OFG BANCORP (OFG) FY 2023 MD&A

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

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 2021 results where it would be redundant to the discussion previously included in Item 7 of our 2022 annual report on Form 10-K. For our discussion and analysis of our financial condition and results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2022 annual report on Form 10-K.

RECENT DEVELOPMENTS

Capital Actions

2023 Capital Actions

In January 2023, OFG announced that its Board of Directors approved the increase of its regular quarterly cash dividend to $0.22 per common share from $0.20 per share, beginning in the quarter ended March 31, 2023.

At December 31, 2023, OFG had repurchased 3.1 million shares of common stock for $82.8 million of the $100 million stock repurchase program authorized in January 2022. During 2023, OFG repurchased 743,699 shares for a total of $18.7 million at an average price of $25.08 per share.

Announcement of Forthcoming 2024 Capital Actions

In January 2024, OFG announced that its Board of Directors approved the increase of its regular quarterly cash dividend to $0.25 per common share from $0.22 per share, beginning in the quarter ending March 31, 2024. The Board of Directors also approved a new $50.0 million stock repurchase program. The new stock repurchase program, which is open-ended, replaces the prior stock repurchase program, which had had been approved by the Board of Directors in January 2022 and had $17.2 million remaining of its $100 million repurchase parameters.

Local Economic Conditions

We believe that Puerto Rico’s economy continues to demonstrate resiliency and growth and its private sector is expanding. The Puerto Rico Economic Activity Index, as published by the Economic Development Bank for Puerto Rico, in November 2023 increased 5.9% year-over-year and retail sales in November increased 7.4% year-over-year and, according to the data published by Economic Development Bank for Puerto Rico, wages are also rising and labor participation is increasing. Total non-farm payroll employment in November 2023 improved 2.6% year-over-year and total employment rose 2.5% from July 2022 to December 2023. The inflow of federal stimulus and reconstruction funds for rebuilding infrastructure has continued. Nevertheless, OFG continues to pay attention to the potential impact of interest rate changes, inflation, and a possible U.S. mainland recession, all of which could impact our business and results of operations.

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– Summary of Significant Accounting Policies” to the consolidated financial statements and should be read in conjunction with this section.

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Allowance for Credit Losses related to loans collectively evaluated for impairment

The most critical and complex accounting estimate is associated with the determination of the ACL. The provision for credit losses charged to current operations is based on this determination. The ACL 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.

OFG’s management evaluates the adequacy of the ACL on a quarterly basis following a systematic methodology in order to provide for inherent risks in the loan portfolio. In developing its assessment of the adequacy of the ACL, 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 ACL. Consequently, the business, financial condition, liquidity, capital and results of operations could also be affected.

The ACL estimation requires management to use relevant forward-looking economic forecasts, by using variables such as employment and unemployment rate, gross national product (“GNP”), 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.

OFG applied a discounted cash flow (“DCF”) method for non-purchased credit deteriorated loans (non-PCD) and an undiscounted cash flow (“UDCF”) method for purchased credit deteriorated (PCD) loans to determine the ACL 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, the expected cash flows are calculated for each loan pool, pool reserve is calculated by aggregating total loss from the UDCF. 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. As of December 31, 2023, management gave more weight to the baseline scenario, except for the US loan segment where the moderate recession scenario was given a greater weight. Management selects the macroeconomic forecast that is most reflective of expectations at that point in time. The applicability of qualitative adjustments includes adjustments of inherent risk not captured by the quantitative model.

OFG’s sensitivity analysis does not represent management’s view of expected credit losses at December 31, 2023. OFG evaluated sensitivities by applying 100% weight to baseline and moderate recession scenarios. The impact of assigning a 100% weight to the baseline scenario was a hypothetical decrease of 4% to the collective ACL, and the impact of assigning a 100% weight to the moderate recession scenario was a hypothetical increase of 6% 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 ACL for off-balance sheet credit exposures.

For a detailed description of the principal factors used to determine the ACL related to loans collectively evaluated for impairment and for the principal enhancement’s management made to its methodology, please refer to “Note 1– Summary of Significant Accounting Policies” and “Note 5 – Loans” to the consolidated financial statements.

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FINANCIAL HIGHLIGHTS

The year ended December 31, 2023 was an outstanding year. At December 31, 2023, OFG ended with record levels of loans, customer deposits, assets, and stockholders’ equity. For the first time, commercial loan balances exceeded $3 billion and tangible common equity was more than $1 billion. OFG's ‘Digital First Strategy’ resulted in our retail customers completing 93% of routine transactions through self-service channels. OFG’s self-service portal, launched in early 2023, has been expanded to include more features and is rapidly being adopted by our customers. While consumer credit in Puerto Rico has begun to normalize post-pandemic, consumer liquidity and employment as well as commercial clients and the broader Puerto Rico economy continue to be strong.

Year Ended 2023:

Earnings per share diluted was $3.83 in 2023 compared to $3.44 in 2022. Total core revenues of $682.7 million in 2023 compared to $607.8 million in 2022.

Fourth Quarter of 2023:

Results Included:

Gain on Sale of Non-Performing Puerto Rico Small Business Loans: Resulted in a $6.3 million pre-tax gain in other non-interest income.

Workforce Early Retirement & Rightsizing: Resulted in $3.2 million in severance and lease cancellation costs in non-interest compensation and infrastructure expenses.

Large Public Funds Deposit: $1.2 billion in funds from an existing long-standing Puerto Rico government client were deposited mid-December.

Highlights:

Earnings per share diluted was $0.98 compared to $0.95 in the third quarter of 2023 and $0.97 in the fourth quarter of 2022. Total core revenues of $175.6 million compared to $172.2 million in the third quarter of 2023 and $168.3 million in the fourth quarter of 2022.

Performance metrics: Net interest margin of 5.62%, return on average assets of 1.76%, return on average tangible common stockholders’ equity of 18.22%, and efficiency ratio of 53.59%.

Total interest income of $176.2 million compared to $165.7 million in the third quarter of 2023 and $145.7 million in the fourth quarter of 2022. Compared to the third quarter of 2023, the fourth quarter of 2023 primarily reflected higher average balances and yields on loans and investment securities.

Total interest expense of $32.7 million compared to $23.9 million in the third quarter of 2023 and $10.4 million in the fourth quarter of 2022. Compared to the third quarter of 2023, the fourth quarter of 2023 reflected increases of $4.0 million in the cost of average core deposits and $4.8 million in the cost of average wholesale funding, primarily due to temporarily higher balances of borrowings and brokered deposits during the quarter.

Total banking and financial service revenues of $32.1 million compared to $30.4 million in the third quarter of 2023 and $33.0 million in the fourth quarter of 2022. Compared to the third quarter of 2023, the fourth quarter of 2023 reflected annual insurance commission recognition of $2.5 million in wealth management revenues and lower mortgage servicing revenues.

Pre-provision net revenues of $88.2 million compared to $82.3 million in the third quarter of 2023 and $76.9 million in the fourth quarter of 2022.

Total provision for credit losses of $19.7 million compared to $16.4 million in the third quarter of 2023 and $8.8 million in the fourth quarter of 2022. The fourth quarter of 2023 provision primarily reflected increased loan volume.

Credit quality: Net charge-offs of $16.3 million compared to $18.8 million in the third quarter of 2023 and $11.2 million in the fourth quarter of 2022. The fourth quarter of 2023 early and total delinquency rates were 2.76% and 3.76%, respectively, in line with the third quarter of 2023. The non-performing loan rate of 1.22% was the lowest over the last five quarters.

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Total non-interest expense of $94.1 million compared to $90.2 million in the third quarter of 2023 and $91.6 million in the fourth quarter of 2022.

Loans held for investment of $7.53 billion compared to $7.26 billion in the third quarter of 2023 and $6.84 billion in the fourth quarter of 2022. Loans increased 3.8% from the previous quarter and 10.2% year-over-year, reflecting increases in commercial loans and retail auto and consumer loans. This was partially offset by regular paydowns of residential mortgages and securitization and sale of conforming loans.

New loan production of $663.9 million compared to $567.5 million in the third quarter of 2023 and $616.4 million in the fourth quarter of 2022. The fourth quarter of 2023 primarily reflected increased commercial lending within Puerto Rico.

Total investments of $2.69 billion compared to $2.07 billion in the third quarter of 2023 and $1.97 billion in the fourth quarter of 2022. The third quarter of 2023 investments reflected purchases of $300 million of short-term US Treasury bills and $250 million of long-term government insured, mortgage-backed securities.

Customer deposits of $9.60 billion compared to $8.54 billion in the third quarter of 2023 and $8.56 billion in the fourth quarter of 2022.

Total borrowings and brokered deposits of $363.0 million compared to $454.4 million in the third quarter of 2023 and $38.4 million in the fourth quarter of 2022. The average balance of such wholesale funding was $602.0 million in the fourth quarter of 2023 compared to $266.4 million in the third quarter of 2023. The December 31, 2023 balance reflected repayment of $250 million of borrowings and the addition of $160 million of brokered deposits, most of which will mature in the first quarter of 2024.

Cash and cash equivalents of $748.2 million compared to $532.7 million in the third quarter of 2023 and $550.5 million in the fourth quarter of 2022.

Total assets of $11.34 billion at December 31, 2023 compared to $10.26 billion at September 30, 2023 and $9.82 billion at December 31, 2022.

Capital: CET1 ratio of 14.12% compared to 14.06% in the third quarter of 2023 and 13.64% in the fourth quarter of 2022. The Tangible Common Equity ratio was 9.68% compared to 9.74% in the third quarter of 2023 and 9.59% in the fourth quarter of 2022. Tangible Book Value per share of $23.13 compared to $21.01 in the third quarter of 2023 and $19.56 in the fourth quarter of 2022. The fourth quarter of 2023 Tangible Book Value reflected increased retained earnings and accumulated other comprehensive income.

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

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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 2023 and 2022.

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

FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022

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C - CHANGES IN NET INTEREST INCOME DUE TO:

Net Interest Income

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

Comparison of the years ended December 31, 2023 and 2022

Net interest income of $560.9 million increased by $78.8 million from $482.1 million. Tax equivalent basis net interest income of $576.9 million increased $80.2 million, or 16.1%, from $496.8 million.

Interest rate spread increased by 69 basis points to 5.71% from 5.02% and net interest margin increased 74 basis points to 5.79% from 5.05%. This increase reflects an increase of 130 and 61 basis points, respectively, in the total average yield of interest-earning assets and the average cost of interest-bearing liabilities.

Net interest income was positively impacted by:

•A $94.6 million increase in interest income from loans driven by higher interest income from: (i) commercial loans of $63.2 million, primarily related to the upward repricing of variable rate commercial loans, increased yields on new loans originated during 2023, and higher average balance; (ii) consumer loans of $12.0 million mainly due to an increase of $98.7 million in the average balance of this portfolio; and (iii) auto loans of $28.0 million reflecting higher originations during 2023, partially offset by a decrease of $8.6 million in interest income from mortgage loans due to a reduction of $185.5 million in the average balance of this portfolio;

•A $22.0 million increase in interest income from investment securities, primarily related to a higher average volume of $346.1 million, which resulted in an increase in interest income of approximately $10.0 million, and higher yield by 68 basis points, which contributed to the increase in net interest income by approximately $12.0 million; and

•A $16.7 million increase in interest income from higher yield in lower balances of interest-bearing cash and money market related to the increase in the FRB federal funds rate during 2022 and 2023.

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These increases were partially offset by higher interest expense of $54.5 million from (i) interest paid on deposits of $43.7 million due to higher average cost of total deposits of 52 basis points, (ii) $10.8 million paid on a new $200.0 million two-year FHLB advance in the period and (iii) interest paid on repurchase agreements of $3.3 million originated during the third quarter of 2023 that matured before the year-end, partially offset by the early redemption of $36.1 million subordinated capital notes during the first quarter of 2022, which resulted in a decrease in interest expense of $521 thousand.

TABLE 2 - NON-INTEREST INCOME SUMMARY

Non-Interest Income

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

Comparison of the years ended December 31, 2023 and 2022

OFG recorded non-interest income in the amount of $128.4 million, compared to $131.7 million, a decrease of 2.5%, or $3.3 million. The decrease in non-interest income was mainly due to:

•A decrease of $3.1 million in mortgage banking activities due to: (i) an unfavorable impact of $1.9 million in mortgage servicing rights valuation, (ii) a $1.1 million reduction in net gains on sales driven by lower sales volume, (iii) a $474 thousand reduction in servicing fees as a result of the FNMA mortgage servicing transfer to a third party and (iv) a $513 thousand reduction in cash collections;

•A $1.1 million loss associated with the sale of a $203.3 million short-term US treasury note available for sale during 2023; and

•A decrease of $1.1 million in banking service revenues, primarily related to: (i) a $531 thousand reduction in electronic banking charges of merchant-related income, (ii) a $405 thousand reduction in credit life commissions and (iii) a $221 thousand reduction in prepayment loan fees.

These increases in non-interest income were partially offset by, an increase of $1.5 million in other non-interest income. During 2023, OFG recorded a $6.3 million gain on the sale of commercial non-performing loans held-for-sale with a reporting balance of $4.3 million and unpaid principal balance of $25.3 million. Results for 2022 also included a $4.7 million gain recognized on the sale of a branch building.

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TABLE 3 - NON-INTEREST EXPENSES SUMMARY

Non-Interest Expenses

Comparison of the years ended December 31, 2023 and 2022

Non-interest expense was $363.4 million, representing an increase of 5.2%, or $17.8 million, compared to $345.5 million. The increase in non-interest expense was mainly due to:

•Increase in compensation and employee benefits of $12.9 million due to higher salaries and benefits, including payroll taxes. Also, during 2023, OFG recognized a $2.8 million expense relating to employee severance obligations resulting from a voluntary retirement program launched during the fourth quarter of 2023 and other rightsizing initiatives.

•Increase of $7.9 million in occupancy, equipment and infrastructure costs primary related to: (i) higher balances of $4.6 million in depreciation and amortization expenses reflecting new digital projects placed in production since 2022 and (ii) a $1.2 million increase in software maintenance expenses;

•Increase of $5.3 million in information technology expenses driven by higher design, development and operating support expenses incurred as part of OFG’s digital transformation strategy;

•Decrease of $1.7 million in foreclosed real estate and other repossessed assets income reflecting lower gain on sales of such assets; and

•Increase of $1.8 million in electronic banking charges mainly due to increases of $2.2 million in point-of-sale and merchant-related fees.

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The increase in non-interest expense was partially offset by, a decrease in (i) professional and service fees of $6.1 million, reflecting lower balances in compliance-related expenses and (ii) other expenses of $5.7 million, including $2.5 million due to the extinguishment of pandemic expenses, climate events expenses of $1.5 million and a $1.6 million decrease in debit card losses.

The efficiency ratio was 53.22%, an improvement from 56.85%. Amounts presented as part of non-interest income that were excluded from the efficiency ratio computation for years ended December 31, 2023 and 2022 amounted to $6.5 million and $6.0 million, respectively.

Provision for Credit Losses

Comparison of the years ended December 31, 2023 and 2022

Provision for credit losses increased $36.5 million to $60.6 million from $24.1 million. The provision for credit losses for 2023 reflected a provision of $42.6 million related to the growth in loan balances, a provision of $13.1 million related to commercial-specific loan reserves, mainly in the US commercial loan portfolio, and $4.8 million associated with qualitative adjustments mostly to the auto loan and US commercial loan portfolios.

The provision for credit losses for 2022 reflected a provision of $25.9 million related to the growth in loan balances, a provision of $11.8 million related to commercial-specific loan reserves due to certain commercial loans placed in non-accrual status, and a provision of $1.9 million for changes in the economic and loss rate models, offset by a $15.2 million release associated with qualitative adjustment due to improvement in the performance of the portfolios and in Puerto Rico’s labor market and $288 thousand release in other miscellaneous reserves.

Income Tax Expense

Comparison of the years ended December 31, 2023 and 2022

Income tax expense increased by $5.5 million to $83.4 million from $77.9 million. OFG’s Effective Tax Rate was 31.4% in 2023 compared to 31.9% in 2022. The increase in the income tax expense was related to greater income before tax by $13.0 million. OFG maintained an effective tax rate lower than statutory rate for the year ended December 31, 2023, mainly related to exempt investments, doing business through OFG's subsidiaries that are fully exempt or have a lower statutory tax rate, and changes in OFG’s valuation allowance.

During 2023, the Bank utilized $150.5 million deferred loan charge-offs for income tax purposes, decreasing its net deferred tax asset by $56.5 million. After this decrease, the Bank finalized in a net deferred tax liability position.

Refer to “Note 17 – Income Taxes” to the consolidated financial statements for additional information on the income tax expense.

Business Segments

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

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Eliminations include interest income and expense for a time deposit opened by the Bank in Oriental Overseas, an international banking entity organized pursuant to the Puerto Rico International Banking Center Regulatory Act, as amended, which operates as a unit within the Bank. The time deposit with a balance of $300.3 million and $470.2 million at December 31, 2023 and 2022, respectively, is included in the Treasury Segment with its corresponding interest expense, to fund Oriental Overseas operations, which is included in the Banking Segment with its corresponding interest income, and are eliminated in the consolidation. Interest income is accrued on the unpaid principal balance. The increase in interest income and interest expense from the prior year was mainly as a result of the FRB federal funds rate increases and higher average balance.

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Comparison of years ended December 31, 2023 and 2022

Banking

OFG’s banking segment net income before taxes increased by $1.7 million from $186.6 million to $188.3 million, mainly reflecting:

•Increase of $94.6 million in interest income from loans, driven by increased yields on higher loan balances; and

•Increase of $7.9 million in interest income related to Oriental Overseas’ time deposit from the Bank to fund its operations, which is eliminated in the consolidation, mainly as a result of higher average unpaid principal balance and interest rates in the current period.

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

•Increase of $36.1 million in provision for credit losses. The 2023 provision reflects $42.6 million related to the growth in loan balances, a provision of $13.1 million related to commercial-specific loan reserves, mainly in the US commercial loan portfolio, and $4.8 million associated with qualitative adjustments;

•Increase of $41.6 million in interest expense on deposits mainly related to higher costs of deposits;

•Increase of $21.4 million in non-interest expenses, mainly due to increases of: (i) $12.9 million in compensation and employee benefits, (ii) $7.9 million in occupancy, equipment and infrastructure costs related to depreciation and amortization expenses reflecting new digital projects placed in production since 2022 and software maintenance expenses, and (iii) $5.3 million in information technology expenses related to digital transformation, partially offset by lower: (a) professional and service fees of $6.1 million, and (b) other expenses of $5.7 million related to lower pandemic expenses by $2.5 million, climate event expenses by $1.5 million related to 2022 Hurricane Fiona and $1.6 million from debit card losses; and

•Decrease of $1.3 million in non-interest income. The current period included a $6.3 million gain on the sale of commercial non-performing loans held-for-sale, while the previous year included a $4.7 million gain recognized on the sale of a branch building.

Wealth Management

Net income before taxes from this segment increased by $3.2 million compared to the prior year, mainly reflecting:

•Annual insurance contingent commission amounting to $2.5 million received during 2023, $1.3 million higher than prior year due to Hurricane Fiona's related claims; and

•The sale of OFG’s retirement plan administration business during the fourth quarter of 2022, which resulted in a decrease of $3.2 million in non-interest expenses and $2.2 million in non-interest income.

Treasury

Treasury segment net income before taxes increased by $16.2 million, mainly reflecting:

•Increase of $38.5 million in interest income, reflecting the purchase of agency mortgage-backed securities and US Treasury securities during such period and higher yield in lower balances of interest-bearing cash and money market investments related to higher FRB federal funds rate than in the previous year;

•Increase of $20.8 million in interest expense, reflecting higher expenses of: (i) $7.9 million from inter-segment borrowing as a result of higher average balance and FRB federal funds rate, (ii) $10.8 million in interest from a new $200 million two-year FHLB advance, (iii) $3.3 million from repurchase agreements; and

•A loss of $1.1 million related to the sale of a short-term US treasury note during 2023.

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ANALYSIS OF FINANCIAL CONDITION

Assets Owned

At December 31, 2023, OFG’s total assets amounted to $11.344 billion, an increase of $1.526 billion, when compared to $9.819 billion at December 31, 2022.

Cash and due from banks increased by $197.4 million to $743.6 million, driven by the receipt of a $1.2 billion deposit from an existing long-standing Puerto Rico government client during the fourth quarter of 2023, the effect of a two-year $200.0 million FHLB advance and the sale of US Treasury securities during the year ended December 31, 2023, partially offset by loan funding, the purchase of $1.070 billion of investment securities and repayments of $150.0 million and $100.0 million, respectively, of repurchase agreements and overnight FHLB advances.

The investment portfolio increased by $715.2 million or 36.3% primarily driven by the purchase of $1.035 billion of mortgage-backed securities, $93.6 million in mortgage loan securitization, the purchase of a $35 million two-year privately placed hospital revenue bond issued by the Puerto Rico, Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority (“AFICA”, by its Spanish acronym) during the fourth quarter of 2023, and favorable market value adjustments of $31.5 million, partially offset by the sale of a $203.3 million US Treasury securities available for sale, the maturity and repayment of $111.5 million U.S. Treasury notes and principal paydowns on mortgage-backed securities totaling $162.0 million. OFG’s investment strategy focuses on liquidity and highly liquid securities, considering their investment and the current market environment.

OFG’s loan portfolio is comprised of commercial loans secured by real estate, other commercial and industrial loans, US commercial loans, residential mortgage loans, consumer loans, and auto loans. At December 31, 2023, OFG’s net loan portfolio increased by $678.4 million or 10.1% reflecting increases in commercial, auto and consumer loans, partially offset by a decrease in residential mortgage loans.

Financial Assets Managed

At December 31, 2023, OFG’s financial assets include those managed by OFG’s trust division and its securities broker-dealer and insurance agency subsidiaries. OFG’s trust division offers various types of individual retirement accounts (“IRAs”) and manages Keogh retirement plans and custodian and corporate trust accounts. At December 31, 2023 and 2022, the total assets managed by OFG’s trust division amounted to $2.512 billion and $2.335 billion, respectively. OFG’s broker-dealer subsidiary offers a wide array of investment alternatives to its client base, such as tax-advantaged fixed income securities, mutual funds, stocks, bonds and money management wrap-fee programs. At December 31, 2023, total assets managed by the securities broker-dealer and insurance agency subsidiaries from their customers’ investment accounts amounted to $2.446 billion, compared to $2.172 billion at December 31, 2022. Changes in trust and broker-dealer related assets also reflect changes in portfolio balances and differences in market value resulting from the increase in interest rates.

Goodwill

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

As of both December 31, 2023 and 2022, OFG had $84.2 million of goodwill allocated as follows: $84.1 million to the banking segment and $100 thousand to the wealth management segment. Please refer to “Note 11 – Goodwill and Other Intangible Assets” to our consolidated financial statements for more information on the annual goodwill impairment test.

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TABLE 5 - ASSETS SUMMARY AND COMPOSITION

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TABLE 6 - LOAN PORTFOLIO COMPOSITION

OFG’s loan portfolio is composed of commercial, mortgage, consumer, and auto loans. As shown in Table 6 above, total loans, net, amounted to $7.402 billion at December 31, 2023, a 10.1% increase when compared to $6.723 billion at December 31, 2022. The composition and trends of OFG’s loans held-for-investment portfolio were as follows:

•Commercial loan portfolio amounted to $3.077 billion (40.8% of the gross loan portfolio) compared to $2.630 billion (38.5% of the gross loan portfolio) at December 31, 2022. Commercial loans secured by non-owner occupied commercial real estate amounted to $744.6 million and $605.5 million at December 31, 2023 and December 31, 2022, respectively, which represented 9.9% and 8.9% of our total loan portfolio held for investment. US commercial loans amounted to $755.2 million and $642.1 million at December 31, 2023 and 2022, respectively, which represented 10.0% and 9.4% of our total loan portfolio held for investment. Commercial loan production increased 12%, or $118.0 million, to $1,108.3 million in 2023 from $990.3 million in 2022.

•Mortgage loan portfolio amounted to $1.563 billion (20.7% of the gross loan portfolio) compared to $1.704 billion (24.9% of the gross originated loan portfolio) at December 31, 2022. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to $19.4 million and $32.6 million at December 31, 2023 and 2022, respectively. Under the GNMA program, issuers such as OFG have the option but not the obligation to repurchase loans that are 90 days or more past due. For accounting purposes, these loans subject to the repurchase option are required to be reflected (rebooked) on our financial statements with an offsetting liability. Mortgage loan production totaled $133.0 million in 2023 which represents a decrease of 34% from $200.9 million in 2022.

This decrease reflects the negative impact of the FRB federal funds rate increases during 2022 and 2023 in the Puerto Rico housing market. OFG follows a conservative residential mortgage lending policy with more than 90% of its residential mortgage portfolio consisting of fixed-rate, fully amortizing, fully documented loans that do not have the level of risk associated with subprime loans offered by certain major US mortgage loan originators. Furthermore, OFG has never been active in negative amortization loans or offered adjustable-rate mortgage loans with teaser rates.

•Consumer loan portfolio amounted to $620.4 million (8.2% of the gross loan portfolio) compared to $537.3 million (7.9% of the gross loan portfolio) at December 31, 2022. Consumer loan production decreased 6% to $313.6 million in 2023 from $334.2 million in 2022.

•Auto loans portfolio amounted to $2.274 billion (30.3% of the gross loan portfolio) compared to $1.964 billion (28.7% of the gross originated loan portfolio) at December 31, 2022. Auto loans production increased by 13%, or $107.1 million to $919.7 million in 2023 from $812.6 million in 2022.

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The following table presents the loans held for investment portfolio as of December 31, 2023 by maturities and interest rates:

The following table includes the maturities of OFG’s lending exposure to the Puerto Rico government amounting to $68.6 million, which is limited solely to loans to municipalities secured by ad valorem property taxes, without limitation as to rate or amount, on all taxable property within the issuing municipalities. 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 $1,616.3 million at December 31, 2023.

TABLE 8 - PUERTO RICO GOVERNMENT RELATED LOANS

At December 31, 2023, OFG has $68.6 million of direct credit exposure to the Puerto Rico government, a $5.1 million decrease from $73.7 million in December 31, 2022.

Allowance for Credit Losses (“ACL”)

OFG measures its ACL based on management’s best estimate of expected credit losses inherent in OFG’s relevant financial assets. Tables 9 through 12 set forth an analysis of activity in the ACL and present selected credit loss statistics for 2023 and 2022 and as of December 31, 2023 and 2022. In addition, Table 6 sets forth the composition of the loan portfolio.

Please refer to the “Provision for Credit Losses” and “Critical Accounting Policies and Estimates” sections in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this annual report on Form 10-K and “Note 6 – Allowance for Credit Losses” of the accompanying consolidated financial statements for a more detailed analysis of provisions and ACL.

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Non-performing Assets

OFG’s non-performing assets include non-performing loans, foreclosed real estate, and other repossessed assets (see Tables 13 and 15). At December 31, 2023, OFG had $79.4 million of non-accrual loans held for investment, including $6.7 million PCD loans, compared to $89.6 million at December 31, 2022, reflecting decreases of $0.6 million and $9.1 million in auto and mortgage loan portfolios, respectively. At December 31, 2023 and 2022, total commercial non-accrual loans excluded $6.4 million and $16.4 million, respectively, of non-accrual commercial loans held for sale.

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

Delinquent residential mortgage loans insured or guaranteed under applicable Federal Housing Administration (“FHA”) and United States Department of Veterans Affairs (“VA”) programs are classified as non-performing loans when they become 90 days or more past due but are not placed in non-accrual status until they become 12 months or more past due, since they are insured loans. Therefore, those loans are included as non-performing loans but excluded from non-accrual loans. As of December 31, 2023 and 2022, the outstanding balance of these residential mortgage loans was $5.8 million and $10.3 million, respectively.

At December 31, 2023, OFG’s non-performing assets decreased by 13.6% to $100.0 million (0.88% total assets) from $115.7 million (1.18% of total assets) at December 31, 2022.

Foreclosed real estate decreased from $11.2 million at December 31, 2022 to $10.8 million at December 31, 2023 and other repossessed assets decreased from $4.6 million at December 31, 2022 to $4.0 million at December 31, 2023, both recorded at fair value. OFG does not expect non-performing loans to result in significantly higher losses. At December 31, 2023, the allowance coverage ratio to non-performing loans was 189.1% (152.9% at December 31, 2022).

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

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

Commercial loans - At December 31, 2023, OFG’s non-performing commercial loans amounted to $42.5 million (49.9% of OFG’s non-performing loans), a 1.9% decrease from $43.4 million at December 31, 2022 (43.4% of OFG’s non-performing loans). Non-PCD commercial loans are placed on non-accrual status when they become 90 days or more past due and are written down, if necessary, based on the specific evaluation of the underlying collateral, if any.

Mortgage loans - At December 31, 2023, OFG’s non-performing mortgage loans totaled $20.3 million (23.8% of OFG’s non-performing loans), a 40.0% decrease from $33.8 million (33.8% of OFG’s non-performing loans) at December 31, 2022. Non-PCD mortgage loans are placed on non-accrual status when they become 90 days or more past due and are written-down, if necessary, based on the specific evaluation of the collateral underlying the loan, except for FHA and VA insured mortgage loans which are placed in non-accrual when they become 12 months or more past due.

Consumer loans - At December 31, 2023, OFG’s non-performing consumer loans amounted to $3.4 million (4.0% of OFG’s non-performing loans), a 7.9% increase from $3.1 million at December 31, 2022 (3.1% of OFG’s non-performing loans). Non-PCD consumer loans are placed on non-accrual status when they become 90 days past due and written-off when payments are delinquent 120 days in personal loans and 180 days in credit cards and personal lines of credit.

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Auto loans - At December 31, 2023, OFG’s non-performing auto loans amounted to $19.1 million (22.3% of OFG’s total non-performing loans), a decrease of 2.8% from $19.6 million at December 31, 2022 (19.7% of OFG’s total non-performing loans). Non-PCD auto loans are placed on non-accrual status when they become 90 days past due, partially written-off to collateral value when payments are delinquent 120 days, and fully written-off when payments are delinquent 180 days.

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

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

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

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

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TABLE 9 - ALLOWANCE FOR CREDIT LOSSES BREAKDOWN

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TABLE 10 - ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES

TABLE 11 - ALLOWANCE FOR CREDIT LOSSES SUMMARY

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TABLE 12 — NET CREDIT LOSSES STATISTICS ON LOANS

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TABLE 12 — NET CREDIT LOSSES STATISTICS ON LOANS (CONTINUED)

Net charge-offs for 2023 amounted to $51.8 million, increasing by $24.2 million, when compared to $27.7 million in 2022.

Net charge-offs variances were as follows:

Residential mortgage loans net recoveries amounted to $839 thousand in 2023, decreasing by $3.2 million when compared to net recoveries of $4.0 million in 2022.

Commercial loans net charge-offs for 2023 amounted to $14.5 million, increasing by $6.0 million, when compared to net charge-offs of $8.4 million in 2022. The charge-offs for the 2023 included $11.5 million charge-offs recognized on three US commercial loan relationships, a $2.1 million charge-off recognized on a PCD commercial loan, and $906 thousand charge-offs for a small portfolio of non-performing small business commercial loans that were sold during the period.

Consumer loans net charge-offs for 2023 amounted to $20.0 million, increasing by $8.0 million, when compared to $12.0 million in 2022. Auto loans net charge-offs for 2023 amounted to $18.2 million, increasing by $7.0 million, when compared to $11.2 million in 2022. With Covid-19 cash stimulus fading away, OFG has increased net charge-offs in auto and consumer loan portfolios.

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TABLE 13 — NON-PERFORMING ASSETS

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

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TABLE 14 — NON-ACCRUAL LOANS

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TABLE 15 - NON-PERFORMING LOANS

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TABLE 16 - LIABILITIES SUMMARY AND COMPOSITION

Liabilities and Funding Sources

As shown in Table 15 above, at December 31, 2023, OFG’s total liabilities were $10.151 billion, 15.7% higher than the $8.776 billion reported at December 31, 2022. Deposits and borrowings, OFG’s funding sources, amounted to $9.963 billion at December 31, 2023 compared to $8.595 billion at December 31, 2022.

Deposits, excluding accrued interest payable, increased by $1.191 billion reflecting an increase in demand deposits of $733.7 million, brokered deposits of $150.8 million and time deposits of $309.2 million, offset by a decrease in savings and money market accounts of $139.9 million. In December 2023, OFG received a $1.2 billion deposit in an interest-bearing checking account from an existing long-standing Puerto Rico government client who had an inflow of liquidity. At December 31, 2023 and 2022, total public fund deposits from various Puerto Rico government municipalities, agencies and corporations amounted to $1.616 billion and $284.2 million, respectively. These public funds were collateralized with securities and commercial loans amounting to $1.645 billion and $367.3 million at December 31, 2023 and 2022, respectively.

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As of December 31, 2023, borrowings consist mainly of FHLB advances, which increased to $200.8 million, representing an increase of $174.1 million, when compared to $26.7 million at December 31, 2022. The increase in borrowings reflects a new two-year FHLB advance amounting to $200.0 million during the period as part of OFG’s asset liability management strategies.

Stockholders’ Equity

At December 31, 2023, OFG’s total stockholders’ equity was $1.193 billion, a 14.5% increase when compared to $1.042 billion at December 31, 2022. This increase reflects an increase in retained earnings of $123.0 million and legal surplus of $17.1 million, mainly due to $181.9 million in net income, partially offset by $41.9 million in common stock dividends, and a decrease in accumulated other comprehensive loss, net of tax, of $26.4 million from favorable market value adjustments on available-for-sale investment securities during 2023. These variances were partially offset by $17.2 million from treasury stock as a result of repurchases of common stock in the aggregate amount of $18.7 million in connection with the $100 million stock buyback program announced in 2022.

Regulatory Capital

OFG and the Bank are subject to regulatory capital requirements established by the FRB and the FDIC. The current risk-based capital standards applicable to OFG and the Bank (“Basel III capital rules”) are based on the final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision. As of December 31, 2023, the capital ratios of OFG and the Bank continue to exceed the minimum requirements for being “well-capitalized” under the Basel III capital rules.

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

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

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

TABLE 16 — CAPITAL, DIVIDENDS AND STOCK DATA