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 six-month period ended June 30, 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

We believe that the second quarter of 2024 continued to demonstrate the strength of OFG’s strategies and franchise. EPS-diluted increased 16.1% year-over-year on a 5.2% increase in total core revenues. OFG generated strong performance metrics through consistent growth; increased loans, deposits, and non-interest income; and stable credit quality. Further, we believe that our ‘Digital First’ strategy continues to help expand retail and business relationships through new and upgraded products, services, and self-service tools. In addition, we implemented close to half of our $50 million share buyback program, purchasing $24.3 million of OFG’s shares in the open market. At the same time, Puerto Rico’s economy continued to grow and steadily decouple from mainland economic uncertainties.

Earnings per share dilutedof $1.08 compared to $1.05 in the first quarter of 2024 and $0.93 in the second quarter of 2023. Total core revenues of $179.4 million compared to $174.2 million in the first quarter of 2024 and $170.5 million in the second quarter of 2023.

Performance metrics: Net interest margin of 5.51%, return on average assets of 1.82%, return on average tangible common stockholders’ equity of 18.24%, and efficiency ratio of 51.81%.

Total Interest Income of $187.7 million compared to $183.4 million in the first quarter of 2024 and $158.0 million in the second quarter of 2023. Compared to the first quarter of 2024, the second quarter of 2024 primarily reflected higher average balances and yields on loans. The second quarter of 2024 also included $2.1 million from the recovery of a non-accrual U.S. commercial loan paid in full.

Total Interest Expense of $40.3 million compared to $39.3 million in the first quarter of 2024 and $18.3 million in the second quarter of 2023. Compared to the first quarter of 2024, the second quarter of 2024 reflected higher average core deposits and a 7 basis point increase in rates, partially offset by lower average wholesale funding and rate.

Total Banking and Financial Service Revenuesof $32.1 million compared to $30.1 million in the first quarter of 2024 and $30.9 million in the second quarter of 2023. Compared to the first quarter of 2024, the second quarter of 2024 reflected higher banking service, wealth management and mortgage banking revenues. Banking service revenues included $0.6 million prepayment fees on U.S. loans, while wealth management included $0.5 million in annual recognition of certain commercial insurance commissions.

Pre-Provision Net Revenues of $86.8 million compared to $83.0 million in the first quarter of 2024 and $80.8 million in the second quarter of 2023.

Total Provision for Credit Losses of $15.6 million compared to $15.1 million in the first quarter of 2024 and $15.0 million in the second quarter of 2023. The second quarter of 2024 provision primarily reflected increased loan volume.

Credit Quality: Net charge-offs of $15.0 million compared to $19.8 million in the first quarter of 2024 and $6.6 million in the second quarter of 2023. The second quarter of 2024 early and total delinquency rates were 2.81% and 3.71%, respectively. The nonperforming loan rate of 1.08% was the lowest in the last five quarters.

Total Non-Interest Expense of $93.0 million compared to $91.4 million in the first quarter of 2024 and $88.9 million in the second quarter of 2023. Compared to the first quarter of 2024, the second quarter of 2024 included increases of $1.3 million in electronic banking expenses, $1.1 million in professional services fees, and $0.4 million for increased FDIC deposit insurance assessments now that Oriental exceeds $10 billion in assets. This was partially offset by reductions of $1.4 million in foreclosed real estate costs and in FICA payroll-related expenses relative to the prior quarter.

Effective Tax Rate (“ETR”) of 28.2% compared to 26.8% in the first quarter of 2024 and 32.9% in the second quarter of 2023. The second quarter of 2024 reflected an expected 2024 ETR of 29.0% due to higher forecasted business activities with preferential tax treatment under the Puerto Rico tax code, coupled with a $0.8 million tax benefit credit in the second quarter of 2024 compared to $1.1 million discrete benefit for stock vested in in the first quarter of 2024.

Loans Held for Investmentof $7.64 billion compared to $7.54 billion in the first quarter of 2024 and $7.12 billion in the second quarter of 2023. Compared to the first quarter of 2024, the second quarter of 2024 increased 1.3%, reflecting growth in Puerto Rico commercial, auto and consumer loans, partially offset by regular paydowns of residential mortgages and prepayment of U.S. commercial loans. Compared to the second quarter of 2023, the first quarter of 2024 loans increased 7.3%.

New Loan Productionof $589.0 million compared to $536.6 million in the first quarter of 2024 and $681.8 million in the second quarter of 2023. Compared to the first quarter of 2024, the second quarter of 2024 loan production, led by auto, reflected increases in all categories.

Total Investmentsof $2.48 billion compared to $2.48 billion in the first quarter of 2024 and $1.70 billion in the second quarter of 2023.

Customer Depositsof $9.60 billion compared to $9.55 billion in the first quarter of 2024 and $8.54 billion in the second quarter of 2023. Compared to the first quarter of 2024, the second quarter of 2024 reflected an increase in commercial deposits partially offset by a decline in retail deposits.

Total Borrowings and Brokered Deposits of $201.2 million compared to $203.3 million in the first quarter of 2024 and $226.5 million in the second quarter of 2023.

Cash and Cash Equivalentsof$740.4 million compared to$754.4 million in the first quarter of 2024 and$799.0 million in the second quarter of 2023.

Capital: CET1 ratio was 14.29% compared to 14.45% in the first quarter of 2024 and 14.03% in the second quarter of 2023. The Tangible Common Equity ratio was 10.09% compared to 10.06% in the first quarter of 2024 and 9.99% in the second quarter of 2023. Tangible Book Value of $24.18 per share compared to $23.55 in the first quarter of 2024 and $21.06 in the second quarter of 2023.

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 and six-month periods ended June 30, 2024 and 2023.

TABLE 1 - ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE FOR THE QUARTERS ENDED JUNE 30, 2024 AND 2023

C - CHANGES IN NET INTEREST INCOME DUE TO:

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

FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 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 $147.3 million increased $7.7 million from $139.6 million. Tax equivalent basis net interest income of $150.9 million increased $7.3 million, or 5.1%, from $143.6 million.

Interest rate spread decreased 48 basis points to 5.36% from 5.84% and net interest margin decreased 39 basis points to 5.51% from 5.90%.

Net interest income was positively impacted by:

•A $18.7 million increase in interest income from loans, primarily driven by: (i) higher interest income from commercial loans by $11.3 million, reflecting the upward repricing of variable rate loans, increased yields on new loans originated during 2024 and a $2.1 million recovery of a non-accrual commercial US loan paid in full; (ii) higher interest income from auto loans by $7.8 million, mainly due to an increase in the average balance of this portfolio by $308.3 million; and (iii) higher interest income from consumer loans by $1.8 million, mainly due to an increase in the average balance of this portfolio by $56.5 million. These increases were partially offset by lower interest income from residential mortgage loans by $2.1 million, reflecting a decrease in the average balance of this portfolio by $137.3 million, mainly from regular paydowns and the securitization and sale of conforming loans; and

•A $11.2 million increase in interest income from investments securities, primarily related to higher yield by 97 basis points, which contributed to an increase in interest income of approximately $5.5 million and higher average volume of $693.0 million, resulting in an increase in interest income of approximately $5.7 million.

These increases were offset by higher interest expense of $22.0 million, $21.9 million from deposits due to higher average cost of 83 basis points, reflecting a$1.2 billion deposit from an existing long-standing Puerto Rico government client received during the fourth quarter of 2023 with variable interest rate.

Net interest income of $291.4 million increased by $15.9 million from $275.5 million. Tax equivalent basis net interest income of $299.2 million increased $15.1 million, or 5.3%, from $284.1 million.

Interest rate spread decreased by 53 basis points to 5.31% from 5.84% and net interest margin decreased 44 basis points to 5.45% from 5.89%. This decrease reflects an increase of 37 and 90 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 $40.0 million increase in interest income from loans driven by higher interest income from: (i) commercial loans of $23.2 million, primarily related to the upward repricing of variable rate commercial loans, increased yields on new loans originated during 2024, and higher average balance; (ii) consumer loans of $4.2 million mainly due to an increase of $64.9 million in the average balance of this portfolio; and (iii) auto loans of $16.4 million reflecting higher originations during 2024. These increases were partially offset by a decrease of $3.8 million in interest income from mortgage loans due to a reduction of $139.6 million in the average balance of this portfolio, mainly from regular paydowns and the securitization and sale of conforming loans;

•A $22.8 million increase in interest income from investment securities, primarily related to a higher average volume of $675.7 million, which resulted in an increase in interest income of $11.1 million, and higher yield by 101 basis points, which contributed to the increase in net interest income of $11.8 million; and

•A $1.3 million increase in interest income from higher yield in lower balances of interest-bearing cash and money market related to higher interest rates.

These increases were partially offset by higher interest expense of $48.2 million from (i) interest paid on deposits of $46.2 million due to higher average cost of total deposits of 89 basis points, reflecting a$1.2 billion deposit from an existing long-standing Puerto Rico government client received during the fourth quarter of 2023 with a variable interest rate, and (ii) $2.0 million interest expense on the $200.0 million two-year FHLB advance taken in late 2023.

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 $32.5 million, compared to $30.1 million, an increase of 8.0%, or $2.4 million. The increase in non-interest income was mainly due to the net effect of:

•A $1.3 million increase in banking service revenues mainly due to: (i) higher debit card income of $639 thousand and merchant income of $300 thousand resulting from higher transactionality and migration of USVI merchant activity,

(ii) $623 thousand prepayment fees, mainly from US commercial loans; offset by lower fees on deposits of $311 thousand from lower maintenance and overdrawn fees and higher waived fees.

•A $1.1 million loss associated with the sale of a $203.3 million short-term US treasury note available for sale during 2023, there were no sales of investments during the second quarter of 2024; and

•A $246 thousand increase in wealth management revenue primarily reflecting: (i) $212 thousand increase in broker-dealer fees related to higher market asset values and investment advisory services fees and (ii) $137 thousand increase in insurance income related to $123 thousand from reinsurance income, partially offset by lower annuities income of $92 thousand.

These increases were partially offset by a $361 thousand decrease in mortgage banking activities mainly from unfavorable impact in mortgage servicing rights valuation and lower servicing fees, partially offset by gains on repurchased loan sales in the current quarter.

OFG recorded non-interest income in the amount of $62.8 million, compared to $59.0 million, an increase of 6.5%, or $3.9 million. The increase in non-interest income was mainly due to:

•A $1.2 million increase in wealth management revenue primarily reflecting: (i) $519 thousand increase in broker-dealer fees related to higher market values of assets and investments advisory services fees, (ii) $449 thousand increase in insurance income related to $298 thousand from reinsurance income and $120 thousand in annuities income;

•A $1.1 million loss associated with the sale of a $149.4 million short-term US treasury note available for sale during 2023; and

•A $1.1 million increase in banking service revenues mainly due to: (i) higher debit card income of $675 thousand and merchant income of $411 thousand resulting from higher volume and migration of USVI merchants, and (ii) $623 thousand prepayment fees, mainly from US commercial loans; offset by lower fees on deposits of $389 thousand from lower maintenance and overdrawn fees and higher waived fees.

TABLE 3 - NON-INTEREST EXPENSES SUMMARY

Non-interest expense was $93.0 million, representing an increase of 4.6% or $4.1 million, compared to $88.9 million. The increase in non-interest expense was mainly due to:

•Decrease of $1.6 million in foreclosed real estate and other repossessed assets income, net of expenses due to lower valuation adjustments andlower gain on sale of foreclosed real estate due to lower volume of properties sold.

•Increase of $1.4 million in electronic banking charges mainly due to increases of $1.2 million in point-of-sale and merchant-related fees due to increased transaction volumes.

•Increase of $626 thousand in compensation and employee benefits, as a result of higher salaries and benefits, including payroll taxes; and

•Increase of $428 thousand in insurance expenses related to higher FDIC deposit insurance assessment expense as a result of the Bank exceeding $10 billion in assets.

The efficiency ratio was 51.81%, an improvement from 52.13%. 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 June 30, 2024 and 2023 amounted to $391 thousand and $786 thousand, respectively.

Non-interest expense was $184.4 million, representing an increase of 2.9%, or $5.3 million, compared to $179.1 million. The increase in non-interest expense was mainly due to:

•Increase in compensation and employee benefits of $2.0 million due to higher salaries and benefits, including payroll taxes;

•Decrease of $1.5 million in foreclosed real estate and other repossessed assets income, net of expenses due to lower valuation adjustments and lower gain on sale of foreclosed real estate due to lower volume of properties sold;

•Increase of $1.5 million in electronic banking charges mainly due to increases of $2.1 million in point-of-sale and merchant-related fees from higher volume, partially offset by a $400 thousand annual transaction processing incentive; and

•Increase of $858 thousand in other expenses, primarily driven by a $993 thousand accrual recorded during the current period related to regulatory examinations.

The increase in non-interest expense was partially offset by, a decrease in professional and service fees of $1.3 million, reflecting lower balances in compliance-related expenses.

The efficiency ratio was 52.15%, an improvement from 53.48%. Amounts presented as part of non-interest income that were excluded from the efficiency ratio computation for six-month periods ended June 30, 2024 and 2023 amounted to $680 thousand and $416 thousand, respectively.

Provision for Credit Losses

Provision for credit losses increased by $537 thousand to $15.6 million from $15.0 million. The provision for credit losses for the second quarter of 2024, reflected a provision of $11.3 million related to the growth in loan balances, $2.8 million related to commercial-specific loan reserves, mainly in the US commercial loan portfolio, $2.1 million associated with qualitative adjustment, mainly in auto loans, and $1.5 million in loss rate models. These increases were partially offset by $2.0 million in changes in the economic model.

The provision for credit losses for the second quarter of 2023 reflected a provision of $6.3 million related to the growth in loan balances and a provision of $9.4 million related to commercial-specific loan reserves, mainly in the US commercial loan portfolio, and $1.6 million associated with qualitative adjustment, partially offset by $2.8 million for changes in the economic and loss rate models.

Provision for credit losses increased $6.2 million to $30.7 million from $24.5 million. The provision for credit losses for the six-month period ended June 30, 2024, reflected adjustments of $26.4 million related to the growth in loan balances, $4.5 million from loss rate model and $2.9 million related to commercial-specific loan reserves, mainly in the US commercial loan portfolio, offset by a $4.9 million release from economic model.

The provision for credit losses for 2023 reflected a provision of $12.5 million related to the growth in loan balances, a provision of $13.5 million related to commercial specific loan reserves, mainly in the US commercial loan portfolio, and $1.0 million associated with qualitative adjustment, partially offset by releases of $3.1 million for changes in the economic and loss rate models.

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 six-month periods ended June 30, 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 $302.4 million and $364.2 million at June 30, 2024 and 2023, respectively, to fund Oriental Overseas operations is included in the Treasury Segment with its corresponding interest expense, and the related interest income is included in the Banking Segment, 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 period was mainly as a result of lower interest rate and average balance.

Banking

OFG’s banking segment net income before taxes decreased by $9.1 million from $49.2 million to $40.1 million, mainly due to:

•Increase of $21.8 million in interest expense primarily related to an increase in the average cost of deposits, reflecting a$1.2 billion deposit from an existing long-standing Puerto Rico government client received during the fourth quarter of 2023 with a variable interest rate; and

•Decrease of $3.9 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 average in the current period.

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

•Increase of $15.7 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 $3.4 million to $2.8 million, mainly from higher salaries and employee benefits by $489 thousand.

Treasury

Treasury segment net income before taxes increased by $15.1 million, mainly reflecting an increase in interest income from the purchases of investment securities during 2024 and late 2023 with higher yields, higher yield in interest bearing cash and money market investments related to higher interest rates, and lower interest expense associated with inter-segment borrowing as a result of lower average balance.

Comparison of six-month periods ended June 30, 2024 and 2023

Banking

OFG’s banking segment net income before taxes decreased by $19.1 million from $96.6 million to $77.5 million, mainly due to:

•Increase of $45.3 million in interest expense mainly related to higher costs of deposits, reflecting a$1.2 billion deposit from an existing long-standing Puerto Rico government client received during the fourth quarter of 2023 with variable interest rate;

•Increase of $6.4 million in provision for credit losses, mainly due togrowth in loan balances;

•Decrease of $7.4 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 lower average balance in the current period; and

•Increase of $4.3 million in non-interest expenses, mainly due to: (i) $2.0 million increase in compensation and employee benefits, (ii) $1.5 million increase in electronic banking charges from higher point-of-sale and merchant-related fees, and (iii) $1.5 million decrease in foreclosed real estate and other repossessed assets income, net of expenses due to lower valuation adjustments and lower gain on sale of foreclosed real estate from decrease in sales volume, partially offset by lower: (a) professional and service fees of $1.3 million.

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

•Increase of $40.0 million in interest income from loans, driven by increased yields on higher loan balances; and

•Increase of $2.8 million in non-interest income. The current period includes: (i) $1.1 million in prepayment fees, mainly from commercial US loans, (ii) higher debit card and merchant income due to higher volume and migration of USVI merchants, partially offset by lower period maintenance and overdrawn fees and higher waived fees.

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 from $6.3 million to $5.4 million, mainly from higher salaries and employee benefits by $818 thousand.

Treasury

Treasury segment net income before taxes increased by $28.3 million, mainly reflecting:

•Increase of $22.5 million in interest income, reflecting the purchase of agency mortgage-backed securities and US Treasury securities with higher yields during such period and higher yield in interest-bearing cash and money market investments related to higher interest rate than in the previous period; and

•Decrease of $4.5 million in interest expense, reflecting $7.4 million lower inter-segment borrowings as a result of lower average balances, offset by a $2.0 million increase from the $200 million two-year FHLB advance taken in late 2023.

Income Tax Expense

Income tax expense for the quarter ended June 30, 2024 decreased $1.5 million to $20.1 million from $21.6 million. OFG maintained an effective tax rate (“ETR”) lower than the statutory rate for the quarters ended June 30, 2024 and 2023 of 28.2% and 32.9%, respectively. The current quarter reflected expected 2024 ETR of 29.2% due to higher forecasted business activities with preferential tax treatment under the Puerto Rico tax code, coupled with a $800 thousand tax benefit credit in the second quarter of 2024.

Income tax expense decreased $2.2 million to $38.4 million from $40.5 million. OFG’s ETR was 27.6% in 2024 compared to 30.9% in 2023. The decrease is mainly related to exempt income, income subject to preferential tax treatment under the PR Code and a discrete tax windfall on stock options recognized during the first quarter of 2024 and discrete benefit mainly related to the purchase of tax credits during the second quarter of 2024.

ANALYSIS OF FINANCIAL CONDITION

Assets Owned

At June 30, 2024, OFG’s total assets amounted to $11.259 billion, a decrease of $85.4 million, when compared to $11.344 billion at December 31, 2023.

Cash and due from banks decreased by $8.2 million to $735.3 million, reflecting the effect of loan funding and lower deposit balances.

The investment portfolio decreased by $210.8 million or 7.8% primarily driven by the maturity of $500 million in US Treasury securities, principal paydowns of $129 million, mainly on mortgage-backed securities, and the sale of $149.4 million of US Treasury securities available-for-sale. These decreases were offset by $545.4 million new available-for-sale US Treasury and mortgage-backed securities, and $38.1 million in mortgage loan securitization. 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 June 30, 2024, OFG’s net loan portfolio increased by $101.5 million or 1.4% reflecting increases in commercial, retail auto and consumer loans, partially offset by regular paydowns of residential mortgage loans and securitization and sale of conforming loans.

Financial Assets Managed

At June 30, 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 June 30, 2024 and December 31, 2023, the total assets managed by OFG’s trust division amounted to $2.200 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 June 30, 2024, total assets managed by the securities broker-dealer and insurance agency subsidiaries from their customers’ investment accounts amounted to $2.159 billion, compared to $2.446 billion at December 31, 2023. The decrease in trust and broker-dealer related assets reflects the termination of services by a retirement plan customer during the second quarter of 2024.

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 June 30, 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 $7.503 billion at June 30, 2024, a 1.4% 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 $3.082 billion (40.3% of the gross loan portfolio) compared to $3.077 billion (40.8% of the gross loan portfolio) at December 31, 2023, a 0.2% increase as a result of lines of credit usage and originations during 2024. Commercial loans secured by non-owner occupied commercial real estate amounted to $802.7 million and $744.6 million at June 30, 2024 and December 31, 2023, respectively, which represented 10.5% and 9.9% of our total loan portfolio held for investment. US commercial loans amounted to $662.0 million and $755.2 million at June 30, 2024 and December 31, 2023, respectively, which represented 8.7% and 10.0% of our total loan portfolio held for investment. Commercial loan production decreased by 32% or $103.0 million, to $219.5 million in the second quarter of 2024 from $322.6 million in the prior year quarter, and decreased 22% or $121.9 million, to $423.0 million in the six-month period ended June 30, 2024 from $544.9 million for the same period of 2023, mainly in the US commercial loan portfolio. US commercial loans activities include the purchase of middle market senior secured cash flow loan participations and the purchase of participations of loans to small and medium sized businesses. Excluding US commercial loans activities, PR commercial loan production decreased 8.8% to $192.1 million in the second quarter of 2024 from $210.7 million in the prior year quarter, and increased 22.5% to $378.5 million in the six month period ended June 30, 2024 from $309.0 million for the same period in of 2023.

•Mortgage loan portfolio amounted to $1.485 billion (19.4% of the gross loan portfolio) compared to $1.563 billion (20.7% of the gross originated loan portfolio) at December 31, 2023, a 5.0% decrease resulting from regular paydowns of residential mortgages and securitization of conforming loans into mortgage-backed securities. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to $19.0 million and $19.4 million at June 30, 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 $38.5 million and $70.7 million in the quarter and six-month period ended June 30, 2024, respectively, which represents an increase of 7% and an increase of 6.6%, respectively, from $35.9 million and $66.3 million for the same periods in 2023.

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 $644.2 million (8.4% 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 8% to $80.3 million in the second quarter of 2024 from $87.1 million in the prior year quarter, and decreased by 14%, or $24.4 million to $148.9 million in the six-month period ended June 30, 2024 from $173.3 million in the same period in 2023.

•Auto loans portfolio amounted to $2.428 billion (31.9% 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 6% to $250.6 million in the second quarter of 2024 compared to $236.3 million in the prior year quarter, and increased by 5%, or $24.3 million to $483.0 million in the six-month period ended June 30, 2024 from $458.6 million in the same period of 2023.

TABLE 7 - PUERTO RICO GOVERNMENT RELATED LOANS

At June 30, 2024, OFG has $75.8 million of direct credit exposure to the Puerto Rico government, a $7.2 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 and six-month periods ended June 30, 2024 and 2023 and as of June 30, 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 June 30, 2024, OFG had $72.2 million of non-accrual loans held for investment, including $5.0 million PCD loans, compared to $79.4 million at December 31, 2023, reflecting decreases of $1.5 million, $2.4 million and $3.3 million in mortgage, auto, and commercial loan portfolios, respectively. As of December 31, 2023, total past due loans exclude $6.4 million of past due commercial loans held-for-sale, these loans were sold during the quarter ended June 30, 2024. There were no past due commercial loans held-for-sale as of June 30, 2024.

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 June 30, 2024 and December 31, 2023, the outstanding balance of these residential mortgage loans was $4.6 million and $5.8 million, respectively.

At June 30, 2024, OFG’s non-performing assets decreased by 11.0% to $89.1 million (0.79% total assets) from $100.0 million (0.88% of total assets) at December 31, 2023.

Foreclosed real estate decreased from $10.8 million at December 31, 2023 to $6.5 million at June 30, 2024 and other repossessed assets increased from $4.0 million at December 31, 2023 to $5.7 million at June 30, 2024, both recorded at fair value. OFG does not expect non-performing loans to result in significantly higher losses. At June 30, 2024, the allowance coverage ratio to non-performing loans was 204.8% (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 June 30, 2024, OFG’s non-performing commercial loans amounted to $39.2 million (51.1% of OFG’s non-performing loans), a 7.7% 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 June 30, 2024, OFG’s non-performing mortgage loans totaled $17.6 million (22.9% of OFG’s non-performing loans), a 13.3% 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 June 30, 2024, OFG’s non-performing consumer loans amounted to $3.3 million (4.3% of OFG’s non-performing loans), a 1.4% decrease 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 June 30, 2024, OFG’s non-performing auto loans amounted to $16.7 million (21.7% of OFG’s total non-performing loans), a decrease of 12.4% 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 for the second quarter of 2024 amounted to $15.0 million increasing by $8.4 million, when compared to $6.6 million in prior year quarter. Net charge-offs for the six-month period ended June 30, 2024 amounted to $34.8 million, increasing by $18.1 million, when compared to $16.7 million in the prior year period.

Net charge-offs variances were as follows:

•Residential mortgage loans net recoveries amounted to $603 thousand in the second quarter of 2024, increasing by $201 thousand when compared to $402 thousand in the second quarter of 2023. Residential mortgage loans net recoveries for the six-month period ended June 30, 2024 amounted to $1.4 million, increasing by $772 thousand when compared to net recoveries of $589 thousand for prior year period.

•Commercial loans net charge-offs amounted to $1.7 million in the second quarter of 2024, decreasing by $1.3 million, when compared to $2.9 million in the second quarter of 2023. Net charge-offs for the six-month period ended June 30, 2024 amounted $6.8 million, increasing by $1.2 million, when compared to $5.6 million in the prior year period. The charge-offs for the six-month period ended June 30, 2024, include $3.5 million from retail commercial loans, mainly from previously and fully-reserved nonperforming paycheck protection program (“PPP”) loans.

•Consumer loans net charge-offs amounted to $7.3 million in the second quarter of 2024, increasing by $3.7 million, when compared to net charge-offs of $3.6 million in the second quarter of 2023. Net charge-offs for the six-month period ended June 30, 2024 amounted $14.6 million increasing by $6.2 million when compared to $8.4 million in the prior year period. The increase in net charge-offs during the six-month period ended June 30, 2024 was driven by an increase in business volume.

•Auto loans net charge-offs amounted to $6.6 million in the second quarter of 2024, increasing by $6.1 million, when compared to $0.5 million in the second quarter of 2023. Net charge-offs for the six-month period ended June 30, 2024 amounted to $14.8 million, increasing by $11.5 million, when compared to $3.3 million in the prior year period, reflecting post-pandemic credit normalization.

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 June 30, 2024, OFG’s total liabilities were $10.031 billion, 1.2% lower than the $10.151 billion reported at December 31, 2023. Deposits and borrowings, OFG’s funding sources, amounted to $9.806 billion at June 30, 2024 compared to $9.963 billion at December 31, 2023. Deposits, excluding accrued interest payable, decreased by $155.7 million reflecting a decrease in brokered deposits of $161.8 million, savings and money market accounts of $85.8 million and demand deposits of $33.1 million, offset by an increase in time deposits of $123.7 million. Excluding public fund deposits, retail deposits decreased $33.3 million and commercial deposits increased $77.2 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 June 30, 2024 and December 31, 2023, total public fund deposits from various Puerto Rico government municipalities, agencies and corporations amounted to $1.577 billion and $1.616 billion, respectively. These public funds were collateralized with securities and commercial loans amounting to $1.679 billion and $1.645 billion at June 30, 2024 and December 31, 2023, respectively.

As of June 30, 2024, borrowings consist of a two-year FHLB advance amounting to $200.7 million taken in 2023 as part of OFG’s asset liability management strategies.

Stockholders’ Equity

At June 30, 2024, OFG’s total stockholders’ equity was $1.228 billion, a 2.9% increase when compared to $1.193 billion at December 31, 2023. This increase reflects an increase in retained earnings of $67.5 million and legal surplus of $9.6 million, mainly due to $100.8 million in net income, partially offset by $23.7 million in common stock dividends. These variances were partially offset by $22.6 million from treasury stock as a result of repurchases of common stock in the aggregate amount of $24.3 million in connection with the $50 million stock buy back program announced in January 2024, and an increase in accumulated other comprehensive loss, net of tax, of $19.5 million from unfavorable market value adjustments on available-for-sale investment securities.

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 June 30, 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 June 30, 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 June 30, 2024 and December 31, 2023:

TABLE 16 — CAPITAL, DIVIDENDS AND STOCK DATA

From December 31, 2023 to June 30, 2024, leverage capital ratio decreased from 11.03% to 10.86% as average assets increased, tier 1 risk-based capital ratio and common equity tier 1 capital ratio increased from 14.12% to 14.29%, total risk-based capital ratio increased from 15.37% to 15.54%, and tangible common equity to tangible total assets increased from 9.68% to 10.09%. The increases in capital ratios reflected an increase in retained earnings from net income, net of dividends, CECL transition and stock repurchases, partially offset by an increase in risk-weighted assets of $243.7 million. Risk-weighted assets increased mainly due to an increase in unused commitments, loans, and other assets.

The following table presents a reconciliation of OFG’s total stockholders’ equity to tangible common equity and total assets to tangible assets at June 30, 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 June 30, 2024 and December 31, 2023:

OFG’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG”. At June 30, 2024 and December 31, 2023, OFG’s market capitalization for its outstanding common stock was $1.744 billion ($37.45 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. During the six-month period ended June 30, 2024, OFG repurchased 669,200 shares for a total of $24.3 million at an average price of $36.28 per share. Under the prior stock repurchase program, OFG repurchased 670,099 shares for a total of $16.5 million at an average price of $24.57 per share during the six-month period ended June 30, 2023. OFG did not repurchase any shares of its common stock during the six-month periods ended June 30, 2024 and 2023, other than through its publicly announced stock repurchase program.

At June 30, 2024, the estimated remaining number of shares that may be purchased under the new $50 million program is 686,741 and was calculated by dividing the remaining balance of $25.7 million by $37.45 (closing price of OFG’s common stock at June 30, 2024).