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 nine-month period ended September 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 third quarter was another solid quarter of performance for OFG, with EPS-diluted up 5.3% year-over-year on a 1.1% increase in total core revenues. OFG continued to produce consistent, core operating results, and digital adoption of our new and upgraded products, services, and self-service tools keeps steadily growing. We celebrate our 60th anniversary by renewing our commitment to bring progress to our customers, employees, shareholders, and the communities we serve.

Earnings per share diluted of $1.00 comparedto $1.08 in the second quarter of 2024 and $0.95 in the third quarter of 2023. Total core revenues of $174.1 million compared to $179.4 million in the second quarter of 2024 and $172.2 million in the third quarter of 2023.

Performance metrics: Net interest margin of 5.43%, return on average assets of 1.66%, return on average tangible common stockholders’ equity of 15.94%, and efficiency ratio of 52.60%.

Total Interest Income of $189.0 million compared to $187.7 million in the second quarter of 2024 and $165.7 million in the third quarter of 2023. Compared to the second quarter of 2024, the third quarter of 2024 increased $1.4 million, primarily reflecting higher principal balances and yields of investment securities, higher balances of loans, and the absence of a $2.1 million loan recovery on a non-accrual U.S. commercial loan paid in full during the second quarter of 2024.

Total Interest Expense of $41.2 million compared to $40.3 million in the second quarter of 2024 and $23.9 million in the third quarter of 2023. Compared to the second quarter of 2024, the third quarter of 2024 increased $0.8 million, reflecting higher average balances of higher-cost borrowings and brokered deposits and slightly reduced average core deposit balances and cost.

Total Banking and Financial Service Revenuesof $26.3 million compared to $32.1 million in the second quarter of 2024 and $30.4 million in the third quarter of 2023. The third quarter of 2024 primarily reflected $2.7 million in reduced interchange fees due to the implementation of the Durbin Amendment during the third quarter of 2024, $2.1 million reduced mortgage servicing rights valuation due to lower long-term rates, and $0.3 million revenue from the acquisition in late August 2024 of a $1.7 billion Puerto Rico residential mortgage servicing portfolio.

Pre-Provision Net Revenues of $83.1 million compared to $86.8 million in the second quarter of 2024 and $82.3 million in the third quarter of 2023.

Total Provision for Credit Losses of $21.4 million compared to $15.6 million in the second quarter of 2024 and $16.4 million in the third quarter of 2023. The third quarter of 2024 primarily reflected $18.7 million for increased loan volume; $5.2 million related to the annual update of auto risk drivers and consumer loan loss factors, and the extension of cash flows in a PR commercial loan up for renewal; and a $2.7 million reserve release mainly due to an improved U.S. macroeconomic perspective.

Credit Quality: Net charge-offs of $17.1 million (0.90% of average loans) compared to $15.0 million (0.79%) in the second quarter of 2024 and $18.8 million (1.05%) in the third quarter of 2023. During the third quarter of 2024 early and total delinquency rates were 2.78% and 4.10%, respectively. The nonperforming loan rate was 1.11%. The third quarter of 2024 total delinquency rate increased sequentially due to booking of the GNMA buy-back option program related to the previously mentioned mortgage servicing portfolio acquisition.

Total Non-Interest Expense of $91.6 million compared to $93.0 million in the second quarter of 2024 and $90.2 million in the third quarter of 2023. The third quarter of 2024 included a $2.3 million credit and debit card processing business contract renewal rebate and $1.3 million in expenses related to sales of repossessed assets.

Effective Tax Rate (“ETR”) of 23.9% compared to 28.2% in the second quarter of 2024 and 31.9% in the third quarter of 2023. Lower third quarter of 2024 ETR reflected an estimated 2024 ETR of 26.8% due to higher forecasted business activities with preferential tax treatment under the Puerto Rico tax code, coupled with discrete benefits of $3.1 million mainly related to stock vested in the first quarter of 2024 and tax credit purchases.

Loans Held for Investmentof $7.75 billion compared to $7.64 billion in the second quarter of 2024 and $7.26 billion in the third quarter of 2023. Compared to the second quarter of 2024, the third quarter of 2024 increased 1.5%, reflecting growth in Puerto Rico and U.S. commercial loans and Puerto Rico auto and consumer loans, and regular paydowns and securitization of residential mortgages. Compared to the third quarter of 2023, the third quarter of 2024 increased 6.7%.

New Loan Productionof $572.2 million compared to $589.0 million in the second quarter of 2024 and $567.5 million in the third quarter of 2023. Compared to the second quarter of 2024, the third quarter of 2024 production reflected increases in U.S. commercial and Puerto Rico consumer lending originations, and decreases in Puerto Rico commercial and auto lending originations.

Total Investments of $2.61 billion compared to $2.48 billion in the second quarter of 2024 and $2.07 billion in the third quarter of 2023.

Customer Depositsof $9.53 billion compared to $9.60 billion in the second quarter of 2024 and $8.54 billion in the third quarter of 2023. Compared to the second quarter of 2024, the third quarter of 2024 reflected increases in savings and time deposits, and lower demand deposits.

Total Borrowings and Brokered Deposits of $346.5 million compared to $201.2 million in the second quarter of 2024 and $454.4 million in the third quarter of 2023.

Cash and Cash Equivalentsof $680.6 million compared to $740.4 million in the second quarter of 2024 and $532.7 million in the third quarter of 2023.

Capital: CET1 ratio was 14.37% compared to 14.29% in the second quarter of 2024 and 14.06% in the third quarter of 2023. The Tangible Common Equity ratio was 10.72% compared to 10.09% in the second quarter of 2024 and 9.74% in the third quarter of 2023. Tangible Book Value of $26.15 per share compared to $24.18 in the second quarter of 2024 and $21.01 in the third 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 nine-month periods ended September 30, 2024 and 2023.

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

C - CHANGES IN NET INTEREST INCOME DUE TO:

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

FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 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 $147.9 million increased $6.1 million from $141.8 million. Tax equivalent basis net interest income of $153.2 million increased $7.9 million, or 5.5%, from $145.2 million.

Interest rate spread decreased 43 basis points to 5.28% from 5.71% and net interest margin decreased 37 basis points to 5.43% from 5.80%.

Net interest income was positively impacted by:

•A $12.3 million increase in interest income from loans, primarily driven by: (i) higher interest income of $7.0 million from auto loans, mainly due to an increase in the average balance of this portfolio by $281.6 million from new loans originated; (ii) higher interest income of $5.1 million from commercial loans, reflecting the upward repricing of variable rate loans and increased yields on new loans originated during 2024; and (iii) higher interest income of $1.6 million from consumer loans, mainly due to an increase in the average balance of this portfolio by $50.9 million. These increases were partially offset by lower interest income of $1.4 million from residential mortgage loans, reflecting a decrease in the average balance of this portfolio by $129.8 million, mainly from regular paydowns and the securitization and sale of conforming loans; and

•A $11.7 million increase in interest income from investments securities, primarily due to the acquisition of higher-yield investment securities during 2024 and late 2023. It reflects higher yield by 90 basis points, which contributed to an increase in interest income of approximately $5.3 million and higher average volume of $742.0 million, resulting in an increase in interest income of approximately $6.4 million.

These increases were offset by higher interest expense of $17.2 million, $17.5 million from deposits due to higher average cost of 63 basis points, reflecting a $1.2 billion deposit from an existing long-standing Puerto Rico government client received in December 2023 with a variable interest rate.

Net interest income of $439.3 million increased by $22.0 million from $417.3 million. Tax equivalent basis net interest income of $452.3 million increased $23.0 million, or 5.4%, from $429.3 million.

Interest rate spread decreased by 48 basis points to 5.30% from 5.78% and net interest margin decreased 41 basis points to 5.44% from 5.85%. This reflects a an increase of 32 and 80 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 $52.3 million increase in interest income from loans driven by higher interest income from: (i) commercial loans of $28.4 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) auto loans of $23.3 million reflecting higher originations during 2024; and (iii) consumer loans of $5.8 million mainly due to an increase of $60.1 million in the average balance of this portfolio. These increases were partially offset by a decrease of $5.2 million in interest income from mortgage loans due to a reduction of $136.2 million in the average balance of this portfolio, mainly from regular paydowns and the securitization and sale of conforming loans; and

•A $34.5 million increase in interest income from investment securities, primarily due to the acquisition of higher-yield investment securities during 2024 and late 2023. Purchases contributed to higher average volume of $698.0 million, which resulted in an increase in interest income of $17.5 million, and higher yield by 98 basis points, which contributed to the increase in net interest income of $17.1 million.

These increases were partially offset by higher interest expense of $65.5 million from interest paid on: (i) deposits of $63.7 million due to higher average cost of total deposits of 80 basis points, reflecting a $1.2 billion deposit from an existing long-standing Puerto Rico government client received in December 2023 with a variable interest rate, and (ii) borrowings of $1.7 million reflecting FHLB advances taken in late 2023 and in the third quarter of 2024.

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 $26.9 million, compared to $30.7 million, a decrease of 12.5%, or $3.8 million. The decrease in non-interest income was mainly due to the net effect of:

•A $3.1 million decrease in mortgage banking activities mainly from: (i) $2.1 million unfavorable impact in mortgage servicing rights valuation due to lower long-term rates and (ii) lower gains of $390 thousand on repurchased loan sales in the current quarter, offset by higher servicing fees of $467 thousand, mainly from the acquisition in late August 2024 of a $1.7 billion Puerto Rico residential mortgage servicing portfolio; and

•A $1.7 million decrease in banking service revenues related to: (i) $2.7 million in reduced interchange fees mainly due to the implementation of Durbin Amendment that took effect during the current quarter, offset by higher merchant income of $417 thousand resulting from higher transactionality and migration of USVI merchant activity.

These decreases were offset by a $758 thousand increase in wealth management revenue primarily reflecting: (i) $304 thousand increase in broker-dealer fees related to higher market asset values and investment advisory service fees and (ii) $372 thousand increase in insurance income related to annuities and reinsurance income of $235 thousand and $121 thousand, respectively.

OFG's non-interest income remained constant at $89.7 million.

Non-interest income was mainly impacted by the following increases:

•A $2.0 million increase in wealth management revenue primarily reflecting: (i) $863 thousand increase in broker-dealer fees related to higher market values of assets and investments advisory services fees, (ii) $821 thousand increase in insurance income related to $422 thousand from reinsurance income and $355 thousand in annuities income and (iii) an increase in trust fees of $342 thousand due to higher trustee-only fees.

•A $1.1 million loss associated with the sale of a $149.4 million short-term US treasury note available for sale during the prior period.

These increases were offset by:

•A $2.7 million decrease in mortgage banking activities mainly from: (i) unfavorable impact in mortgage servicing rights valuation due to lower long-term rates of $1.9 million, (ii) lower gains on repurchased loan sales in the current quarter of $321 thousand and (iii) lower servicing fees of $121 thousand due to less cash collections.

•A $662 thousand decrease in banking service revenues mainly due to lower fees on deposits of $656 thousand from lower maintenance and overdrawn fees and higher waived fees.

TABLE 3 - NON-INTEREST EXPENSES SUMMARY

Non-interest expense was $91.6 million, representing an increase of 1.6% or $1.4 million, compared to $90.2 million. The increase in non-interest expense was mainly due to:

•Increase of $1.3 million in foreclosed real estate and other repossessed assets expenses, net of income, due to unfavorable valuation adjustments andlower gain on sale of foreclosed real estate due to lower volume of properties sold;

•Increase of $388 thousand in insurance expenses related to higher FDIC deposit insurance assessment expense as a result of the Bank exceeding $10 billion in assets;

•Increase of$373 thousand in compensation and employee benefits, as a result of higher salaries and benefits, including payroll taxes; and

•Increase of$335 thousand in taxes, other than payroll and income taxes related to higher municipal taxes recorded during the quarter.

These increases were partially offset by:

• Decrease of $1.4 million in electronic banking charges mainly due to the recognition of a $2.3 million rebate received during the quarter, offset by increases of $964 thousand in point-of-sale and merchant-related fees due to increased transaction volumes.

The efficiency ratio was 52.60% compared to 52.36%. The efficiency ratio measures how much of OFG’s revenues is used to pay operating expenses. OFG computes its efficiency ratio by dividing non-interest expenses by the sum of its net interest income and non-interest income, but excluding gains on the sale of investment securities, other gains and losses, and other income that may be considered volatile in nature. Management believes that the exclusion of those items permits consistent comparability. Amounts presented as part of non-interest income that were excluded from the adjusted efficiency ratio computation for the quarters ended September 30, 2024 and 2023 amounted to$597 thousand and $295 thousand, respectively.

Non-interest expense was $276.0 million, representing an increase of 2.5%, or $6.7 million, compared to $269.3 million. The increase in non-interest expense was mainly due to:

•Increase of $2.8 million in foreclosed real estate and other repossessed assets expenses, net of income, due to unfavorable valuation adjustments and lower gain on sale of foreclosed real estate due to lower volume of properties sold;

•Increase in compensation and employee benefits of $2.3 million due to higher salaries and benefits, including payroll taxes;

•Increase in advertising, business promotion, and strategic initiatives of $989 thousand due to higher expenses related to digital adoption strategy;

•Increase of $628 thousand in other expenses, primarily driven by a $993 thousand accrual recorded during the current period related to regulatory examinations, partially offset by lower charitable contributions of $532 thousand; and

•Increase of $576 thousand in insurance expenses related to higher FDIC deposit insurance assessment expense as a result of the Bank exceeding $10 billion in assets.

The increase in non-interest expense was partially offset by, a decrease in professional and service fees of $1.1 million, reflecting lower balances in compliance-related expenses.

The efficiency ratio was 52.30%, an improvement from 53.10%. Amounts presented as part of non-interest income that were excluded from the efficiency ratio computation for nine-month periods ended September 30, 2024 and 2023 amounted to $1.3 million and $121 thousand, respectively.

Provision for Credit Losses

Provision for credit losses increased by $4.9 million to $21.4 million from $16.4 million. The provision for credit losses for the quarter ended September 30, 2024, reflected a provision of $18.7 million related to the growth in loan balances, $5.2 million related to the annual update of auto risk drivers and consumer loan loss factors, and the extension of cash flows in a Puerto Rico commercial loan up for renewal and a $2.7 million reserve release mainly due to an improved U.S. macroeconomic perspective. The provision for credit losses for the for the quarter ended September 30, 2023 reflected a provision of $11.4 million related to the growth in loan balances, $4.1 million associated with qualitative adjustments, mostly to the auto portfolio, and $702 thousand related to a specific reserve for the sale of a small portfolio of non-performing Puerto Rico small business commercial loans transferred to held for sale at the end of the quarter.

Provision for credit losses increased $11.1 million to $52.1 million from $40.9 million. The provision for credit losses for the nine-month period ended September 30, 2024, reflected adjustments of $45.2 million related to loan volume, $14.7 million from loss rate model and $4.2 million in specific reserves, offset by a $7.5 million release from the economic model. The provision for credit losses for 2023 reflected a provision of $23.8 million related to the growth in loan balances, a provision of $14.7 million related to commercial specific loan reserves, mainly in the US commercial loan portfolio, and $5.1 million associated with qualitative adjustment, partially offset by releases of $3.2 million for changes in the economic and loss rate models.

Business Segments

OFG segregates its businesses into the following segments: Banking, Wealth Management, and Treasury. Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as OFG’s organization, nature of its products, distribution channels and economic characteristics of its services were also considered in the determination of the reportable segments. OFG measures the performance of these reportable segments based on pre-established goals of different financial parameters such as net income, net interest income, loan production, and fees generated. OFG’s methodology for allocating non-interest expenses among segments is based on several factors such as revenue, employee headcount, occupied space, dedicated services or time, among others. Following are the results of operations and the selected financial information by operating segment for the quarters and nine-month periods ended September 30, 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 $277.4 million and $308.9 million at September 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 $17.5 million from $46.8 million to $29.3 million, mainly due to:

•Increase of$17.3 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 in December 2023 with a variable interest rate;

•Increase of $5.1 million in provision for credit losses, mainly due to growth in loan balances;

•Decrease of $4.1 million in non-interest income primarily related to lower interchange fees of $2.7 million due to the implementation of Durbin Amendment and $2.1 million in unfavorable mortgage servicing rights valuation; and

•Decrease of $2.8 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 balance in the current period.

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

•Increase of$10.3 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 increase slightly from $3.4 million to $3.5 million, mainly from higher reinsurance and annuities income by $380 thousand.

Treasury

Treasury segment net income before taxes increased by $13.3 million, mainly reflecting an increase in interest income from the purchases of higher-yield investment securities during 2024 and late 2023 and lower interest expense associated with inter-segment borrowing as a result of lower average balance.

Comparison of nine-month periods ended September 30, 2024 and 2023

Banking

OFG’s banking segment net income before taxes decreased by $36.7 million from $143.4 million to $106.7 million, mainly due to:

•Increase of$62.6 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 in December 2023 with a variable interest rate;

•Increase of $11.4 million in provision for credit losses, mainly due to growth in loan balances;

•Decrease of$10.2 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 interest rates and average balance in the current period; and

•Increase of $5.5 million in non-interest expenses, mainly due to: (i) $2.8 million increase in foreclosed real estate and other repossessed assets expenses, net of income, due to unfavorable valuation adjustments and lower gain on sale of foreclosed real estate from decrease in sales volume; (ii) increase in compensation and employee benefits of $2.3 million due to higher salaries and benefits, including payroll taxes; (iii) increase in advertising, business promotion, and strategic initiatives of $989 thousand due to higher expenses related to digital adoption strategy, partially offset by lower: professional and service fees of $1.1 million, reflecting lower balances in compliance-related expenses.

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

•Increase of $52.3 million in interest income from loans, driven by increased yields on higher loan 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 from $9.7 million to $8.9 million, mainly from higher salaries and employee benefits of $758 thousand.

Treasury

Treasury segment net income before taxes increased by $41.6 million, mainly reflecting:

•Increase of $32.7 million in interest income, reflecting the purchase of agency mortgage-backed securities and US Treasury securities with higher yields during such period; and

•Decrease of $7.4 million in interest expense, reflecting $10.2 million lower inter-segment borrowings as a result of lower average balances, offset by a $1.7 million increase from FHLB advances taken in late 2023 and the third quarter of 2024 as part of OFG’s asset liability management strategies.

Income Tax Expense

Income tax expense for the quarter ended September 30, 2024 decreased by $6.2 million to $14.8 million from $21.0 million. OFG maintained an effective tax rate (“ETR”) lower than the statutory rate for the quarters ended September 30, 2024 and 2023 of 23.9% and 31.9%, respectively. The current quarter reflected expected 2024 ETR of 26.8% due to higher forecasted business activities with preferential tax treatment under the Puerto Rico tax code, coupled with discrete benefits of $3.1 million mainly related to stock vested during the first quarter of 2024 and tax credit purchases.

Income tax expense decreased by $8.4 million to $53.1 million from $61.5 million. OFG’s ETR was 26.4% in 2024 compared to 31.3% in 2023. The decrease is mainly related to higher actual and forecasted business activities with preferential tax treatment under the Puerto Rico tax code, coupled with discrete benefits of $3.1 million mainly related to stock vested during the first quarter of 2024 and tax credit purchases during the period.

ANALYSIS OF FINANCIAL CONDITION

Assets Owned

At September 30, 2024, OFG’s total assets amounted to $11.461 billion, a increase of $116.9 million, when compared to $11.344 billion at December 31, 2023.

Cash and due from banks decreased by $68.8 million to $674.7 million, reflecting the effect of loan funding and lower deposit balances.

The investment portfolio decreased by $78.2 million or 2.9% primarily driven by the maturity of $901.7 million in US Treasury securities, principal paydowns of $208.1 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 $1.070 billion new available-for-sale US Treasury and mortgage-backed securities, and $55.7 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, commercial US loans, residential mortgage loans, consumer loans, and auto loans. At September 30, 2024, OFG’s net loan portfolio increased by $203.1 million or 2.7% reflecting increases in commercial, retail auto and consumer loans, partially offset by regular paydowns and securitization of residential mortgage loans.

Financial Assets Managed

At September 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 September 30, 2024 and December 31, 2023, the total assets managed by OFG’s trust division amounted to $2.300 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 September 30, 2024, total assets managed by the securities broker-dealer and insurance agency subsidiaries from their customers’ investment accounts amounted to $2.254 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 September 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 $7.605 billion at September 30, 2024, a 2.7% 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 $3.118 billion (40.2% of the gross loan portfolio) compared to $3.077 billion (40.8% of the gross loan portfolio) at December 31, 2023, a 1.3% increase as a result of originations and credit lines usage during 2024. Commercial loans secured by non-owner occupied commercial real estate amounted to $800.9 million and $744.6 million at September 30, 2024 and December 31, 2023, respectively, which represented 10.3% and 9.9% of our total gross loan portfolio held for investment. Commercial US loans amounted to $680.4 million and $755.2 million at September 30, 2024 and December 31, 2023, respectively, which represented 8.8% and 10.0% of our total gross loan portfolio held for investment.

Commercial loan production decreased by 2% or $3.4 million to $217.0 million in the third quarter of 2024 from $220.4 million in the prior year quarter, and decreased 17% or $130.3 million to $640.0 million in the nine-month period ended September 30, 2024 from $770.4 million for the same period of 2023, mainly in the commercial US loan portfolio. Commercial US 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 commercial US loans activities, commercial PR loan production slightly decreased 0.2% to $149.9 million in the third quarter of 2024 from $150.1 million in the prior year quarter, and increased 13.8% to $528.4 million in the nine-month period ended September 30, 2024 from $464.2 million for the same period in of 2023.

•Mortgage loan portfolio amounted to $1.484 billion (19.1% of the gross loan portfolio) compared to $1.563 billion (20.7% of the gross originated loan portfolio) at December 31, 2023, a 5.1% 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 $41.8 million and $19.4 million at September 30, 2024 and December 31, 2023, respectively. During the quarter ended September 30, 2024, OFG acquired the servicing rights of a $1.7 billion mortgage loan portfolio that was being subserviced by the Bank. Defaulted loans under the GNMA buy-back option program corresponding to this servicing portfolio amounted to $24.2 million at September 30, 2024. 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 $37.1 million and $107.8 million in the quarter and nine-month period ended September 30, 2024, respectively, which represents an increase of 11% and 8.2%, respectively, from $33.3 million and $99.6 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 $664.3 million (8.6% of the gross loan portfolio) compared to $620.4 million (8.2% of the gross loan portfolio) at December 31, 2023. Consumer loan production increased by 13% to $86.6 million in the third quarter of 2024 from $76.5 million in the prior year quarter, and decreased by 6%, or $14.3 million to $235.5 million in the nine-month period ended September 30, 2024 from $249.8 million in the same period in 2023.

•Auto loans portfolio amounted to $2.484 billion (32.1% 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 decreased by 2% to $231.6 million in the third quarter of 2024 compared to $237.3 million in the prior year quarter, and increased by 3% or $18.6 million to $714.5 million in the nine-month period ended September 30, 2024 from $695.9 million in the same period of 2023.

TABLE 7 - PUERTO RICO GOVERNMENT RELATED LOANS

At September 30, 2024, OFG has $66.2 million of direct credit exposure to the Puerto Rico government, a $2.3 million decrease 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 nine-month periods ended September 30, 2024 and 2023 and as of September 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 September 30, 2024, OFG had $74.7 million of non-accrual loans held for investment, including $4.2 million PCD loans, compared to $79.4 million at December 31, 2023, reflecting decreases of $2.5 million and $2.1 million in commercial and auto 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 nine-month period ended September 30, 2024. There were no past due commercial loans held-for-sale as of September 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 September 30, 2024 and December 31, 2023, the outstanding balance of these residential mortgage loans was $4.9 million and $5.8 million, respectively.

At September 30, 2024, OFG’s non-performing assets decreased by 9.0% to $91.0 million (0.79% total assets) from $100.0 million (0.88% of total assets) at December 31, 2023, mainly non-performing loans and foreclosed real estate.

Foreclosed real estate decreased from $10.8 million at December 31, 2023 to $4.4 million at September 30, 2024 and other repossessed assets increased from $4.0 million at December 31, 2023 to $7.0 million at September 30, 2024, both recorded at fair value. OFG does not expect non-performing loans to result in significantly higher losses. At September 30, 2024, the allowance coverage ratio to non-performing loans was 202.9% (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 September 30, 2024, OFG’s non-performing commercial loans amounted to $40.0 million (50.3% of OFG’s non-performing loans), a 5.9% 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 September 30, 2024, OFG’s non-performing mortgage loans totaled $19.0 million (23.8% of OFG’s non-performing loans), a 6.4% 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 September 30, 2024, OFG’s non-performing consumer loans amounted to $3.6 million (4.6% of OFG’s non-performing loans), a 7.4% 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 September 30, 2024, OFG’s non-performing auto loans amounted to $17.0 million (21.3% of OFG’s total non-performing loans), a decrease of 10.9% 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 third quarter of 2024 amounted to $17.1 million (0.90% of average loans), decreasing by $1.7 million, when compared to $18.8 million (1.05% of average loans) in the prior year quarter. Net charge-offs for the nine-month period ended September 30, 2024 amounted to $51.9 million (0.91% of average loans), increasing by $16.4 million, when compared to $35.6 million (0.68% of average loans) in the prior year period.

Net charge-offs variances were as follows:

•Residential mortgage loans net recoveries amounted to $219 thousand in the third quarter of 2024, increasing by $320 thousand when compared to net charge-offs of $101 thousand in the third quarter of 2023. Residential mortgage loans net recoveries for the nine-month period ended September 30, 2024 amounted to $1.6 million, increasing by $1.1 million when compared to net recoveries of $488 thousand for prior year period.

•Commercial loans net recoveries amounted to $747 thousand in the third quarter of 2024, increasing by $9.0 million, when compared to a net charge-off of $8.3 million in the third quarter of 2023. Net charge-offs for the nine-month period ended September 30, 2024 amounted $6.0 million, decreasing by $7.8 million, when compared to $13.9 million in the prior year period. The charge-offs for the nine-month period ended September 30, 2024, include $3.3 million from previously and fully-reserved nonperforming paycheck protection program (“PPP”) loans. The charge-offs for the nine-month period ended September 30, 2023, include $11.5 million charge-offs recognized on three US commercial loan relationships, a $2.1 million charge-off recognized on a PCD commercial loan, and $906 thousand charge-offs for a small portfolio of non-performing small business commercial loans that were transferred to the held for sale category at the end of the period.

•Consumer loans net charge-offs amounted to $8.0 million in the third quarter of 2024, increasing by $2.8 million, when compared to net charge-offs of $5.3 million in the third quarter of 2023. Net charge-offs for the nine-month period ended September 30, 2024 amounted $22.6 million increasing by $9.0 million when compared to $13.6 million in the prior year period. The increase in net charge-offs during the nine-month period ended September 30, 2024 was mainly driven by an increase in business volume.

•Auto loans net charge-offs amounted to $10.1 million in the third quarter of 2024, increasing by $4.9 million, when compared to $5.2 million in the third quarter of 2023. Net charge-offs for the nine-month period ended September 30, 2024 amounted to $24.9 million, increasing by $16.3 million, when compared to $8.5 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 September 30, 2024, OFG’s total liabilities were $10.143 billion, 0.1% lower than the $10.151 billion reported at December 31, 2023. Deposits and borrowings, OFG’s funding sources, amounted to $9.879 billion at September 30, 2024 compared to $9.963 billion at December 31, 2023. Deposits, excluding accrued interest payable, decreased by $152.6 million or 1.6% reflecting a decrease in demand deposits of $190.6 million, brokered deposits of $86.5 million and savings and money market accounts of $68.3 million, offset by an increase in time deposits of $191.9 million. Excluding public fund deposits, retail and commercial deposits decreased $38.7 million and $30.2 million, respectively.

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 September 30, 2024 and December 31, 2023, total public fund deposits from various Puerto Rico government municipalities, agencies and corporations amounted to $1.574 billion and $1.616 billion, respectively. These public funds were collateralized with securities and commercial loans amounting to $1.672 billion and $1.645 billion at September 30, 2024 and December 31, 2023, respectively.

As of September 30, 2024, borrowings consist of short and long term FHLB advances amounting to $270.8 million. Borrowings increased by $70.1 million or 34.9% from December 31, 2023 reflecting new FHLB advances taken during the third quarter of 2024 as part of OFG’s asset liability management strategies.

Stockholders’ Equity

At September 30, 2024, OFG’s total stockholders’ equity was $1.318 billion, a 10.4% increase when compared to $1.193 billion at December 31, 2023. This increase reflects an increase in retained earnings of $98.5 million and legal surplus of $14.0 million, mainly due to $147.8 million in net income, partially offset by $35.3 million in common stock dividends. These variances were partially offset by $22.7 million from higher treasury stock as a result of repurchases of common stock in the aggregate amount of $24.4 million during the nine-month periods ended September 30, 2024 in connection with the $50 million stock buy back program announced in January 2024, and a decrease in accumulated other comprehensive loss, net of tax, of $34.0 million from favorable 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 September 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 CET1, tier 1 capital, total capital and leverage capital as of September 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, dividends, and stock data, including capital ratios under the Basel III capital rules at September 30, 2024 and December 31, 2023:

TABLE 16 — CAPITAL, DIVIDENDS AND STOCK DATA

From December 31, 2023 to September 30, 2024, leverage capital ratio increased from 11.03% to 11.12%, tier 1 risk-based capital ratio and common equity tier 1 capital ratio increased from 14.12% to 14.37%, total risk-based capital ratio increased from 15.37% to 15.63%, and tangible common equity to tangible total assets increased from 9.68% to 10.72%. The increases in regulatory 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 $454.4 million. Risk-weighted assets increased mainly due to an increase in 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 September 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 September 30, 2024 and December 31, 2023:

OFG’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG”. At September 30, 2024 and December 31, 2023, OFG’s market capitalization for its outstanding common stock was $2.091 billion ($44.92 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 nine-month period ended September 30, 2024, OFG repurchased 671,800 shares for a total of $24.4 million at an average price of $36.30 per share. Under the prior stock repurchase program, OFG repurchased 743,699 shares for a total of $18.7 million at an average price of $25.08 per share during the nine-month period ended September 30, 2023. OFG did not repurchase any shares of its common stock during the nine-month periods ended September 30, 2024 and 2023, other than through its publicly announced stock repurchase program.

At September 30, 2024, the estimated remaining number of shares that may be purchased under the $50 million program is 570,223 and was calculated by dividing the remaining balance of $25.6 million by $44.92 (closing price of OFG’s common stock at September 30, 2024).