousands)

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

Allowance for Credit Losses

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

Tables 8 through 11 set forth an analysis of activity in the allowance for credit losses and present selected credit loss statistics for the quarters and nine month periods ended September 30, 2023 and 2022 and as of September 30, 2023 and December 31, 2022. In addition, Table 6 sets forth the composition of the loan portfolio.

Please refer to the “Provision for Credit Losses” and “Critical Accounting Policies and Estimates” sections in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this quarterly report on Form 10-Q and “Note 5 – Allowance for Credit Losses” of the accompanying consolidated financial statements for a more detailed analysis of provisions and allowance for credit losses.

Non-performing Assets

OFG’s non-performing assets include non-performing loans, foreclosed real estate, and other repossessed assets (see Tables 13 and 15). At September 30, 2023, OFG had $80.6 million of non-accrual loans held for investment, including $6.9 million PCD loans, compared to $89.6 million at December 31, 2022, reflecting decreases of $3.3 million and $5.9 million in auto and mortgage loan portfolios, respectively. At September 30, 2023 and December 31, 2022, total commercial non-accrual loans excluded $8.5 million and $27.8 million, respectively, of non-accrual commercial loans held for sale.

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

Delinquent residential mortgage loans insured or guaranteed under applicable Federal Housing Administration (“FHA”) and United States Department of Veterans Affairs (“VA”) programs are classified as non-performing loans when they become 90 days or more past due but are not placed in non-accrual status until they become 12 months or more past due, since they are insured loans. Therefore, those loans are included as non-performing loans but excluded from non-accrual loans. As of September 30, 2023 and December 31, 2022, the outstanding balance of these residential mortgage loans was $8.0 million and $10.3 million, respectively.

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

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

Upon adoption of the current expected credit losses (“CECL”) methodology, OFG elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. As such, for PCD loans the determination of nonaccrual or accrual status is made at the pool level, not the individual loan level. Upon adoption of CECL, the allowance for credit losses was determined for each pool and added to the pool’s carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the pool and the new amortized cost basis is the non-credit premium or discount which will be amortized interest income over the remaining life of the pool. On a quarterly basis, management will monitor the composition and behavior of the pools to assess the ability for cash flow estimation and timing. If based on the analysis performed the pool is classified as non-accrual, the accretion/amortization of the non-credit (discount) premium will cease.

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

Commercial loans - At September 30, 2023, OFG’s non-performing commercial loans amounted to $43.3 million (48.9% of OFG’s non-performing loans), a 0.1% decrease from $43.4 million at December 31, 2022 (43.4% of OFG’s non-performing loans). Non-PCD commercial loans are placed on non-accrual status when they become 90 days or more past due and are written down, if necessary, based on the specific evaluation of the underlying collateral, if any.

Mortgage loans - At September 30, 2023, OFG’s non-performing mortgage loans totaled $25.6 million (28.9% of OFG’s non-performing loans), a 24.2% decrease from $33.8 million (33.8% of OFG’s non-performing loans) at December 31, 2022. Non-PCD mortgage loans are placed on non-accrual status when they become 90 days or more past due and are written-down, if necessary, based on the specific evaluation of the collateral underlying the loan, except for FHA and VA insured mortgage loans which are placed in non-accrual when they become 12 months or more past due.

Consumer loans - At September 30, 2023, OFG’s non-performing consumer loans amounted to $3.4 million (3.8% of OFG’s non-performing loans), a 7.6% increase from $3.1 million at December 31, 2022 (3.1% of OFG’s non-performing loans). Non-PCD consumer loans are placed on non-accrual status when they become 90 days past due and written-off when payments are delinquent 120 days in personal loans and 180 days in credit cards and personal lines of credit.

Auto loans - At September 30, 2023, OFG’s non-performing auto loans amounted to $16.3 million (18.4% of OFG’s total non-performing loans), a decrease of 16.9% from $19.6 million at December 31, 2022 (19.7% of OFG’s total non-performing loans). Non-PCD auto loans are placed on non-accrual status when they become 90 days past due, partially written-off to collateral value when payments are delinquent 120 days, and fully written-off when payments are delinquent 180 days.

OFG has two mortgage loan modification programs. These are the Loss Mitigation Program and the Non-Conforming Mortgage Loan Program. Both programs are intended to help responsible homeowners to remain in their homes and avoid foreclosure, while also reducing OFG’s losses on non-performing mortgage loans.

The Loss Mitigation Program helps mortgage borrowers who are or will become financially unable to meet the current or scheduled mortgage payments. Loans that qualify under this program are those guaranteed by FHA, VA, USDA Rural Development (RURAL), Puerto Rico Housing Finance Authority (PRHFA), conventional loans guaranteed by Mortgage Guaranty Insurance Corporation (MGIC), conventional loans sold to FNMA and FHLMC, and conventional loans retained by OFG. The program offers diversified alternatives such as regular or reduced payment plans, payment moratorium, mortgage loan modification, partial claims (only FHA), short sale, and deed in lieu of foreclosure.

The Non-Conforming Mortgage Loan Program is for non-conforming mortgages, including balloon payment, interest-only/interest first, variable interest rate, adjustable interest rate and other qualified loans. Non-conforming mortgage loan portfolios are segregated into the following categories: performing loans that meet secondary market requirement and are refinanced under the credit underwriting guidelines of FHA/VA/FNMA/ FHLMC and performing loans not meeting secondary market guidelines processed pursuant OFG’s current credit and underwriting guidelines. OFG achieved an affordable and sustainable monthly payment by taking specific, sequential, and necessary steps such as reducing the interest rate, extending the loan term, capitalizing arrearages, deferring the payment of principal or, if the borrower qualifies, refinancing the loan.

In order to apply for any of our loan modification programs, if the borrower is active in Chapter 13 bankruptcy, it must request an authorization from the bankruptcy trustee to allow the loan modification. Borrowers with discharged Chapter 7 bankruptcies may also apply. Loans in these programs are evaluated by designated credit underwriters for financial difficulty modification if OFG grants a concession for legal or economic reasons due to the debtor’s financial difficulties.

TABLE 8 - ALLOWANCE FOR CREDIT LOSSES BREAKDOWN

(In thousands)

95

TABLE 9 - ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES

TABLE 10 - ALLOWANCE FOR CREDIT LOSSES SUMMARY

(Dollars in thousands)

(Dollars in thousands)

96

TABLE 11 — NET CREDIT LOSSES STATISTICS ON LOANS

(Dollars in thousands)

(Dollars in thousands)

97

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

(Dollars in thousands)

(Dollars in thousands)

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

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

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

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

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

TABLE 12 — NON-PERFORMING ASSETS

(Dollars in thousands)

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

TABLE 13 — NON-ACCRUAL LOANS

(Dollars in thousands)

(In thousands)

100

TABLE 14 - NON-PERFORMING LOANS

(Dollars in thousands)

101

TABLE 15 - LIABILITIES SUMMARY AND COMPOSITION

(Dollars in thousands)

Liabilities and Funding Sources

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

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

Stockholders’ Equity

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

Regulatory Capital

OFG and the Bank are subject to regulatory capital requirements established by the FRB and the FDIC. The current risk-based capital standards applicable to OFG and the Bank (“Basel III capital rules”) are based on the final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision. As of September 30, 2023, the capital ratios of OFG and the Bank continue to exceed the minimum requirements for being “well-capitalized” under the Basel III capital rules.

On January 1, 2020, OFG implemented CECL using the modified retrospective approach, with an impact to capital of $25.5 million, net of its corresponding deferred tax effect. On March 27, 2020, in response to the Covid-19 pandemic, U.S. banking regulators issued an interim final rule that OFG adopted to delay for two years the initial adoption impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during 2020 and 2021 (i.e., a five-year transition period). During the two-year delay, OFG added back to common equity tier 1 (“CET1”) capital 100% of the initial adoption impact of CECL plus 25% of the cumulative quarterly changes in the allowance for credit losses (i.e., quarterly transitional amounts). After two years, starting on January 1, 2022, the quarterly transitional amounts along with the initial adoption impact of CECL are being phased out of CET1 capital over a three-year period.

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

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

TABLE 16 — CAPITAL, DIVIDENDS AND STOCK DATA

104

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

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

(In thousands, except share or per share information)

The tangible common equity to tangible assets ratio and tangible book value per common share are non-GAAP measures and, unlike tier 1 capital and common equity tier 1 capital, are not codified in the federal banking regulations. Management and many stock analysts use the tangible common equity to tangible assets ratio and tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations. Neither tangible common equity nor tangible assets or related measures should be considered in isolation or as a substitute for stockholders’ equity, total assets or any other measure calculated in accordance with GAAP. Moreover, the manner in which OFG calculates its tangible common equity, tangible assets and any other related measures may differ from that of other companies reporting measures with similar names.

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

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

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

106

OFG’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG.” At September 30, 2023 and December 31, 2022, OFG’s market capitalization for its outstanding common stock was $1.405 billion ($29.86 per share) and $1.311 billion ($27.56 per share), respectively.

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

In January 2022, OFG announced the approval by the Board of Directors of a stock repurchase program for the purchase of up to $100 million of its outstanding shares of common stock. The shares of common stock repurchased are held by OFG as treasury shares. During the nine-month period ended September 30, 2023, OFG repurchased 743,699 shares for a total of $18.7 million at an average price of $25.08 per share. During the nine-month period ended September 30, 2022, OFG repurchased 2,351,868 shares for a total of $64.1 million, at an average price of $27.26 per share.

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

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

Background

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

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

Market Risk

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

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

Interest Rate Risk

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

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

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

The following table presents the results of the simulations for the most likely scenarios at September 30, 2023. The left of the table presents an analysis of our interest rate risk as measured by the estimated changes in net interest income resulting from an instantaneous and parallel shift in the yield curve over a 12-month horizon. The base case scenario assumes that the current interest rate environment is held constant throughout the forecast period for a static balance sheet and the instantaneous shocks are performed against that yield curve. The right side of the table presents an analysis of our interest rate risk as measured by the estimated changes in net interest income resulting from parallel gradual interest rates ramps over a 12-month horizon.

(Dollars in thousands)

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

Future net interest income could be affected by OFG’s investments in callable securities, prepayment risk related to mortgage loans and mortgage-backed securities, and any structured repurchase agreements and advances from the FHLB in which it may enter into from time to time. As part of the strategy to limit the interest rate risk and reduce the re-pricing gaps of OFG’s assets and liabilities, OFG has executed, in the past, certain transactions which included extending the maturity and the re-pricing frequency of the liabilities to longer terms and using hedge-designated swaps to hedge the variability of future interest cash flows of forecasted wholesale borrowings.

In the past, OFG has incorporated the use of derivative instruments to minimize significant unplanned fluctuations in earnings that were caused by interest rate volatility. OFG’s goal was to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest margin was not, on a material basis, adversely affected by movements in interest rates. As a result of interest rate fluctuations, hedged fixed-rate assets and liabilities appreciated or depreciated in market value. Also, for some fixed-rate assets or liabilities, the effect of this variability in earnings was expected to be substantially offset by OFG’s gains and losses on the derivative instruments that were linked to the forecasted cash flows of these hedged assets and liabilities. OFG considered the strategic use of derivatives to be a prudent method of managing interest-rate sensitivity as it reduced the exposure of earnings and the market value of its equity to undue risk posed by changes in interest rates.

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

LIBOR Transition

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

Credit Risk

Credit risk is the possibility of loss arising from a borrower or counterparty in a credit-related contract failing to perform in accordance with its terms. The principal source of credit risk for OFG is its lending activities. In Puerto Rico, OFG’s principal market, we believe that recent macroeconomic conditions continue to show strength; however, as was demonstrated by Hurricane Fiona in September 2022, the January 2020 earthquakes and Hurricanes Irma and Maria in 2017, Puerto Rico is susceptible to natural disasters, which can have a disproportionate impact because of the logistical difficulties of bringing relief to an island far from the United States mainland. The effects of climate change may further increase the risk of natural disasters in the future and the correlative risk that the physical impact of such events could adversely affect our customers, operations, and business. Moreover, the Puerto Rico government’s fiscal challenges and Puerto Rico’s unique relationship with the United States also complicate any relief efforts after a natural disaster. These events increase credit risk as debtors may no longer be capable of operating their businesses and the collateral securing OFG’s loans may suffer significant damages.

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

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

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

Liquidity Risk

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

OFG’s business requires continuous access to various funding sources. Liquidity to support growth in loans held for investment has been fulfilled primarily through growth in customer deposits. OFG’s goal is to obtain as much of its funding for loans held for investment and other earning assets as possible from customer deposits, which are generated principally through development of long-term customer relationships. Deposit volumes as well as the customer deposit base have remained stable. While OFG is able to fund its operations through deposits as well as through advances from the FHLB and other alternative sources, OFG’s business may at times need to rely upon other external wholesale funding sources. OFG has selectively reduced its use of certain wholesale funding sources, such as repurchase agreements, subordinated notes and brokered deposits. As of September 30, 2023, OFG had $150.6 million in short-term fixed rate repurchase agreements and $2.9 million in brokered deposits.

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

In the case of loans serviced by OFG for FNMA, OFG is required to advance to the owners the payment of principal and interest on a scheduled basis for six months even when such payment was not collected from the borrower due to payment forbearance granted or payment delinquency. Such amounts advanced are recorded as a receivable by OFG and are expected to be collected from the borrower and/or government agency (FNMA).

At September 30, 2023 and December 31, 2022, OFG maintained other non-credit commitments amounting to $19.7 million and $21.5 million, respectively, primarily for the acquisition of other investments. These cash requirements are expected to be satisfied with OFG’s unrestricted cash. In addition, as we continue to transform OFG with a focus on simplification and building a culture of excellence and customer service, we continue to invest in technology. Some of our technology investments are table stakes and required to continuously upgrade our systems. Others require us to focus our technology on investments that drive our strategy, namely digital, data analytics, cloud migration, cyber security, and our sales and service capabilities. At September 30, 2023 and December 31, 2022, OFG had commitments for capital expenditures in technology amounting to $5.7 million and $8.6 million, respectively, which are expected to be satisfied with OFG’s unrestricted cash.

OFG expects to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. Our liquidity risk management practices have allowed us to effectively manage the market volatility in the past, as with the Covid-19 pandemic, and in the present, with the recent disruption in the banking industry with the high-profile bank failures during the first half of the year 2023. Liquidity grew from the federal stimulus programs Puerto Rico has received following Hurricane Maria in 2017, the January 2020 earthquakes, the Covid-19 pandemic and Hurricane Fiona in 2022. However, liquidity can be further affected by a number of factors such as, counterparty willingness or ability to extend credit, regulatory actions and customer preferences, some of which are beyond our control. With the current economic uncertainty resulting from inflation, recent geopolitical events, and increasing recessionary risk in the US, we continue monitoring our liquidity position, specifically cash on hand to meet customer demands.

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

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

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

Operational Risk

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

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

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

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

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

Concentration Risk

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

Disclosure Controls and Procedures

OFG’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of the end of the period covered by this quarterly report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of OFG’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of OFG’s disclosure controls and procedures. Based upon such evaluation, the CEO and CFO have concluded that, as of the end of the period covered by this quarterly report on Form 10-Q, OFG’s disclosure controls and procedures provided reasonable assurance of effectiveness in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by OFG in the reports that it files or submits under the Securities Exchange Act of 1934. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within OFG to disclose material information otherwise required to be set forth in OFG’s periodic reports.

Internal Control over Financial Reporting

There have not been any changes in OFG’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2023, that has materially affected, or is reasonably likely to materially affect, OFG’s internal control over financial reporting.

PART - II OTHER INFORMATION

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