OFG BANCORP

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 2023 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 2023 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 quarter ended March 31, 2024, 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 2023 Form 10-K.

FINANCIAL HIGHLIGHTS

First quarter earnings per share diluted increased 9.4% year-over-year on a 5.9% increase in total core revenues, reflecting what we believe is an overall solid performance across all businesses in line with our strategic plans. We believe that OFG's Digital First strategy continues to drive an increase in customers and their engagement. Overall, Puerto Rico's business activity and consumer liquidity remains strong. We believe that OFG's balance sheet is well positioned to navigate a longer-high-interest rate environment.

First Quarter of 2024:

Earnings per share diluted was $1.05 compared to $0.98 in the fourth quarter of 2023 and $0.96 in the first quarter of 2023. Total core revenues of $174.2 million compared to $175.6 million in the fourth quarter of 2023 and $164.4 million in the first quarter of 2023.

Performance metrics: Net interest margin of 5.40%, return on average assets of 1.77%, return on average tangible common stockholders’ equity of 17.92%, and efficiency ratio of 52.49%.

Total interest income of $183.4 million compared to $176.2 million in the fourth quarter of 2023 and $149.0 million in the first quarter of 2023. Compared to the fourth quarter of 2023, the first quarter of 2024 primarily reflected higher average balances and yields on investment securities, cash and loans. The first quarter of 2024 included one fewer day than the fourth quarter of 2023, which reduced interest income by about $1.4 million.

Total interest expense of $39.3 million compared to $32.7 million in the fourth quarter of 2023 and $13.1 million in the first quarter of 2023. Compared to the fourth quarter of 2023, the first quarter of 2024 core deposits average balances increased 10% and the cost increased 40 basis points reflecting the impact of the $1.2 billion in government funds deposited late in the fourth quarter of 2023.

Total banking and financial service revenues of $30.1 million compared to $32.1 million in the fourth quarter of 2023 and $28.5 million in the first quarter of 2023. The first quarter of 2024 reflected one fewer day compared to the fourth quarter of 2023, which included $2.5 million of annual insurance recognition.

Pre-provision net revenues of $83.0 million compared to $88.2 million in the fourth quarter of 2023 and $74.6 million in the first quarter of 2023. The fourth quarter of 2023 included $8.8 million from a gain on the sale of nonperforming commercial loans and from annual insurance recognition revenues.

Total provision for credit losses of $15.1 million compared to $19.7 million in the fourth quarter of 2023 and $9.4 million in the first quarter of 2023. The first quarter of 2024 provision reflected $15.1 million related to loan volume and $1.7 million as a result of the strategic sale of a performing U.S. commercial loan. This was partially offset by $1.7 million mainly due to a reduction in specific reserves for payments received on substantially reserved U.S. commercial loans.

Credit quality: Net charge-offs of $19.8 million compared to $16.3 million in the fourth quarter of 2023 and $10.1 million in the first quarter of 2023. The first quarter of 2024 included $3.5 million from previously and fully reserved nonperforming PPP loans. The first quarter of 2024 early and total delinquency rates were 2.41% and 3.30%, respectively, lower than the fourth quarter of 2023 and pre-pandemic levels. The non-performing loan rate of 1.10% was the lowest over the last five quarters.

Total non-interest expense of $91.4 million compared to $94.1 million in the fourth quarter of 2023 and $90.2 million in the first quarter of 2023. The first quarter of 2024 included a higher level of FICA payments compared to the fourth quarter of 2023, which included $3.2 million in workforce early retirement and rightsizing costs.

Effective Tax Rate of 26.8% compared to 31.9% in the fourth quarter of 2023 and first quarter of 2023. The first quarter of 2024 reflected expected 2024 effective tax rate of 28.5% due to higher forecasted business activities with preferential tax treatment under the Puerto Rico Internal Revenue Code of 2011, coupled with a $1.1 million discrete benefit for stock vested in the first quarter of 2024.

Loans held for investment of $7.54 billion compared to $7.53 billion in the fourth quarter of 2023 and $6.85 billion in the first quarter of 2023. Loans were approximately level with December 31, 2023 balances and increasing by 10.0% year-over-year. Compared to December 31, 2023, the March 31, 2024 loans reflected increases in retail auto and consumer, partially offset by regular paydowns of residential mortgages and securitization and sale of conforming loans as well as seasonal paydowns of commercial lines of credit.

New loan production of $536.6 million compared to $663.9 million in the fourth quarter of 2023 and $561.3 million in the first quarter of 2023. Compared to the fourth quarter of 2023, production reflected increased auto and consumer lending and lower commercial and residential mortgage lending.

Total investments of $2.48 billion compared to $2.69 billion in the fourth quarter of 2023 and $1.92 billion in the first quarter of 2023. The first quarter of 2024 primarily reflected the sale of US Treasury securities.

Customer deposits of $9.55 billion compared to $9.60 billion in the fourth quarter of 2023 and $8.57 billion in the first quarter of 2023.

Total borrowings and brokered depositsof $203.3 million compared to $363.0 million in the fourth quarter of 2023 and $226.8 million in the first quarter of 2023. Compared to the fourth quarter of 2023, the first quarter of 2024 reflected a reduced need for wholesale funding.

Cash and cash equivalentsof $754.4 million compared to $748.2 million in the fourth quarter of 2023 and $847.5 million in the first quarter of 2023.

Total assetsof $11.16 billion compared to $11.34 billion in the fourth quarter of 2023 and $10.06 billion in the first quarter of 2023.

Capital: CET1 ratio of 14.45% compared to 14.12% in the fourth quarter of 2023 and 14.07% in the first quarter of 2023. The Tangible Common Equity ratio was 10.06% compared to 9.68% in the fourth quarter of 2023 and 9.85% in the first quarter of 2023. Tangible Book Value per share of $23.55 compared to $23.13 in the fourth quarter of 2023 and $20.57 in the first quarter of 2023. The first quarter of 2024 Tangible Book Value reflected increased retained earnings.

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

ANALYSIS OF RESULTS OF OPERATIONS

The following tables show major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for the quarters ended March 31, 2024 and 2023.

TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE FOR THE QUARTERS ENDED MARCH 31, 2024 AND 2023

C - CHANGES IN NET INTEREST INCOME DUE TO:

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.

Net interest income of $144.1 million increased $8.2 million from $135.9 million. Tax equivalent basis net interest income of $148.2 million increased $7.7 million, or 5.5%, from $140.5 million.

Interest rate spread decreased 59 basis points to 5.26% from 5.85% and net interest margin decreased 49 basis points to 5.40% from 5.89%.

Net interest income was positively impacted by:

•A $21.3 million increase in interest income from loans, primarily driven by: (i) higher interest income from commercial loans by $11.9 million, reflecting the upward repricing of variable rate loans and increased yields on new loans originated during 2024; (ii) higher interest income from auto loans by $8.6 million, mainly due to an increase in the average balance of this portfolio by approximately $302.6 million; and (iii) higher interest income from consumer loans by $2.4 million, mainly due to an increase in the average balance of this portfolio of approximately $73.4 million. These increases were partially offset by lower interest income from residential mortgage loans by $1.6 million, reflecting a decrease in the average balance of this portfolio by approximately $142.1 million, mainly from the securitization and sale of conforming loans;

•A $11.6 million increase in interest income from investments securities, primarily related to higher yield by 105 basis points, which contributed to an increase in interest income of approximately $6.2 million and higher average volume of $657.6 million, resulting in an increase in interest income of approximately $5.4 million; and

•A $1.6 million increase in interest income from interest-bearing cash and money market investments related to higher FRB federal funds rates and higher average balances.

These increases were partially offset by higher interest expense of $26.2 million from (i) deposits of $24.3 million due to higher average cost of total deposits of 95 basis points and (ii) advances from the FHLB of $1.9 million related to a $156.6 million increase in the average balance.

TABLE 2 - NON-INTEREST INCOME SUMMARY

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 or losses on sales of assets.

OFG recorded non-interest income, net, in the amount of $30.3 million, compared to $28.9 million, an increase of 5.0%, or $1.4 million. The increase in non-interest income was mainly due to the net effect of:

•A $987 thousand increase in wealth management revenue primarily reflecting: (i) a $405 thousand increase in insurance income from higher annuities and reinsurance income, (ii) a $318 thousand increase in trust division fees and (iii) a $308 thousand increase in broker-dealer fees related to higher market asset values; and

•A $795 thousand increase in mortgage banking activities mainly from favorable impact of $1.7 million in mortgage servicing rights valuation, partially offset by lower gains on sales in the current quarter driven by lower sales volume.

TABLE 3 - NON-INTEREST EXPENSES SUMMARY

Non-interest expense was $91.4 million, representing an increase of 1.3% or $1.2 million, compared to $90.2 million. The increase in non-interest expense was mainly due to:

•Increase of $1.3 million in compensation and employee benefits, as a result of higher salaries and benefits, including payroll taxes;

•Increase of $539 thousand in other expenses, primarily driven by a $940 thousand accrual recorded during the quarter related to regulatory examinations, offset by lower charitable contributions by $336 thousand; and

•Increase of $343 thousand in advertising, business promotion, and strategic initiatives, primarily driven by an increase in marketing campaigns and digital marketing efforts made during the current quarter.

The increase in non-interest expense was partially offset by a decrease of $1.1 million in professional and service fees, mainly due to lower consulting expenses.

The efficiency ratio was 52.49%, an improvement from 54.87%. 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 March 31, 2024 and 2023 amounted to $289 thousand and $370 thousand, respectively.

Provision for Credit Losses

Provision for credit losses increased by $5.7 million to $15.1 million from $9.4 million. The provision for credit losses for the quarter ended March 31, 2024, reflected adjustments of $15.1 million related to loan volume and $1.7 million as a result of the strategic sale of a performing U.S. commercial loan, partially offset by $1.7 million related to a reduction in specific reserves for payments received on substantially reserved U.S. commercial loans. The provision for credit losses for the quarter ended March 31, 2023, reflected a provision of $6.1 million related to the growth in loan balances and a provision of $4.1 million related to commercial-specific loan reserves. The increases to the provision were partially offset by releases of $619 thousand associated with qualitative adjustment due to improvement in the performance of the portfolios and in Puerto Rico’s labor market and $293 thousand for changes in the economic and loss rate models.

Income Tax Expense

Income tax expense for the quarter ended March 31, 2024 increased $679 thousand to $18.2 million from $18.9 million. OFG maintained an effective tax rate (“ETR”) lower than the statutory rate for the quarters ended March 31, 2024 and 2023 of 26.8% and 29.0%, respectively. The current quarter reflected expected 2024 ETR of 28.5% due to higher forecasted business activities with preferential tax treatment under the Puerto Rico tax code, and a $1.1 million discrete benefit for stock vested in the current period.

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 ended March 31, 2024 and 2023.

Eliminations include interest income and expense for a time deposit opened by the Bank in Oriental Overseas, an international banking entity organized and licensed under Puerto Rico law, which operates as a unit within the Bank. The time deposit with a balance of $301.4 million and $414.6 million at March 31, 2024 and 2023, 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 decrease in interest income and interest expense from the prior year was mainly as a result of lower interest rate and average balance.

Banking

OFG’s banking segment net income before taxes decreased by $10.0 million from $47.4 million to $37.4 million, mainly reflecting:

•Increase of $23.5 million in interest expense primarily related to an increase in the average cost of deposits and borrowings;

•Increase of $5.8 million in provision for credit losses (provision for the first quarter of 2024 included $15.1 million related to the growth in loan balances); and

•Decrease of $3.5 million in interest income related to Oriental Overseas’ time deposit from the Bank to fund its operations, eliminated in the consolidation, mainly as a result of lower interest rates and average in the current period.

The decrease in the banking segment’s net income before taxes was partially offset by:

•Increase of $18.6 million in interest income from loans, driven by increased yields on higher balances.

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 decreased slightly from $2.9 million to $2.6 million. The decrease mostly reflected an increase in non-interest expenses of $567 thousand, mainly from higher salaries and employee benefits.

Treasury

Treasury segment net income before taxes increased by $13.2 million, mainly reflecting an increase in interest income from the purchases of investment securities during 2024 and 2023, higher yield in interest bearing cash and money market investments related to higher rates, and lower interest expense associated with inter-segment borrowing as a result of lower interest rates and average balance.

ANALYSIS OF FINANCIAL CONDITION

Assets Owned

At March 31, 2024, OFG’s total assets amounted to $11.159 billion, a decrease of $185.2 million, when compared to $11.344 billion at December 31, 2023.

Cash and due from banks increased by $6.2 million to $749.7 million, reflecting the effect of $149.4 million sale of US Treasury securities, principal paydowns on mortgage-backed securities totaling $55.3 million, offset by loan funding and lower deposit balances.

The investment portfolio decreased by $204.4 million or 7.6% primarily driven by the sale of a $149.4 million US Treasury securities available for sale, principal paydowns on mortgage-backed securities totaling $55.3 million and unfavorable market value adjustments of $17.5 million, offset by $17.4 million in mortgage loan securitization and $933 thousand new US Treasury securities available for sale. OFG’s investment strategy focuses on liquidity and highly liquid securities, considering their investment 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 March 31, 2024, OFG’s net loan portfolio increased by $9.8 million or 0.1% reflecting increases in retail auto and consumer loans, partially offset by regular paydowns of residential mortgage loans and securitization and sale of conforming loans as well as seasonal paydowns of commercial lines of credit.

Financial Assets Managed

At March 31, 2024, 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 March 31, 2024 and December 31, 2023, the total assets managed by OFG’s trust division amounted to $2.648 billion and $2.512 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 March 31, 2024, total assets managed by the securities broker-dealer and insurance agency subsidiaries from their customers’ investment accounts amounted to $2.579 billion, compared to $2.446 billion at December 31, 2023. Changes in trust and broker-dealer related assets also reflect changes in portfolio balances and differences in market value resulting from higher interest rates.

Goodwill

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

As of both March 31, 2024 and December 31, 2023, 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 8 – 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

TABLE 6 - LOAN PORTFOLIO COMPOSITION

OFG’s loan portfolio is composed of commercial, mortgage, consumer, and auto loans. As shown in Table 6 above, total loans, net, amounted to $7.411 billion at March 31, 2024, a 0.1% increase when compared to $7.402 billion at December 31, 2023. The composition and trends of OFG’s loans held-for-investment portfolio were as follows:

•Commercial loan portfolio amounted to $3.051 billion (40.5% of the gross loan portfolio) compared to $3.077 billion (40.8% of the gross loan portfolio) at December 31, 2023, a 0.8% decrease as a result of seasonal paydowns of lines of credit. Commercial loans secured by non-owner occupied commercial real estate amounted to $804.9 million and $744.6 million at March 31, 2024 and December 31, 2023, respectively, which represented 10.7% and 9.88% of our total loan portfolio held for investment. US commercial loans amounted to $740.7 million and $755.2 million at March 31, 2024 and December 31, 2023, respectively, which represented 9.8% and 10.0% of our total loan portfolio held for investment. Commercial loan production decreased by 8% or $18.9 million, to $203.5 million in the quarter ended March 31, 2024 from $222.4 million in the prior year quarter.

•Mortgage loan portfolio amounted to $1.519 billion (20.1% of the gross loan portfolio) compared to $1.563 billion (20.7% of the gross originated loan portfolio) at December 31, 2023, a 2.8% decrease resulting from regular paydowns of residential mortgages and securitization and sale of conforming loans. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to $18.5 million and $19.4 million at March 31, 2024 and December 31, 2023, 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 $32.2 million in the quarter ended March 31, 2024 which represents an increase of 6% from $30.3 million in the prior year quarter.

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 $628.0 million (8.3% of the gross loan portfolio) compared to $620.4 million (8.2% of the gross loan portfolio) at December 31, 2023. Consumer loan production decreased by 21% to $68.6 million in March 31, 2024 from $86.3 million in the prior year quarter.

•Auto loans portfolio amounted to $2.341 billion (31.1% of the gross loan portfolio) compared to $2.274 billion (30.3% of the gross originated loan portfolio) at December 31, 2023. Auto loans production increased by 4%, or $10.0 million to $232.3 million in the quarter ended March 31, 2024 compared to $222.3 million in the prior year quarter.

TABLE 7 - PUERTO RICO GOVERNMENT RELATED LOANS

At March 31, 2024, OFG has $75.5 million of direct credit exposure to the Puerto Rico government, a $6.9 million increase from $68.6 million at December 31, 2023.

Allowance for Credit Losses

OFG measures its ACL 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 ACL and present selected credit loss statistics for the quarters ended March 31, 2024 and 2023 and as of March 31, 2024 and December 31, 2023. 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 ACL.

Non-performing Assets

OFG’s non-performing assets include non-performing loans, foreclosed real estate, and other repossessed assets (see Tables 12 and 14). At March 31, 2024, OFG had $72.1 million of non-accrual loans held for investment, including $6.2 million PCD loans, compared to $79.4 million at December 31, 2023, reflecting decreases of $0.5 million, $4.5 million and $2.8 million in mortgage, auto and commercial loan portfolios, respectively, partially offset by an increase of $0.5 million in the consumer loan portfolio. At March 31, 2024 and December 31, 2023, total commercial non-accrual loans excluded $6.5 million and $6.4 million, respectively, of non-accrual commercial loans held for sale.

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 March 31, 2024 and December 31, 2023, the outstanding balance of these residential mortgage loans was $5.3 million and $5.8 million, respectively.

At March 31, 2024, OFG’s non-performing assets decreased by 4.9% to $95.2 million (0.85% total assets) from $100.0 million (0.88% of total assets) at December 31, 2023.

Foreclosed real estate slightly increased from $10.8 million at December 31, 2023 to $10.9 million at March 31, 2024 and other repossessed assets increased from $4.0 million at December 31, 2023 to $6.8 million at March 31, 2024, both recorded at fair value. OFG does not expect non-performing loans to result in significantly higher losses. At March 31, 2024, the allowance coverage ratio to non-performing loans was 202.1% (189.1% at December 31, 2023).

Upon adoption of the CECL methodology, OFG elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. As such, for PCD loans the determination of non-accrual or accrual status is made at the pool level, not the individual loan level. The ACL 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 March 31, 2024, OFG’s non-performing commercial loans amounted to $39.8 million (51.3% of OFG’s non-performing loans), a 6.5% decrease from $42.5 million at December 31, 2023 (49.9% 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 March 31, 2024, OFG’s non-performing mortgage loans totaled $19.3 million (24.9% of OFG’s non-performing loans), a 4.8% decrease from $20.3 million (23.8% of OFG’s non-performing loans) at December 31, 2023. 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 March 31, 2024, OFG’s non-performing consumer loans amounted to $3.9 million (5.0% of OFG’s non-performing loans), a 15.3% increase from $3.4 million at December 31, 2023 (4.0% 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 March 31, 2024, OFG’s non-performing auto loans amounted to $14.5 million (18.8% of OFG’s total non-performing loans), a decrease of 23.8% from $19.1 million at December 31, 2023 (22.3% 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

TABLE 9 - ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES

TABLE 10 - ALLOWANCE FOR CREDIT LOSSES SUMMARY

TABLE 11 — NET CREDIT LOSSES STATISTICS ON LOANS

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

Net charge-offs of $19.8 million for the quarter ended March 31, 2024, increased by $9.7 million, when compared to $10.1 million in prior year quarter.

Net charge-offs variances were as follows:

Residential mortgage loans net recoveries amounted to $758 thousand in the first quarter of 2024, increasing by $571 thousand when compared to $187 thousand in the first quarter of 2023.

Commercial loans net charge-offs amounted to $5.1 million in the first quarter of 2024, increasing by $2.4 million, when compared to $2.7 million in the first quarter of 2023. The first quarter of 2024 includes $3.5 million from previously and fully-reserved nonperforming PPP loans.

Consumer loans net charge-offs amounted to $7.3 million in the first quarter of 2024, increasing by $2.5 million, when compared to $4.8 million in the first quarter of 2023.

Auto loans net charge-offs amounted to $8.2 million in the first quarter of 2024, increasing by $5.3 million, when compared to $2.9 million in the first quarter of 2023.

With Covid-19 cash stimulus fading away, OFG has increased net charge-offs in auto and consumer loan portfolios. Nevertheless, these figures are lower than pre-pandemic levels.

TABLE 12 — NON-PERFORMING ASSETS

TABLE 13 — NON-ACCRUAL LOANS

TABLE 14 - NON-PERFORMING LOANS

TABLE 15 - LIABILITIES SUMMARY AND COMPOSITION

Liabilities and Funding Sources

As shown in Table 15 above, at March 31, 2024, OFG’s total liabilities were $9.944 billion, 2.0% lower than the $10.151 billion reported at December 31, 2023. Deposits and borrowings, OFG’s funding sources, amounted to $9.749 billion at March 31, 2024 compared to $9.963 billion at December 31, 2023. Deposits, excluding accrued interest payable, decreased by $212.6 million reflecting a decrease in brokered deposits of $159.6 million, demand deposits of $99.9 million and savings and money market accounts of $86.3 million, offset by an increase in time deposits of $45.6 million.

In December 2023, OFG received a $1.2 billion deposit in an interest-bearing checking account from an existing long-standing Puerto Rico government client who had an inflow of liquidity. At March 31, 2024 and December 31, 2023, total public fund deposits from various Puerto Rico government municipalities, agencies and corporations amounted to $1.590 billion and $1.616 billion, respectively. These public funds were collateralized with securities and commercial loans amounting to $1.694 billion and $1.645 billion at March 31, 2024 and December 31, 2023, respectively.

As of March 31, 2024, borrowings consist of FHLB advances, amounting to $200.8 million, representing a two-year FHLB advance amounting to $200.0 million acquired in 2023 as part of OFG’s asset liability management strategies.

Stockholders’ Equity

At March 31, 2024, OFG’s total stockholders’ equity was $1.216 billion, a 1.9% increase when compared to $1.193 billion at December 31, 2023. This increase reflects an increase in retained earnings of $33.1 million and legal surplus of $4.8 million, mainly due to $49.7 million in net income, partially offset by $11.8 million in common stock dividends, and an increase in accumulated other comprehensive loss, net of tax, of $14.7 million from unfavorable market value adjustments on available-for-sale investment securities during the quarter ended March 31, 2024.

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 March 31, 2024, 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 ACL (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 March 31, 2024 and December 31, 2023 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 March 31, 2024 and December 31, 2023:

TABLE 16 — CAPITAL, DIVIDENDS AND STOCK DATA

From December 31, 2023 to March 31, 2024, leverage capital ratio decreased from 11.03% to 10.76% as average assets increased, tier 1 risk-based capital ratio and common equity tier 1 capital ratio increased from 14.12% to 14.45%, total risk-based capital ratio increased from 15.37% to 15.71%, and tangible common equity to tangible total assets increased from 9.68% to 10.06%. The increases in capital ratios reflected an increase in retained earnings from net income, net of dividends and CECL transition, partially offset by an increase in risk-weighted assets of $20.4 million. Risk-weighted assets increased mainly due to an increase in unused commitments, from repayment of credit lines, and 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 March 31, 2024 and December 31, 2023:

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 March 31, 2024 and December 31, 2023:

OFG’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG.” At March 31, 2024 and December 31, 2023, OFG’s market capitalization for its outstanding common stock was $1.738 billion ($36.81 per share) and $1.764 billion ($37.48 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 2024, OFG announced the approval by the Board of Directors of a stock repurchase program for the purchase of up to $50 million. There were no repurchases of stock under this program during the quarter ended March 31, 2024. Under the prior stock program, OFG repurchased 104,800 shares for a total of $2.9 million at an average price of $27.61 per share during the quarter ended March 31, 2023.

OFG did not repurchase any shares of its common stock during the March 31, 2024 and 2023, other than through its publicly announced stock repurchase program in prior year quarter.