# OFG BANCORP (OFG) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from OFG BANCORP's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1030469/000103046922000015/ofg-20211231.htm
Accession: 0001030469-22-000015
Filing date: 2022-02-25
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/OFG/
All MD&A years: /company/OFG/mda/
Next year: /company/OFG/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2021

Please read the following discussion and analysis of our financial condition and results of operations together with “Note about Forward-Looking Statements,” Part I, Item 1 “Business,” Part I, Item 1A “Risk Factors,” and our consolidated financial statements and related notes included under Item 8 of this annual report on Form 10-K. We have omitted discussion of 2019 results where it would be redundant to the discussion previously included in Item 7 of our 2020 annual report on Form 10-K.

RECENT DEVELOPMENTS

Capital Actions

2021 Capital Actions

In July 2021, OFG announced that its Board of Directors approved a stock repurchase program to purchase $50 million of its common stock in the open market. As of December 31, 2021, OFG completed the stock repurchase program and has repurchased approximately 2.1 million shares of its common stock for a total aggregate purchase price of $49.9 million at an average of $24.29 per share.

In July 2021, OFG also announced that its Board of Directors approved a 50% increase in its common stock dividend payable to shareholders of record to $0.12 per share from $0.08 per share, beginning with the quarter ended on September 30, 2021.

During the year ended December 31, 2021, OFG completed the redemption of $92.0 million of its Series A, B and D preferred stock, which represented all of its outstanding preferred stock.

Announcement of Forthcoming 2022 Capital Actions

On January 26, 2022, OFG announced that its Board of Directors approved the increase of its regular quarterly cash dividend by 25%, to $0.15 per common share from $0.12 per share, beginning on the quarter ending March 31, 2022. The Board of Directors also approved a new stock repurchase program to purchase $100 million of its common stock in the open market, which OFG expects to complete during the 2022 fiscal year.

Covid-19 Pandemic and Economic Conditions

In the first quarter of 2020, the World Health Organization declared the outbreak of Covid-19 a pandemic. OFG has been and may continue to be impacted by the Covid-19 pandemic. Although we believe Puerto Rico’s economic prospects may improve as more people get vaccinated and restrictive measures imposed by the government are eased, uncertainty remains about the duration of the pandemic and the timing and strength of Puerto Rico’s economic recovery, as Puerto Rico and the United States have recently faced a surge in cases from a highly contagious variant. In response to the pandemic, the federal government enacted several economic relief packages providing trillions of dollars in relief to businesses and individuals and have also decreased interest rates to further stimulate the economy. In addition to these government relief initiatives, OFG and other banks in Puerto Rico granted various forms of assistance to customers and clients impacted by the Covid-19 pandemic, including payment deferrals and extending forgivable loans to businesses for payroll and certain other expenses under the Paycheck Protection Program (“PPP”) of the Small Business Administration. These relief measures have led to a surge in liquidity in Puerto Rico that have substantially increased OFG’s deposits ($8.6 billion as of December 31, 2021) and cash balances ($2.0 billion as of December 31, 2021). This increase in deposits caused OFG to exceed $10 billion in assets for the first time during the first quarter of 2021, and even though it ended 2021 with less than $10 billion of assets, thereby postponing the applicability to the Bank of Regulation II (Debit Card Interchange Fees and Routing) of the Federal Reserve Board (promulgated pursuant to the Durbin Amendment of the Dodd-Frank Act), OFG has nonetheless commenced preparing for the increased regulatory oversight and other requirements that will apply as a result of crossing such size threshold in the future.

With respect to our loan portfolios, the increased liquidity has significantly contributed to a reduction in delinquent and non-performing loans by $95.3 million and $40.2 million, respectively, compared to December 31, 2020. Moreover, such

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liquidity coupled with the decrease in interest rates has led to increases in new home purchases, real estate values, and refinancing of owned residential mortgage loans with lower-rate residential mortgage loans sold to agency investors. These refinancing together with the decrease in PPP loans as they are forgiven have been partially offset by increase in the origination of loans.

Given OFG’s cash position and capital levels, OFG will seek opportunities to continue growing our loan portfolios organically and will continue to evaluate returning capital to shareholders through is stock repurchase program and quarterly common stock dividend.

For our employees and staff, we have implemented a mandatory Covid-19 vaccination policy in order to keep our customers and employees safe. We have also implemented a hybrid work model to increase flexibility for our employees and have increased the hourly base pay rate for non-salaried staff.

We believe that Puerto Rico is entering a period of expected economic growth. The macroeconomic outlook for Puerto Rico has improved from the loosening of Covid-19-related restrictions on economic activity, combined with the additional federal disaster recovery and stimulus funds Puerto Rico is expected to receive related to the recovery from hurricane Maria in 2017, the early 2020 earthquakes, and now the Covid-19 pandemic. In addition, following five years of bankruptcy proceedings under Title III of PROMESA, and seven years since it announced that it was unable to pay its outstanding debt obligations, on January 18, 2022, the Title III bankruptcy court approved a plan of adjustment that would restructure $33 billion of public debt to $7.4 billion in new bonds. Nevertheless, any recovery of the Puerto Rican economy could be adversely impacted by macroeconomic developments within the United States and across the globe. The global macroeconomic outlook continues to remain uncertain due to a variety of factors, including Covid-19 variants, labor shortages, supply chain disruptions and inflation, and the impacts of the Covid-19 pandemic may continue even after outbreaks subside and containment measures are lifted.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accounting and reporting policies followed by OFG conform with GAAP and general practices within the financial services industry. The preparation of these financial statements requires our management to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We evaluate these judgments, assumptions and estimates for changes that would affect the reported amounts. These estimates are based on management's historical industry experience and on various other judgments and assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these judgments, assumptions and estimates. The following critical accounting estimate involves significant estimation uncertainty that has or is reasonably likely to have a material impact on our financial condition or results of operations. A discussion of OFG's significant accounting policies, including further discussion of the accounting estimate described below, can be found in Note 1 to the consolidated financial statements and should be read in conjunction with this section.

Allowance for Credit Losses related to loans collectively evaluated for impairment

The most critical and complex accounting estimates is associated with the determination of the allowance for credit losses. The provision for credit losses charged to current operations is based on this determination. The allowance for credit losses represents management’s best estimate deemed appropriate to provide current expected future credit losses in the portfolio as of the date of the reporting period. As discussed in “Note 1– Summary of Significant Accounting Policies” to the consolidated financial statements, OFG adopted ASU No. 2016-13, Financial Instruments – Credit Losses (ASC Topic 326), as of January 1, 2020. The total allowance for credit losses as of December 31, 2021 and 2020, which included loans evaluated on a collective basis, was calculated consistent with our adopted policy.

OFG’s management evaluates the adequacy of the allowance for credit losses on a quarterly basis following a systematic methodology in order to provide for known and inherent risks in the loan portfolio. In developing its assessment of the adequacy of the allowance for credit losses, OFG must rely on estimates and exercise judgment regarding matters where the ultimate outcome is unknown, such as economic developments affecting specific customers, industries or markets. Other factors that can affect management’s estimates are the key drivers used for each macroeconomic scenario, the macroeconomic scenarios selected, and the weighting given to each scenario, among others. Significant changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required level of the allowance for credit losses. Consequently, the business, financial condition, liquidity, capital and results of operations could also be affected.

The ACL estimation require management to use relevant forward-looking economic forecasts, by using variables such as unemployment rate, gross national product, retail sales, and house price index, including in the application of reasonable and supportable forecasts. ACL estimations are performed by aggregating loans with similar risk characteristics.

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OFG applied a discounted cash flow method for non-purchased credit deteriorated loans (non-PCD) and undiscounted cash flow method for purchased credit deteriorated (PCD) loans to determine the allowance for credit losses for loans collectively measured for impairment, except for credit cards and overdrafts which utilize a remaining life methodology. For non-PCD, the expected cash flows are calculated for each loan and discounted using the effective yield. The discounted amount of expected cash flows is compared to the amortized cost, and any shortfall is recorded as a reserve. For PCD loans, OFG uses the unpaid principal balance to determine its expected cash flows. Expected cash flows are resulted from applying the contractual payment term, probability of defaults, loss given defaults, and prepayment assumptions.

Management's judgment is required in selecting the macroeconomic scenarios and the weighting of the economic scenarios, which consist of baseline and moderate recession scenarios, giving more weight to the baseline scenario as of December 31, 2021. The applicability of qualitative adjustments includes adjustments in the economic forecast and inherent risk not captured by the quantitative model. Management selects the macroeconomic forecast that is most reflective of expectations at that point in time.

OFG's sensitivity analysis does not represent management’s view of expected credit losses at December 31, 2021. OFG evaluated sensitivities by applying 100% weight to both the baseline and moderate recession scenarios. The impact on assigning a 100% weight to the baseline scenario was a hypothetical decrease of 3% to the collective ACL, and the impact on assigning a 100% with to the moderate recession scenario was a hypothetical increase of 9% to the collective ACL. These hypothetical sensitivities do not incorporate the impact of management's judgment for qualitative factors applied in the current ACL for loans. It is possible that others performing similar sensitivity analyses could reach different conclusions or results. The sensitivity analysis excludes the allowance for credit losses for off-balance sheet credit exposures.

For a detailed description of the principal factors used to determine the allowance for credit losses related to loans collectively evaluated for impairment and for the principal enhancement’s management made to its methodology, please refer to Notes 1 and 6 to the consolidated financial statements.

FINANCIAL HIGHLIGHTS

Results for the fourth quarter and year ended December 31, 2021 underscore OFG’s opportunities for the future. We are extremely proud of our accomplishments in 2021 and look forward to continuing to invest in improving the customer experience and growing together with our clients and the communities we serve.

Fourth Quarter of 2021:

Earnings Per Share (“EPS”) diluted was $0.66 compared to $0.81 in the third quarter of 2021 and $0.42 in the fourth quarter of 2020. Fourth quarter 2021 results were impacted by the strategic decision to sell $65.5 million of past due loans, which had been partially reserved, but required $9.7 million in additional provision. Total core revenues were $141.0 million compared to $134.7 million in the third quarter of 2021 and $132.8 million in the fourth quarter of 2020.

Net Interest Income (“NII”) of $104.2 million compared to $102.7 million in the third quarter of 2021 and $98.7 million in the fourth quarter of 2020. Compared to the third quarter of 2021, the fourth quarter of 2021 NII reflected level interest income from loans and cash, increased income from investment securities, and lower cost of deposits and borrowings.

Loans Held for Investment totaled $6.40 billion at December 31, 2021 compared to $6.41 billion at September 30, 2021 and $6.66 billion at December 31, 2020. Decrease in the fourth quarter of 2021 of $8.3 million included a $65.5 million reduction from the previously mentioned decision to sell past due loans.

New Loan Originations totaled $632.7 million compared to $556.2 million in the third quarter of 2021 and $485.3 million in the fourth quarter of 2020. Fourth quarter 2021 reflected continued high levels of auto, commercial, and mortgage lending, and increased demand for consumer loans.

Total Interest Expense was $8.4 million compared to $9.4 million in the third quarter of 2021 and $14.3 million in in the fourth quarter of 2020. The fourth quarter of 2021 results reflected lower cost of core deposits (26 bps vs. 30 bps in the third quarter of 2021 and 53 bps in in the fourth quarter of 2020) due to generally lower rates and CD maturities. Fourth quarter 2021 also reflected lower borrowings with the cancellation of $33.3 million in 2.98% FHLB advances.

Customer Deposits totaled $8.59 billion at December 31, 2021 compared to $9.23 billion at September 30, 2021 and $8.37 billion at December 31, 2020. The $641.3 million sequential decline from the third quarter of 2021 reflected withdrawals at year-end by government-related and institutional commercial clients, partially offset by increased retail deposits.

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Provision for credit losses of $7.2 million included $9.7 million for the previously mentioned decision to sell past due loans and $2.7 million in net reserve releases. This compares to a net benefit of $5.0 million in the third quarter of 2021 and a net expense of $14.2 million in in the fourth quarter of 2020. Fourth quarter 2021 net charge-offs of $32.5 million are primarily related to the decision to sell past due loans. Total non-performing loan rate fell to 1.75% from 2.08% in the third quarter of 2021 and 2.28% in the fourth quarter of 2020.

Banking and Financial Service Revenues were $36.7 million compared to $32.0 million in the third quarter of 2021 and $34.0 million in the fourth quarter of 2020. Fourth quarter 2021 results reflected higher levels of banking service, mortgage banking activity, and wealth management, which included $4.3 million in annual insurance commissions.

Non-Interest Expenses were $86.5 million compared to $78.9 million in the third quarter of 2021 and $89.0 million in the fourth quarter of 2020. Fourth quarter 2021 included increased compensation related investment in our employees and staff, $2.4 million for a legal reserve and to cover operational losses, $2.0 million in technology enhancements, $1.0 million lower gains on sales of real estate owned compared to the third quarter of 2021, and costs related to higher levels of business activity.

Pre-Provision Net Revenues were $55.8 million compared to $56.3 million in the third quarter of 2021 and $44.1 million in the fourth quarter of 2020.

Capital: CET1 ratio was 13.77% compared to 13.52% in the third quarter of 2021 and 13.08% in the fourth quarter of 2020.

Year Ended 2021:

EPS diluted was $2.81 compared to $1.32 in 2020. Total core revenues were $536.6 million compared to $519.3 million. During the year ended December 31, 2021, OFG completed the $92.0 million redemption of its outstanding preferred stock and its $50.0 million common stock repurchase plan. Tangible Book Value per share of $19.08 grew 12.4% year over year.

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

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OFG Bancorp

FINANCIAL OVERVIEW

YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","2019"],["EARNINGS DATA:","(In thousands, except per share data)"],["Interest income","$","449,199","","$","473,347","","$","373,795"],["Interest expense","41,829","","64,915","","51,002"],["Net interest income","407,370","","408,432","","322,793"],["Provision for loan and lease losses","221","","92,672","","96,792"],["Net interest income after provision for loan and leases losses","407,149","","315,760","","226,001"],["Non-interest income","133,210","","124,352","","82,493"],["Non-interest expenses","325,756","","345,286","","233,244"],["Income before taxes","214,603","","94,826","","75,250"],["Income tax expense","68,452","","20,499","","21,409"],["Net income","146,151","","74,327","","53,841"],["Less: dividends on preferred stock","(1,255)","","(6,512)","","(6,512)"],["Income available to common shareholders","$","144,896","","$","67,815","","$","47,329"],["PER SHARE DATA:"],["Basic","$","2.85","","$","1.32","","$","0.92"],["Diluted","$","2.81","","$","1.32","","$","0.92"],["Average common shares outstanding","50,956","","51,358","","51,335"],["Average common shares outstanding and equivalents","51,370","","51,555","","51,719"],["Cash dividends declared per common share","$","0.40","","0.28","","0.28"],["Cash dividends declared on common shares","$","20,505","","14,381","","14,375"],["PERFORMANCE RATIOS:"],["Return on average assets (ROA)","1.42","%","","0.77","%","","0.83","%"],["Return on average tangible common stockholders' equity","15.70","%","","8.10","%","","5.42","%"],["Return on average common equity (ROE)","13.80","%","","6.96","%","","4.91","%"],["Equity-to-assets ratio","10.80","%","","11.05","%","","11.24","%"],["Efficiency ratio","60.70","%","","66.49","%","","58.88","%"],["Interest rate spread","4.18","%","","4.51","%","","5.26","%"],["Interest rate margin","4.20","%","","4.55","%","","5.37","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","December 31,"],["","2021","","2020","","2019"],["PERIOD END BALANCES AND CAPITAL RATIOS:","(In thousands, except per share data)"],["Investments and loans"],["Investment securities","$","895,818","","$","458,700","","$","1,087,814"],["Loans, net","6,329,311","","6,501,259","","6,641,847"],["Total investments and loans","$","7,225,129","","$","6,959,959","","$","7,729,661"],["Deposits and borrowings"],["Deposits","$","8,603,118","","$","8,415,640","","$","7,698,610"],["Securities sold under agreements to repurchase","\u2014","","\u2014","","190,274"],["Other borrowings","64,571","","102,351","","115,287"],["Total deposits and borrowings","$","8,667,689","","$","8,517,991","","$","8,004,171"],["Stockholders\u2019 equity"],["Preferred stock","$","\u2014","","$","92,000","","$","92,000"],["Common stock","59,885","","59,885","","59,885"],["Additional paid-in capital","637,061","","622,652","","621,515"],["Legal surplus","117,677","","103,269","","95,779"],["Retained earnings","399,949","","300,096","","279,646"],["Treasury stock, at cost","(150,572)","","(102,949)","","(102,339)"],["Accumulated other comprehensive income (loss)","5,160","","11,022","","(1,008)"],["Total stockholders' equity","$","1,069,160","","$","1,085,975","","$","1,045,478"],["Per share data"],["Book value per common share","$","21.54","","$","19.54","","$","18.75"],["Tangible book value per common share","$","19.08","","$","16.97","","$","15.96"],["Market price at end of year","$","26.56","","$","18.54","","$","23.61"],["Capital ratios"],["Leverage capital","9.69","%","","10.30","%","","9.24","%"],["Common equity Tier 1 capital","13.77","%","","13.08","%","","10.78","%"],["Tier 1 risk-based capital","14.27","%","","14.78","%","","12.49","%"],["Total risk-based capital","15.52","%","","16.04","%","","13.76","%"],["Financial assets managed"],["Trust assets managed","$","3,758,895","","$","3,476,491","","$","3,136,884"],["Broker-dealer assets gathered","2,466,004","","2,474,234","","2,375,871"],["Total assets managed","$","6,224,899","","$","5,950,725","","$","5,512,755"]]
[[/GREPCENT_TABLE]]

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 years ended December 31, 2021 and 2020.

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

FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020

[[GREPCENT_TABLE]]
[["","Interest","","Average rate","","Average balance"],["","December 2021","","December 2020","","December 2021","","December 2020","","December 2021","","December 2020"],["","(Dollars in thousands)"],["A - TAX EQUIVALENT SPREAD"],["Interest-earning assets","$","449,199","","","$","473,347","","","4.64","%","","5.28","%","","$","9,688,890","","$","8,966,989"],["Tax equivalent adjustment","9,350","","","10,127","","","0.10","%","","0.11","%","","\u2014","","","\u2014"],["Interest-earning assets - tax equivalent","458,549","","","483,474","","","4.74","%","","5.39","%","","9,688,890","","8,966,989"],["Interest-bearing liabilities","41,829","","","64,915","","","0.46","%","","0.77","%","","9,043,126","","8,378,207"],["Tax equivalent net interest income / spread","416,720","","","418,559","","","4.28","%","","4.62","%","","645,764","","588,782"],["Tax equivalent interest rate margin","","","","","4.38","%","","4.73","%"],["B - NORMAL SPREAD"],["Interest-earning assets:"],["Investments:"],["Investment securities","12,180","","","11,539","","","1.78","%","","1.84","%","","684,476","","626,866"],["Interest bearing cash and money market investments","3,231","","","4,373","","","0.13","%","","0.27","%","","2,466,926","","1,591,613"],["Total investments","15,411","","","15,912","","","0.49","%","","0.72","%","","3,151,402","","2,218,479"],["Non-PCD loans"],["Mortgage","40,270","","","43,974","","","5.27","%","","5.43","%","","764,153","","809,134"],["Commercial","115,684","","","112,234","","","5.42","%","","5.51","%","","2,134,805","","2,036,728"],["Consumer","45,669","","","54,078","","","11.21","%","","11.66","%","","407,403","","463,846"],["Auto and leasing","136,445","","","125,228","","","8.45","%","","8.39","%","","1,614,825","","1,492,105"],["Total Non-PCD loans","338,068","","","335,514","","","6.87","%","","6.99","%","","4,921,186","","4,801,813"],["PCD loans"],["Mortgage","77,252","","","93,343","","","5.77","%","","6.08","%","","1,338,062","","1,536,431"],["Commercial","16,213","","","24,811","","","6.29","%","","6.71","%","","257,820","","369,960"],["Consumer","238","","","388","","","14.98","%","","12.31","%","","1,592","","3,153"],["Auto and leasing","2,017","","","3,379","","","10.71","%","","9.09","%","","18,828","","37,153"],["Total PCD loans","95,720","","","121,921","","","5.92","%","","6.26","%","","1,616,302","","1,946,697"],["Total loans (1)","433,788","","","457,435","","","6.64","%","","6.78","%","","6,537,488","","6,748,510"],["Total interest-earning assets","449,199","","","473,347","","","4.64","%","","5.28","%","","9,688,890","","8,966,989"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Interest","","Average rate","","Average balance"],["","December 2021","","December 2020","","December 2021","","December 2020","","December 2021","","December 2020"],["","(Dollars in thousands)"],["Interest-bearing liabilities:"],["Deposits:"],["NOW Accounts","9,179","","","9,029","","","0.35","%","","0.42","%","","2,623,358","","2,156,300"],["Savings and money market","7,149","","","8,380","","","0.32","%","","0.45","%","","2,233,824","","1,858,416"],["Time deposits","15,130","","","30,455","","","1.01","%","","1.55","%","","1,499,457","","1,966,706"],["Total core deposits","31,458","","","47,864","","","0.49","%","","0.80","%","","6,356,639","","5,981,422"],["Brokered deposits","206","","","4,132","","","0.80","%","","2.45","%","","25,664","","168,728"],["","31,664","","","51,996","","","0.50","%","","0.85","%","","6,382,303","","6,150,150"],["Non-interest bearing deposits","\u2014","","","\u2014","","","\u2014","","","0.00","%","","2,566,924","","2,069,786"],["Fair value premium and core deposit intangible amortizations","7,350","","","8,202","","","\u2014","","","0.00","%","","\u2014","","\u2014"],["Total deposits","39,014","","","60,198","","","0.44","%","","0.73","%","","8,949,227","","8,219,936"],["Borrowings:"],["Securities sold under agreements to repurchase","\u2014","","","1,335","","","\u2014","%","","2.63","%","","\u2014","","50,874"],["Advances from FHLB and other borrowings","1,641","","","1,988","","","2.84","%","","2.79","%","","57,816","","71,314"],["Subordinated capital notes","1,174","","","1,394","","","3.25","%","","3.86","%","","36,083","","36,083"],["Total borrowings","2,815","","","4,717","","","3.00","%","","2.98","%","","93,899","","158,271"],["Total interest bearing liabilities","41,829","","","64,915","","","0.46","%","","0.77","%","","9,043,126","","8,378,207"],["Net interest income / spread","$","407,370","","","$","408,432","","","4.18","%","","4.51","%"],["Interest rate margin","","","","","4.20","%","","4.55","%"],["Excess of average interest-earning assets over average interest-bearing liabilities","","","","","","","","","$","645,764","","$","588,782"],["Average interest-earning assets to average interest-bearing liabilities ratio","","","","","","","","","107.14","%","","107.03","%"],["(1) Includes loans held for sale and excludes allowance for credit losses."]]
[[/GREPCENT_TABLE]]

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C - CHANGES IN NET INTEREST INCOME DUE TO:

[[GREPCENT_TABLE]]
[["","Volume","","Rate","","Total"],["","(In thousands)"],["Interest Income:"],["Investment securities","$","1,464","","","$","(823)","","","$","641"],["Interest bearing cash and money market investments","1,756","","","(2,898)","","","(1,142)"],["Loans","(13,676)","","","(9,971)","","","(23,647)"],["Total interest income","(10,456)","","","(13,692)","","","(24,148)"],["Interest Expense:"],["NOW Accounts","1,770","","","(1,620)","","","150"],["Savings and money market","1,488","","","(2,719)","","","(1,231)"],["Time deposits","(6,532)","","","(8,793)","","","(15,325)"],["Brokered deposits","(2,184)","","","(1,742)","","","(3,926)"],["Fair value premium and core deposit intangible amortizations","\u2014","","","(852)","","","(852)"],["Securities sold under agreements to repurchase","(666)","","","(669)","","","(1,335)"],["Advances from FHLB and other borrowings","(382)","","","35","","","(347)"],["Subordinated capital notes","\u2014","","","(220)","","","(220)"],["Total interest expense","(6,506)","","","(16,580)","","","(23,086)"],["Net Interest Income","$","(3,950)","","","$","2,888","","","$","(1,062)"]]
[[/GREPCENT_TABLE]]

Net Interest Income

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

Comparison of years ended December 31, 2021 and 2020

Net interest income of $407.4 million decreased $1 million from $408.4 million. Tax equivalent basis net interest income of $416.7 million decreased $1.8 million, or 0.4%, from $418.6 million.

Interest rate spread decreased 33 basis points to 4.18% from 4.51% and net interest margin decreased 35 basis points to 4.20% from 4.55%. These decreases are mainly due to the net effect of a decrease of 64 basis points in the average yield of total interest-earning assets, driven by the increase in average balances of cash and investment securities, as well as a decrease of 31 basis point in the total average cost of interest-bearing liabilities.

Net interest income was adversely impacted by:

•Lower interest income from loans by $23.6 million, reflecting lower average balances in the mortgage and commercial purchased with credit deterioration (“PCD”) portfolios, and the effect of Federal Reserve Board’s rate cuts on variable rate commercial loans, a $6.5 million in one-time interest recoveries from acquired PCD loans recorded during prior year, partially offset by interest income of $9.3 million from unamortized yield for $362.6 million of forgiven PPP loans.

Net interest income was positively impacted by:

•Lower interest expense from deposits by $21.2 million, mainly related to pricing changes implemented during fourth quarter of 2020 and to the maturity and cancellation of higher cost time and brokered deposits and migration of these time deposits to checking and savings accounts at lower costs; and

•Lower interest expense in borrowings by $1.9 million, mainly as a result of a decrease in interest expense from securities sold under agreements to repurchase from $1.3 million in the prior year to none in the current period, as all agreements to repurchase have matured or were terminated prior to maturity during 2020.

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TABLE 2 - NON-INTEREST INCOME SUMMARY

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","Variance"],["","(In thousands)"],["Banking service revenue","$","71,706","","","$","62,579","","","14.6","%"],["Wealth management revenue","35,044","","","31,789","","","10.2","%"],["Mortgage banking activities","22,508","","","16,504","","","36.4","%"],["Total banking and financial service revenue","129,258","","","110,872","","","16.6","%"],["Net gain (loss) on:"],["Sale of securities","19","","","4,728","","","-99.6","%"],["Early extinguishment of debt","(1,481)","","","(63)","","","2,250.8","%"],["Bargain purchase from Scotiabank Acquisition","\u2014","","","7,336","","","(100.0)","%"],["Other non-interest income","5,414","","","1,479","","","266.1","%"],["Total non-interest income, net","$","133,210","","","$","124,352","","","7.1","%"]]
[[/GREPCENT_TABLE]]

Non-Interest Income

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

Comparison of years ended December 31, 2021 and 2020

OFG recorded non-interest income, net, in the amount of $133.2 million, compared to $124.4 million, an increase of 7.1%, or $8.9 million. The increase in non-interest income was mainly due to:

•An increase of $9.1 million in banking service revenues, mainly from higher fees on deposit accounts, credit and debit cards interchange fees and higher volume of transactions reflecting the impact of the COVID-19 on economic activity during 2020;

•An increase of $3.3 million in wealth management revenue due to higher broker-dealer sales by $1.6 million, increase in insurance income by $1.0 million, which includes income from the new captive reinsurance company, OFG Reinsurance, and increase in trust division fees by approximately $857 thousand;

•An increase of $6.0 million in mortgage-banking activities, as net servicing fees and gains on loans sold increased by $4.7 million and $4.4 million, respectively. This increase was offset by higher losses of $3.1 million on repurchased loans as average volume increased during the period; and

•An increase of $3.9 million in other non-interest income due to a $2.4 million warrant revenue and $1.5 million from receivable recoveries written-off in the Scotiabank Acquisition.

The increase in non-interest income was offset by:

•A $4.7 million gain recorded during 2020 on the sales of $316.0 million mortgage-backed securities;

•A $7.3 million bargain purchase gain from the Scotiabank Acquisition to adjust the fair value of accrued interest receivable at closing, net of taxes, recorded during 2020; and

•A $1.5 million loss recorded for the early termination of $33.3 million in Federal Home Loan Bank advances with an average cost of 2.98%.

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TABLE 3 - NON-INTEREST EXPENSES SUMMARY

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020","","Variance %"],["","(In thousands)"],["Compensation and employee benefits","$","133,442","","$","132,926","","0.4","%"],["Occupancy, equipment and infrastructure costs","50,158","","47,283","","6.1","%"],["Electronic banking charges","37,202","","34,698","","7.2","%"],["Professional and service fees","20,080","","17,135","","17.2","%"],["Information technology expenses","18,965","","20,823","","-8.9","%"],["Taxes, other than payroll and income taxes","13,829","","13,831","","0.0","%"],["Insurance","10,092","","11,424","","-11.7","%"],["Loan servicing and clearing expenses","7,604","","6,752","","12.6","%"],["Advertising, business promotion, and strategic initiatives","6,999","","5,851","","19.6","%"],["Pandemic expenses","5,631","","5,795","","-2.8","%"],["Communication","4,555","","4,067","","12.0","%"],["Printing, postage, stationery and supplies","4,037","","3,847","","4.9","%"],["Director and investor relations","1,135","","1,174","","-3.3","%"],["Foreclosed real estate and other repossessed assets (income) expenses, net","(3,007)","","7,767","","-138.7","%"],["Merger and restructuring charges","\u2014","","16,083","","-100.0","%"],["Other","15,034","","15,830","","-5.0","%"],["Total non-interest expenses","$","325,756","","$","345,286","","-5.7","%"],["Relevant ratios and data:"],["Efficiency ratio","60.70","%","","66.49","%"],["Compensation and benefits to non-interest expense","40.96","%","","38.50","%"],["Compensation to average total assets owned","1.29","%","","1.37","%"],["Number of employees end of year","2,269","","","2,278"],["Average number of employees","2,251","","","2,384"],["Average compensation per employee","$","59.28","","","$","55.76"],["Average loans per average employee","$","2,904","","","$","2,831"]]
[[/GREPCENT_TABLE]]

Non-Interest Expenses

Comparison of years ended December 31, 2021 and 2020

Non-interest expense was $325.8 million, representing a decrease of 5.7%, or $19.5 million, compared to $345.3 million.

Non-interest expenses were positively impacted by:

•Decrease in information technology expenses by $1.9 million reflecting systems integrations expenses related to Scotiabank Acquisition recorded during prior year period;

•Decrease in insurance expenses by $1.3 million related to the effect of higher FDIC annual assessment during 2020 due to the Scotiabank Acquisition integration;

•Improvements in foreclosed real estate and other repossessed assets (income) expenses by $10.8 million reflecting higher valuations and gains on sales of foreclosed real estate of $3.0 million and $3.6 million, respectively, as well as, higher gains in sales of repossessed autos of $2.5 million due to higher demand and volume compared to 2020; and

•Merger and restructuring charges amounting to $16.1 million that were recorded in 2020 related to the Scotiabank Acquisition on December 31, 2019.

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Non-interest expenses were adversely impacted by:

•Increase in occupancy, equipment, and infrastructure costs by $2.9 million reflecting an increase of information technology infrastructure expenses by $2.3 million.

•Increase in professional and service fees expenses by $2.9 million mainly due an increase in legal expenses by $2.0 million.

The efficiency ratio was 60.70%, improved from 66.49%. 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, derivatives gains or losses, other gains and losses, and other income that may be considered volatile in nature. Management believes that the exclusion of those items permits consistent comparability. Amounts presented as part of non-interest income that are excluded from the efficiency ratio computation for the years ended December 31, 2021 and 2020 amounted to $4.0 million and $13.5 million, respectively.

Provision for Credit Losses

Comparison of years ended December 31, 2021 and 2020

Provision for credit losses decreased $92.5 million from $92.7 million to $221 thousand mainly due to updates in macro-economic forecasts and continued asset quality improvement, as reflected in net credit losses, non-performing, and delinquency rates. The provision for credit losses for 2021 includes an additional expense of $9.7 million related to the decision to sell $65.5 million of past due loans. The provision for credit losses for 2020 included a $39.9 million provision to incorporate changes in the macro-economic scenario and qualitative adjustments as a result of the Covid-19 pandemic.

Income Taxes

Comparison of years ended December 31, 2021 and 2020

OFG’s effective tax rate (“ETR”) was 31.9% in 2021 compared to 21.6% in 2020. The increase in ETR is mainly due to a decrease in transactions subject to preferential tax rate and credits from non-recurring true-ups recorded in 2020, which contributed to substantially decrease the 2020 ETR.

Business Segments

OFG segregates its businesses into the following major reportable segments: Banking, Wealth Management, and Treasury. Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as 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 years ended December 31, 2021 and 2020.

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[[GREPCENT_TABLE]]
[["","December 31, 2021"],["","Banking","","Wealth Management","","Treasury","","Total Major Segments","","Eliminations","","Consolidated Total"],["","(In thousands)"],["Interest income","$","435,530","","","$","30","","","$","13,639","","","$","449,199","","","$","\u2014","","","$","449,199"],["Interest expense","(39,889)","","","\u2014","","","(1,940)","","","(41,829)","","","\u2014","","","(41,829)"],["Net interest income","395,641","","","30","","","11,699","","","407,370","","","\u2014","","","407,370"],["Provision (recapture) for credit losses","1,342","","","\u2014","","","(1,121)","","","221","","","\u2014","","","221"],["Non-interest income (loss)","98,950","","","35,625","","","(1,365)","","","133,210","","","\u2014","","","133,210"],["Non-interest expenses","(300,568)","","","(20,941)","","","(4,247)","","","(325,756)","","","\u2014","","","(325,756)"],["Intersegment revenue","2,355","","","\u2014","","","\u2014","","","2,355","","","(2,355)","","","\u2014"],["Intersegment expenses","\u2014","","","(1,269)","","","(1,086)","","","(2,355)","","","2,355","","","\u2014"],["Income before income taxes","$","197,720","","","$","13,445","","","$","3,880","","","$","215,045","","","$","\u2014","","","$","215,045"],["Income tax expense","68,409","","","\u2014","","","43","","","68,452","","","\u2014","","","68,452"],["Net income","$","129,311","","","$","13,445","","","$","3,837","","","$","146,593","","","$","\u2014","","","$","146,593"],["Total assets","$","8,041,725","","","$","32,082","","","$","2,894,612","","","$","10,968,419","","","$","(1,068,699)","","","$","9,899,720"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","December 31, 2020"],["","Banking","","Wealth Management","","Treasury","","Total Major Segments","","Eliminations","","Consolidated Total"],["","(In thousands)"],["Interest income","$","462,493","","","$","59","","","$","10,795","","","$","473,347","","","$","\u2014","","","$","473,347"],["Interest expense","(57,811)","","","\u2014","","","(7,104)","","","(64,915)","","","\u2014","","","(64,915)"],["Net interest income","404,682","","","59","","","3,691","","","408,432","","","\u2014","","","408,432"],["Provision for credit losses","92,237","","","\u2014","","","435","","","92,672","","","\u2014","","","92,672"],["Non-interest income","87,810","","","32,043","","","4,499","","","124,352","","","\u2014","","","124,352"],["Non-interest expenses","(320,997)","","","(20,240)","","","(4,049)","","","(345,286)","","","\u2014","","","(345,286)"],["Intersegment revenue","2,443","","","\u2014","","","\u2014","","","2,443","","","(2,443)","","","\u2014"],["Intersegment expenses","\u2014","","","(1,164)","","","(1,279)","","","(2,443)","","","2,443","","","\u2014"],["Income before income taxes","$","266,175","","","$","10,698","","","$","3,297","","","$","280,170","","","$","\u2014","","","$","280,170"],["Income tax expense","15,939","","","4,506","","","54","","","20,499","","","\u2014","","","20,499"],["Net income","$","250,236","","","$","6,192","","","$","3,243","","","$","259,671","","","$","\u2014","","","$","259,671"],["Total assets","$","8,478,326","","","$","32,893","","","$","2,436,029","","","$","10,947,248","","","$","(1,121,237)","","","$","9,826,011"]]
[[/GREPCENT_TABLE]]

Comparison of years ended December 31, 2021 and 2020

Banking

OFG’s banking segment net income before taxes increased by $113.3 million from $81.7 million to $195.0 million, mainly reflecting:

•Lower interest expense by $17.9 million, mainly related to customer deposits pricing changes implemented during fourth quarter of 2020 and to the maturity and cancellation of higher cost time and brokered deposits and migration of these time and brokered deposits to checking and savings accounts at lower costs;

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•Decrease in provision for credit losses by $90.9 million, mainly due to updates in macro-economic outlook and continued asset quality improvement, as reflected in charge-off, non-performing, and delinquency rates. The provision for credit losses for 2021 includes an additional expense of $9.7 million related to the decision to sell $65.5 million of past due loans. The provision for credit losses for 2020 included a $39.9 million provision to incorporate changes in the macro-economic scenario and qualitative adjustments as a result of the Covid-19 pandemic;

•An increase of $11.1 million in non-interest income, mainly from banking service revenues of $9.1 million on deposit accounts, credit and debit cards interchange fees and higher volume of transactions, net increase of $6.0 million in mortgage-banking activities due to higher servicing fees and gains on loans sold, a $2.4 million warrant revenue recorded for the cancellation of a loan and $1.5 million from receivable recoveries charged-off in the Scotiabank Acquisition. This increase was offset by a $7.3 million bargain purchase gain recorded during 2020 from the Scotiabank Acquisition to adjust the fair value of accrued interest receivable at closing.

•Decrease in non-interest expenses by $20.4 million, mainly due to merger and restructuring charges amounting to $16.1 million in 2020 related to the Scotiabank Acquisition, improvements in foreclosed real estate and other repossessed assets income by $10.8 million reflecting higher valuations and gains on sales on other real estate owned and repossessed autos. This decrease was partially offset by higher professional services and occupancy expenses by $5.8 million.

The increases in the banking segment’s net income were partially offset by:

•Lower interest income from loans by $27.0 million, reflecting lower average balances in the mortgage and commercial PCD portfolios, and the effect of Federal Reserve Board’s rate cuts on variable rate commercial loans, a $6.5 million in one-time interest recoveries from acquired PCD loans recorded during prior year, partially offset by interest income of $9.3 million from unamortized yield for $362.6 million of forgiven PPP loans.

Wealth Management

Wealth management segment revenue consists of commissions and fees from fiduciary activities, and securities brokerage and insurance activities. Net income before taxes from this segment increased by $2.7 million due to higher broker-dealers sales by $1.6 million, higher insurance income by $1.0 million, which includes income from the new captive reinsurance company, OFG Reinsurance, and higher trust division fees by approximately $857 thousand.

Treasury

Treasury segment net income before taxes increased by $3.7 million, mainly reflecting:

•Increase in interest income by $2.8 million, reflecting the purchase of agency mortgage-backed securities (MBS) amounting to $405.6 million during 2021;

•Lower interest expense by $5.2 million, reflecting the maturity of brokered deposits during current year and the maturity and early extinguishment of repurchase agreements during 2020; and

•Decrease to the provision for credit losses in US commercial loans by $1.6 million, mainly due asset quality improvements during 2021.

The increases in the treasury segment’s net income were partially offset by:

•A $4.7 million gain recorded during 2020 on the sales of $316.0 million mortgage-backed securities; and

•A $1.5 million loss recorded for the early termination of $33.3 million in Federal Home Loan Bank advances.

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ANALYSIS OF FINANCIAL CONDITION

Assets Owned

At December 31, 2021, OFG’s total assets amounted to $9.900 billion, for an increase of $73.7 million, when compared to $9.826 billion at December 31, 2020.

The investment portfolio increased by $437.1 million or 95.3% due to the purchase of agency mortgage-backed securities during the year amounting to $405.6 million. OFG’s strategy is to invest its liquidity in mortgage-backed securities and designate them as held-to-maturity or available for sale after taking into account the bond’s characteristics with respect to yield and term and the current market environment.

OFG’s loan portfolio is comprised of residential mortgage loans, commercial loans secured by real estate, other commercial and industrial loans, consumer loans, and auto loans and leases. For the year ended December 31, 2021, OFG’s net loan portfolio decreased by $171.9 million or 2.6%, mainly due to loan repayments and PPP loans forgiven during the year by the Small Business Administration amounting to $362.6 million. This decrease was offset by loan production in 2021 of $2.390 billion, compared to $1.730 billion in the year ago period, reflecting higher production in all loan portfolios.

During 2021, OFG decided to sell $65.5 million in past due loans. During the fourth quarter of 2021, OFG sold commercial past due loans amounting to $4.2 million and residential mortgage past due loans amounting to $629 thousand. In addition, OFG transferred to held for sale past due residential mortgage loans with reporting balance of $39.8 million and a PCD commercial loan with reporting balance of $20.9 million. As a result, OFG recognized $30.1 million in net charge-offs and an additional provision of $9.7 million, decreasing the allowance for credit losses by $20.4 million.

Cash and due from banks of $2.0 billion decreased by $127.8 million primarily from withdrawals at 2021 year-end by government-related and institutional commercial clients, partially offset by increased retail deposits.

Financial Assets Managed

OFG’s financial assets include those managed by OFG’s trust division, retirement plan administration subsidiary, and assets gathered by its broker-dealer and insurance subsidiaries. OFG’s trust division offers various types of individual retirement accounts (“IRAs”) and manages 401(k) and Keogh retirement plans and custodian and corporate trust accounts, while the retirement plan administration subsidiary manages private retirement plans. At December 31, 2021, the total assets managed by OFG’s trust division and retirement plan administration subsidiary amounted to $3.759 billion, compared to $3.476 billion at December 31, 2020. 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 December 31, 2021, total assets gathered by the broker-dealer and insurance agency subsidiaries from their customers’ investment accounts amounted to $2.466 billion, compared to $2.474 billion at December 31, 2020.

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.

In connection with reviewing our financial condition in light of the Covid-19 pandemic, we evaluated our assets, including goodwill and other intangibles, for potential impairment. Based upon our review as of December 31, 2021, no impairments have been recorded.

As of December 31, 2021 and 2020, OFG had $86.1 million of goodwill allocated as follows: $84.1 million to the banking segment and $2.0 million to the wealth management segment. Please refer to Note 12 Goodwill and Other Intangible Assets to our consolidated financial statements for more information on the annual goodwill impairment test.

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TABLE 4 - ASSETS SUMMARY AND COMPOSITION

[[GREPCENT_TABLE]]
[["","December 31,","","","Variance %"],["","2021","","2020"],["","(In thousands)"],["Investments:"],["FNMA and FHLMC certificates","$","550,809","","$","210,949","","","161.1","%"],["Obligations of US government-sponsored agencies","1,183","","1,606","","","-26.3","%"],["US Treasury securities","10,825","","10,983","","","-1.4","%"],["CMOs issued by US government-sponsored agencies","24,430","","39,214","","","-37.7","%"],["GNMA certificates","288,578","","182,772","","","57.9","%"],["Equity securities","17,578","","12,240","","","43.6","%"],["Other debt securities","2,395","","914","","","162.0","%"],["Trading securities","20","","22","","","-9.1","%"],["Total investments","895,818","","458,700","","","95.3","%"],["Loans, net","6,329,311","","6,501,259","","","-2.6","%"],["Total investments and loans","7,225,129","","6,959,959","","","3.8","%"],["Other assets:"],["Cash and due from banks (including restricted cash)","2,014,698","","2,143,669","","","-6.0","%"],["Money market investments","8,952","","11,908","","","-24.8","%"],["Foreclosed real estate","15,039","","11,596","","","29.7","%"],["Accrued interest receivable","56,560","","65,547","","","-13.7","%"],["Deferred tax asset, net","99,063","","162,478","","","-39.0","%"],["Premises and equipment, net","92,124","","83,786","","","10.0","%"],["Servicing assets","48,973","","47,295","","","3.5","%"],["Goodwill","86,069","","86,069","","","0.0","%"],["Right of use assets","28,846","","31,383","","","-8.1","%"],["Core deposit, customer relationship and other intangibles","36,093","","45,896","","","-21.4","%"],["Other assets and customers' liability on acceptances","188,174","","176,425","","","6.7","%"],["Total other assets","2,674,591","","2,866,052","","","-6.7","%"],["Total assets","$","9,899,720","","$","9,826,011","","","0.8","%"],["Investment portfolio composition:"],["FNMA and FHLMC certificates","61.5","%","","46.0","%"],["Obligations of US government-sponsored agencies","0.1","%","","0.4","%"],["US Treasury securities","1.2","%","","2.4","%"],["CMOs issued by US government-sponsored agencies","2.7","%","","8.5","%"],["GNMA certificates","32.2","%","","39.8","%"],["Equity securities","2.0","%","","2.7","%"],["Other debt securities and trading securities","0.3","%","","0.2","%"],["","100.0","%","","100.0","%"]]
[[/GREPCENT_TABLE]]

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TABLE 5 - LOAN PORTFOLIO COMPOSITION

[[GREPCENT_TABLE]]
[["","December 31,","","Variance %"],["","2021","","2020"],["","(In thousands)"],["Loans held for investment:"],["Commercial","$","2,379,330","","","$","2,402,010","","","(0.9)","%"],["Mortgage","1,907,271","","","2,307,034","","","(17.3)","%"],["Consumer","409,675","","","391,287","","","4.7","%"],["Auto and leasing","1,706,310","","","1,561,802","","","9.3","%"],["","6,402,586","","","6,662,133","","","(3.9)","%"],["Allowance for credit losses","(155,937)","","","(204,809)","","","(23.9)","%"],["Total loans held for investment","6,246,649","","","6,457,324","","","(3.3)","%"],["Mortgage loans held for sale","51,096","","","41,654","","","22.7","%"],["Other loans held for sale","31,566","","","2,281","","","1283.9","%"],["Total loans, net","$","6,329,311","","","$","6,501,259","","","(2.6)","%"]]
[[/GREPCENT_TABLE]]

OFG’s loan portfolio is composed of mortgage, commercial, consumer, and auto and leasing loans business products. As shown in Table 5 above, total loans, net, amounted to $6.329 billion at December 31, 2021 and $6.501 billion at December 31, 2020. OFG’s loans held-for-investment portfolio composition and trends were as follows:

•Commercial loan portfolio amounted to $2.379 billion (37.2% of the gross loan portfolio) compared to $2.402 billion (36.1% of the gross loan portfolio) at December 31, 2020. During the fourth quarter of 2021, OFG sold past due commercial loans amounting to $4.2 million. In addition, OFG transferred to held for sale a PCD commercial loan amounting to $20.9 million.

Commercial production, excluding PPP loans, increased 62.2%, or $394.4 million from $634.1 million in 2020 to $1.028 billion. PPP loan production decreased $137.7 million in 2021 from $296.7 million in 2020, as the PPP program was initially launched in the second quarter of 2020 and concluded in May 2021.

•Mortgage loan portfolio amounted to $1.907 billion (29.8% of the gross loan portfolio) compared to $2.307 billion (34.6% of the gross originated loan portfolio) at December 31, 2020. During the fourth quarter of 2021, OFG transferred to held for sale past due residential mortgage loans amounting to $39.8 million.

Mortgage loan production totaled $364.2 million for the year ended December 31, 2021 which represents an increase of 48.0% from $246.0 million in 2020. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to $14.5 million and $56.2 million at December 31, 2021 and 2020, respectively. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option.

•Consumer loan portfolio amounted to $409.7 million (6.4% of the gross loan portfolio) compared to $391.3 million (5.9% of the gross loan portfolio) at December 31, 2020. Consumer loan production increased 91.2% to $196.8 million in 2021 from $103.0 million in 2020.

•Auto and leasing portfolio amounted to $1.706 billion (26.7% of the gross loan portfolio) compared to $1.562 billion (23.4% of the gross originated loan portfolio) at December 31, 2020. Auto loans production increased 42.6% to $641.7 million in 2021 compared to $450.1 million in 2020.

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[[GREPCENT_TABLE]]
[["","Balance Outstanding at December 31, 2021","","Maturities"],["","One Year or Less","","From One to Five Years","","After Five Years To 15 Years","","After 15 Years"],["","","Fixed Interest Rates","","Variable Interest Rates","","Fixed Interest Rates","","Variable Interest Rates","","Fixed Interest Rates","","Variable Interest Rates"],["","(In thousands)"],["Non-PCD"],["Mortgage","$","718,848","","","$","23,818","","","$","8,177","","","$","608","","","$","220,270","","","$","520","","","$","449,004","","","$","16,451"],["Commercial","2,174,995","","","586,774","","","621,404","","","574,189","","","107,770","","","230,947","","","21,059","","","32,852"],["Consumer","408,759","","","77,362","","","214,835","","","\u2014","","","107,292","","","\u2014","","","9,270","","","\u2014"],["Auto and leasing","1,693,029","","","28,524","","","895,145","","","\u2014","","","769,360","","","\u2014","","","\u2014","","","\u2014"],["Total","$","4,995,631","","","$","716,478","","","$","1,739,561","","","$","574,797","","","$","1,204,692","","","$","231,467","","","$","479,333","","","$","49,303"],["PCD"],["Mortgage","$","1,188,423","","","$","8,829","","","$","15,852","","","$","423","","","$","370,832","","","$","885","","","$","775,397","","","$","16,205"],["Commercial","204,335","","","81,870","","","89,863","","","18,082","","","923","","","13,407","","","190","","","\u2014"],["Consumer","916","","","426","","","186","","","\u2014","","","26","","","\u2014","","","278","","","\u2014"],["Auto and leasing","13,281","","","2,696","","","10,507","","","\u2014","","","78","","","\u2014","","","\u2014","","","\u2014"],["Total","$","1,406,955","","","$","93,821","","","$","116,408","","","$","18,505","","","$","371,859","","","$","14,292","","","$","775,865","","","$","16,205"],["Total loans","$","6,402,586","","","$","810,299","","","$","1,855,969","","","$","593,302","","","$","1,576,551","","","$","245,759","","","$","1,255,198","","","$","65,508"]]
[[/GREPCENT_TABLE]]

The following table includes the maturities of OFG’s lending exposure to the Puerto Rico government, which is limited solely to loans to municipalities secured by ad valorem taxation, without limitation as to rate or amount, on all taxable property within the issuing municipalities and a loan to a public corporation acquired in the Scotiabank Acquisition. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations. Deposits from the Puerto Rico government totaled $183.8 million at December 31, 2021.

TABLE 6 - PUERTO RICO GOVERNMENT RELATED LOANS AND SECURITIES

[[GREPCENT_TABLE]]
[["December 31, 2021"],["","","","Maturity"],["","Carrying Value","","Less than 1 Year","","1 to 3 Years","","More than 3 Years"],["Loans:","(In thousands)"],["Public corporations","$","1,102","","","$","1,102","","","$","\u2014","","","$","\u2014"],["Municipalities","86,177","","","\u2014","","","34,931","","","51,246"],["Total","$","87,279","","","$","1,102","","","$","34,931","","","$","51,246"]]
[[/GREPCENT_TABLE]]

At December 31, 2021, OFG has $87.3 million of direct credit exposure to the Puerto Rico government, a 11.8 million decrease from December 31, 2020.

Credit Risk Management

Allowance for Credit Losses

On January 1, 2020, OFG adopted the new accounting standard that requires the measurement of the allowance for credit losses to be based on management’s best estimate of future expected credit losses inherent in OFG’s relevant financial assets.

Tables 7 through 9 set forth an analysis of activity in the allowance for credit losses and present selected credit loss statistics for December 31, 2021 and 2020. In addition, Table 5 sets forth the composition of the loan portfolio.

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The allowance for credit losses for December 31, 2021 reflects a decrease of $20.4 million associated with OFG’s decision to sell $65.5 million past due loans. As a result of the decision to sell loans, OFG recognized $30.1 million in net-charge-offs and an additional provision of $9.7 million.

Please refer to the "Provision for Credit Losses" and "Critical Accounting Estimates" sections in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section and Note 7 – Allowance for Credit Losses of this annual report for a more detailed analysis of provisions and allowance for credit losses.

Non-performing Assets

OFG’s non-performing assets include non-performing loans and foreclosed real estate (see Tables 10 and 12). At December 31, 2021, OFG had $101.9 million of non-accrual loans, including $12.9 million PCD loans, compared to $147.9 million at December 31, 2020.

At December 31, 2021 and 2020, loans whose terms have been extended and which were classified as troubled-debt restructurings that were not included in non-accrual loans amounted to $125.9 million and $113.9 million, respectively, as they were performing under their new terms.

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

At December 31, 2021, OFG’s non-performing assets decreased by 22.1% to $129.0 million (1.30% of total assets) from $165.6 million (1.69% of total assets) at December 31, 2020. Foreclosed real estate and other repossessed assets amounting to $15.0 million and $1.9 million, respectively, at December 31, 2021, increased from $11.6 million and $1.8 million, respectively, at December 31, 2020, recorded at fair value. OFG does not expect non-performing loans to result in significantly higher losses. At December 31, 2021, the allowance coverage ratio to non-performing loans was 139.2% (134.6% at December 31, 2020).

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

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 U.S. mortgage loan originators. Furthermore, OFG has never been active in negative amortization loans or adjustable rate mortgage loans, including those with teaser rates.

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

Commercial loans - At December 31, 2021, OFG’s non-performing commercial loans amounted to $50.1 million (44.8% of OFG’s non-performing loans), a 36.1% decrease from $78.5 million at December 31, 2020 (51.6% 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 December 31, 2021, OFG’s non-performing mortgage loans totaled $39.7 million (35.5% of OFG’s non-performing loans), a 18.5% decrease from $48.7 million (32.0% of OFG’s non-performing loans) at December 31, 2020. 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 December 31, 2021, OFG’s non-performing consumer loans amounted to $2.3 million (2.1% of OFG’s non-performing loans), a 45.5% decrease from $4.2 million at December 31, 2020 (2.8% of OFG’s non-

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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 and leasing loans - At December 31, 2021, OFG’s non-performing auto and leasing loans amounted to $19.8 million (17.6% of OFG’s total non-performing loans), a decrease of 4.5% from $20.8 million at December 31, 2020 (13.6% of OFG’s total non-performing loans). Non-PCD auto and leasing loans a 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.

Please refer to the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our 2020 annual report on Form 10-K for detailed information for the year ended December 31, 2019.

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, RURAL, 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 for the loan modification. Borrowers with discharged Chapter 7 bankruptcies may also apply. Loans in these programs are evaluated by designated underwriters for troubled-debt restructuring classification if OFG grants a concession for legal or economic reasons due to the debtor’s financial difficulties.

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TABLE 7 - ALLOWANCE FOR CREDIT LOSSES BREAKDOWN

[[GREPCENT_TABLE]]
[["","December 31,","","Variance %"],["","2021","","2020"],["","(In thousands)"],["Allowance for credit losses:"],["Non-PCD"],["Commercial","$","32,262","","$","45,779","","-29.5","%"],["Mortgage","15,299","","19,687","","-22.3","%"],["Consumer","19,141","","25,253","","-24.2","%"],["Auto and leasing","65,363","","70,296","","-7.0","%"],["Total allowance for credit losses","$","132,065","","$","161,015","","-18.0","%"],["PCD"],["Commercial","$","4,508","","$","16,405","","-72.5","%"],["Mortgage","19,018","","26,389","","-27.9","%"],["Consumer","34","","57","","-40.4","%"],["Auto and leasing","312","","943","","-66.9","%"],["Total allowance for credit losses","$","23,872","","$","43,794","","-45.5","%"],["Allowance for credit losses summary"],["Commercial","$","36,770","","$","62,184","","-40.9","%"],["Mortgage","34,317","","46,076","","-25.5","%"],["Consumer","19,175","","25,310","","-24.2","%"],["Auto and leasing","65,675","","71,239","","-7.8","%"],["Total allowance for credit losses","$","155,937","","$","204,809","","-23.9","%"],["Allowance composition:"],["Commercial","23.6","%","","30.4","%"],["Mortgage","22.0","%","","22.5","%"],["Consumer","12.3","%","","12.4","%"],["Auto and leasing","42.1","%","","34.8","%"],["","100.0","%","","100.0","%"],["Allowance coverage ratio at end of year:"],["Commercial","1.6","%","","2.6","%","","-40.2","%"],["Mortgage","1.8","%","","2.0","%","","-10.0","%"],["Consumer","4.7","%","","6.5","%","","-27.7","%"],["Auto and leasing","3.9","%","","4.6","%","","-15.6","%"],["","2.4","%","","3.1","%","","-20.5","%"],["Allowance coverage ratio to non-performing loans:"],["Commercial","73.3","%","","79.3","%","","-7.5","%"],["Mortgage","86.4","%","","94.6","%","","-8.6","%"],["Consumer","832.6","%","","599.1","%","","39.0","%"],["Auto and leasing","331.2","%","","343.1","%","","-3.5","%"],["","139.2","%","","134.6","%","","3.5","%"]]
[[/GREPCENT_TABLE]]

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TABLE 8 - ALLOWANCE FOR CREDIT LOSSES SUMMARY

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Variance %"],["","2021","","2020"],["","(Dollars in thousands)"],["Allowance for credit losses:"],["Balance at beginning of year","$","204,809","","","$","116,539","","","75.7","%"],["Impact of ASC 326 adoption","\u2014","","","89,720","","","-100.0","%"],["Provision for credit losses","883","","","93,717","","","-99.1","%"],["Charge-offs","(86,546)","","","(125,186)","","","-30.9","%"],["Recoveries","36,791","","","30,019","","","22.6","%"],["Balance at end of year","$","155,937","","","$","204,809","","","-23.9","%"]]
[[/GREPCENT_TABLE]]

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TABLE 9 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Variance %"],["","2021","","2020"],["","(Dollars in thousands)"],["Non-PCD"],["Mortgage"],["Charge-offs","$","(5,789)","","","$","(884)","","","554.9","%"],["Recoveries","1,643","","","606","","","171.1","%"],["Total","(4,146)","","","(278)","","","1,391.4","%"],["Commercial"],["Charge-offs","(8,788)","","","(4,979)","","","76.5","%"],["Recoveries","2,401","","","2,741","","","-12.4","%"],["Total","(6,387)","","","(2,238)","","","185.4","%"],["Consumer"],["Charge-offs","(11,880)","","","(21,772)","","","-45.4","%"],["Recoveries","2,900","","","3,582","","","-19.0","%"],["Total","(8,980)","","","(18,190)","","","-50.6","%"],["Auto and leasing"],["Charge-offs","(26,530)","","","(48,547)","","","-45.4","%"],["Recoveries","23,970","","","19,494","","","23.0","%"],["Total","(2,560)","","","(29,053)","","","-91.2","%"],["PCD Loans:"],["Mortgage"],["Charge-offs","$","(20,350)","","","$","(10,342)","","","96.8","%"],["Recoveries","1,423","","","854","","","66.6","%"],["Total","(18,927)","","","(9,488)","","","99.5","%"],["Commercial"],["Charge-offs","(12,241)","","","(36,097)","","","(66.1)","%"],["Recoveries","2,929","","","986","","","197.1","%"],["Total","(9,312)","","","(35,111)","","","(73.5)","%"],["Consumer"],["Charge-offs","(22)","","","(542)","","","(95.9)","%"],["Recoveries","316","","","292","","","8.2","%"],["Total","294","","","(250)","","","(217.6)","%"],["Auto and leasing"],["Charge-offs","(946)","","","(2,023)","","","(53.2)","%"],["Recoveries","1,209","","","1,464","","","(17.4)","%"],["Total","263","","","(559)","","","(147.0)","%"],["Total charge-offs","(86,546)","","","(125,186)","","","(30.9)","%"],["Total recoveries","36,791","","","30,019","","","22.6","%"],["Net credit losses","$","(49,755)","","","$","(95,167)","","","(47.7)","%"]]
[[/GREPCENT_TABLE]]

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TABLE 9 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES (CONTINUED)

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Variance %"],["","2021","","2020"],["","(Dollars in thousands)"],["Net credit losses to average loans outstanding:"],["Mortgage","1.10","%","","0.42","%","","163.61","%"],["Commercial","0.66","%","","1.55","%","","-57.7","%"],["Consumer","2.12","%","","3.95","%","","-46.2","%"],["Auto and leasing","0.14","%","","1.94","%","","-92.7","%"],["Total","0.76","%","","1.41","%","","-46.0","%"],["Recoveries to charge-offs","42.51","%","","23.98","%","","77.3","%"],["Average Loans Held for Investment"],["Mortgage","$","2,102,215","","$","2,345,565","","-10.4","%"],["Commercial","2,392,625","","2,406,728","","-0.6","%"],["Consumer","408,995","","466,998","","-12.4","%"],["Auto and leasing","1,633,653","","1,529,219","","6.8","%"],["Total","$","6,537,488","","$","6,748,510","","-3.1","%"]]
[[/GREPCENT_TABLE]]

TABLE 10 — NON-PERFORMING ASSETS

[[GREPCENT_TABLE]]
[["","December 31,","","Variance %"],["","2021","","2020"],["","(Dollars in thousands)"],["Non-performing assets:"],["Non-PCD"],["Non-accruing loans"],["Troubled-Debt Restructuring loans","$","24,539","","$","28,297","","-13.3","%"],["Other loans","64,465","","82,122","","-21.5","%"],["Accruing loans"],["Troubled-Debt Restructuring loans","9,087","","3,411","","166.4","%"],["Other loans","1,038","","889","","16.8","%"],["Total","$","99,129","","$","114,719","","-13.6","%"],["PCD","12,879","","37,475","","-65.6","%"],["Total non-performing loans","$","112,008","","$","152,194","","-26.4","%"],["Foreclosed real estate","15,039","","11,596","","29.7","%"],["Other repossessed assets","1,945","","1,816","","7.1","%"],["","$","128,992","","$","165,606","","-22.1","%"],["Non-performing assets to total assets","1.30","%","","1.69","%","","-23.1","%"],["Non-performing assets to total capital","12.06","%","","15.25","%","","-20.9","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2021","","2020"],["","(In thousands)"],["Interest that would have been recorded in the period if the loans had not been classified as non-accruing loans","$","1,467","","","$","2,419"]]
[[/GREPCENT_TABLE]]

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TABLE 11 - NON-ACCRUAL LOANS

[[GREPCENT_TABLE]]
[["","December 31,","","Variance %"],["","2021","","2020"],["","(Dollars in thousands)"],["Non-accrual loans"],["Non-PCD"],["Commercial","$","37,604","","$","41,999","","-10.5","%"],["Mortgage","29,268","","43,430","","-32.6","%"],["Consumer","2,303","","4,224","","-45.5","%"],["Auto and leasing","19,829","","20,766","","-4.5","%"],["Total","$","89,004","","$","110,419","","-19.4","%"],["PCD"],["Commercial","$","12,545","","$","36,471","","-65.6","%"],["Mortgage","334","","1,003","","-66.7","%"],["Consumer","\u2014","","1","","-100.0","%"],["Total","$","12,879","","$","37,475","","-65.6","%"],["Total non-accrual loans","$","101,883","","$","147,894","","-31.1","%"],["Non-accruals loans composition percentages:"],["Commercial","49.2","%","","53.1","%"],["Mortgage","29.1","%","","30.0","%"],["Consumer","2.3","%","","2.9","%"],["Auto and leasing","19.4","%","","14.0","%"],["","100.0","%","","100.0","%"],["Non-accrual loans ratios:"],["Non-accrual loans to total loans","1.59","%","","2.22","%","","-28.38","%"],["Allowance for credit losses to non-accrual loans","153.05","%","","138.48","%","","10.52","%"]]
[[/GREPCENT_TABLE]]

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TABLE 12 - NON-PERFORMING LOANS

[[GREPCENT_TABLE]]
[["","December 31,","","Variance %"],["","2021","","2020"],["","(Dollars in thousands)"],["Non-performing loans"],["Non-PCD"],["Commercial","$","37,603","","$","41,999","","-10.5","%"],["Mortgage","39,394","","47,730","","-17.5","%"],["Consumer","2,303","","4,224","","-45.5","%"],["Auto and leasing","19,829","","20,766","","-4.5","%"],["Total","$","99,129","","$","114,719","","-13.6","%"],["PCD"],["Commercial","$","12,545","","$","36,471","","-65.6","%"],["Mortgage","334","","1,003","","-66.7","%"],["Consumer","\u2014","","1","","-100.0","%"],["Total","$","12,879","","$","37,475","","-65.6","%"],["Total non-performing loans","$","112,008","","$","152,194","","-26.4","%"],["Non-performing loans composition percentages:"],["Commercial","44.8","%","","51.6","%"],["Mortgage","35.5","%","","32.0","%"],["Consumer","2.1","%","","2.8","%"],["Auto and leasing","17.6","%","","13.6","%"],["","100.0","%","","100.0","%"],["Non-performing loans to:"],["Total loans","1.75","%","","2.28","%","","-23.25","%"],["Total assets","1.13","%","","1.60","%","","-29.4","%"],["Total capital","10.48","%","","14.01","%","","-25.2","%"],["Non-performing loans with partial charge-offs to:"],["Total loans","0.46","%","","0.57","%","","-19.3","%"],["Non-performing loans","26.53","%","","24.81","%","","6.9","%"],["Other non-performing loans ratios:"],["Charge-off rate on non-performing loans to non-performing loans on which charge-offs have been taken","170.31","%","","151.33","%","","12.5","%"],["Allowance for credit losses to non-performing loans on which no charge-offs have been taken","189.49","%","","178.98","%","","5.9","%"]]
[[/GREPCENT_TABLE]]

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TABLE 13 - LIABILITIES SUMMARY AND COMPOSITION

[[GREPCENT_TABLE]]
[["","December 31,","","Variance %"],["","2021","","2020"],["","(Dollars in thousands)"],["Deposits:"],["Non-interest bearing deposits","$","2,501,644","","$","2,259,048","","10.7","%"],["NOW accounts","2,702,636","","2,354,194","","14.8","%"],["Savings and money market accounts","2,177,779","","1,944,426","","12.0","%"],["Certificates of deposit","1,220,262","","1,856,400","","-34.3","%"],["Total deposits","8,602,321","","8,414,068","","2.2","%"],["Accrued interest payable","797","","1,572","","-49.3","%"],["Total deposits and accrued interest payable","8,603,118","","8,415,640","","2.2","%"],["Borrowings:"],["Advances from FHLB","28,488","","65,561","","-56.5","%"],["Subordinated capital notes","36,083","","36,083","","0.0","%"],["Other term notes","\u2014","","707","","-100.0","%"],["Total borrowings","64,571","","102,351","","-36.9","%"],["Total deposits and borrowings","8,667,689","","8,517,991","","1.8","%"],["Other Liabilities:"],["Securities purchased not yet received","\u2014","","\u2014","","\u2014","%"],["Derivative liabilities","804","","1,712","","-53.0","%"],["Acceptances outstanding","35,329","","33,349","","5.9","%"],["Lease liability","30,498","","32,566","","-6.4","%"],["Other liabilities","96,240","","154,418","","-37.7","%"],["Total liabilities","$","8,830,560","","$","8,740,036","","1.0","%"],["Deposits portfolio composition percentages:"],["Non-interest bearing deposits","29.1","%","","26.8","%"],["NOW accounts","31.4","%","","28.0","%"],["Savings and money market accounts","25.3","%","","23.1","%"],["Certificates of deposit","14.2","%","","22.1","%"],["","100.0","%","","100.0","%"],["Borrowings portfolio composition percentages:"],["Advances from FHLB","44.1","%","","64.1","%"],["Subordinated capital notes","55.9","%","","35.2","%"],["Other term notes","0.0","%","","0.7","%"],["","100.0","%","","100.0","%"],["Securities sold under agreements to repurchase (excluding accrued interest)"],["Amount outstanding at period-end","$","\u2014","","$","\u2014"],["Daily average outstanding balance","$","\u2014","","$","50,492"],["Maximum outstanding balance at any month-end","$","\u2014","","$","190,000"]]
[[/GREPCENT_TABLE]]

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Liabilities and Funding Sources

As shown in Table 13 above, at December 31, 2021, OFG’s total liabilities were $8.831 billion, 1.0% more than the $8.740 billion reported at December 31, 2020. Deposits and borrowings, OFG’s funding sources, amounted to $8.668 billion at December 31, 2021 compared to $8.518 billion at December 31, 2020. Deposits, excluding accrued interest payable, increased 2.2% mainly from higher core deposits by $824.4 million offset by decreases of $623.3 million and $37.7 million in time deposits and brokered deposits, respectively, associated with the maturity of CD's with the majority of them transferred into demand deposit and savings accounts. During the year ended December 31, 2021, money market deposit accounts were reclassified from brokered deposits to interest-bearing savings accounts as a result of an FDIC exemption from the brokered deposit definition. At December 31, 2021, these money market deposit accounts amounted to $22.5 million.

Borrowings consist mainly of FHLB-NY advances and subordinated capital notes. Borrowings decrease of $37.8 million reflects the early termination of $33.3 million in Federal Home Loan Bank advances with an average cost of 2.98% during 2021.

Stockholders’ Equity

At December 31, 2021, OFG’s total stockholders’ equity was $1.069 billion, a 2% decrease when compared to $1.086 billion at December 31, 2020. This reduction in stockholders’ equity reflects decreases in preferred stock of $92.0 million due to the Series A, Series B and Series D preferred stock redemptions; in accumulated other comprehensive income, net of tax, of $5.9 million from changes in market rates; and in treasury stock of $47.6 million due to repurchases of $49.9 million common stocks, as part of the $50 million buyback program implemented during 2021. Decrease was offset by, increase in retained earnings of $99.9 million, mainly from 2021 net income, in legal surplus of $14.4 million, and in additional paid-in capital of $14.4 million. Book value per share was $21.54 at December 31, 2021 compared to $19.54 at December 31, 2020.

From December 31, 2020 to December 31, 2021, tangible common equity to tangible total assets increased from 9.00% to 9.69%, leverage capital ratio decreased from 10.30% to 9.69%, tier 1 risk-based capital ratio decreased from 14.78% to 14.27%, and total risk-based capital ratio decreased from 16.04% to 15.52%, mainly as a result of the preferred stock redemptions and stock repurchase program during the year ended December 31, 2021. Common equity tier 1 capital ratio increased from 13.08% to 13.77%, mainly from net income during the year ended December 31, 2021, partially offset by the stock repurchase program.

Regulatory Capital

OFG and the Bank are subject to regulatory capital requirements established by the Federal Reserve Board and the FDIC. The current risk-based capital standards applicable to OFG and the Bank (“Basel III capital rules”), which have been effective since January 1, 2015, are based on the final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision. As of December 31, 2021, 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, the Company 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 the Company adopted to delay for two years the initial adoption impact of CECL on regulatory capital, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during 2020 and 2021 (i.e., a five-year transition period). During the two-year delay, OFG added back to common equity tier 1 (“CET1”) capital 100% of the initial adoption impact of CECL plus 25% of the cumulative quarterly changes in the allowance for credit losses (i.e., quarterly transitional amounts). After two years, starting on January 1, 2022, the quarterly transitional amounts along with the initial adoption impact of CECL will be phased out of CET1 capital over a three-year period.

The risk-based capital ratios presented in Table 14, which include common equity tier 1, tier 1 capital, total capital and leverage capital as of December 31, 2021 and 2020, are calculated based on the Basel III capital rules related to the measurement of capital, risk-weighted assets and average assets.

Please refer to the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our 2020 annual report on Form 10-K for detailed information for the year ended December 31, 2019.

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The following are OFG’s consolidated capital ratios under the Basel III capital rules at December 31, 2021 and 2020:

TABLE 14 — CAPITAL, DIVIDENDS AND STOCK DATA

[[GREPCENT_TABLE]]
[["","December 31,","","Variance"],["","2021","","2020","","%"],["","(Dollars in thousands, except per share data)"],["Capital data:"],["Stockholders\u2019 equity","$","1,069,160","","$","1,085,975","","(1.5)","%"],["Regulatory Capital Ratios data:"],["Common equity tier 1 capital ratio","13.77","%","","13.08","%","","5.3","%"],["Minimum common equity tier 1 capital ratio required","4.50","%","","4.50","%","","0.0","%"],["Actual common equity tier 1 capital","$","964,284","","894,075","","7.9","%"],["Minimum common equity tier 1 capital required","$","315,219","","307,703","","2.4","%"],["Minimum capital conservation buffer required (2.5%)","$","175,122","","170,946","","2.4","%"],["Excess over regulatory requirement","$","473,943","","415,426","","14.1","%"],["Risk-weighted assets","$","7,004,876","","6,837,846","","2.4","%"],["Tier 1 risk-based capital ratio","14.27","%","","14.78","%","","(3.5)","%"],["Minimum tier 1 risk-based capital ratio required","6.00","%","","6.00","%","","0.0","%"],["Actual tier 1 risk-based capital","$","999,284","","$","1,010,945","","(1.2)","%"],["Minimum tier 1 risk-based capital required","$","420,293","","$","140,271","","199.6","%"],["Minimum capital conservation buffer required (2.5%)","$","175,122","","170,946","","2.4","%"],["Excess over regulatory requirement","$","403,869","","$","429,728","","(6.0)","%"],["Risk-weighted assets","$","7,004,876","","$","6,837,846","","2.4","%"],["Total risk-based capital ratio","15.52","%","","16.04","%","","(3.2)","%"],["Minimum total risk-based capital ratio required","8.00","%","","8.00","%","","0.0","%"],["Actual total risk-based capital","$","1,086,897","","$","1,096,766","","(0.9)","%"],["Minimum total risk-based capital required","$","560,390","","$","547,028","","2.4","%"],["Minimum capital conservation buffer required (2.5%)","$","175,122","","170,946","","2.4","%"],["Excess over regulatory requirement","$","351,385","","$","378,792","","(7.2)","%"],["Risk-weighted assets","$","7,004,876","","$","6,837,846","","2.4","%"],["Leverage capital ratio","9.69","%","","10.30","%","","(5.9)","%"],["Minimum leverage capital ratio required","4.00","%","","4.00","%","","0.0","%"],["Actual tier 1 capital","$","999,284","","$","1,010,945","","(1.2)","%"],["Minimum tier 1 capital required","$","412,359","","$","392,424","","5.1","%"],["Excess over regulatory requirement","$","586,925","","$","618,521","","(5.1)","%"],["Tangible common equity to total assets","9.57","%","","8.88","%","","7.8","%"],["Tangible common equity to risk-weighted assets","13.52","%","","12.75","%","","6.0","%"],["Total equity to total assets","10.80","%","","11.05","%","","-2.3","%"],["Total equity to risk-weighted assets","15.26","%","","15.88","%","","(3.9)","%"],["Stock data:"],["Outstanding common shares","49,636,352","","51,387,071","","(3.4)","%"],["Book value per common share","$","21.54","","$","19.54","","10.2","%"],["Tangible book value per common share","$","19.08","","$","16.97","","12.4","%"],["Market price at end of year","$","26.56","","$","18.54","","43.3","%"],["Market capitalization at end of year","$","1,318,342","","$","952,716","","38.4","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Variance"],["","2021","","2020","","%"],["","(Dollars in thousands)"],["Common dividend data:"],["Cash dividends declared","$","20,505","","$","14,381","","42.6","%"],["Cash dividends declared per share","$","0.40","","$","0.28","","42.9","%"],["Payout ratio","14.19","%","","21.20","%","","-33.1","%"],["Dividend yield","1.50","%","","1.51","%","","(0.7)","%"]]
[[/GREPCENT_TABLE]]

The following table presents a reconciliation of OFG’s total stockholders’ equity to tangible common equity and total assets to tangible assets at December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","December 31,"],["","2021","","2020"],["","(In thousands, except share or per share information)"],["Total stockholders' equity","$","1,069,160","","$","1,085,975"],["Preferred stock","\u2014","","$","(92,000)"],["Preferred stock issuance costs","\u2014","","$","10,130"],["Goodwill","(86,069)","","$","(86,069)"],["Core deposit intangible","(27,630)","","$","(34,983)"],["Customer relationship intangible","(8,368)","","$","(10,629)"],["Other intangibles","(95)","","$","(284)"],["Total tangible common equity (non-GAAP)","$","946,998","","$","872,140"],["Total assets","$","9,899,720","","9,826,011"],["Goodwill","(86,069)","","(86,069)"],["Core deposit intangible","(27,630)","","(34,983)"],["Customer relationship intangible","(8,368)","","(10,629)"],["Other intangibles","(95)","","(284)"],["Total tangible assets","$","9,777,558","","$","9,694,046"],["Tangible common equity to tangible assets","9.69","%","","9.00","%"],["Common shares outstanding at end of period","49,636,352","","51,387,071"],["Tangible book value per common share","$","19.08","","$","16.97"]]
[[/GREPCENT_TABLE]]

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

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

[[GREPCENT_TABLE]]
[["","December 31,","","Variance"],["","2021","","2020","","%"],["","(Dollars in thousands)"],["Risk-based capital:"],["Common equity tier 1 capital","$","964,284","","$","894,075","","7.9","%"],["Additional tier 1 capital","35,000","","116,870","","(70.1)","%"],["Tier 1 capital","999,284","","1,010,945","","(1.2)","%"],["Additional Tier 2 capital","87,613","","85,820","","2.1","%"],["Total risk-based capital","$","1,086,897","","$","1,096,765","","(0.9)","%"],["Risk-weighted assets:"],["Balance sheet items","$","6,406,115","","$","6,338,524","","1.1","%"],["Off-balance sheet items","598,761","","499,322","","19.9","%"],["Total risk-weighted assets","$","7,004,876","","$","6,837,846","","2.4","%"],["Ratios:"],["Common equity tier 1 capital (minimum required, including capital conservation buffer - 7%)","13.77","%","","13.08","%","","5.3","%"],["Tier 1 capital (minimum required, including capital conservation buffer - 8.5%)","14.27","%","","14.78","%","","(3.5)","%"],["Total capital (minimum required, including capital conservation buffer - 10.5%)","15.52","%","","16.04","%","","(3.2)","%"],["Leverage ratio (minimum required - 4%)","9.69","%","","10.30","%","","(5.9)","%"],["Equity to assets","10.80","%","","11.05","%","","-2.3","%"],["Tangible common equity to assets","9.57","%","","8.88","%","","7.8","%"]]
[[/GREPCENT_TABLE]]

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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 December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","December 31,","","Variance"],["","2021","","2020","","%"],["","(Dollars in thousands)"],["Oriental Bank Regulatory Capital Ratios:"],["Common Equity Tier 1 Capital to Risk-Weighted Assets","13.09%","","14.06%","","(6.90)","%"],["Actual common equity tier 1 capital","$","908,717","","$","956,845","","(5.0)","%"],["Minimum capital requirement (4.5%)","$","312,371","","$","306,206","","2.0","%"],["Minimum capital conservation buffer requirement (2.5%)","$","173,540","","$","170,114","","2.0","%"],["Minimum to be well capitalized (6.5%)","$","451,203","","$","442,297","","2.0","%"],["Tier 1 Capital to Risk-Weighted Assets","13.09%","","14.06%","","(6.9)","%"],["Actual tier 1 risk-based capital","$","908,717","","$","956,845","","(5.0)","%"],["Minimum capital requirement (6%)","$","416,495","","$","408,274","","2.0","%"],["Minimum capital conservation buffer requirement (2.5%)","$","173,540","","$","170,114","","2.0","%"],["Minimum to be well capitalized (8%)","$","555,327","","$","544,366","","2.0","%"],["Total Capital to Risk-Weighted Assets","14.34%","","15.32%","","(6.4)","%"],["Actual total risk-based capital","$","995,549","","$","1,042,255","","(4.5)","%"],["Minimum capital requirement (8%)","$","555,327","","$","544,366","","2.0","%"],["Minimum capital conservation buffer requirement (2.5%)","$","173,540","","$","170,114","","2.0","%"],["Minimum to be well capitalized (10%)","$","694,159","","$","680,457","","2.0","%"],["Total Tier 1 Capital to Average Total Assets","8.87%","","9.81%","","(9.6)","%"],["Actual tier 1 capital","$","908,717","","$","956,845","","(5.0)","%"],["Minimum capital requirement (4%)","$","409,855","","$","390,304","","5.0","%"],["Minimum to be well capitalized (5%)","$","512,319","","$","487,879","","5.0","%"]]
[[/GREPCENT_TABLE]]

OFG’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG.” At December 31, 2021 and 2020, OFG’s market capitalization for its outstanding common stock was $1.318 billion ($26.56 per share) and $952.7 million ($18.54 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:

[[GREPCENT_TABLE]]
[["","","","","","Cash"],["","Price","","Dividend"],["","High","","Low","","Per share"],["2021"],["December 31, 2021","$","27.33","","","$","23.84","","","$","0.12"],["September 30, 2021","$","25.66","","","$","20.04","","","$","0.12"],["June 30, 2021","$","25.14","","","$","21.61","","","$","0.08"],["March 31, 2021","$","22.93","","","$","16.48","","","$","0.08"],["2020"],["December 31, 2020","$","18.54","","","$","12.59","","","$","0.07"],["September 30, 2020","$","14.35","","","$","12.12","","","$","0.07"],["June 30, 2020","$","15.10","","","$","9.38","","","$","0.07"],["March 31, 2020","$","23.50","","","$","9.32","","","$","0.07"],["2019"],["December 31, 2019","$","23.61","","","$","20.00","","","$","0.07"],["September 30, 2019","$","24.20","","","$","19.84","","","$","0.07"],["June 30, 2019","$","23.77","","","$","18.78","","","$","0.07"],["March 31, 2019","$","21.24","","","$","16.37","","","$","0.07"]]
[[/GREPCENT_TABLE]]

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In July 2021, OFG announced that its Board of Directors approved a stock repurchase program to purchase $50 million of its common stock in the open market. As of December 31, 2021, OFG completed the stock repurchase program and repurchased approximately 2.1 million shares of its common stock for a total aggregate purchase price of $49.9 million at an average of $24.29 per share.

Under OFG’s $5.5 million repurchase program effective in 2020, OFG repurchased 175,000 shares of common stock for a total aggregate purchase price of $2.2 million, at an average price of $12.69 per share.

OFG did not repurchase any shares of its common stock during the years ended December 31, 2021 and 2020, other than through its publicly announced stock repurchase programs.