OFG 10-Q Quarterly Report March 31, 2017

OFG BANCORP

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10-Q 1 ofg10q03312017.htm FORM 10-Q UNITED STATES

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington , D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission File Number 001-12647

OFG Bancorp

Incorporated in the Commonwealth of Puerto Rico, IRS Employer Identification No. 66-0538893

Principal Executive Offices :

254 Muñoz Rivera Avenue

San Juan, Puerto Rico 00918

Telephone Number: (787) 771-6800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☐ Accelerated Filer ý Non-Accelerated Filer ☐ Smaller Reporting Company ☐ (Do not check if a smaller reporting company)

Emerging Growth Company ☐

If an Emerging Growth Company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

Number of shares outstanding of the registrant’s common stock, as of the latest practicable date:

43,947,442 common shares ($1.00 par value per share) outstanding as of April 30, 2017

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION			Page
Item 1.	Financial Statements
	Unaudited Consolidated Statements of Financial Condition		1
	Unaudited Consolidated Statements of Operations		2
	Unaudited Consolidated Statements of Comprehensive (Loss) Income		3
	Unaudited Consolidated Statements of Changes in Stockholders’ Equity		4
	Unaudited Consolidated Statements of Cash Flows		5
	Notes to Unaudited Consolidated Financial Statements
		Note 1 – Organization, Consolidation and Basis of Presentation	7
		Note 2 – Restricted Cash	9
		Note 3 – Investment Securities	9
		Note 4 – Loans	16
		Note 5 – Allowance for Loan and Lease Losses	38
		Note 6 – FDIC Indemnification Asset and True-Up Payment Obligation	44
		Note 7 – Derivatives	45
		Note 8 – Accrued Interest Receivable and Other Assets	47
		Note 9 – Deposits and Related Interest	48
		Note 10 – Borrowings and Related Interest	49
		Note 11 – Offsetting of Financial Assets and Liabilities	52
		Note 12 – Related Party Transactions	54
		Note 13 – Income Taxes	54
		Note 14 – Regulatory Capital Requirements	55
		Note 15 – Stockholders’ Equity	57
		Note 16 – Accumulated Other Comprehensive Income	58
		Note 17 – Earnings (Loss) per Common Share	59
		Note 18 – Guarantees	60
	Note 19 – Commitments and Contingencies		61
	Note 20 – Fair Value of Financial Instruments		63
	Note 21 – Business Segments		70

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		72
		Critical Accounting Policies and Estimates	72
		Overview of Financial Performance:	73
		Selected Financial Data	73
		Financial Highlights of the First Quarter of 2017	75
		Analysis of Results of Operations	76
		Analysis of Financial Condition	90
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		115
Item 4.	Controls and Procedures		119
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings		120
Item 1A.	Risk Factors		120
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		120
Item 3.	Default upon Senior Securities		120
Item 4.	Mine Safety Disclosures		120
Item 5.	Other Information		120
Item 6.	Exhibits		121
SIGNATURES			122
EXHIBIT INDEX

FORWARD-LOOKING STATEMENTS

The information included in this quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may relate to the financial condition, results of operations, plans, objectives, future performance and business of OFG Bancorp (“we,” “our,” “us” or the “Company”), including, but not limited to, statements with respect to the adequacy of the allowance for loan losses, delinquency trends, market risk and the impact of interest rate changes, capital markets conditions, capital adequacy and liquidity, and the effect of legal proceedings and new accounting standards on the Company’s financial condition and results of operations. All statements contained herein that are not clearly historical in nature are forward-looking, and the words “anticipate,” “believe,” “continues,” “expect,” “estimate,” “intend,” “project” and similar expressions and future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may,” or similar expressions are generally intended to identify forward-looking statements.

These statements are not guarantees of future performance and involve certain risks, uncertainties, estimates and assumptions by management that are difficult to predict. Various factors, some of which by their nature are beyond the Company’s control, could cause actual results to differ materially from those expressed in, or implied by, such forward-looking statements. Factors that might cause such a difference include, but are not limited to:

· additional credit defaults or a restructuring by the Commonwealth of Puerto Rico or any of its agencies, municipalities or instrumentalities;

· possible legislative, tax or regulatory changes;

· the rate of growth in the economy and employment levels, as well as general business and economic conditions;

· the relative strength or weakness of the consumer and commercial credit sectors and of the real estate market in

Puerto Rico;

· competition in the financial services industry;

· the fiscal and monetary policies of the federal government and its agencies;

· changes in interest rates, as well as the magnitude of such changes;

· changes in federal bank regulatory and supervisory policies, including required levels of capital;

· the impact of the industry regulations on the Company’s businesses, business practices and cost of operations;

· the performance of the securities markets; and

· additional Federal Deposit Insurance Corporation (“FDIC”) assessments.

Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward-looking statements include the following: negative economic conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense; changes in interest rates and market liquidity which may reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets; adverse movements and volatility in debt and equity capital markets; changes in market rates and prices which may adversely impact the value of financial assets and liabilities; liabilities resulting from litigation and regulatory investigations; changes in accounting standards, rules and interpretations; increased competition; the Company’s ability to grow its core businesses; decisions to downsize, sell or close units or otherwise change the Company’s business mix; and management’s ability to identify and manage these and other risks.

All forward-looking statements included in this quarterly report on Form 10-Q are based upon information available to the Company as of the date of this report, and other than as required by law, including the requirements of applicable securities laws, the Company assumes no obligation to update or revise any such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

ITEM 1. FINANCIAL STATEMENTS

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

AS OF MARCH 31, 2017 AND DECEMBER 31, 2016

	March 31,		December 31,
	2017		2016
	(In thousands)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	473,586	$	504,833
Money market investments		6,685		5,606
Total cash and cash equivalents		480,271		510,439
Restricted cash		3,030		3,030
Investments:
Trading securities, at fair value, with amortized cost of $667 (December 31, 2016 - $667)		314		347
Investment securities available-for-sale, at fair value, with amortized cost of $796,558 (December 31, 2016 - $749,867)		800,042		751,484
Investment securities held-to-maturity, at amortized cost, with fair value of $570,963 (December 31, 2016 - $592,763)		577,997		599,884
Federal Home Loan Bank (FHLB) stock, at cost		17,161		10,793
Other investments		3		3
Total investments		1,395,517		1,362,511
Loans:
Mortgage loans held-for-sale, at lower of cost or fair value		15,837		12,499
Loans held for investment, net of allowance for loan and lease losses of $121,034 (December 31, 2016 - $115,937)		4,073,871		4,135,193
Total loans		4,089,708		4,147,692
Other assets:
FDIC indemnification asset		-		14,411
Foreclosed real estate		47,551		47,520
Accrued interest receivable		18,555		20,227
Deferred tax asset, net		121,442		124,200
Premises and equipment, net		69,786		70,407
Customers' liability on acceptances		24,288		23,765
Servicing assets		9,688		9,858
Derivative assets		1,123		1,330
Goodwill		86,069		86,069
Other assets		67,579		80,365
Total assets	$	6,414,607	$	6,501,824
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand deposits	$	1,944,921		1,939,764
Savings accounts		1,237,874		1,196,232
Time deposits		1,535,033		1,528,491
Total deposits		4,717,828		4,664,487
Borrowings:
Securities sold under agreements to repurchase		531,179		653,756
Advances from FHLB		104,948		105,454
Subordinated capital notes		36,083		36,083
Other borrowings		185		61
Total borrowings		672,395		795,354
Other liabilities:
Derivative liabilities		1,967		2,437
Acceptances executed and outstanding		24,288		23,765
Accrued expenses and other liabilities		66,700		95,370
Total liabilities		5,483,178		5,581,413
Commitments and contingencies (See Note 19)
Stockholders’ equity:
Preferred stock; 10,000,000 shares authorized;
1,340,000 shares of Series A, 1,380,000 shares of Series B, and 960,000 shares of Series D
issued and outstanding, (December 31, 2016 - 1,340,000 shares; 1,380,000 shares; and 960,000 shares)
$25 liquidation value		92,000		92,000
84,000 shares of Series C issued and outstanding (December 31, 2016 - 84,000 shares); $1,000 liquidation value		84,000		84,000
Common stock, $1 par value; 100,000,000 shares authorized; 52,625,869 shares issued:
43,947,442 shares outstanding (December 31, 2016 - 52,625,869; 43,914,844)		52,626		52,626
Additional paid-in capital		540,808		540,948
Legal surplus		77,772		76,293
Retained earnings		185,377		177,808
Treasury stock, at cost, 8,678,427 shares (December 31, 2016 - 8,711,025 shares)		(104,502)		(104,860)
Accumulated other comprehensive income, net of tax of $296 (December 31, 2016 $983)		3,348		1,596
Total stockholders’ equity		931,429		920,411
Total liabilities and stockholders’ equity	$	6,414,607	$	6,501,824
See notes to unaudited financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS ENDED MARCH 31, 2017 AND 2016

	Quarter Ended March 31,
	2017		2016
	(In thousands, except per share data)
Interest income:
Loans	$	77,650	$	81,152
Mortgage-backed securities		7,206		8,997
Investment securities and other		1,322		1,157
Total interest income		86,178		91,306
Interest expense:
Deposits		7,353		7,124
Securities sold under agreements to repurchase		3,245		6,099
Advances from FHLB and other borrowings		596		2,240
Subordinated capital notes		366		868
Total interest expense		11,560		16,331
Net interest income		74,618		74,975
Provision for loan and lease losses, net		17,654		13,789
Net interest income after provision for loan and lease losses		56,964		61,186
Non-interest income:
Banking service revenue		10,626		10,118
Wealth management revenue		6,215		6,152
Mortgage banking activities		587		855
Total banking and financial service revenues		17,428		17,125

FDIC shared-loss benefit (expense), net		1,403		(4,029)
Net gain (loss) on:
Sale of securities		-		11,996
Derivatives		81		(3)
Early extinguishment of debt		-		(12,000)
Other non-interest income		162		414
Total non-interest income, net		19,074		13,503

Non-interest expense:
Compensation and employee benefits		20,347		20,254
Professional and service fees		3,237		2,985
Occupancy and equipment		7,199		7,677
Insurance		1,600		3,150
Electronic banking charges		4,902		5,589
Information technology expenses		1,998		1,657
Advertising, business promotion, and strategic initiatives		1,361		1,294
Foreclosure, repossession and other real estate expenses		1,326		1,930
Loan servicing and clearing expenses		1,189		2,130
Taxes, other than payroll and income taxes		2,372		2,671
Communication		914		963
Printing, postage, stationary and supplies		637		725
Director and investor relations		280		278
Credit related expenses		2,626		2,255
Other		1,696		1,299
Total non-interest expense		51,684		54,857
Income before income taxes		24,354		19,832
Income tax expense		9,204		5,661
Net income		15,150		14,171
Less: dividends on preferred stock		(3,465)		(3,465)
Income available to common shareholders	$	11,685	$	10,706
Earnings per common share:
Basic	$	0.27	$	0.24
Diluted	$	0.26	$	0.24
Average common shares outstanding and equivalents		51,131		51,064
Cash dividends per share of common stock	$	0.06	$	0.06

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE QUARTERS ENDED MARCH 31, 2017 AND 2016


	Quarter Ended March 31,
	2017		2016
	(In thousands)

Net income	$	15,150	$	14,171
Other comprehensive income (loss) before tax:
Unrealized gain on securities available-for-sale		1,866		8,643
Realized gain on investment securities included in net income		-		(11,996)
Unrealized gain (loss) on cash flow hedges		182		(11)
Other comprehensive income (loss) before taxes		2,048		(3,364)
Income tax effect		(296)		1,651
Other comprehensive income (loss) after taxes		1,752		(1,713)
Comprehensive income	$	16,902	$	12,458

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE QUARTERS ENDED MARCH 31, 2017 AND 2016


	Quarter Ended March 31,
	2017		2016
	(In thousands)
Preferred stock:
Balance at beginning of period	$	176,000	$	176,000
Balance at end of period		176,000		176,000
Common stock:
Balance at beginning of period		52,626		52,626
Balance at end of period		52,626		52,626
Additional paid-in capital:
Balance at beginning of period		540,948		540,512
Stock-based compensation expense		218		364
Lapsed restricted stock units		(358)		(505)
Balance at end of period		540,808		540,371
Legal surplus:
Balance at beginning of period		76,293		70,435
Transfer from retained earnings		1,479		1,430
Balance at end of period		77,772		71,865
Retained earnings:
Balance at beginning of period		177,808		148,886
Net income		15,150		14,171
Cash dividends declared on common stock		(2,637)		(2,633)
Cash dividends declared on preferred stock		(3,465)		(3,465)
Transfer to legal surplus		(1,479)		(1,430)
Balance at end of period		185,377		155,529
Treasury stock:
Balance at beginning of period		(104,860)		(105,379)
Lapsed restricted stock units		358		505
Balance at end of period		(104,502)		(104,874)
Accumulated other comprehensive income, net of tax:
Balance at beginning of period		1,596		13,997
Other comprehensive income (loss), net of tax		1,752		(1,713)
Balance at end of period		3,348		12,284
Total stockholders’ equity	$	931,429	$	903,801

See notes to unaudited consolidated financial statements

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE QUARTERS ENDED MARCH 31, 2017 AND 2016


	Quarter Ended March 31,
	2017		2016
	(In thousands)
Cash flows from operating activities:
Net income	$	15,150	$	14,171
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred loan origination fees, net of costs		618		888
Amortization of fair value premiums, net of discounts, on acquired loans		-		39
Amortization of investment securities premiums, net of accretion of discounts		2,336		2,129
Amortization of core deposit and customer relationship intangibles		369		419
Amortization of fair value premiums on acquired deposits		-		97
FDIC shared-loss (benefit) expense, net		(1,403)		4,029
Depreciation and amortization of premises and equipment		2,110		2,487
Deferred income tax expense, net		2,443		2,033
Provision for loan and lease losses, net		17,654		13,789
Stock-based compensation		218		364
(Gain) loss on:
Sale of securities		-		(11,996)
Sale of mortgage loans held-for-sale		(207)		(344)
Derivatives		(81)		61
Early extinguishment of debt		-		12,000
Foreclosed real estate		1,570		2,483
Sale of other repossessed assets		(160)		(723)
Sale of premises and equipment		-		14
Originations of loans held-for-sale		(38,945)		(39,513)
Proceeds from sale of mortgage loans held-for-sale		10,893		13,303
Net (increase) decrease in:
Trading securities		33		(26)
Accrued interest receivable		1,672		2,245
Servicing assets		170		(364)
Other assets		11,615		(949)
Net increase (decrease) in:
Accrued interest on deposits and borrowings		(1,031)		(397)
Accrued expenses and other liabilities		(25)		7,239
Net cash provided by operating activities		24,999		23,478
Cash flows from investing activities:
Purchases of:
Investment securities available-for-sale		(51,430)		(107)
Investment securities held-to-maturity		-		(32,552)
FHLB stock		(7,065)		-
Maturities and redemptions of:
Investment securities available-for-sale		28,659		40,778
Investment securities held-to-maturity		20,551		14,704
FHLB stock		697		22
Proceeds from sales of:
Investment securities available-for-sale		-		295,172
Foreclosed real estate and other repossessed assets, including write-offs		(127)		12,248
Proceeds from sale of loans held-for-sale		-		478
Premises and equipment		-		36
Origination and purchase of loans, excluding loans held-for-sale		(171,153)		(186,640)
Principal repayment of loans, including covered loans		213,135		236,787
Repayment to the FDIC for the termination of shared-loss agreements		(10,125)		-
Reimbursements from the FDIC on shared-loss agreements, net of repayments		-		406
Additions to premises and equipment		(1,489)		(1,922)
Net cash provided by investing activities		21,653		379,410

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE QUARTERS ENDED MARCH 31, 2017 AND 2016 – (CONTINUED)


	Quarter Ended March 31,
	2017		2016
	(In thousands)
Cash flows from financing activities:
Net increase (decrease) in:
Deposits		51,853		54,635
Securities sold under agreements to repurchase		(121,792)		(310,000)
FHLB advances, federal funds purchased, and other borrowings		(378)		(460)
Subordinated capital notes		-		175
Exercise of stock options and restricted units lapsed, net		(1)		-
Dividends paid on preferred stock		(3,465)		(3,465)
Dividends paid on common stock		(3,037)		(2,633)
Net cash used in financing activities	$	(76,820)	$	(261,748)
Net change in cash and cash equivalents		(30,168)		141,140
Cash and cash equivalents at beginning of period		510,439		536,709
Cash and cash equivalents at end of period	$	480,271	$	677,849
Supplemental Cash Flow Disclosure and Schedule of Non-cash Activities:
Interest paid	$	12,131	$	16,310
Income taxes paid	$	-	$	3,642
Mortgage loans securitized into mortgage-backed securities	$	24,921	$	23,003
Transfer from loans to foreclosed real estate and other repossessed assets	$	1,601	$	11,629

See notes to unaudited consolidated financial statements

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ORGANIZATION, CONSOLIDATION AND BASIS OF PRESENTATION

Nature of Operations

OFG Bancorp (the “Company”) is a publicly-owned financial holding company incorporated under the laws of the Commonwealth of Puerto Rico. The Company operates through various subsidiaries including, a commercial bank, Oriental Bank (the “Bank”), a securities broker-dealer, Oriental Financial Services Corp. (“Oriental Financial Services”), an insurance agency, Oriental Insurance, LLC. (“Oriental Insurance”) and a retirement plan administrator, Oriental Pension Consultants, Inc. (“OPC”). Through these subsidiaries and their respective divisions, the Company provides a wide range of banking and financial services such as commercial, consumer and mortgage lending, auto loans, financial planning, insurance sales, money management and investment banking and brokerage services, as well as corporate and individual trust services.

On April 30, 2010, the Bank acquired certain assets and assumed certain deposits and other liabilities of Eurobank, a Puerto Rico commercial bank, in an FDIC-assisted acquisition. On February 6, 2017, the Bank and the FDIC agreed to terminate the shared-loss agreements related to the Eurobank Acquisition. On December 18, 2012, the Company acquired a group of Puerto Rico-based entities that included Banco Bilbao Vizcaya Argentaria Puerto Rico (“BBVAPR”), a Puerto Rico commercial bank, as well as a securities broker-dealer and an insurance agency, which is referred to herein as the “BBVAPR Acquisition.” The businesses acquired in these acquisitions have been integrated with the Company’s existing business.

Recent Accounting Developments

Premium Amortization on Purchased Callable Debt Securities Receivables . In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-08, which requires the amortization of the premium on callable debt securities to the earliest call date. The amortization period for callable debt securities purchased at a discount would not be impacted by the ASU. This ASU will be applied prospectively for annual and interim periods in fiscal years beginning after December 15, 2018. We are currently assessing the impact that the adoption of ASU 2017-08 will have on our consolidated financial statements and related disclosures.

Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting (a consensus of the Emerging Issues Task Force). In February 2017, the FASB issued ASU No. 2017-06, which intended to reduce diversity and improve the usefulness of information provided by employee benefit plans that hold interests in master trusts. This ASU will be applied prospectively for annual and interim periods in fiscal years beginning after December 15, 2018. The ASU is not expected to have a material impact on the Company's consolidated financial position or results of operations.

Simplifying the Test for Goodwill Impairment. In January 2017, the FASB issued ASU No. 2017-04, which simplifies the measurement of goodwill impairment. An entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. This ASU will be applied prospectively for annual and interim periods in fiscal years beginning after December 15, 2019. We are currently assessing the impact that the adoption of ASU 2017-04 will have on our consolidated financial statements and related disclosures.

Restricted Cash. In November 2016, the FASB issued ASU No. 2016-18, which amends Topic 230 (Statement of Cash Flows) and requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU No. 2016-18 is intended to reduce diversity in practice in how restricted cash or restricted cash equivalents are presented and classified in the statement of cash flows. ASU No. 2016-18 is effective for fiscal years, and interim periods, beginning after December 15, 2017, with early adoption permitted. The standard requires application using a retrospective transition method. The adoption of ASU No. 2016-18 will change the presentation and classification of restricted cash and restricted cash equivalents in our consolidated statements of cash flows.

Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued ASU No. 2016-13, which includes an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. ASU No. 2016-13 is effective for fiscal years, and interim periods, beginning after December 15, 2019. Early application is permitted for fiscal years, and interim periods, beginning after December 15, 2018. While we continue to assess the impact of ASU No. 2016-13, we have developed a roadmap with time schedules in place from 2016 to implementation date.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Leases. In February 2016, the FASB issued ASU No. 2016-02, which requires lessees to recognize a right-of-use asset and related lease liability for leases classified as operating leases at the commencement date that have lease terms of more than 12 months. This ASU retains the classification distinction between finance leases and operating leases. ASU No. 2016-02 is effective for fiscal years, and interim periods, beginning after December 15, 2018. Early application is permitted, but we have not yet adopted ASU No. 2016-02. We are currently assessing the impact the adoption of ASU 2016-02 will have on our consolidated financial statements and related disclosures.

Revenue from Contracts with Customers. In May 2014, the FASB issued ASU No. 2014-09, which supersedes the revenue recognition requirements Topic 605 (Revenue Recognition), and most industry-specific guidance. ASU No. 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU No. 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09 permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). In August 2015, the FASB issued ASU No. 2015-14 to defer the effective date of ASU No. 2014-09 by one year to fiscal years beginning after December 15, 2017. ASU No. 2015-14 also permits early adoption of ASU No. 2014-09, but not before the original effective date, which was for fiscal years beginning after December 15, 2016. We currently anticipate adopting ASU 2014-09, as amended by ASU No. 2015-14, using the modified retrospective method and do not believe the adoption will have a material impact on the timing of our revenue recognition as it is not applicable to our finance charges and premiums earned sources of revenue. We are currently evaluating the effect that ASU 2014-09, as amended by ASU No. 2015-14, will have on our other income source of revenue.

Other than the accounting pronouncements disclosed above, there are no other new accounting pronouncements issued during the first quarter of 2017 that could have a material impact on the Company's financial position, operating results or financial statements disclosures.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 2 – RESTRICTED CASH

The following table includes the composition of the Company’s restricted cash :

	March 31,		December 31,
	2017		2016
	(In thousands)
Cash pledged as collateral to other financial institutions to secure:
Derivatives	$	1,980	$	1,980
Obligations under agreement of loans sold with recourse		1,050		1,050
	$	3,030	$	3,030

At March 31, 2017 and December 31, 2016, the Bank’s international banking entities, Oriental International Bank Inc. (“OIB”) and Oriental Overseas, a division of the Bank, held an unencumbered certificate of deposit and other short-term highly liquid securities in the amount of $300 thousand as the legal reserve required for international banking entities in Puerto Rico law. At March 31, 2017 the Bank’s international banking entities, Oriental International Bank Inc. (“OIB”) and Oriental Overseas, a division of the Bank, held an unencumbered certificate of deposit and other short-term highly liquid securities in the amount of $ 300 thousand and $ 325 thousand, respectively, as the legal reserve required for international banking entities under Puerto Rico law. The certificate of deposit and other securities cannot be withdrawn or sold by OIB or Oriental Overseas without prior written approval of the OCFI.

As part of its derivative activities, the Company has entered into collateral agreements with certain financial counterparties. At March 31, 2017 and December 31, 2016, the Company had delivered approximately $2.0 million, at both periods, of cash as collateral for such derivatives activities.

As part of the BBVA Acquisition, the Company assumed a contract with FNMA which required collateral to guarantee the repurchase, if necessary, of loans sold with recourse. At March 31, 2017 and December 31, 2016, the Company delivered as collateral cash amounting to approximately $1.1 million, at both periods.

The Bank is required by Puerto Rico law to maintain average weekly reserve balances to cover demand deposits. The amount of those minimum average reserve balances for the week that covered March 31, 2017 was $ 160.0 million (December 31, 2016 - $ 161.0 million). At March 31, 2017 and December 31, 2016, the Bank complied with the requirement. Cash and due from bank as well as other short-term, highly liquid securities are used to cover the required average reserve balances.

NOTE 3 – INVESTMENT SECURITIES

Money Market Investments

The Company considers as cash equivalents all money market instruments that are not pledged and that have maturities of three months or less at the date of acquisition. At March 31, 2017 and December 31, 2016, money market instruments included as part of cash and cash equivalents amounted to $6.7 million and $5.6 million, respectively.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Investment Securities

The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the securities owned by the Company at March 31, 2017 and December 31, 2016 were as follows:

	March 31, 2017
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
	(In thousands)
Available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates	$	452,484	$	6,703	$	2,165	$	457,022	2.62%
GNMA certificates		186,514		2,110		727		187,897	2.96%
CMOs issued by US government-sponsored agencies		98,023		73		1,610		96,486	1.89%
Total mortgage-backed securities		737,021		8,886		4,502		741,405	2.61%
Investment securities
US Treasury securities		49,530		-		526		49,004	1.73%
Obligations of US government-sponsored agencies		3,604		-		19		3,585	1.38%
Obligations of Puerto Rico government and public instrumentalities		4,680		-		433		4,247	5.55%
Other debt securities		1,723		78		-		1,801	2.97%
Total investment securities		59,537		78		978		58,637	2.05%
Total securities available for sale	$	796,558	$	8,964	$	5,480	$	800,042	2.57%
Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates	$	577,997	$	118	$	7,152	$	570,963	2.13%
Total	$	1,374,555	$	9,082	$	12,632	$	1,371,005	2.38%

	December 31, 2016
			Gross		Gross				Weighted
	Amortized		Unrealized		Unrealized		Fair		Average
	Cost		Gains		Losses		Value		Yield
	(In thousands)
Available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates	$	422,168	$	6,354	$	3,036	$	425,486	2.59%
GNMA certificates		163,614		2,241		620		165,235	2.95%
CMOs issued by US government-sponsored agencies		103,990		64		2,223		101,831	1.88%
Total mortgage-backed securities		689,772		8,659		5,879		692,552	2.57%
Investment securities
US Treasury securities		49,672		-		618		49,054	1.73%
Obligations of US government-sponsored agencies		3,903		-		19		3,884	1.38%
Obligations of Puerto Rico government and public instrumentalities		4,680		-		607		4,073	5.55%
Other debt securities		1,840		81		-		1,921	3.00%
Total investment securities		60,095		81		1,244		58,932	2.04%
Total securities available-for-sale	$	749,867	$	8,740	$	7,123	$	751,484	2.53%
Held-to-maturity
Mortgage-backed securities
FNMA and FHLMC certificates	$	599,884	$	145	$	7,266	$	592,763	2.15%
Total	$	1,349,751	$	8,885	$	14,389	$	1,344,247	2.36%

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The amortized cost and fair value of the Company’s investment securities at March 31, 2017, by contractual maturity, are shown in the next table. Securities not due on a single contractual maturity date, such as collateralized mortgage obligations, are classified in the period of final contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	March 31, 2017
	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)				(In thousands)
Mortgage-backed securities
Due from 1 to 5 years
FNMA and FHLMC certificates	$	9,137	$	9,212	$	-	$	-
Total due from 1 to 5 years		9,137	$	9,212		-		-
Due after 5 to 10 years
CMOs issued by US Government-sponsored agencies	$	7,511	$	7,296	$	-	$	-
FNMA and FHLMC certificates		33,357		33,648		-		-
Total due after 5 to 10 years		40,868		40,944		-		-
Due after 10 years
FNMA and FHLMC certificates	$	409,990	$	414,162	$	577,997	$	570,963
GNMA certificates		186,514		187,897		-		-
CMOs issued by US Government-sponsored agencies		90,512		89,190		-		-
Total due after 10 years		687,016		691,249		577,997		570,963
Total mortgage-backed securities		737,021		741,405		577,997		570,963
Investment securities
Due less than one year
US Treasury securities	$	324	$	324	$	-	$	-
Total due in less than one year		324		324		-		-
Due from 1 to 5 years
US Treasury securities	$	34,493	$	34,190	$	-	$	-
Obligations of US Government and sponsored agencies		3,604		3,585		-		-
Obligations of Puerto Rico government and public instrumentalities		4,680		4,247		-		-
Total due from 1 to 5 years		42,777		42,022		-		-
Due from 5 to 10 years
US Treasury securities	$	14,713	$	14,490	$	-	$	-
Other debt securities		1,723		1,801		-		-
Total due after 5 to 10 years		16,436		16,291		-		-
Total investment securities		59,537		58,637		-		-
Total securities available-for-sale	$	796,558	$	800,042	$	577,997	$	570,963

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company, as part of its asset/liability management, may purchase U.S. Treasury securities and U.S. government-sponsored agency discount notes close to their maturities as alternatives to cash deposits at correspondent banks or as a short term vehicle to reinvest the proceeds of sale transactions until investment securities with attractive yields can be purchased. During the quarter ended March 31, 2017 and 2016, the Company retained securitized GNMA pools totaling $ 25.0 million and $ 23.0 million amortized cost, respectively, at a yield of 3.14 % and 3.06 %, respectively, from its own originations .

During the quarter ended March 31 , 2017, the Company did not sell any mortgage-backed securities or record any net gain on sale of securities. During the quarter ended March 31, 2016, the Company sold $272.1 million on mortgage-backed securities and $11.1 million of Puerto Rico government bonds, and recorded a net gain on sale of securities of $12.0 million. Among the 2016 sales, the Company sold all but one of the Puerto Rico government bonds it held.

	Quarter Ended March 31, 2016
			Book Value
Description	Sale Price		at Sale		Gross Gains		Gross Losses
	(In thousands)
Sale of securities available-for-sale
Mortgage-backed securities
FNMA and FHLMC certificates	$	288,194	$	272,081	$	16,113	$	-
Investment securities
Obligations of PR government and public instrumentalities		6,978		11,095		-		4,117
Total mortgage-backed securities	$	295,172	$	283,176	$	16,113	$	4,117

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables show the Company’s gross unrealized losses and fair value of investment securities available-for-sale and held-to-maturity, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position at March 31, 2017 and December 31, 2016:

	March 31, 2017
	12 months or more
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US government-sponsored agencies	$	31,942	$	564	$	31,378
Obligations of Puerto Rico government and public instrumentalities		4,680		433		4,247
	$	36,622	$	997	$	35,625

	Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies	$	55,117	$	1,046	$	54,071
FNMA and FHLMC certificates		177,258		2,165		175,093
Obligations of US government and sponsored agencies		3,604		19		3,585
GNMA certificates		30,727		727		30,000
US Treausury Securities		49,206		526		48,680
	$	315,912	$	4,483	$	311,429

Securities held-to-maturity
FNMA and FHLMC Certificates		501,949		7,152		494,797
	$	501,949		7,152		494,797
	$	1,133,773	$	16,118	$	1,117,655


	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies	$	87,059	$	1,610	$	85,449
FNMA and FHLMC certificates		177,258		2,165		175,093
Obligations of Puerto Rico government and political subdivisions		4,680		433		4,247
Obligations of US government and sponsored agencies		3,604		19		3,585
GNMA certificates		30,727		727		30,000
US Treausury Securities		49,206		526		48,680
		352,534		5,480		347,054
Securities held-to-maturity
FNMA and FHLMC certificates		501,949		7,152		494,797
	$	854,483	$	12,632	$	841,851

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2016
	12 months or more
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
Obligations of Puerto Rico government and public instrumentalities	$	4,680	$	607	$	4,073
CMOs issued by US government-sponsored agencies		33,883		793		33,090
	$	38,563	$	1,400	$	37,163


	Less than 12 months
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies		67,777		1,430		66,347
FNMA and FHLMC certificates		184,782		3,036		181,746
Obligations of US government and sponsored agencies		3,903		19		3,884
GNMA certificates		29,445		620		28,825
US Treausury Securities		49,172		618		48,554
	$	335,079	$	5,723	$	329,356

Securities held to maturity
FNMA and FHLMC certificates		525,258		7,266		517,992
	$	525,258	$	7,266	$	517,992
	$	860,337	$	12,989	$	847,348


	Total
	Amortized		Unrealized		Fair
	Cost		Loss		Value
	(In thousands)
Securities available-for-sale
CMOs issued by US Government-sponsored agencies		101,660		2,223		99,437
FNMA and FHLMC certificates		184,782		3,036		181,746
Obligations of Puerto Rico government and public instrumentalities		4,680		607		4,073
Obligations of US government and sponsored agencies		3,903		19		3,884
GNMA certificates		29,445		620		28,825
US Treausury Securities		49,172		618		48,554
	$	373,642	$	7,123	$	366,519

Securities available-for-sale
FNMA and FHLMC certificates		525,258		7,266		517,992
	$	525,258	$	7,266	$	517,992
	$	898,900	$	14,389	$	884,511

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company performs valuations of the investment securities on a monthly basis. Moreover, the Company conducts quarterly reviews to identify and evaluate each investment in an unrealized loss position for other-than-temporary impairment. Any portion of a decline in value associated with credit loss is recognized in the statements of operations with the remaining noncredit-related component recognized in other comprehensive income (loss). A credit loss is determined by assessing whether the amortized cost basis of the security will be recovered by comparing the present value of cash flows expected to be collected from the security, discounted at the rate equal to the yield used to accrete current and prospective beneficial interest for the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered to be the “credit loss.” Other-than-temporary impairment analysis is based on estimates that depend on market conditions and are subject to further change over time. In addition, while the Company believes that the methodology used to value these exposures is reasonable, the methodology is subject to continuing refinement, including those made as a result of market developments. Consequently, it is reasonably possible that changes in estimates or conditions could result in the need to recognize additional other-than-temporary impairment charges in the future.

Most of the investments ($ 849.8 million, amortized cost, or 99.5 %) with an unrealized loss position at March 31, 2017 consist of securities issued or guaranteed by the U.S. Treasury or U.S. government-sponsored agencies, all of which are highly liquid securities that have a large and efficient secondary market. Their aggregate losses and their variability from period to period are the result of changes in market conditions, and not due to the repayment capacity or creditworthiness of the issuers or guarantors of such securities.

The remaining investment ($ 4.7 million, amortized cost, or 0.5 %) with an unrealized loss position at March 31, 2017 consists of an obligation issued by the Puerto Rico Highways and Transportation Authority ("PRHTA") secured by a pledge of toll revenues from the Teodoro Moscoso Bridge operated through a public-private partnership. The decline in the market value of this security is mainly attributed to the significant economic and fiscal challenges that Puerto Rico is facing, which is expected to result in a significant restructuring of the government under the supervision of a federally created Fiscal Oversight Board. All other Puerto Rico government securities were sold during the first quarter of 2016. The PRHTA bond had an aggregate fair value of $ 4.2 million at March 31, 2017 (90% of the bond's amortized cost) and matures on July 1, 2018. The discounted cash flow analysis for the investment showed a cumulative default probability at maturity of 6.4 %, thus reflecting that it is more likely than not that the bond will not default during its remaining term. Based on this analysis, the Company determined that it is more likely than not that it will recover all interest and principal invested in this Puerto Rico government bond and is, therefore, not required to recognize a credit loss as of March 31, 2017. Also, the Company’s conclusion is based on the assessment of the specific source of repayment of the outstanding bond, which continues to perform. PRHTA started principal repayments on July 1, 2014. All scheduled principal and interest payments to date have been collected. On July 1, 2016, the Company received a scheduled principal payment of $ 2.0 million. The next principal payment amounting to $ 2.2 million is scheduled for July 1, 2017. As a result of the aforementioned analysis, no other-than-temporary losses were recorded during the period ended March 31, 2017 .

As of March 31, 2017, the Company performed a cash flow analysis of its Puerto Rico government bond to calculate the cash flows expected to be collected and determine if any portion of the decline in market value of this investment was considered an other-than-temporary impairment. The analysis derives an estimate of value based on the present value of risk-adjusted future cash flows of the underlying investment, and included the following components:

· The contractual future cash flows of the bond are projected based on the key terms as set forth in the official statements for the investment. Such key terms include among others the interest rate, amortization schedule, if any, and maturity date.

· The risk-adjusted cash flows are calculated based on a monthly default probability and recovery rate assumptions based on the credit rating of the investment. Constant monthly default rates are assumed throughout the life of the bond which is based on the respective security’s credit rating as of the date of the analysis.

· The adjusted future cash flows are then discounted at the original effective yield of the investment based on the purchase price and expected risk-adjusted future cash flows as of the purchase date of the investment.

The following table presents a rollforward of credit-related impairment losses recognized in earnings for the quarters ended March 31, 2017 and 2016 on available-for-sale securities :

		Quarter Ended March 31,
		2017		2016
	(In thousands)
Balance at beginning of period		$	-	$	1,490
Reductions for securities sold during the period (realized)			-		(1,490)
Balance at end of period		$	-	$	-

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 4 - LOANS

The Company’s loan portfolio is composed of two segments, loans initially accounted for under the amortized cost method (referred to as "originated and other" loans) and loans acquired (referred to as "acquired" loans). Acquired loans are further segregated between acquired BBVAPR loans and acquired Eurobank loans. Acquired Eurobank loans were purchased subject to loss-sharing agreements with the FDIC , which were terminated on February 6, 2017.

The composition of the Company’s loan portfolio at March 31, 2017 and December 31, 2016 was as follows :

	March 31,		December 31,
	2017		2016
	(In thousands)
Originated and other loans and leases held for investment:
Mortgage	$	709,863	$	721,494
Commercial		1,253,712		1,277,866
Consumer		300,412		290,515
Auto and leasing		786,606		756,395
		3,050,593		3,046,270
Allowance for loan and lease losses on originated and other loans and leases		(60,483)		(59,300)
		2,990,110		2,986,970
Deferred loan costs, net		6,464		5,766
Total originated and other loans loans held for investment, net		2,996,574		2,992,736

Acquired loans:
Acquired BBVAPR loans:
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Commercial		5,436		5,562
Consumer		31,001		32,862
Auto		42,523		53,026
		78,960		91,450
Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-20		(3,615)		(4,300)
		75,345		87,150

Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage		558,112		569,253
Commercial		278,665		292,564
Consumer		3,201		4,301
Auto		71,495		85,676
		911,473		951,794
Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-30		(34,930)		(31,056)
		876,543		920,738
Total acquired BBVAPR loans, net		951,888		1,007,888
Acquired Eurobank loans:
Loans secured by 1-4 family residential properties		72,966		73,018
Commercial		73,181		81,460
Consumer		1,268		1,372
Total acquired Eurobank loans		147,415		155,850
Allowance for loan and lease losses on Eurobank loans		(22,006)		(21,281)
Total acquired Eurobank loans, net		125,409		134,569
Total acquired loans, net		1,077,297		1,142,457
Total held for investment, net		4,073,871		4,135,193
Mortgage loans held-for-sale		15,837		12,499
Total loans, net	$	4,089,708	$	4,147,692

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Originated and Other Loans and Leases Held for Investment

The Company’s originated and other loans held for investment are encompassed within four portfolio segments: mortgage, commercial, consumer, and auto and leasing.

The following tables present the aging of the recorded investment in gross originated and other loans held for investment a t March 31, 2017 and December 31, 2016, by class of loans. Mortgage loans past due include delinquent loans in the GNMA buy-back option program. 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 .

	March 31, 2017
															Loans 90+
															Days Past
									Current						Due and
	30-59 Days		60-89 Days		90+ Days		Total Past		in Non-		Current				Still
	Past Due		Past Due		Past Due		Due		Accrual		Accruing		Total Loans		Accruing
	(In thousands)
Mortgage
Traditional (by origination year):
Up to the year 2002	$	195	$	1,408	$	3,135	$	4,738	$	56	$	44,001	$	48,795	$	112
Years 2003 and 2004		163		3,963		6,743		10,869		192		77,391		88,452		-
Year 2005		-		1,852		3,573		5,425		111		42,372		47,908		-
Year 2006		658		2,094		5,757		8,509		-		58,460		66,969		-
Years 2007, 2008 and 2009		288		2,053		10,455		12,796		-		61,909		74,705		389
Years 2010, 2011, 2012, 2013		243		1,565		9,379		11,187		124		125,773		137,084		433
Years 2014, 2015, 2016 and 2017		-		232		1,573		1,805		-		109,593		111,398		-
		1,547		13,167		40,615		55,329		483		519,499		575,311		934
Non-traditional		-		378		4,567		4,945		-		16,397		21,342		-
Loss mitigation program		9,956		5,779		14,840		30,575		2,960		69,363		102,898		1,637
		11,503		19,324		60,022		90,849		3,443		605,259		699,551		2,571
Home equity secured personal loans		-		-		-		-		-		339		339		-
GNMA's buy-back option program		-		-		9,973		9,973		-		-		9,973		-
		11,503		19,324		69,995		100,822		3,443		605,598		709,863		2,571
Commercial
Commercial secured by real estate:
Corporate		-		-		-		-		-		228,306		228,306		-
Institutional		-		-		254		254		-		47,553		47,807		-
Middle market		813		-		3,240		4,053		1,255		222,862		228,170		-
Retail		3,030		359		6,042		9,431		4,408		231,436		245,275		-
Floor plan		-		-		-		-		-		2,950		2,950		-
Real estate		-		-		-		-		-		16,090		16,090		-
		3,843		359		9,536		13,738		5,663		749,197		768,598		-
Other commercial and industrial:
Corporate		-		-		-		-		-		135,056		135,056		-
Institutional		-		-		-		-		-		154,965		154,965		-
Middle market		-		99		-		99		1,207		76,902		78,208		-
Retail		1,177		230		413		1,820		728		80,340		82,888		-
Floor plan		-		-		55		55		-		33,942		33,997		-
		1,177		329		468		1,974		1,935		481,205		485,114		-
		5,020		688		10,004		15,712		7,598		1,230,402		1,253,712		-

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	March 31, 2017
															Loans 90+
															Days Past
									Current						Due and
	30-59 Days		60-89 Days		90+ Days		Total Past		in Non-		Current				Still
	Past Due		Past Due		Past Due		Due		Accrual		Accruing		Total Loans		Accruing
	(In thousands)
Consumer
Credit cards	$	641	$	247	$	456	$	1,344	$	-	$	25,596	$	26,940	$	-
Overdrafts		12		16		16		44		-		192		236		-
Personal lines of credit		25		44		37		106		-		2,201		2,307		-
Personal loans		3,030		1,701		830		5,561		370		249,613		255,544		-
Cash collateral personal loans		275		33		21		329		-		15,056		15,385		-
		3,983		2,041		1,360		7,384		370		292,658		300,412		-
Auto and leasing		47,588		14,324		7,710		69,622		254		716,730		786,606		-
Total	$	68,094	$	36,377	$	89,069	$	193,540	$	11,665	$	2,845,388	$	3,050,593	$	2,571

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2016
															Loans 90+
															Days Past
									Current						Due and
	30-59 Days		60-89 Days		90+ Days		Total Past		in Non-		Current				Still
	Past Due		Past Due		Past Due		Due		Accrual		Accruing		Total Loans		Accruing
	(In thousands)
Mortgage
Traditional (by origination year):
Up to the year 2002	$	196	$	2,176	$	3,371	$	5,743	$	-	$	44,542	$	50,285	$	158
Years 2003 and 2004		156		3,872		7,272		11,300		181		79,226		90,707		-
Year 2005		-		1,952		4,306		6,258		180		43,571		50,009		-
Year 2006		506		2,905		6,261		9,672		94		59,534		69,300		-
Years 2007, 2008 and 2009		409		1,439		11,732		13,580		111		63,038		76,729		398
Years 2010, 2011, 2012, 2013		349		1,772		10,417		12,538		126		127,196		139,860		583
Years 2014, 2015 and 2016		47		123		1,357		1,527		-		106,672		108,199		-
		1,663		14,239		44,716		60,618		692		523,779		585,089		1,139
Non-traditional		-		498		4,730		5,228		-		17,631		22,859		-
Loss mitigation program		8,911		7,205		16,541		32,657		3,599		67,272		103,528		1,724
		10,574		21,942		65,987		98,503		4,291		608,682		711,476		2,863
Home equity secured personal loans		-		-		-		-		-		337		337		-
GNMA's buy-back option program		-		-		9,681		9,681		-		-		9,681		-
		10,574		21,942		75,668		108,184		4,291		609,019		721,494		2,863
Commercial
Commercial secured by real estate:
Corporate		-		-		-		-		-		242,770		242,770		-
Institutional		-		-		254		254		-		26,546		26,800		-
Middle market		-		60		3,319		3,379		1,304		230,298		234,981		-
Retail		154		350		6,594		7,098		4,638		237,992		249,728		-
Floor plan		-		-		-		-		-		2,989		2,989		-
Real estate		-		-		-		-		-		16,395		16,395		-
		154		410		10,167		10,731		5,942		756,990		773,663		-
Other commercial and industrial:
Corporate		-		-		-		-		-		136,438		136,438		-
Institutional		-		-		-		-		-		180,285		180,285		-
Middle market		-		-		-		-		1,278		80,355		81,633		-
Retail		930		100		969		1,999		294		71,412		73,705		-
Floor plan		8		-		61		69		-		32,073		32,142		-
		938		100		1,030		2,068		1,572		500,563		504,203		-
		1,092		510		11,197		12,799		7,514		1,257,553		1,277,866		-

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2016
															Loans 90+
															Days Past
									Current						Due and
	30-59 Days		60-89 Days		90+ Days		Total Past		in Non-		Current				Still
	Past Due		Past Due		Past Due		Due		Accrual		Accruing		Total Loans		Accruing
	(In thousands)
Consumer
Credit cards	$	527	$	283	$	525	$	1,335	$	-	$	25,023	$	26,358	$	-
Overdrafts		16		12		5		33		-		174		207		-
Personal lines of credit		41		4		32		77		-		2,327		2,404		-
Personal loans		2,474		1,489		1,081		5,044		259		240,969		246,272		-
Cash collateral personal loans		240		20		4		264		-		15,010		15,274		-
		3,298		1,808		1,647		6,753		259		283,503		290,515		-
Auto and leasing		42,714		19,014		8,173		69,901		181		686,313		756,395		-
Total	$	57,678	$	43,274	$	96,685	$	197,637	$	12,245	$	2,836,388	$	3,046,270	$	2,863

At March 31, 2017 and December 31, 2016, the Company had carrying balance of $ 136.5 million and $ 136.6 million, respectively, in originated and other loans held for investment granted to the Puerto Rico government, including its instrumentalities, public corporations and municipalities as part of the institutional commercial loan segment. All originated and other loans granted to the Puerto Rico government are general obligations of municipalities secured by ad valorem taxation, 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.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Acquired Loans

Acquired loans were initially measured at fair value and subsequently accounted for under either ASC 310-30 or ASC 310-20 (Non-refundable fees and Other Costs). We have acquired loans in two acquisitions, BBVAPR and Eurobank.

Acquired BBVAPR Loans

Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)

Credit cards, retail and commercial revolving lines of credits, floor plans and performing auto loans with FICO scores over 660 acquired at a premium are accounted for under the guidance of ASC 310-20, which requires that any contractually required loan payment receivable in excess of the Company’s initial investment in the loans be accreted into interest income on a level-yield basis over the life of the loan. Loans accounted for under ASC 310-20 are placed on non-accrual status when past due in accordance with the Company’s non-accrual policy, and any accretion of discount or amortization of premium is discontinued. Acquired BBVAPR loans that were accounted for under the provisions of ASC 310-20 are removed from the acquired loan category at the end of the reporting period upon refinancing, renewal or normal re-underwriting.

The following tables present the aging of the recorded investment in gross acquired BBVAPR loans accounted for under ASC 310-20 as of March 31, 2017 and December 31, 2016, by class of loans:

	March 31, 2017
															Loans 90+
															Days Past
									Current						Due and
	30-59 Days		60-89 Days		90+ Days		Total Past		in Non-		Current				Still
	Past Due		Past Due		Past Due		Due		Accrual		Accruing		Total Loans		Accruing
	(In thousands)
Commercial
Commercial secured by real estate
Retail	$	-	$	-	$	103	$	103	$	30	$	-	$	133	$	-
Floor plan		911		-		209		1,120		-		1,198		2,318		-
		911		-		312		1,223		30		1,198		2,451		-
Other commercial and industrial
Retail		97		90		33		220		-		2,763		2,983		-
Floor plan		-		-		2		2		-		-		2		-
		97		90		35		222		-		2,763		2,985		-
		1,008		90		347		1,445		30		3,961		5,436		-
Consumer
Credit cards		536		235		546		1,317		-		27,087		28,404		-
Personal loans		24		22		48		94		-		2,503		2,597		-
		560		257		594		1,411		-		29,590		31,001		-
Auto		2,875		944		435		4,254		9		38,260		42,523		-
Total	$	4,443	$	1,291	$	1,376	$	7,110	$	39	$	71,811	$	78,960	$	-

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2016
															Loans 90+
															Days Past
									Current						Due and
	30-59 Days		60-89 Days		90+ Days		Total Past		in Non-		Current				Still
	Past Due		Past Due		Past Due		Due		Accrual		Accruing		Total Loans		Accruing
	(In thousands)
Commercial
Commercial secured by real estate
Retail	$	33	$	-	$	110	$	143	$	-	$	-	$	143	$	-
Floor plan		-		-		219		219		929		1,242		2,390		-
		33		-		329		362		929		1,242		2,533		-
Other commercial and industrial
Retail		97		34		121		252		-		2,775		3,027		-
Floor plan		-		-		2		2		-		-		2		-
		97		34		123		254		-		2,775		3,029		-
		130		34		452		616		929		4,017		5,562		-
Consumer
Credit cards		736		369		708		1,813		-		28,280		30,093		-
Personal loans		48		14		120		182		-		2,587		2,769		-
		784		383		828		1,995		-		30,867		32,862		-
Auto		3,652		1,355		517		5,524		15		47,487		53,026		-
Total	$	4,566	$	1,772	$	1,797	$	8,135	$	944	$	82,371	$	91,450	$	-

Acquired BBVAPR Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)

Acquired BBVAPR loans, except for credit cards, retail and commercial revolving lines of credits, floor plans and performing auto loans with FICO scores over 660 acquired at a premium, are accounted for by the Company in accordance with ASC 310-30.

The carrying amount corresponding to acquired BBVAPR loans with deteriorated credit quality, including those accounted under ASC 310-30 by analogy, in the statements of financial condition at March 31, 2017 and December 31, 2016 is as follows:

	March 31,		December 31,
		2017		2016
		(In thousands)
Contractual required payments receivable:	$	1,610,352	$	1,669,602
Less: Non-accretable discount		365,519		363,107
Cash expected to be collected		1,244,833		1,306,495
Less: Accretable yield		333,360		354,701
Carrying amount, gross		911,473		951,794
Less: allowance for loan and lease losses		34,930		31,056
Carrying amount, net	$	876,543	$	920,738

At March 31, 2017 and December 31, 2016, the Company had $ 66.1 million and $ 66.2 million, respectively, in loans granted to the Puerto Rico government, including its instrumentalities, public corporations and municipalities as part of its acquired BBVAPR loans accounted for under ASC 310-30. These loans are primarily secured municipal general obligations and a $ 10.7 million participation in a loan to the Puerto Rico Housing Finance Authority ("PRHFA") legally required to be repaid from abandoned or unclaimed funds at financial institutions that revert to the government under a Puerto Rico escheat law. Such loan defaulted on an annual principal payment in the third quarter of 2016.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables describe the accretable yield and non-accretable discount activity of acquired BBVAPR loans accounted for under ASC 310-30 for the quarters ended March 31, 2017, and 2016 :

	Quarter Ended March 31, 2017
	Mortgage		Commercial		Auto		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	292,115	$	50,366	$	8,538	$	3,682	$	354,701
Accretion		(7,890)		(4,981)		(2,147)		(602)		(15,620)
Change in expected cash flows		1		198		52		36		287
Transfer (to) from non-accretable discount		(7,409)		1,319		140		(58)		(6,008)
Balance at end of period	$	276,817	$	46,902	$	6,583	$	3,058	$	333,360

Non-Accretable Discount Activity:
Balance at beginning of period	$	305,615	$	16,965	$	22,407	$	18,120	$	363,107
Change in actual and expected losses		(3,031)		(843)		297		(19)		(3,596)
Transfer from (to) accretable yield		7,409		(1,319)		(140)		58		6,008
Balance at end of period	$	309,993	$	14,803	$	22,564	$	18,159	$	365,519

	Quarter Ended March 31, 2016
	Mortgage		Commercial		Auto		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	268,794	$	65,026	$	21,578	$	6,290	$	361,688
Accretion		(8,307)		(7,708)		(4,211)		(938)		(21,164)
Change in actual and expected losses		-		328		1		-		329
Transfer from (to) non-accretable discount		70		(388)		219		(91)		(190)
Balance at end of period	$	260,557	$	57,258	$	17,587	$	5,261	$	340,663

Non-Accretable Discount Activity:
Balance at beginning of period	$	374,772	$	18,545	$	22,039	$	18,834	$	434,190
Change in actual and expected losses		(4,547)		(785)		118		(190)		(5,404)
Transfer (to) from accretable yield		(70)		388		(219)		91		190
Balance at end of period	$	370,155	$	18,148	$	21,938	$	18,735	$	428,976

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Acquired Eurobank Loans

The carrying amount of acquired Eurobank loans at March 31, 2017 and December 31, 2016 is as follows:

	March 31		December 31
	2017		2016
	(In thousands)
Contractual required payments receivable:	$	216,962	$	232,698
Less: Non-accretable discount		10,236		12,340
Cash expected to be collected		206,726		220,358
Less: Accretable yield		59,311		64,508
Carrying amount, gross		147,415		155,850
Less: Allowance for loan and lease losses		22,006		21,281
Carrying amount, net	$	125,409	$	134,569

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables describe the accretable yield and non-accretable discount activity of acquired Eurobank loans for the quarters ended March 31, 2017, and 2016:

	Quarter Ended March 31, 2017
	Loans Secured by 1-4 Family Residential Properties		Commercial		Construction & Development Secured by 1-4 Family Residential Properties		Leasing		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	45,839	$	16,475	$	2,194	$	-	$	-	$	64,508
Accretion		(1,904)		(4,510)		(38)		-		(158)		(6,610)
Change in expected cash flows		81		778		37		(143)		310		1,063
Transfer from (to) non-accretable discount		681		-		(322)		143		(152)		350
Balance at end of period	$	44,697	$	12,743	$	1,871	$	-	$	-	$	59,311

Non-Accretable Discount Activity:
Balance at beginning of period	$	8,441	$	3,880	$	11	$	-	$	8	$	12,340
Change in actual and expected losses		(334)		(1,409)		-		143		(154)		(1,754)
Transfer from (to) accretable yield		(681)		-		322		(143)		152		(350)
Balance at end of period	$	7,426	$	2,471	$	333	$	-	$	6	$	10,236

	Quarter Ended March 31, 2016
	Loans Secured by 1-4 Family Residential Properties		Commercial		Construction & Development Secured by 1-4 Family Residential Properties		Consumer		Total
	(In thousands)
Accretable Yield Activity:
Balance at beginning of period	$	51,954	$	26,970	$	2,255	$	3,213	$	84,392
Accretion		(2,266)		(4,095)		(14)		(1,185)		(7,560)
Change in actual and expected losses		984		11,093		(23)		(2,028)		10,026
Transfer from (to) non-accretable discount		115		(765)		19		-		(631)
Balance at end of period	$	50,787	$	33,203	$	2,237	$	-	$	86,227

Non-Accretable Discount Activity:
Balance at beginning of period	$	12,869	$	-	$	-	$	8,287	$	21,156
Change in actual and expected losses		(51)		(765)		19		(8,287)		(9,084)
Transfer (to) from accretable yield		(115)		765		(19)		-		631
Balance at end of period	$	12,703	$	-	$	-	$	-	$	12,703

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Non-accrual Loans

The following table presents the recorded investment in loans in non-accrual status by class of loans as of March 31, 2017 and December 31, 2016:

	March 31,		December 31,
	2017		2016
	(In thousands)
Originated and other loans and leases held for investment
Mortgage
Traditional (by origination year):
Up to the year 2002	$	3,079	$	3,336
Years 2003 and 2004		7,064		7,668
Year 2005		3,794		4,487
Year 2006		5,807		6,746
Years 2007, 2008 and 2009		10,256		11,526
Years 2010, 2011, 2012, 2013		9,070		10,089
Years 2014, 2015, 2016 and 2017		1,573		1,404
		40,643		45,256
Non-traditional		4,567		4,730
Loss mitigation program		18,239		20,744
		63,449		70,730
Commercial
Commercial secured by real estate
Institutional		254		-
Middle market		4,497		4,682
Retail		11,168		11,561
		15,919		16,243
Other commercial and industrial
Middle market		1,306		1,278
Retail		2,107		1,950
Floor plan		55		61
		3,468		3,289
		19,387		19,532
Consumer
Credit cards		456		525
Overdrafts		16		-
Personal lines of credit		37		32
Personal loans		1,418		1,420
Cash collateral personal loans		21		4
		1,948		1,981
Auto and leasing		8,709		9,052
Total non-accrual originated loans	$	93,493	$	101,295

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	March 31,		December 31,
	2017		2016
	(In thousands)
Acquired BBVAPR loans accounted for under ASC 310-20
Commercial
Commercial secured by real estate
Retail	$	133	$	143
Floor plan		1,120		1,149
		1,253		1,292
Other commercial and industrial
Retail		33		121
Floor plan		2		2
		35		123
		1,288		1,415
Consumer
Credit cards		546		708
Personal loans		48		120
		594		828
Auto		466		552
Total non-accrual acquired BBVAPR loans accounted for under ASC 310-20		2,348		2,795
Total non-accrual loans	$	95,841	$	104,090

Loans accounted for under ASC 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses or are accounted under the cost recovery method.

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 18 months or more past due, since they are insured loans. Therefore, these loans are included as non-performing loans but excluded from non-accrual loans. In addition, these loans are excluded from the impairment analysis.

At March 31, 2017 and December 31, 2016, loans whose terms have been extended and which are classified as troubled-debt restructurings that are not included in non-accrual loans amounted to $ 99.1 million and $ 98.1 million, respectively, as they are performing under their new terms.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Impaired Loans

The Company evaluates all loans, some individually and others as homogeneous groups, for purposes of determining impairment. The total investment in impaired commercial loans that were individually evaluated for impairment was $ 59.6 million and $ 54.3 million at March 31, 2017 and December 31, 2016, respectively. The impairments on these commercial loans were measured based on the fair value of collateral or the present value of cash flows, including those identified as troubled-debt restructurings. The allowance for loan and lease losses for these impaired commercial loans amounted to $ 1.6 million and $ 1.8 million at March 31, 2017 and December 31, 2016, respectively. The total investment in impaired mortgage loans that were individually evaluated for impairment was $ 88.8 million and $ 91.6 million at March 31, 2017 and December 31, 2016, respectively. Impairment on mortgage loans assessed as troubled-debt restructurings was measured using the present value of cash flows. The allowance for loan losses for these impaired mortgage loans amounted to $ 8.2 million and $ 7.8 million at March 31, 2017 and December 31, 2016, respectively.

Originated and Other Loans and Leases Held for Investment

The Company’s recorded investment in commercial and mortgage loans categorized as originated and other loans and leases held for investment that were individually evaluated for impairment and the related allowance for loan and lease losses at March 31, 2017 and December 31, 2016 are as follows:

	March 31, 2017
	Unpaid		Recorded		Related
	Principal		Investment		Allowance		Coverage
	(In thousands)
Impaired loans with specific allowance:
Commercial	$	14,091	$	12,362	$	1,475	12%
Residential impaired and troubled-debt restructuring		97,696		88,820		8,156	9%
Impaired loans with no specific allowance:
Commercial		52,682		46,345		N/A	0%
Total investment in impaired loans	$	164,469	$	147,527	$	9,631	7%

	December 31, 2016
	Unpaid		Recorded		Related
	Principal		Investment		Allowance		Coverage
	(In thousands)
Impaired loans with specific allowance:
Commercial	$	13,183	$	11,698	$	1,626	14%
Residential impaired and troubled-debt restructuring		100,101		91,650		7,761	8%
Impaired loans with no specific allowance
Commercial		49,038		41,441		N/A	0%
Total investment in impaired loans	$	162,322	$	144,789	$	9,387	6%

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Acquired BBVAPR Loans Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)

The Company’s recorded investment in acquired BBVAPR commercial loans accounted for under ASC 310-20 that were individually evaluated for impairment and the related allowance for loan and lease losses at March 31, 2017 and December 31, 2016 are as follows:


	March 31, 2017
	Unpaid		Recorded		Related
	Principal		Investment		Allowance		Coverage
	(In thousands)
Impaired loans with specific allowance
Commercial	$	936	$	911		149	16%
Impaired loans with no specific allowance
Commercial	$	-	$	-		N/A	0%
Total investment in impaired loans	$	936	$	911	$	149	16%


	December 31, 2016
	Unpaid		Recorded		Specific
	Principal		Investment		Allowance		Coverage
	(In thousands)
Impaired loans with specific allowance
Commercial	$	944	$	929		141	15%
Impaired loans with no specific allowance
Commercial	$	240	$	221		N/A	0%
Total investment in impaired loans	$	1,184	$	1,150	$	141	12%

Acquired BBVAPR Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)

The Company’s recorded investment in acquired BBVAPR loan pools accounted for under ASC 310-30 that have recorded impairments and their related allowance for loan and lease losses at March 31, 2017 and December 31, 2016 are as follows :

	March 31, 2017
							Coverage
	Unpaid		Recorded				to Recorded
	Principal		Investment		Allowance		Investment
	(In thousands)
Impaired loan pools with specific allowance:
Mortgage	$	584,300	$	558,112	$	3,573	1%
Commercial		191,970		189,408		23,528	12%
Auto		79,022		71,495		7,829	11%
Total investment in impaired loan pools	$	855,292	$	819,015	$	34,930	4%

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31 , 2016
							Coverage
	Unpaid		Recorded				to Recorded
	Principal		Investment		Allowance		Investment
	(In thousands)
Impaired loan pools with specific allowance:
Mortgage	$	595,757	$	569,250	$	2,682	0%
Commercial		199,092		195,528		23,452	12%
Auto		92,797		85,676		4,922	6%
Total investment in impaired loan pools	$	887,646	$	850,454	$	31,056	4%

The tables above only present information with respect to acquired BBVAPR loan pools accounted for under ASC 310-30 if there is a recorded impairment to such loan pools and a specific allowance for loan losses.

Acquired Eurobank Loans

The Company’s recorded investment in acquired Eurobank loan pools that have recorded impairments and their related allowance for loan and lease losses as of March 31, 2017 and December 31, 2016 are as follows :

	March 31, 2017
							Coverage
	Unpaid		Recorded				to Recorded
	Principal		Investment		Allowance		Investment
	(In thousands)
Impaired loan pools with specific allowance:
Loans secured by 1-4 family residential properties	$	87,689	$	72,966	$	14,168	19%
Commercial		69,800		62,529		7,833	13%
Consumer		13		1,268		5	0%
Total investment in impaired loan pools	$	157,502	$	136,763	$	22,006	16%

	December 31, 2016
							Coverage
	Unpaid		Recorded		Specific		to Recorded
	Principal		Investment		Allowance		Investment
	(In thousands)
Impaired loan pools with specific allowance
Loans secured by 1-4 family residential properties	$	88,017	$	73,018	$	11,947	16%
Commercial		81,992		72,140		9,328	13%
Consumer		29		1,372		6	0%
Total investment in impaired loan pools	$	170,038	$	146,530	$	21,281	15%

The tables above only present information with respect to acquired Eurobank loan pools accounted for under ASC 310-30 if there is a recorded impairment to such loan pools and a specific allowance for loan losses.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents the interest recognized in commercial and mortgage loans that were individually evaluated for impairment, which excludes loans accounted for under ASC 310-30, for the quarters ended March 31, 2017 and 2016:

	Quarter Ended March 31,
	2017				2016
	Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment
	(In thousands)
Originated and other loans held for investment:
Impaired loans with specific allowance
Commercial	$	125	$	12,809	$	71	$	196,795
Residential troubled-debt restructuring		766		89,543		798		90,292
Impaired loans with no specific allowance
Commercial		532		43,895		270		33,626
		1,423		146,247		1,139		320,713
Acquired loans accounted for under ASC 310-20:
Impaired loans with specific allowance
Commercial		-		917		-		-
Impaired loans with no specific allowance
Commercial		-		-		-		467
Total interest income from impaired loans	$	1,423	$	147,164	$	1,139	$	321,180

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Modifications

The following tables present the troubled-debt restructurings in all loan portfolios during the quarters ended March 31, 2017 and 2016.

	Quarter Ended March 31, 2017
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate	Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate	Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Mortgage	32	$	4,004	6.53%	391	$	4,015	4.86%	387
Commercial	9		1,218	7.29%	55		1,219	5.93%	64
Consumer	25		392	10.94%	64		430	10.33%	74
Auto	3		45	8.90%	75		47	11.88%	39


	Quarter Ended March 31, 2016
	Number of contracts	Pre-Modification Outstanding Recorded Investment		Pre-Modification Weighted Average Rate	Pre-Modification Weighted Average Term (in Months)	Post-Modification Outstanding Recorded Investment		Post-Modification Weighted Average Rate	Post-Modification Weighted Average Term (in Months)
	(Dollars in thousands)
Mortgage	33	$	3,957	6.03%	361	$	4,854	4.83%	493
Commercial	2		655	6.81%	41		656	6.71%	36
Consumer	21		192	14.28%	75		231	11.15%	72

The following table presents troubled-debt restructurings for which there was a payment default during the twelve month periods ended March 31, 2017 and 2016:

	Twelve Month Period Ended, March 31,
	2017			2016
	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
	(Dollars in thousands)
Mortgage	14	$	2,051	31	$	3,732
Commercial	1	$	50	-	$	-
Consumer	15	$	188	3	$	77
Auto	-	$	-	1	$	17

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Credit Quality Indicators

The Company categorizes originated and other loans and acquired loans accounted for under ASC 310-20 into risk categories based on relevant information about the ability of borrowers to service their debt, such as economic conditions, portfolio risk characteristics, prior loss experience, and the results of periodic credit reviews of individual loans.

The Company uses the following definitions for risk ratings:

Pass: Loans classified as “pass” have a well-defined primary source of repayment very likely to be sufficient, with no apparent risk, strong financial position, minimal operating risk, profitability, liquidity and capitalization better than industry standards.

Special Mention: Loans classified as “special mention” have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard: Loans classified as “substandard” are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as “doubtful” have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, questionable and improbable.

Loss: Loans classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be effected in the future.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of March 31, 2017 and December 31, 2016, and based on the most recent analysis performed, the risk category of gross originated and other loans and BBVAPR acquired loans accounted for under ASC 310-20 subject to risk rating by class of loans is as follows:

	March 31, 2017
	Risk Ratings
											Individually
	Balance				Special						Measured for
	Outstanding		Pass		Mention		Substandard		Doubtful		Impairment
	(In thousands)
Commercial - originated and other loans held for investment
Commercial secured by real estate:
Corporate	$	228,306	$	213,576	$	14,730	$	-	$	-	$	-
Institutional		47,807		35,458		10,788		-		-		1,561
Middle market		228,170		189,767		8,151		454		-		29,798
Retail		245,275		218,160		6,844		3,708		-		16,563
Floor plan		2,950		2,950		-		-		-		-
Real estate		16,090		16,090		-		-		-		-
		768,598		676,001		40,513		4,162		-		47,922
Other commercial and industrial:
Corporate		135,056		135,056		-		-		-		-
Institutional		154,965		154,965		-		-		-		-
Middle market		78,208		61,094		9,832		235		-		7,047
Retail		82,888		77,716		720		714		-		3,738
Floor plan		33,997		31,259		2,683		55		-		-
		485,114		460,090		13,235		1,004		-		10,785
Total		1,253,712		1,136,091		53,748		5,166		-		58,707

Commercial - acquired loans (under ASC 310-20)
Commercial secured by real estate:
Retail		133		-		-		133		-		-
Floor plan		2,318		880		318		209		-		911
		2,451		880		318		342		-		911
Other commercial and industrial:
Retail		2,983		2,977		-		6		-		-
Floor plan		2		-		-		2		-		-
		2,985		2,977		-		8		-		-
Total		5,436		3,857		318		350		-		911
Total	$	1,259,148	$	1,139,948	$	54,066	$	5,516	$	-	$	59,618

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2016
	Risk Ratings
											Individually
	Balance				Special						Measured for
	Outstanding		Pass		Mention		Substandard		Doubtful		Impairment
	(In thousands)
Commercial - originated and other loans held for investment
Commercial secured by real estate:
Corporate	$	242,770	$	226,768	$	16,002	$	-	$	-	$	-
Institutional		26,800		16,067		9,090		-		-		1,643
Middle market		234,981		194,913		9,437		514		-		30,117
Retail		249,728		221,687		7,860		4,318		-		15,863
Floor plan		2,989		2,989		-		-		-		-
Real estate		16,395		16,395		-		-		-		-
		773,663		678,819		42,389		4,832		-		47,623
Other commercial and industrial:
Corporate		136,438		136,438		-		-		-		-
Institutional		180,285		180,185		100		-		-		-
Middle market		81,633		63,556		16,150		149		-		1,778
Retail		73,705		68,529		731		740		-		3,705
Floor plan		32,142		29,267		2,814		28		-		33
		504,203		477,975		19,795		917		-		5,516
Total		1,277,866		1,156,794		62,184		5,749		-		53,139

Commercial - acquired loans (under ASC 310-20)
Commercial secured by real estate:
Retail		143		-		-		143		-		-
Floor plan		2,390		905		337		-		-		1,148
		2,533		905		337		143		-		1,148
Other commercial and industrial:
Retail		3,027		3,014		-		13		-		-
Floor plan		2		-		-		-		-		2
		3,029		3,014		-		13		-		2
Total		5,562		3,919		337		156		-		1,150
Total	$	1,283,428	$	1,160,713	$	62,521	$	5,905	$	-	$	54,289

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

For residential and consumer loan classes, the Company evaluates credit quality based on the delinquency status of the loan. As of March 31, 2017 and December 31, 2016, and based on the most recent analysis performed, the risk category of gross originated and other loans and acquired BBVAPR loans accounted for under ASC 310-20 not subject to risk rating by class of loans is as follows:

	March 31, 2017
	Delinquency
															Individually
	Balance														Measured for
	Outstanding		0-29 days		30-59 days		60-89 days		90-119 days		120-364 days		365+ days		Impairment
	(In thousands)
Originated and other loans and leases held for investment
Mortgage
Traditional (by origination year)
Up to the year 2002	$	48,795	$	43,628	$	-	$	1,407	$	477	$	1,188	$	1,334	$	761
Years 2003 and 2004		88,452		76,647		-		3,834		861		3,128		2,295		1,687
Year 2005		47,908		42,078		-		1,643		580		1,009		1,560		1,038
Year 2006		66,969		56,976		-		2,094		162		2,122		3,139		2,476
Years 2007, 2008 and 2009		74,705		60,651		-		1,681		568		2,464		6,015		3,326
Years 2010, 2011, 2012 2013		137,084		126,278		90		1,483		589		1,824		3,217		3,603
Years 2014, 2015, 2016 and 2017		111,398		109,594		-		232		-		811		761		-
		575,311		515,852		90		12,374		3,237		12,546		18,321		12,891
Non-traditional		21,342		16,397		-		378		299		1,195		3,073		-
Loss mitigation program		102,898		18,042		1,618		1,573		994		1,033		3,709		75,929
		699,551		550,291		1,708		14,325		4,530		14,774		25,103		88,820
Home equity secured personal loans		339		339		-		-		-		-		-		-
GNMA's buy-back option program		9,973		-		-		-		1,991		4,153		3,829		-
		709,863		550,630		1,708		14,325		6,521		18,927		28,932		88,820
Consumer
Credit cards		26,940		25,596		641		247		145		311		-		-
Overdrafts		236		192		12		16		3		13		-		-
Unsecured personal lines of credit		2,307		2,202		25		44		-		11		25		-
Unsecured personal loans		255,544		249,982		3,030		1,701		803		28		-		-
Cash collateral personal loans		15,385		15,056		275		33		21		-		-		-
		300,412		293,028		3,983		2,041		972		363		25		-
Auto and Leasing		786,606		716,985		47,588		14,324		5,798		1,911		-		-
		1,796,881		1,560,643		53,279		30,690		13,291		21,201		28,957		88,820
Acquired loans (accounted for under ASC 310-20)
Consumer
Credit cards		28,404		27,087		536		235		232		314		-		-
Personal loans		2,597		2,503		24		22		1		46		1		-
		31,001		29,590		560		257		233		360		1		-
Auto		42,523		38,268		2,875		944		347		89		-		-
		73,524		67,858		3,435		1,201		580		449		1		-
Total	$	1,870,405	$	1,628,501	$	56,714	$	31,891	$	13,871	$	21,650	$	28,958	$	88,820

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2016
	Delinquency
															Individually
	Balance														Measured for
	Outstanding		0-29 days		30-59 days		60-89 days		90-119 days		120-364 days		365+ days		Impairment
	(In thousands)
Originated and other loans and leases held for investment
Mortgage
Traditional (by origination year)
Up to the year 2002	$	50,285	$	44,248	$	-	$	2,095	$	368	$	1,315	$	1,552	$	707
Years 2003 and 2004		90,707		78,501		-		3,712		1,767		2,675		2,100		1,952
Year 2005		50,009		43,177		-		1,952		561		1,024		2,181		1,114
Year 2006		69,300		57,271		82		2,397		353		2,210		3,410		3,577
Years 2007, 2008 and 2009		76,729		61,547		83		1,439		865		2,330		6,459		4,006
Years 2010, 2011, 2012 2013		139,860		127,375		60		1,451		1,459		1,667		3,584		4,264
Year 2014, 2015 and 2016		108,199		106,672		-		123		386		210		761		47
		585,089		518,791		225		13,169		5,759		11,431		20,047		15,667
Non-traditional		22,859		17,631		-		498		366		1,263		3,101		-
Loss mitigation program		103,528		17,814		2,304		1,681		388		1,599		3,759		75,983
		711,476		554,236		2,529		15,348		6,513		14,293		26,907		91,650
Home equity secured personal loans		337		337		-		-		-		-		-		-
GNMA's buy-back option program		9,681		(1)		-		-		2,441		3,141		4,100		-
		721,494		554,572		2,529		15,348		8,954		17,434		31,007		91,650
Consumer
Credit cards		26,358		25,023		527		283		191		334		-		-
Overdrafts		207		174		16		12		1		4		-		-
Unsecured personal lines of credit		2,404		2,327		41		4		3		25		4		-
Unsecured personal loans		246,272		241,227		2,474		1,489		1,074		8		-		-
Cash collateral personal loans		15,274		15,010		240		20		4		-		-		-
		290,515		283,761		3,298		1,808		1,273		371		4		-
Auto and Leasing		756,395		686,493		42,714		19,014		6,253		1,921		-		-
		1,768,404		1,524,826		48,541		36,170		16,480		19,726		31,011		91,650
Acquired loans (accounted for under ASC 310-20)
Consumer
Credit cards		30,093		28,281		736		369		227		480		-		-
Personal loans		2,769		2,587		48		14		21		99		-		-
		32,862		30,868		784		383		248		579		-		-
Auto		53,026		47,503		3,652		1,355		415		101		-		-
		85,888		78,371		4,436		1,738		663		680		-		-
Total	$	1,854,292	$	1,603,197	$	52,977	$	37,908	$	17,143	$	20,406	$	31,011	$	91,650

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 5 – ALLOWANCE FOR LOAN AND LEASE LOSSES

The composition of the Company’s allowance for loan and lease losses at March 31, 2017 and December 31, 2016 was as follows :

	March 31,		December 31,
	2017		2016
	(In thousands)
Allowance for loans and lease losses:
Originated and other loans and leases held for investment:
Mortgage	$	18,578	$	17,344
Commercial		9,888		8,995
Consumer		13,394		13,067
Auto and leasing		18,621		19,463
Unallocated		2		431
Total allowance for originated and other loans and lease losses		60,483		59,300

Acquired BBVAPR loans:
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Commercial		183		169
Consumer		2,591		3,028
Auto		841		1,103
		3,615		4,300
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage		3,573		2,682
Commercial		23,528		23,452
Auto		7,829		4,922
		34,930		31,056
Total allowance for acquired BBVAPR loans and lease losses		38,545		35,356
Acquired Eurobank loans:
Loans secured by 1-4 family residential properties		14,168		11,947
Commercial		7,833		9,328
Consumer		5		6
Total allowance for acquired Eurobank loan and lease losses		22,006		21,281
Total allowance for loan and lease losses	$	121,034	$	115,937

The Company maintains an allowance for loan and lease losses at a level that management considers adequate to provide for probable losses based upon an evaluation of known and inherent risks. The Company’s allowance for loan and lease losses policy provides for a detailed quarterly analysis of probable losses. The analysis includes a review of historical loan loss experience, value of underlying collateral, current economic conditions, financial condition of borrowers and other pertinent factors. While management uses available information in estimating probable loan losses, future additions to the allowance may be required based on factors beyond the Company’s control. We also maintain an allowance for loan losses on acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Allowance for Originated and Other Loan and Lease Losses Held for Investment

The following tables presents the activity in our allowance for loan and lease losses and the related recorded investment of the originated and other loans held for investment portfolio by segment for the periods indicated:

	Quarter Ended March 31, 2017
	Mortgage		Commercial		Consumer		Auto and Leasing		Unallocated		Total
	(In thousands)
Allowance for loan and lease losses for originated and other loans:
Balance at beginning of period	$	17,344	$	8,995	$	13,067	$	19,463	$	431	$	59,300
Charge-offs		(2,379)		(856)		(3,358)		(7,563)		-		(14,156)
Recoveries		56		89		165		3,294		-		3,604
Provision for originated and other loans and lease losses		3,557		1,660		3,520		3,427		(429)		11,735
Balance at end of period	$	18,578	$	9,888	$	13,394	$	18,621	$	2	$	60,483

	Quarter Ended March 31, 2016
	Mortgage		Commercial		Consumer		Auto and Leasing		Unallocated		Total
	(In thousands)
Allowance for loan and lease losses for originated and other loans:
Balance at beginning of period	$	18,352	$	64,791	$	11,197	$	18,261	$	25	$	112,626
Charge-offs		(1,662)		(1,011)		(2,327)		(8,362)		-		(13,362)
Recoveries		145		88		102		2,979		-		3,314
Provision for originated and other loans and lease losses		1,949		338		2,442		5,838		93		10,660
Balance at end of period	$	18,784	$	64,206	$	11,414	$	18,716	$	118	$	113,238

	March 31, 2017
	Mortgage		Commercial		Consumer		Auto and Leasing		Unallocated		Total
	(In thousands)
Allowance for loan and lease losses on originated and other loans:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	8,156	$	1,475	$	-	$	-	$	-	$	9,631
Collectively evaluated for impairment		10,422		8,413		13,394		18,621		2		50,852
Total ending allowance balance	$	18,578	$	9,888	$	13,394	$	18,621	$	2	$	60,483
Loans:
Individually evaluated for impairment	$	88,820	$	58,707	$	-	$	-	$	-	$	147,527
Collectively evaluated for impairment		621,043		1,195,005		300,412		786,606		-		2,903,066
Total ending loan balance	$	709,863	$	1,253,712	$	300,412	$	786,606	$	-	$	3,050,593

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2016
	Mortgage		Commercial		Consumer		Auto and Leasing		Unallocated		Total
	(In thousands)
Allowance for loan and lease losses on originated and other loans:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	7,761	$	1,626	$	-	$	-	$	-	$	9,387
Collectively evaluated for impairment		9,583		7,369		13,067		19,463		431		49,913
Total ending allowance balance	$	17,344	$	8,995	$	13,067	$	19,463	$	431	$	59,300
Loans:
Individually evaluated for impairment	$	91,650	$	53,139	$	-	$	-	$	-	$	144,789
Collectively evaluated for impairment		629,844		1,224,727		290,515		756,395		-		2,901,481
Total ending loan balance	$	721,494	$	1,277,866	$	290,515	$	756,395	$	-	$	3,046,270

Allowance for BBVAPR Acquired Loan Losses

Loans accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)

The following tables present the activity in our allowance for loan losses and related recorded investment of the associated loans in our BBVAPR acquired loan portfolio accounted for under ASC 310-20, for the periods indicated :

	Quarter Ended March 31, 2017
	Commercial		Consumer		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Balance at beginning of period	$	169	$	3,028	$	1,103	$	4,300
Charge-offs		(6)		(885)		(278)		(1,169)
Recoveries		1		64		452		517
Provision (recapture) for acquired BBVAPR loan and lease losses accounted for under ASC 310-20		19		384		(436)		-33
Balance at end of period	$	183	$	2,591	$	841	$	3,615

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	March 31, 2017
	Commercial		Consumer		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	149	$	-	$	-	$	149
Collectively evaluated for impairment		34		2,591		841		3,466
Total ending allowance balance	$	183	$	2,591	$	841	$	3,615
Loans:
Individually evaluated for impairment	$	911	$	-	$	-	$	911
Collectively evaluated for impairment		4,525		31,001		42,523		78,049
Total ending loan balance	$	5,436	$	31,001	$	42,523	$	78,960

	Quarter Ended March 31, 2016
	Commercial		Consumer		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Balance at beginning of period	$	26	$	3,429	$	2,087	$	5,542
Charge-offs		(7)		(812)		(737)		(1,556)
Recoveries		32		81		598		711
Provision (recapture) for acquired loan and lease losses accounted for under ASC 310-20		(28)		545		(221)		296
Balance at end of period	$	23	$	3,243	$	1,727	$	4,993

	December 31, 2016
	Commercial		Consumer		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	141	$	-	$	-	$	141
Collectively evaluated for impairment		28		3,028		1,103		4,159
Total ending allowance balance	$	169	$	3,028	$	1,103	$	4,300
Loans:
Individually evaluated for impairment	$	1,150	$	-	$	-	$	1,150
Collectively evaluated for impairment		4,412		32,862		53,026		90,300
Total ending loan balance	$	5,562	$	32,862	$	53,026	$	91,450

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)

For loans accounted for under ASC 310- 30, as part of the evaluation of actual versus expected cash flows, the Company assesses on a quarterly basis the credit quality of these loans based on delinquency, severity factors and risk ratings, among other assumptions. Migration and credit quality trends are assessed at the pool level, by comparing information from the latest evaluation period through the end of the reporting period.

The following tables present the activity in our allowance for loan losses and related recorded investment of the acquired BBVAPR loan portfolio accounted for under ASC 310-30 for the periods indicated :

	Quarter Ended March 31, 2017
	Mortgage		Commercial		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-30:
Balance at beginning of period	$	2,682	$	23,452	$	4,922	$	31,056
Provision for BBVAPR loans and lease losses accounted for under ASC 310-30		923		223		3,186		4,332
Allowance de-recognition		(32)		(147)		(279)		(458)
Balance at end of period	$	3,573	$	23,528	$	7,829	$	34,930


	Quarter Ended March 31, 2016
	Mortgage		Commercial		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-30:
Balance at beginning of period	$	1,678	$	21,245	$	2,862	$	25,785
Provision (recapture) for BBVAPR loans and lease losses accounted for under ASC 310-30		84		(749)		2,693		2,028
Loan pools fully charged-off		-		(66)		-		(66)
Balance at end of period	$	1,762	$	20,430	$	5,555	$	27,747

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Allowance for Acquired Eurobank Loan Losses

The changes in the allowance for loan and lease losses on acquired Eurobank loans for the quarters ended March 31, 2017 and 2016 were as follows:

	Quarter Ended March 31, 2017
	Loans Secured by 1-4 Family Residential Properties		Commercial		Consumer		Total
	(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of period	$	11,947	$	9,328	$	6	$	21,281
Provision for acquired Eurobank loans and lease losses, net		2,398		(778)		-		1,620
Allowance de-recognition from new policy		(177)		(717)		(1)		(895)
Balance at end of period	$	14,168	$	7,833	$	5	$	22,006

	Quarter Ended March 31, 2016
	Loans secured by 1-4 Family Residential Properties		Commercial		Consumer		Total
	(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of period	$	22,570	$	67,365	$	243	$	90,178
Provision for covered loan and lease losses, net		(53)		858		-		805
Loan pools fully charged-off		-		(134)		-		(134)
FDIC shared-loss portion of provision for covered loan and lease losses, net		1,444		-		-		1,444
Balance at end of period	$	23,961	$	68,089	$	243	$	92,293

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 6- FDIC INDEMNIFICATION ASSET, TRUE-UP PAYMENT OBLIGATION, AND FDIC SHARED-LOSS EXPENSE

On February 6, 2017, the Bank and the FDIC agreed to terminate the single family and commercial shared-loss agreements related to the FDIC assisted acquisition of Eurobank on April 30, 2010. As part of the loss share termination transaction, the Bank made a payment of $ 10.1 million to the FDIC and recorded a net benefit of $ 1.4 million. Such termination payment took into account the anticipated reimbursements over the life of the shared-loss agreements and the true-up payment liability of the Bank anticipated at the end of the ten year term of the single family shared-loss agreement. All rights and obligations of the parties under the shared-loss agreements terminated as of the closing date of the agreement.

Pursuant to the terms of the shared-loss agreements, the FDIC would reimburse the Bank for 80% of all qualifying losses with respect to assets covered by such agreements, and the Bank would reimburse the FDIC for 80% of qualifying recoveries with respect to losses for which the FDIC reimbursed the Bank. The single family shared-loss agreement provided for FDIC loss sharing and the Bank’s reimbursement to the FDIC to last for ten years, and the commercial shared-loss agreement provided for FDIC loss sharing and the Bank’s reimbursement to the FDIC to last for five years, with additional recovery sharing for three years thereafter.

The following table presents the activity in the FDIC indemnification asset and true-up payment obligation for the quarters ended March 31, 2017 and 2016:

	Quarter Ended March 31,
	2017		2016
	(In thousands)
FDIC indemnification asset:
Balance at beginning of period	$	14,411	$	22,599
Shared-loss agreements reimbursements from the FDIC		-		(406)
Increase in expected credit losses to be covered under shared-loss agreements, net		-		1,444
FDIC indemnification asset benefit (expense)		1,403		(2,865)
Net expenses incurred under shared-loss agreements		-		151
Shared-loss termination settlement		(15,814)		-
Balance at end of period	$	-	$	20,923

True-up payment obligation:
Balance at beginning of period	$	26,786	$	24,658
Change in true-up payment obligation		-		577
Shared-loss termination settlement		(26,786)		-
Balance at end of period	$	-	$	25,235

The Company recognized an FDIC shared-loss (benefit) expense, net in the consolidated statements of operations, which consists of the following, for the quarters ended March 31, 2017 and 2016:

	Quarter Ended March 31,
	2017		2016
	(In thousands)
FDIC indemnification asset (benefit) expense	$	(1,403)	$	2,865
Change in true-up payment obligation		-		577
Reimbursement to FDIC for recoveries		-		587
Total FDIC shared-loss (benefit) expense, net	$	(1,403)	$	4,029

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 7 — DERIVATIVES

The following table presents the Company’s derivative assets and liabilities at March 31, 2017 and December 31, 2016:

	March 31,		December 31,
	2017		2016
	(In thousands)
Derivative assets:
Interest rate swaps not designated as hedges	$	1,017	$	1,187
Interest rate caps		106		143
	$	1,123	$	1,330
Derivative liabilities:
Interest rate swaps designated as cash flow hedges		822		1,004
Interest rate swaps not designated as hedges		1,017		1,187
Interest rate caps		106		139
Other		22		107
	$	1,967	$	2,437

Interest Rate Swaps

The Company enters into interest rate swap contracts to hedge the variability of future interest cash flows of forecasted wholesale borrowings attributable to changes in a predetermined variable index rate. The interest rate swaps effectively fix the Company’s interest payments on an amount of forecasted interest expense attributable to the variable index rate corresponding to the swap notional stated rate. These swaps are designated as cash flow hedges for the forecasted wholesale borrowing transactions, are properly documented as such, and therefore, qualify for cash flow hedge accounting. Any gain or loss associated with the effective portion of the cash flow hedges is recognized in other comprehensive income (loss) and is subsequently reclassified into operations in the period during which the hedged forecasted transactions affect earnings. Changes in the fair value of these derivatives are recorded in accumulated other comprehensive income to the extent there is no significant ineffectiveness in the cash flow hedging relationships. Currently, the Company does not expect to reclassify any amount included in other comprehensive income (loss) related to these interest rate swaps to operations in the next twelve months.

The following table shows a summary of these swaps and their terms at March 31, 2017:

Notional

Fixed

Variable

Trade

Settlement

Maturity

Type

Amount

Rate

Rate Index

Date

(In thousands)

Interest Rate Swaps

36,221

2.4210%

1-Month LIBOR

07/03/13

08/01/23

36,221

An accumulated unrealized loss of $ 822 thousand and $ 1.0 million was recognized in accumulated other comprehensive income (loss) related to the valuation of these swaps at March 31, 2017 and December 31, 2016, respectively, and the related liability is being reflected in the consolidated statements of financial condition.

At March 31, 2017 and December 31, 2016, interest rate swaps not designated as hedging instruments that were offered to clients represented an asset of $1.0 million and $1.2 million, respectively, and were included as part of derivative assets in the consolidated statements of financial position. The credit risk to these clients stemming from these derivatives, if any, is not material. At March 31, 2017 and December 31, 2016, interest rate swaps not designated as hedging instruments that are the mirror-images of the derivatives offered to clients represented a liability of $1.0 million and $1.2 million, respectively, and were included as part of derivative liabilities in the consolidated statements of financial condition.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table shows a summary of these interest rate swaps not designated as hedging instruments and their terms at March 31, 2017:

	Notional		Fixed	Variable	Settlement	Maturity
Type	Amount		Rate	Rate Index	Date	Date
	(In thousands)
Interest Rate Swaps - Derivatives Offered to Clients	$	12,500	5.5050%	1-Month LIBOR	04/11/09	04/11/19
	$	12,500

Interest Rate Swaps - Mirror Image Derivatives	$	12,500	5.5050%	1-Month LIBOR	04/11/09	04/11/19
	$	12,500

Interest Rate Caps

The Company has entered into interest rate cap transactions with various clients with floating-rate debt who wish to protect their financial results against increases in interest rates. In these cases, the Company simultaneously enters into mirror-image interest rate cap transactions with financial counterparties. None of these cap transactions qualify for hedge accounting, and therefore, they are marked to market through earnings. As of March 31, 2017 and December 31, 2016 , t he outstanding total notional amount of interest rate caps was $ 135.9 million and $ 136.1 million, respectively. At March 31, 2017 and December 31, 2016, the interest rate caps sold to clients represented a liability of $106 thousand and $139 thousand, respectively, and were included as part of derivative liabilities in the consolidated statements of financial condition. At March 31, 2017 and December 31, 2016, the interest rate caps purchased as mirror-images represented an asset of $106 thousand and $143 thousand, respectively, and were included as part of derivative assets in the consolidated statements of financial condition.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 8 — ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS

Accrued interest receivable at March 31, 2017 and December 31, 2016 consists of the following:

	March 31,		December 31,
	2017		2016
	(In thousands)
Loans, excluding acquired loans	$	14,772	$	16,706
Investments		3,783		3,521
	$	18,555	$	20,227

Other assets at March 31, 2017 and December 31, 2016 consist of the following :

	March 31,			December 31,
	2017		2016
	(In thousands)
Prepaid expenses	$	15,496	$	17,096
Other repossessed assets		3,269		3,224
Core deposit and customer relationship intangibles		5,792		6,160
Mortgage tax credits		6,277		6,277
Investment in Statutory Trust		1,083		1,083
Accounts receivable and other assets		35,662		46,525
	$	67,579	$	80,365

Prepaid expenses amounting to $15.5 million and $17.1 million at March 31, 2017 and December 31, 2016, respectively, include prepaid municipal, property and income taxes aggregating to $ 11.4 million and $ 12.5 million, respectively.

In connection with the FDIC-assisted acquisition and the BBVAPR Acquisition, the Company recorded a core deposit intangible representing the value of checking and savings deposits acquired. At March 31, 2017 and December 31, 2016 this core deposit intangible amounted to $ 4.0 million and $ 4.3 million, respectively. In addition, the Company recorded a customer relationship intangible representing the value of customer relationships acquired with the acquisition of the securities broker-dealer and insurance agency in the BBVAPR Acquisition. At March 31, 2017 and December 31, 2016 , this customer relationship intangible amounted to $ 1.8 million and $ 1.9 million, respectively.

Other repossessed assets totaled $3.3 million and $3.2 million at March 31, 2017 and December 31, 2016, respectively, include repossessed automobiles amounting to $ 3.1 million and $ 3.0 million, respectively, which are recorded at their net realizable value.

At March 31, 2017 and December 31, 2016, tax credits for the Company totaled $6.3 million for both periods. These tax credits do not have an expiration date.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 9 — DEPOSITS AND RELATED INTEREST

Total deposits, including related accrued interest payable, as of March 31, 2017 and December 31, 2016 consist of the following:

	March 31,		December 31,
	2017		2016
	(In thousands)
Non-interest bearing demand deposits	$	859,990	$	848,502
Interest-bearing savings and demand deposits		2,259,512		2,219,452
Individual retirement accounts		246,162		265,754
Retail certificates of deposit		590,093		563,965
Institutional certificates of deposit		186,192		190,419
Total core deposits		4,141,949		4,088,092
Brokered deposits		575,879		576,395
Total deposits	$	4,717,828	$	4,664,487

Brokered deposits include $ 512.6 million in certificates of deposits and $ 63.3 million in money market accounts at March 31, 2017, and $ 508.4 million in certificates of deposits and $ 68.0 million in money market accounts at December 31, 2016.

The weighted average interest rate of the Company’s deposits was 0.64 % and 0.62 % at March 31, 2017 and December 31, 2016 respectively. Interest expense for the quarters ended March 31, 2017 and 2016 was as follows:

	Quarter Ended March 31,
	2017		2016
	(In thousands)
Demand and savings deposits	$	2,909	$	2,842
Certificates of deposit		4,444		4,282
	$	7,353	$	7,124

At March 31, 2017 and December 31, 2016, demand and interest-bearing deposits and certificates of deposit included uncollateralized deposits of Puerto Rico Cash & Money Market Fund, Inc. ("the Fund”), which amounted to $ 14.4 million and $ 15.3 million, respectively, with a weighted average rate of 0.81 % and 0.77 %, respectively. The Fund was dissolved and liquidated on April 3, 2017.

At March 31, 2017 and December 31, 2016, time deposits in denominations of $250 thousand or higher, excluding accrued interest and unamortized discounts, amounted to $ 336.7 million and $ 344.0 million, respectively. Such amounts include public funds time deposits from various Puerto Rico government municipalities, agencies, and corporations of $ 2.5 million and $ 2.1 million at a weighted average rate of 0.46 % and 0.50 % at March 31, 2017 and December 31, 2016, respectively.

At March 31, 2017 and December 31, 2016, total public fund deposits from various Puerto Rico government municipalities, agencies, and corporations amounted to $ 147.9 million and $ 170.7 million, respectively. These public funds were collateralized with commercial loans amounting to $ 209.2 million at March 31, 2017 and December 31, 2016, respectively.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Excluding accrued interest of approximately $ 1.4 million, the scheduled maturities of certificates of deposit at March 31, 2017 and December 31, 2016 are as follows:

	March 31, 2017		December 31, 2016
	(In thousands)
Within one year:
Three (3) months or less	$	305,077	$	277,621
Over 3 months through 1 year		507,127		534,548
		812,204		812,169
Over 1 through 2 years		493,616		488,440
Over 2 through 3 years		156,649		154,545
Over 3 through 4 years		30,223		29,701
Over 4 through 5 years		40,908		41,949
	$	1,533,600	$	1,526,804

The table of scheduled maturities of certificates of deposits above includes brokered-deposits and individual retirement accounts.

The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans amounted to $ 770 thousand and $ 575 thousand as of March 31, 2017 and December 31, 2016, respectively.

NOTE 10 — BORROWINGS AND RELATED INTEREST

Securities Sold under Agreements to Repurchase

At March 31, 2017, securities underlying agreements to repurchase were delivered to, and are being held by, the counterparties with whom the repurchase agreements were transacted. The counterparties have agreed to resell to the Company the same or similar securities at the maturity of these agreements.

At March 31, 2017 and December 31, 2016, securities sold under agreements to repurchase (classified by counterparty), excluding accrued interest in the amount of $ 739 thousand and $ 1.5 million, respectively, were as follows:

	March 31,				December 31,
	2017				2016
			Fair Value of				Fair Value of
	Borrowing		Underlying		Borrowing		Underlying
	Balance		Collateral		Balance		Collateral
	(In thousands)
PR Cash and Money Market Fund	$	62,480	$	65,704	$	70,010	$	74,538
JP Morgan Chase Bank NA		325,960		350,397		350,219		376,674
Federal Home Loan Bank		142,000		150,271		-		-
Credit Suisse Securities (USA) LLC		-		-		232,000		249,286
Total	$	530,440	$	566,372	$	652,229	$	700,498

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table shows a summary of the Company’s repurchase agreements and their terms, excluding accrued interest in the amount of $739 thousand, at March 31, 2017 :

			Weighted-
	Borrowing		Average		Maturity
Year of Maturity	Balance		Coupon	Settlement Date	Date
	(In thousands)
2017	$	33,460	1.20%	3/21/2017	4/4/2017
		62,480	1.21%	3/30/2017	4/3/2017
		32,000	0.99%	3/31/2017	4/7/2017

2018		192,500	1.42%	12/10/2012	4/29/2018

2019		25,000	1.52%	12/9/2016	6/9/2019
		75,000	1.46%	12/9/2016	12/9/2019
		50,000	1.72%	3/2/2017	9/3/2019

2020		60,000	1.85%	3/2/2017	3/2/2020

	$	530,440	1.44%

All the repurchase agreements referred above with maturity up to the date of this report were renewed by the Company.

A repurchase agreement in the original amount of $ 500 million with an original term of ten years was modified in February 2016 to terminate, before maturity, $ 268.0 million of this repurchase agreement at a cost of $12.0 million, included as a loss on early extinguishment of debt in the consolidated statements of operations. The remaining balance of this repurchase agreement of $ 232.0 million matured on March 2, 2017.

The following table presents the repurchase liability associated with the repurchase agreement transactions (excluding accrued interest) by maturity. Also, it includes the carrying value and approximate market value of collateral (excluding accrued interest) at March 31, 2017 and December 31, 2016. There was no cash collateral at March 31, 2017 and December 31, 2016.

	March 31, 2017
					Market Value of Underlying Collateral

			Weighted		FNMA and					US Treasury
	Repurchase		Average		FHLMC		GNMA			Treasury
	Liability		Rate		Certificates		Certificates			Notes	Total
	(Dollars in thousands)
Less than 90 days	$	127,940		1.15%	$	33,776	$	65,704	$	34,190	$	133,670
Over 90 days		402,500		1.54%		432,610		92		-		432,702
Total	$	530,440		1.44%	$	466,386	$	65,796	$	34,190	$	566,372

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	December 31, 2016
					Market Value of Underlying Collateral

			Weighted		FNMA and					US Treasury
	Repurchase		Average		FHLMC		GNMA			Treasury
	Liability		Rate		Certificates		Certificates			Notes	Total
	(Dollars in thousands)
Less than 90 days	$	349,729	$	3.35%		248,288	$	75,536	$	48,954	$	372,778
Over 90 days		302,500		1.44%		327,627		93		-		327,720
Total	$	652,229		2.47%	$	575,915	$	75,629		48,954		700,498

Advances from the Federal Home Loan Bank of New York

Advances are received from the Federal Home Loan Bank of New York (the “FHLB-NY”) under an agreement whereby the Company is required to maintain a minimum amount of qualifying collateral with a fair value of at least 110 % of the outstanding advances. At March 31, 2017 and December 31, 2016 , these advances were secured by mortgage and commercial loans amounting to $ 1.4 billion at both periods. Also, at March 31, 2017 and December 31, 2016 , the Company had an additional borrowing capacity with the FHLB-NY of $ 1.0 billion and $ 1.2 billion, respectively. At March 31, 2017 and December 31, 2016 , the weighted average remaining maturity of FHLB’s advances was 8.6 months and 10.6 months , respectively. The original terms of these advances range between one month and seven years, and the FHLB-NY does not have the right to exercise put options at par on any advances outstanding as of March 31, 2017.

The following table shows a summary of these advances and their terms, excluding accrued interest in the amount of $ 296 thousand, at March 31, 2017 :

			Weighted-
		Borrowing	Average		Maturity
Year of Maturity		Balance	Coupon	Settlement Date	Date
		(In thousands)
2017	$	36,221	0.80%	3/1/2017	4/3/2017
		3,972	1.24%	4/3/2012	4/3/2017
		40,193

2018		30,000	2.19%	1/16/2013	1/16/2018
		25,000	2.18%	1/16/2013	1/16/2018
		55,000

2020		9,459	2.59%	7/19/2013	7/20/2020
	$	104,652	1.71%

All of the advances referred to above with maturity dates up to the date of this report were renewed as one-month short-term advances.

Subordinated Capital Notes

Subordinated capital notes amounted to $36.1 million at March 31, 2017 and December 31, 2016, for both periods .

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 11 – OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES

The Company’s derivatives are subject to agreements which allow a right of set-off with each respective counterparty. In addition, the Company’s securities purchased under agreements to resell and securities sold under agreements to repurchase have a right of set-off with the respective counterparty under the supplemental terms of the master repurchase agreements. In an event of default, each party has a right of set-off against the other party for amounts owed in the related agreements and any other amount or obligation owed in respect of any other agreement or transaction between them. Security collateral posted to open and maintain a master netting agreement with a counterparty, in the form of cash and securities, may from time to time be segregated in an account at a third-party custodian pursuant to a an account control agreement.

The following table presents the potential effect of rights of set-off associated with the Company’s recognized financial assets and liabilities at March 31, 2017 and December 31, 2016 :

March 31, 2017

Gross Amounts Not Offset in the Statement of Financial Condition

Gross Amounts

Net Amount of

Offset in the

Assets Presented

Gross Amount

Statement of

in Statement

Cash

of Recognized

Financial

of Financial

Financial

Collateral

Net

Assets

Condition

Instruments

Received

Amount

(In thousands)

Derivatives

1,123

2,001

(878)

December 31, 2016

Gross Amounts Not Offset in the Statement of Financial Condition

Gross Amounts

Net amount of

Offset in the

Assets Presented

Gross Amount

Statement of

in Statement

Cash

of Recognized

Financial

of Financial

Financial

Collateral

Net

Assets

Condition

Instruments

Received

Amount

(In thousands)

Derivatives

1,330

2,003

(673)

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

March 31, 2017
							Gross Amounts Not Offset in the Statement of Financial Condition
					Net Amount of
			Gross Amounts		Liabilities
			Offset in the		Presented
	Gross Amount		Statement of		in Statement				Cash
	of Recognized		Financial		of Financial		Financial		Collateral		Net
	Liabilities		Condition		Condition		Instruments		Provided		Amount
					(In thousands)
Derivatives	$	1,967	$	-	$	1,967	$	-	$	1,980	$	(13)
Securities sold under agreements to repurchase		530,440		-		530,440		566,372		-		(35,932)
Total	$	532,407	$	-	$	532,407	$	566,372	$	1,980	$	(35,945)


December 31, 2016
							Gross Amounts Not Offset in the Statement of Financial Condition
					Net Amount of
			Gross Amounts		Liabilities
			Offset in the		Presented
	Gross Amount		Statement of		in Statement				Cash
	of Recognized		Financial		of Financial		Financial		Collateral		Net
	Liabilities		Condition		Condition		Instruments		Provided		Amount
	(In thousands)
Derivatives	$	2,437	$	-	$	2,437	$	-	$	1,980	$	457
Securities sold under agreements to repurchase		652,229		-		652,229		700,498		-		(48,269)
Total	$	654,666	$	-	$	654,666	$	700,498	$	1,980	$	(47,812)

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 12 — RELATED PARTY TRANSACTIONS

The Bank grants loans to its directors, executive officers and to certain related individuals or organizations in the ordinary course of business. These loans are offered at the same terms as loans to unrelated third parties. The activity and balance of these loans for the quarters ended March 31, 2017 and 2016 was as follows:

	Quarter Ended March 31,
	2017		2016
	(In thousands)
Balance at the beginning of period	$	29,020	$	31,475
New loans and disbursements		873		233
Repayments		(658)		(574)
Balance at the end of period	$	29,235	$	31,134

NOTE 13 — INCOME TAXES

At March 31, 2017 and December 31, 2016, the Company’s net deferred tax asset amounted to $121.4 million and $124.2 million, respectively. In assessing the realizability of the deferred tax asset, management considers whether it is more likely than not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax asset are deductible, management believes it is more likely than not that the Company will realize the deferred tax asset, net of the existing valuation allowances recorded at March 31, 2017 and December 31, 2016. The amount of the deferred tax asset that is considered realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.

At March 31, 2017 and December 31, 2016, Oriental International Bank Inc. (“OIB”), the Bank’s international banking entity subsidiary, had $ 101 thousand and $ 109 thousand, respectively, in income tax effect of unrecognized gain on available-for-sale securities included in other comprehensive income. Following the change in OIB’s applicable tax rate from 5% to 0% as a result of a Puerto Rico law adopted in 2011, this remaining tax balance will flow through income as these securities are repaid or sold in future periods. During both quarters ended March 31, 2017 and 2016, $ 8 thousand related to this residual tax effect from OIB was reclassified from accumulated other comprehensive income (loss) into income tax provision.

The Company classifies unrecognized tax benefits in other liabilities. These gross unrecognized tax benefits would affect the effective tax rate if realized. At March 31, 2017 the amount of unrecognized tax benefits was $ 2.1 million (December 31, 2016 - $ 2.0 million). The Company had accrued $ 39 thousand at March 31, 2017 (December 31, 2016 - $ 229 thousand) for the payment of interest and penalties relating to unrecognized tax benefits.

Income tax expense for the quarters ended March 31, 2017 and 2016 was $9.2 million and $5.7 million, respectively.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 14 — REGULATORY CAPITAL REQUIREMENTS

Regulatory Capital Requirements

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and Puerto Rico banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Pursuant to the Dodd-Frank Act, federal banking regulators adopted capital rules that became effective January 1, 2015 for the Company and the Bank (subject to certain phase-in periods through January 1, 2019) and that replaced their general risk-based capital rules, advanced approaches rule, market risk rule, and leverage rules. Among other matters, the new capital rules: (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to prior regulations. The current capital rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, and resulting in higher risk weights for a variety of asset classes.

Pursuant to the current capital rules, the minimum capital ratios requirements are as follows:

4.5% CET1 to risk-weighted assets;

6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;

8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and

4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known

as the “leverage ratio”).

As of March 31, 2017 and December 31, 2016 , the Company and the Bank met all capital adequacy requirements to which they are subject. As of March 31, 2017 and December 31, 2016 , the Bank is “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” an institution must maintain minimum CET1 risk-based, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios as set forth in the tables presented below.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company’s and the Bank’s actual capital amounts and ratios as of March 31, 2017 and December 31, 2016 are as follows:

				Minimum Capital			Minimum to be Well
	Actual			Requirement			Capitalized
	Amount		Ratio	Amount		Ratio		Amount	Ratio
	(Dollars in thousands)
Company Ratios
As of March 31, 2017
Total capital to risk-weighted assets	$	878,867	20.05%	$	350,679	8.00%	$	438,349	10.00%
Tier 1 capital to risk-weighted assets	$	822,847	18.77%	$	263,010	6.00%	$	350,679	8.00%
Common equity tier 1 capital to risk-weighted assets	$	626,707	14.30%	$	197,257	4.50%	$	284,927	6.50%
Tier 1 capital to average total assets	$	822,847	13.20%	$	249,254	4.00%	$	311,568	5.00%
As of December 31, 2016
Total capital to risk-weighted assets	$	876,657	19.62%	$	357,404	8.00%	$	446,756	10.00%
Tier 1 capital to risk-weighted assets	$	819,662	18.35%	$	268,053	6.00%	$	357,404	8.00%
Common equity tier 1 capital to risk-weighted assets	$	627,733	14.05%	$	201,040	4.50%	$	290,391	6.50%
Tier 1 capital to average total assets	$	819,662	12.99%	$	252,344	4.00%	$	315,430	5.00%



				Minimum Capital			Minimum to be Well
	Actual			Requirement			Capitalized
	Amount		Ratio	Amount		Ratio	Amount		Ratio
	(Dollars in thousands)
Bank Ratios
As of March 31, 2017
Total capital to risk-weighted assets	$	862,768	19.69%	$	350,502	8.00%	$	438,128	10.00%
Tier 1 capital to risk-weighted assets	$	806,972	18.42%	$	262,877	6.00%	$	350,502	8.00%
Common equity tier 1 capital to risk-weighted assets	$	806,972	18.42%	$	197,157	4.50%	$	284,783	6.50%
Tier 1 capital to average total assets	$	806,972	13.01%	$	248,133	4.00%	$	310,167	5.00%
As of December 31, 2016
Total capital to risk-weighted assets	$	857,259	19.23%	$	356,596	8.00%	$	445,745	10.00%
Tier 1 capital to risk-weighted assets	$	800,544	17.96%	$	267,447	6.00%	$	356,596	8.00%
Common equity tier 1 capital to risk-weighted assets	$	800,544	17.96%	$	200,585	4.50%	$	289,734	6.50%
Tier 1 capital to average total assets	$	800,544	12.75%	$	251,200	4.00%	$	314,000	5.00%

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 15 – STOCKHOLDERS’ EQUITY

Additional Paid-in Capital

Additional paid-in capital represents contributed capital in excess of par value of common and preferred stock net of the costs of issuance. As of both periods, March 31, 2017 and December 31, 2016 accumulated issuance costs charged against additional paid in capital amounted to $ 13.6 million and $ 10.1 million for preferred and common stock, respectively.

Legal Surplus

The Puerto Rico Banking Act requires that a minimum of 10% of the Bank’s net income or loss for the year be transferred to a reserve fund until such fund (legal surplus) equals the total paid in capital on common and preferred stock. At March 31, 2017 and December 31, 2016, the Bank’s legal surplus amounted to $ 77.8 million and $ 76.3 million, respectively. The amount transferred to the legal surplus account is not available for the payment of dividends to shareholders.

Treasury Stock

Under the Company’s current stock repurchase program it is authorized to purchase in the open market up $ 7.7 million of its outstanding shares of common stock. The shares of common stock repurchased are to be held by the Company as treasury shares. During the quarters ended March 31, 2017 and 2016, the Company did not purchase any shares under the program.

At March 31, 2017 the number of shares that may yet be purchased under the $70 million program is estimated at 655,157 and was calculated by dividing the remaining balance of $ 7.7 million by $ 11.80 (closing price of the Company common stock at March 31, 2017).

The activity in connection with common shares held in treasury by the Company for the quarters ended March 31, 2017 and 2016 is set forth below :

	Quarter Ended March 31,
	2017			2016
		Dollar			Dollar
	Shares	Amount		Shares	Amount
	(In thousands, except shares data)
Beginning of period	8,711,025	$	104,860	8,757,960	$	105,379
Common shares used upon lapse of restricted stock units	(32,598)		(358)	(45,810)		(505)
End of period	8,678,427	$	104,502	8,712,150	$	104,874

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 16 - ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income, net of income taxes, as of March 31, 2017 and December 31, 2016 consisted of:

	March 31,		December 31,
	2017		2016
	(In thousands)
Unrealized gain on securities available-for-sale which are not other-than-temporarily impaired	$	3,485	$	1,617
Income tax effect of unrealized gain on securities available-for-sale		365		592
Net unrealized gain on securities available-for-sale which are not other-than-temporarily impaired		3,850		2,209
Unrealized loss on cash flow hedges		(822)		(1,004)
Income tax effect of unrealized loss on cash flow hedges		320		391
Net unrealized loss on cash flow hedges		(502)		(613)
Accumulated other comprehensive income, net of income taxes	$	3,348	$	1,596

The following table presents changes in accumulated other comprehensive income by component, net of taxes, for the quarters ended March 31, 2017 and 2016:

	Quarter Ended March 31, 2017
	Net unrealized		Net unrealized		Accumulated
	gains on		loss on		other
	securities		cash flow		comprehensive
	available-for-sale		hedges		income
	(In thousands)
Beginning balance	$	2,209	$	(613)	$	1,596
Other comprehensive loss before reclassifications		1,707		(38)		1,669
Amounts reclassified out of accumulated other comprehensive income (loss)		(66)		149		83
Other comprehensive income (loss)		1,641		111		1,752
Ending balance	$	3,850	$	(502)	$	3,348

	Quarter Ended March 31, 2016
	Net unrealized		Net unrealized		Accumulated
	gains on		loss on		other
	securities		cash flow		comprehensive
	available-for-sale		hedges		income
	(In thousands)
Beginning balance	$	16,924	$	(2,927)	$	13,997
Other comprehensive income (loss) before reclassifications		(4,326)		(1,457)		(5,783)
Amounts reclassified out of accumulated other comprehensive income (loss)		2,491		1,579		4,070
Other comprehensive income (loss)		(1,835)		122		(1,713)
Ending balance	$	15,089	$	(2,805)	$	12,284

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents reclassifications out of accumulated other comprehensive income for the quarters ended March 31, 2017 and 2016:

	Amount reclassified out of accumulated
	other comprehensive income				Affected Line Item in
	Quarter Ended March 31,				Consolidated Statement
		2017		2016	of Operations
	(In thousands)
Cash flow hedges:
Interest-rate contracts	$	149	$	1,450	Net interest expense
Tax effect from increase in capital gains tax rate		-		129	Income tax expense
Available-for-sale securities:
Other-than-temporary impairment losses on investment securities		-		2,557	Net impairment losses recognized in earnings
Residual tax effect from OIB's change in applicable tax rate		8		8	Income tax expense
Tax effect from increase in capital gains tax rate		(74)		(74)	Income tax expense
	$	83	$	4,070

NOTE 17 – EARNINGS PER COMMON SHARE

The calculation of earnings per common share for the quarters ended March 31, 2017 and 2016 is as follows:

	Quarter Ended March 31,
	2017		2016
	(In thousands, except per share data)
Net income	$	15,150	$	14,171
Less: Dividends on preferred stock
Non-convertible preferred stock (Series A, B, and D)		(1,627)		(1,627)
Convertible preferred stock (Series C)		(1,838)		(1,838)
Income available to common shareholders	$	11,685	$	10,706
Effect of assumed conversion of the convertible ' ' preferred stock		1,838		1,838
Income available to common shareholders assuming conversion	$	13,523	$	12,544

Weighted average common shares and share equivalents:
Average common shares outstanding		43,916		43,898
Effect of dilutive securities:
Average potential common shares-options		77		28
Average potential common shares-assuming ' ' conversion of convertible preferred stock		7,138		7,138
Total weighted average common shares ' ' outstanding and equivalents		51,131		51,064
Earnings per common share - basic	$	0.27	$	0.24
Earnings per common share - diluted	$	0.26	$	0.24

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In computing diluted earnings per common share, the 84,000 shares of convertible preferred stock, which remain outstanding at March 31, 2017, with a conversion rate, subject to certain conditions, of 86.4225 shares of common stock per share, were included as average potential common shares from the date they were issued and outstanding. Moreover, in computing diluted earnings per common share, the dividends declared during the quarters ended March 31, 2017 and 2016 on the convertible preferred stock were added back as income available to common shareholders.

For the quarters ended March 31, 2017 and 2016, weighted-average stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to 507,786 and 977,823 , respectively.

NOTE 18 – GUARANTEES

At March 31, 2017 and December 31, 2016 , the unamortized balance of the obligations undertaken in issuing the guarantees under standby letters of credit represented a liability of $ 4.5 million and $ 4.0 million, respectively.

As a result of the BBVAPR Acquisition, the Company assumed a liability for residential mortgage loans sold subject to credit recourse, pursuant to FNMA’s residential mortgage loan sales and securitization programs. At March 31, 2017 and December 31, 2016, the unpaid principal balance of residential mortgage loans sold subject to credit recourse was $ 8.0 million and $ 20.1 million, respectively.

The following table shows the changes in the Company’s liability for estimated losses from these credit recourse agreements, included in the consolidated statements of financial condition during the quarters ended March 31, 2017 and 2016.

	Quarter Ended March 31,
	2017		2016
	(In thousands)
Balance at beginning of period	$	710	$	439
Net (charge-offs/terminations) recoveries		(140)		(258)
Balance at end of period	$	570	$	181

The estimated losses to be absorbed under the credit recourse arrangements were recorded as a liability when the credit recourse was assumed, and are updated on a quarterly basis. The expected loss, which represents the amount expected to be lost on a given loan, considers the probability of default and loss severity. The probability of default represents the probability that a loan in good standing would become 120 days delinquent, in which case the Company is obligated to repurchase the loan. The recourse obligation will be fully extinguished before the end of 2017.

If a borrower defaults, pursuant to the credit recourse provided, the Company is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount of future payments that the Company would be required to make under the recourse arrangements is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During the quarters ended March 31, 2017 and 2016, the Company repurchased approximately $ 41 thousand and $ 209 thousand, respectively of unpaid principal balance in mortgage loans subject to the credit recourse provisions. If a borrower defaults, the Company has rights to the underlying collateral securing the mortgage loan. The Company suffers losses on these mortgage loans when the proceeds from a foreclosure sale of the collateral property are less than the outstanding principal balance of the loan, any uncollected interest advanced, and the costs of holding and disposing the related property. At March 31, 2017, the Company’s liability for estimated credit losses related to loans sold with credit recourse amounted to $ 570 thousand (December 31, 2016– $ 710 thousand).

When the Company sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. The Company's mortgage operations division groups conforming mortgage loans into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or are sold directly to FNMA or other private investors for cash. As required under such mortgage backed securities programs, quality review procedures are performed by the Company to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, the Company may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

the loans. During the quarter ended March 31, 2017 , the Company repurchased $ 978 thousand (March 31, 2016 – $ 1.5 million) of unpaid principal balance in mortgage loans , excluding mortgage loans subject to credit recourse provision referred above .

During the quarters ended March 31, 2017 and 2016 , the Company recognized $ 100 thousand and $ 19 thousand, respectively, in losses from the repurchase of residential mortgage loans sold subject to credit recourse, and $ 308 thousand and $ 501 thousand, respectively, from the repurchase of residential mortgage loans as a result of breaches of the customary representations and warranties.

Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including the FHLMC, require the Company to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. At March 31, 2017 , the Company serviced $ 822.1 million in mortgage loans for third-parties. The Company generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, in the meantime, the Company must absorb the cost of the funds it advances during the time the advance is outstanding. The Company must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Company would not receive any future servicing income with respect to that loan. At March 31, 2017 , the outstanding balance of funds advanced by the Company under such mortgage loan servicing agreements was approximately $ 367 thousand (December 31, 2016 - $ 334 thousand). To the extent the mortgage loans underlying the Company's servicing portfolio experience increased delinquencies, the Company would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts.

NOTE 19 — COMMITMENTS AND CONTINGENCIES

Loan Commitments

In the normal course of business, the Company becomes a party to credit-related financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby and commercial letters of credit, and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated statements of financial condition. The contract or notional amount of those instruments reflects the extent of the Company’s involvement in particular types of financial instruments.

The Company’s exposure to credit losses in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit, including commitments under credit card arrangements, and commercial letters of credit is represented by the contractual notional amounts of those instruments, which do not necessarily represent the amounts potentially subject to risk. In addition, the measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are identified. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Credit-related financial instruments at March 31, 2017 and December 31, 2016 were as follows:

	March 31,		December 31,
	2017		2016
	(In thousands)
Commitments to extend credit	$	459,403	$	492,885
Commercial letters of credit		1,108		2,721

Commitments to extend credit represent agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company upon the extension of credit, is based on management’s credit evaluation of the counterparty.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At March 31, 2017 and December 31, 2016, commitments to extend credit consisted mainly of undisbursed available amounts on commercial lines of credit, construction loans, and revolving credit card arrangements. Since many of the unused commitments are expected to expire unused or be only partially used, the total amount of these unused commitments does not necessarily represent future cash requirements. These lines of credit had a reserve of $ 667 thousand at March 31, 2017 and December 31, 2016 .

Commercial letters of credit are issued or confirmed to guarantee payment of customers’ payables or receivables in short-term international trade transactions. Generally, drafts will be drawn when the underlying transaction is consummated as intended. However, the short-term nature of this instrument serves to mitigate the risk associated with these contracts.

The summary of instruments that are considered financial guarantees in accordance with the authoritative guidance related to guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others, at March 31, 2017 and December 31, 2016, is as follows:

	March 31,		December 31,
	2017		2016
	(In thousands)
Standby letters of credit and financial guarantees	$	4,500	$	4,041
Loans sold with recourse		8,007		20,126

Standby letters of credit and financial guarantees are written conditional commitments issued by the Company to guarantee the payment and/or performance of a customer to a third party (“beneficiary”). If the customer fails to comply with the agreement, the beneficiary may draw on the standby letter of credit or financial guarantee as a remedy. The amount of credit risk involved in issuing letters of credit in the event of nonperformance is the face amount of the letter of credit or financial guarantee. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer.

Lease Commitments

The Company has entered into various operating lease agreements for branch facilities and administrative offices. Rent expense for the quarters ended March 31, 2017 and 2016, amounted to $ 2.0 million and $ 2.1 million, respectively, and is included in the “occupancy and equipment” caption in the consolidated statements of operations. Future rental commitments under leases in effect at March 31, 2017, exclusive of taxes, insurance, and maintenance expenses payable by the Company, are summarized as follows:

	Minimum Rent
Year Ending December 31,	(In thousands)
2017	$	5,300
2018		6,563
2019		6,522
2020		5,795
2021		4,965
Thereafter		7,678
	$	36,823

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Contingencies

The Company and its subsidiaries are defendants in a number of legal proceedings incidental to their business. In the ordinary course of business, the Company and its subsidiaries are also subject to governmental and regulatory examinations. Certain subsidiaries of the Company, including the Bank (and its subsidiary OIB), Oriental Financial Services, and Oriental Insurance, are subject to regulation by various U.S., Puerto Rico and other regulators.

The Company seeks to resolve all litigation and regulatory matters in the manner management believes is in the best interests of the Company and its shareholders, and contests allegations of liability or wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter.

Subject to the accounting and disclosure framework under the provisions of ASC 450, it is the opinion of the Company’s management, based on current knowledge and after taking into account its current legal accruals, that the eventual outcome of all matters would not be likely to have a material adverse effect on the consolidated statements of financial condition of the Company. Nonetheless, given the substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse outcome in certain of these matters could, from time to time, have a material adverse effect on the Company’s consolidated results of operations or cash flows in particular quarterly or annual periods. The Company has evaluated all litigation and regulatory matters where the likelihood of a potential loss is deemed reasonably possible. The Company has determined that the estimate of the reasonably possible loss is not significant.

NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company follows the fair value measurement framework under U.S. Generally Accepted Accounting Principles (“GAAP”) .

Fair Value Measurement

The fair value measurement framework defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This framework also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Money market investments

The fair value of money market investments is based on the carrying amounts reflected in the consolidated statements of financial condition as these are reasonable estimates of fair value given the short-term nature of the instruments.

Investment securities

The fair value of investment securities is based on quoted market prices, when available, or market prices provided by Interactive Data Corporation ("IDC"), and independent, well-recognized pricing company. Such securities are classified as Level 1 or Level 2 depending on the basis for determining fair value. If listed prices or quotes are not available, fair value is based upon externally developed models that use both observable and unobservable inputs depending on the market activity of the instrument, and such securities are classified as Level 3. At March 31, 2017 and December 31, 2016, the Company did not have investment securities classified as Level 3.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Derivative instruments

The fair value of the interest rate swaps is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, for the most part, on the shape of the yield curve, the level of interest rates, as well as the expectations for rates in the future. The fair value of most of these derivative instruments is based on observable market parameters, which include discounting the instruments’ cash flows using the U.S. dollar LIBOR-based discount rates, and also applying yield curves that account for the industry sector and the credit rating of the counterparty and/or the Company.

Certain other derivative instruments with limited market activity are valued using externally developed models that consider unobservable market parameters. Based on their valuation methodology, derivative instruments are classified as Level 2 or Level 3. In the past, the Company offered its customers certificates of deposit with an option tied to the performance of the S&P Index and used equity indexed option agreements with major broker-dealers to manage its exposure to changes in this index. Their fair value was obtained through the use of an external based valuation that was thoroughly evaluated and adopted by management as its measurement tool for these options. The payoff of these options was linked to the average value of the S&P Index on a specific set of dates during the life of the option. The methodology used an average rate option or a cash-settled option whose payoff was based on the difference between the expected average value of the S&P Index during the remaining life of the option and the strike price at inception. The assumptions, which were uncertain and required a degree of judgment, included primarily S&P Index volatility, forward interest rate projections, estimated index dividend payout, and leverage. At March 31, 2017 and December 31, 2016, there were no options tied to the S&P Index outstanding.

Servicing assets

Servicing assets do not trade in an active market with readily observable prices. Servicing assets are priced using a discounted cash flow model. The valuation model considers servicing fees, portfolio characteristics, prepayment assumptions, delinquency rates, late charges, other ancillary revenues, cost to service and other economic factors. Due to the unobservable nature of certain valuation inputs, the servicing rights are classified as Level 3.

Impaired Loans

Impaired loans are carried at the present value of expected future cash flows using the loan’s existing rate in a discounted cash flow calculation, or the fair value of the collateral if the loan is collateral-dependent. Expected cash flows are based on internal inputs reflecting expected default rates on contractual cash flows. This method of estimating fair value does not incorporate the exit-price concept of fair value described in ASC 820-10 and would generally result in a higher value than the exit-price approach. For loans measured using the estimated fair value of collateral less costs to sell, fair value is generally determined based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC 310-10-35 less disposition costs. Currently, the associated loans considered impaired are classified as Level 3.

Foreclosed real estate

Foreclosed real estate includes real estate properties securing residential mortgage and commercial loans. The fair value of foreclosed real estate may be determined using an external appraisal, broker price option or an internal valuation. These foreclosed assets are classified as Level 3 given certain internal adjustments that may be made to external appraisals.

Other repossessed assets

Other repossessed assets include repossessed automobiles. The fair value of the repossessed automobiles may be determined using internal valuation and an external appraisal. These repossessed assets are classified as Level 3 given certain internal adjustments that may be made to external appraisals.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Assets and liabilities measured at fair value on a recurring and non-recurring basis, are summarized below:

	March 31, 2017
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
	(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale	$	-	$	800,042	$	-	$	800,042
Trading securities		-		314		-		314
Money market investments		6,685		-		-		6,685
Derivative assets		-		1,123		-		1,123
Servicing assets		-		-		9,688		9,688
Derivative liabilities		-		(1,967)		-		(1,967)
	$	6,685	$	799,512	$	9,688	$	815,885
Non-recurring fair value measurements:
Impaired commercial loans	$	-	$	-	$	59,618	$	59,618
Foreclosed real estate		-		-		47,551		47,551
Other repossessed assets		-		-		3,269		3,269
	$	-	$	-	$	110,438	$	110,438

	December 31, 2016
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
	(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale	$	-	$	751,484	$	-	$	751,484
Trading securities		-		347		-		347
Money market investments		5,606		-		-		5,606
Derivative assets		-		1,330		-		1,330
Servicing assets		-		-		9,858		9,858
Derivative liabilities		-		(2,437)		-		(2,437)
	$	5,606	$	750,724	$	9,858	$	766,188
Non-recurring fair value measurements:
Impaired commercial loans	$	-	$	-	$	54,289	$	54,289
Foreclosed real estate		-		-		47,520		47,520
Other repossessed assets		-		-		3,224		3,224
	$	-	$	-	$	105,033	$	105,033

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarters ended March 31, 2017 and 2016:

	Quarter Ended March 31, 2017
	Derivative				Derivative
	asset				liability
	(S&P				(S&P
	Purchased			Servicing	Embedded
Level 3 Instruments Only	Options)			assets	Options)		Total

Balance at beginning of period	$	-	$	9,858	$	-	$	9,858
New instruments acquired		-		534		-		534
Principal repayments		-		(162)		-		(162)
Changes in fair value of servicing assets		-		(542)		-		(542)
Balance at end of period	$	-	$	9,688	$	-	$	9,688

	Quarter Ended March 31, 2016
	Derivative					Derivative
	asset					liability
	(S&P					(S&P
	Purchased			Servicing		Embedded
Level 3 Instruments Only	Options)			assets		Options)		Total

Balance at beginning of period	$	1,171	$	7,455	$	(1,095)	$	7,531
Gains (losses) included in earnings		(399)		-		330		(69)
New instruments acquired		-		557		-		557
Principal repayments		-		(104)		-		(104)
Amortization		-		-		19		19
Changes in fair value of servicing assets		-		(89)		-		(89)
Balance at end of period	$	772	$	7,819	$	(746)	$	7,845

During the quarters ended March 31, 2017 and 2016, there were purchases and sales of assets and liabilities measured at fair value on a recurring basis. There were no transfers into and out of Level 1 and Level 2 fair value measurements during such periods.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The table below presents quantitative information for all assets and liabilities measured at fair value on a recurring and non-recurring basis using significant unobservable inputs (Level 3) at March 31, 2017:

	March 31, 2017
	Fair Value		Valuation Technique	Unobservable Input	Range
	(In thousands)

Servicing assets	$	9,688	Cash flow valuation	Constant prepayment rate	3.90% - 8.96%
				Discount rate	10.00% - 12.00%
Collateral dependant impaired loans	$	23,587	Fair value of property or collateral	Appraised value less disposition costs	24.20% - 38.20%


Other non-collateral dependant impaired loans	$	36,031	Cash flow valuation	Discount rate	3.25% - 10.50%

Foreclosed real estate	$	47,551	Fair value of property or collateral	Appraised value less disposition costs	24.20% - 38.20%

Other repossessed assets	$	3,269	Fair value of property or collateral	Estimated net realizable value less disposition costs	47.00% - 53.00%

Information about Sensitivity to Changes in Significant Unobservable Inputs

Servicing assets – The significant unobservable inputs used in the fair value measurement of the Company’s servicing assets are constant prepayment rates and discount rates. Changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or offset the sensitivities. Mortgage banking activities, a component of total banking and financial service revenue in the consolidated statements of operations, include the changes from period to period in the fair value of the mortgage loan servicing rights, which may result from changes in the valuation model inputs or assumptions (principally reflecting changes in discount rates and prepayment speed assumptions) and other changes, including changes due to collection/realization of expected cash flows.

Fair Value of Financial Instruments

The information about the estimated fair value of financial instruments required by GAAP is presented hereunder. The aggregate fair value amounts presented do not necessarily represent management’s estimate of the underlying value of the Company.

The estimated fair value is subjective in nature, involves uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could affect these fair value estimates. The fair value estimates do not take into consideration the value of future business and the value of assets and liabilities that are not financial instruments. Other significant tangible and intangible assets that are not considered financial instruments are the value of long-term customer relationships of retail deposits, and premises and equipment.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The estimated fair value and carrying value of the Company’s financial instruments at March 31, 2017 and December 31, 2016 is as follows:

	March 31,				December 31,
	2017				2016
	Fair		Carrying		Fair		Carrying
	Value		Value		Value		Value
	(In thousands)
Level 1
Financial Assets:
Cash and cash equivalents	$	480,271	$	480,271	$	510,439	$	510,439
Restricted cash	$	3,030	$	3,030	$	3,030	$	3,030
Level 2
Financial Assets:
Trading securities	$	314	$	314	$	347	$	347
Investment securities available-for-sale	$	800,042	$	800,042	$	751,484	$	751,484
Investment securities held-to-maturity	$	570,963	$	577,997	$	592,763	$	599,884
Federal Home Loan Bank (FHLB) stock	$	17,161	$	17,161	$	10,793	$	10,793
Other investments	$	3	$	3	$	3	$	3
Derivative assets	$	1,123	$	1,123	$	1,330	$	1,330
Financial Liabilities:
Derivative liabilities	$	1,967	$	1,967	$	2,437	$	2,437
Level 3
Financial Assets:
Total loans (including loans held-for-sale)	$	3,891,904	$	4,089,708	$	3,917,340	$	4,147,692
FDIC indemnification asset	$	-	$	-	$	8,669	$	14,411
Accrued interest receivable	$	18,555	$	18,555	$	20,227	$	20,227
Servicing assets	$	9,688	$	9,688	$	9,858	$	9,858
Accounts receivable and other assets	$	35,662	$	35,662	$	46,518	$	46,518
Financial Liabilities:
Deposits	$	4,700,821	$	4,717,828	$	4,644,629	$	4,664,487
Securities sold under agreements to repurchase	$	527,032	$	531,179	$	651,898	$	653,756
Advances from FHLB	$	105,671	$	104,948	$	106,422	$	105,454
Other borrowings	$	185	$	185	$	61	$	61
Subordinated capital notes	$	30,710	$	36,083	$	30,230	$	36,083
Accrued expenses and other liabilities	$	66,700	$	66,700	$	95,370	$	95,370

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following methods and assumptions were used to estimate the fair values of significant financial instruments at March 31, 2017 and December 31, 2016:

• Cash and cash equivalents (including money market investments and time deposits with other banks), restricted cash, accrued interest receivable, accounts receivable and other assets and accrued expenses and other liabilities have been valued at the carrying amounts reflected in the consolidated statements of financial condition as these are reasonable estimates of fair value given the short-term nature of the instruments.

• Investments in FHLB-NY stock are valued at their redemption value.

• The fair value of investment securities, including trading securities and other investments, is based on quoted market prices, when available or prices provided from contracted pricing providers, or market prices provided by recognized broker-dealers. If listed prices or quotes are not available, fair value is based upon externally developed models that use both observable and unobservable inputs depending on the market activity of the instrument.

• The fair value of the FDIC indemnification asset represented the present value of the net estimated cash payments expected to be received from the FDIC for future losses on covered assets based on the credit assumptions on estimated cash flows for each covered asset and the loss sharing percentages. The FDIC shared-loss agreements were terminated on February 6, 2017. Such termination takes into account the anticipated reimbursements over the life of the shared-loss agreements and the true-up payment liability of the Bank anticipated at the end of the ten year term of the single family shared-loss agreement. Therefore, at March 31, 2017, the Company had no FDIC indemnification asset.

• The fair value of servicing asset is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions.

• The fair values of the derivative instruments are provided by valuation experts and counterparties. Certain derivatives with limited market activity are valued using externally developed models that consider unobservable market parameters. In the past, the Company offered its customers certificates of deposit with an option tied to the performance of the S&P Index and used equity indexed option agreements with major broker-dealers to manage its exposure to changes in this index. Their fair value was obtained through the use of an external based valuation that was thoroughly evaluated and adopted by management as its measurement tool for these options. The payoff of these options was linked to the average value of the S&P Index on a specific set of dates during the life of the option. The methodology used an average rate option or a cash-settled option whose payoff was based on the difference between the expected average value of the S&P Index during the remaining life of the option and the strike price at inception. The assumptions, which were uncertain and required a degree of judgment, included primarily S&P Index volatility, forward interest rate projections, estimated index dividend payout, and leverage. At March 31, 2017, there were no options tied to S&P Index outstanding.

• Fair value of derivative liabilities, which include interest rate swaps and forward-settlement swaps, are based on the net discounted value of the contractual projected cash flows of both the pay-fixed receive-variable legs of the contracts. The projected cash flows are based on the forward yield curve, and discounted using current estimated market rates.

• The fair value of the loan portfolio (including loans held-for-sale) is estimated by segregating by type, such as mortgage, commercial, consumer, auto and leasing. Each loan segment is further segmented into fixed and adjustable interest rates and by performing and non-performing categories. The fair value of performing loans is calculated by discounting contractual cash flows, adjusted for prepayment estimates (voluntary and involuntary), if any, using estimated current market discount rates that reflect the credit and interest rate risk inherent in the loan. This fair value is not currently an indication of an exit price as that type of assumption could result in a different fair value estimate. Non-performing loans have been valued at the carrying amounts.

• The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is based on the discounted value of the contractual cash flows, using estimated current market discount rates for deposits of similar remaining maturities.

• The fair value of long-term borrowings, which include securities sold under agreements to repurchase, advances from FHLB, and subordinated capital notes is based on the discounted value of the contractual cash flows using current estimated market discount rates for borrowings with similar terms, remaining maturities and put dates.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 21 – BUSINESS SEGMENTS

The Company segregates its businesses into the following major reportable segments of business: 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 the Company’s organization, nature of its products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. The Company 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. The Company’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. These factors are reviewed on a periodical basis and may change if the conditions warrant.

Banking includes the Bank’s branches and traditional banking products such as deposits and commercial, consumer and mortgage loans. Mortgage banking activities are carried out by the Bank’s mortgage banking division, whose principal activity is to originate mortgage loans for the Company’s own portfolio. As part of its mortgage banking activities, the Company may sell loans directly into the secondary market or securitize conforming loans into mortgage-backed securities.

Wealth Management is comprised of the Bank’s trust division, Oriental Financial Services, Oriental Insurance, and OPC. The core operations of this segment are financial planning, money management and investment banking, brokerage services, insurance sales activity, corporate and individual trust and retirement services, as well as retirement plan administration services.

The Treasury segment encompasses all of the Company’s asset/liability management activities, such as purchases and sales of investment securities, interest rate risk management, derivatives, and borrowings. Intersegment sales and transfers, if any, are accounted for as if the sales or transfers were to third parties, that is, at current market prices.

OFG BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Following are the results of operations and the selected financial information by operating segment for the quarters ended March 31, 2017 and 2016:

	Quarter Ended March 31, 2017
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	77,573	$	12	$	8,593	$	86,178	$	-	$	86,178
Interest expense		(6,814)		-		(4,746)		(11,560)		-		(11,560)
Net interest income		70,759		12		3,847		74,618		-		74,618
Provision for loan and lease losses, net		(17,642)		-		(12)		(17,654)		-		(17,654)
Non-interest income, net		13,227		5,928		(81)		19,074		-		19,074
Non-interest expenses		(46,054)		(4,220)		(1,410)		(51,684)		-		(51,684)
Intersegment revenue		464		-		71		535		(535)		-
Intersegment expenses		(71)		(311)		(153)		(535)		535		-
Income before income taxes	$	20,683	$	1,409	$	2,262	$	24,354	$	-	$	24,354
Total assets	$	5,485,678	$	24,866	$	1,861,616	$	7,372,160	$	(957,553)	$	6,414,607



	Quarter Ended March 31, 2016
			Wealth				Total Major				Consolidated
	Banking		Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	81,152	$	18	$	10,136	$	91,306	$	-	$	91,306
Interest expense		(6,807)		-		(9,524)		(16,331)		-		(16,331)
Net interest income		74,345		18		612		74,975		-		74,975
Provision for loan and lease losses, net		(13,789)		-		-		(13,789)		-		(13,789)
Non-interest income, net		7,795		6,020		(312)		13,503		-		13,503
Non-interest expenses		(48,249)		(4,484)		(2,124)		(54,857)		-		(54,857)
Intersegment revenue		399		-		100		499		(499)		-
Intersegment expenses		(101)		(291)		(107)		(499)		499		-
Income (loss) before income taxes	$	20,400	$	1,263	$	(1,831)	$	19,832	$	-	$	19,832
Total assets	$	5,814,279	$	23,369	$	1,970,264	$	7,807,912	$	(933,340)	$	6,874,572

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the “Selected Financial Data” and the Company’s consolidated financial statements and related notes. This discussion and analysis contains forward-looking statements. Please see “Forward-Looking Statements” and the risk factors set forth in our Form 10-K for the year ended December 31, 2016 (the “2016 Form 10-K”), for discussion of the uncertainties, risks and assumptions associated with these statements.

The Company is a publicly-owned financial holding company that provides a full range of banking and financial services through its subsidiaries, including commercial, consumer, auto and mortgage lending; checking and savings accounts; financial planning, insurance and securities brokerage services; and corporate and individual trust and retirement services. The Company operates through three major business segments: Banking, Wealth Management, and Treasury, and distinguishes itself based on quality service. The Company has 48 branches in Puerto Rico and a subsidiary in Boca Raton, Florida. The Company’s long-term goal is to strengthen its banking and financial services franchise by expanding its lending businesses, increasing the level of integration in the marketing and delivery of banking and financial services, maintaining effective asset-liability management, growing non-interest revenue from banking and financial services, and improving operating efficiencies.

The Company’s diversified mix of businesses and products generates both the interest income traditionally associated with a banking institution and non-interest income traditionally associated with a financial services institution (generated by such businesses as securities brokerage, fiduciary services, investment banking, insurance agency, and retirement plan administration). Although all of these businesses, to varying degrees, are affected by interest rate and financial market fluctuations and other external factors, the Company’s commitment is to continue producing a balanced and growing revenue stream.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the consolidated financial statements. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a summary of our significant accounting policies in “Note 1—Summary of Significant Accounting Policies” of our 2016 Form 10-K.

In the “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” section of our 2016 Form 10-K, we identified the following accounting policies as critical because they require significant judgments and assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition:

	•		Loans and lease receivables
	•		Allowance for loan and lease losses
	•		Financial instruments

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them as necessary based on changing conditions. Management has reviewed and approved these critical accounting policies and has discussed its judgments and assumptions with the Audit Committee of our Board of Directors. T here have been no material changes in the methods used to formulate these critical accounting estimates from those discussed in our 2016 Form 10-K.

OVERVIEW OF FINANCIAL PERFORMANCE

SELECTED FINANCIAL DATA

	Quarter Ended March 31,
					Variance
	2017		2016		%
EARNINGS DATA:	(In thousands, except per share data)
Interest income	$	86,178	$	91,306	-5.6%
Interest expense		11,560		16,331	-29.2%
Net interest income		74,618		74,975	-0.5%
Provision for loan and lease losses, net		17,654		13,789	28.0%
Net interest income after provision for loan and lease losses		56,964		61,186	-6.9%
Non-interest income		19,074		13,503	41.3%
Non-interest expenses		51,684		54,857	-5.8%
Income before taxes		24,354		19,832	22.8%
Income tax expense		9,204		5,661	62.6%
Net income		15,150		14,171	6.9%
Less: dividends on preferred stock		(3,465)		(3,465)	153.0%
Income available to common shareholders	$	11,685	$	10,706	9.1%
PER SHARE DATA:
Basic	$	0.27	$	0.24	9.1%
Diluted	$	0.26	$	0.24	8.4%
Average common shares outstanding		43,915		43,898	0.0%
Average common shares outstanding and equivalents		51,131		51,064	0.1%
Cash dividends declared per common share	$	0.06	$	0.06	0.0%
Cash dividends declared on common shares	$	2,637	$	2,633	0.2%
PERFORMANCE RATIOS:
Return on average assets (ROA)		0.95%		0.81%	17.2%
Return on average tangible common equity		7.00%		6.69%	4.6%
Return on average common equity (ROE)		6.15%		5.83%	5.4%
Equity-to-assets ratio		14.52%		13.09%	10.9%
Efficiency ratio		56.15%		59.56%	-5.7%
Interest rate spread		5.02%		4.59%	9.4%
Interest rate margin		5.10%		4.67%	9.2%

SELECTED FINANCIAL DATA - (Continued)

	March 31,		December 31,		Variance
	2017		2016		%
PERIOD END BALANCES AND CAPITAL RATIOS:	(In thousands, except per share data)
Investments and loans
Investment securities	$	1,395,517	$	1,362,511	2.4%
Loans and leases , net		4,089,708		4,147,692	-1.4%
Total investments and loans	$	5,485,225	$	5,510,203	-0.5%
Deposits and borrowings
Deposits	$	4,717,828	$	4,664,487	1.1%
Securities sold under agreements to repurchase		531,179		653,756	-18.7%
Other borrowings		141,216		141,598	-0.3%
Total deposits and borrowings	$	5,390,223	$	5,459,841	-1.3%
Stockholders’ equity
Preferred stock	$	176,000	$	176,000	0.0%
Common stock		52,626		52,626	0.0%
Additional paid-in capital		540,808		540,948	0.0%
Legal surplus		77,772		76,293	1.9%
Retained earnings		185,377		177,808	4.3%
Treasury stock, at cost		(104,502)		(104,860)	0.3%
Accumulated other comprehensive income		3,348		1,596	109.8%
Total stockholders' equity	$	931,429	$	920,411	1.2%
Per share data
Book value per common share	$	17.42	$	17.18	1.4%
Tangible book value per common share	$	15.33	$	15.08	1.7%
Market price at end of period	$	11.80	$	13.10	-9.9%
Capital ratios
Leverage capital		13.20%		12.99%	1.6%
Common equity Tier 1 capital ratio		14.30%		14.05%	1.8%
Tier 1 risk-based capital		18.77%		18.35%	2.3%
Total risk-based capital		20.05%		19.62%	2.2%
Financial assets managed
Trust assets managed	$	2,929,246	$	2,850,494	2.8%
Broker-dealer assets gathered	$	2,342,034	$	2,350,718	-0.4%

FINANCIAL HIGHLIGHTS OF THE FIRST QUARTER OF 2017

Net income available to shareholders held steady for a fifth consecutive quarter. The Company reported $11.7 million, or $0.26 per share fully diluted, compared to $12.1 million, or $0.27 per share, in the fourth quarter of 2016 and $10.7 million, or $0.24 per share, in the year ago quarter.

Retail franchise continues to grow. The Company’s auto and consumer loan generation was strong, customer deposits increased 1.3% from December 31, 2016, and retail accounts grew 5% year over year.

Innovation streak continues. The Company introduced the first fully integrated online and mobile personal loan application in Puerto Rico.

Net interest margin expanded. NIM increased 16 basis points from the fourth quarter of 2016 to 5.10% due to a significant reduction in the cost of borrowings and as the proportion of higher yielding auto and consumer loans increased.

The FDIC shared-loss agreements were terminated. The termination was in line with the Company's ongoing efforts to optimize its operations.

Credit quality strong. The net charge off, non-performing loan and total delinquency rates declined from the fourth quarter of 2016.

Major performance ratios solid. Return on average assets was 0.95%, return on average tangible common stockholders' equity 7.00%, and efficiency ratio 56.15%.

Capital buildup continues. All major capital metrics advanced compared to the previous and year ago quarters. Tangible book value per common share at $15.33 was up 1.7% and 4.4%, respectively, and the tangible common equity ratio at 10.66% was up 33 and 116 basis points, respectively.

ANALYSIS OF RESULTS OF OPERATIONS

The following tables show major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for the quarters ended March 31, 2017 and 2016:

TABLE 1 - QUARTER-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED MARCH 31, 2017 AND 2016

	Interest				Average rate		Average balance
	March		March		March	March	March		March
	2017		2016		2017	2016	2017		2016
	(Dollars in thousands)
A - TAX EQUIVALENT SPREAD
Interest-earning assets	$	86,178	$	91,306	5.89%	5.69%	$	5,932,923	$	6,437,256
Tax equivalent adjustment		1,225		1,166	0.08%	0.07%		-		-
Interest-earning assets - tax equivalent		87,403		92,472	5.97%	5.76%		5,932,923		6,437,256
Interest-bearing liabilities		11,560		16,331	0.87%	1.10%		5,399,122		5,971,412
Tax equivalent net interest income / spread		75,843		76,141	5.10%	4.66%		533,801		465,844
Tax equivalent interest rate margin					5.18%	4.74%
B - NORMAL SPREAD
Interest-earning assets:
Investments:
Investment securities		7,682		9,508	2.29%	2.63%		1,360,186		1,450,127
Interest bearing cash and money market investments		846		646	0.80%	0.52%		431,110		502,718
Total investments		8,528		10,154	1.93%	2.09%		1,791,296		1,952,845
Non-acquired loans
Mortgage		9,531		9,606	5.43%	5.09%		711,553		756,291
Commercial		15,997		15,414	5.21%	4.34%		1,245,530		1,425,332
Consumer		7,648		6,185	11.09%	10.58%		279,558		234,499
Auto and leasing		18,780		16,710	9.78%	9.80%		778,815		684,035
Total non-acquired loans		51,956		47,915	6.99%	6.20%		3,015,456		3,100,157
Acquired loans:
Acquired BBVAPR
Mortgage		7,890		8,307	5.73%	5.54%		558,864		601,761
Commercial		4,985		7,696	7.81%	9.21%		258,755		335,240
Consumer		2,932		3,088	19.15%	17.56%		62,097		70,553
Auto		3,278		6,570	11.27%	11.32%		117,933		232,699
Total acquired BBVAPR loans		19,085		25,661	7.76%	8.30%		997,649		1,240,253
Acquired Eurobank		6,610		7,576	20.86%	21.10%		128,522		144,001
Total loans		77,651		81,152	7.60%	7.26%		4,141,627		4,484,411
Total interest earning assets		86,179		91,306	5.89%	5.69%		5,932,923		6,437,256

	Interest					Average rate		Average balance
	March		March			March	March	March		March
	2017		2016			2017	2016	2017		2016
	(Dollars in thousands)
Interest-bearing liabilities:
Deposits:
NOW Accounts		1,041		1,081		0.39%	0.38%		1,092,389		1,152,055
Savings and money market		1,481		1,398		0.52%	0.50%		1,164,040		1,115,552
Individual retirement accounts		426		502		0.68%	0.75%		253,626		267,058
Retail certificates of deposits		1,650		1,339		1.24%	1.28%		541,706		417,992
Total core deposits		4,598		4,320		0.61%	0.59%		3,051,761		2,952,657
Institutional deposits		641		654		1.16%	0.97%		224,196		269,807
Brokered deposits		1,885		1,988		1.33%	1.09%		574,549		734,326
Total wholesale deposits		2,526		2,642		1.28%	1.06%		798,745		1,004,133
		7,124		6,962		0.75%	0.71%		3,850,506		3,956,790
Non-interest bearing deposits		-		-		0.00%	0.00%		832,665		774,950
Deposits fair value premium amortization		-		(96)		0.00%	0.00%		-		-
Core deposit intangible amortization		229		258		0.00%	0.00%		-		-
Total deposits		7,353		7,124		0.64%	0.60%		4,683,171		4,731,740
Borrowings:
Securities sold under agreements to repurchase		3,245		6,099		2.29%	3.06%		574,771		799,613
Advances from FHLB and other borrowings		596		2,240		2.30%	2.66%		105,097		337,364
Subordinated capital notes		366		868		4.12%	3.39%		36,083		102,695
Total borrowings		4,207		9,207		2.38%	2.98%		715,951		1,239,672
Total interest bearing liabilities		11,560		16,331		0.87%	1.10%		5,399,122		5,971,412
Net interest income / spread	$	74,618	$	74,975		5.02%	4.59%
Interest rate margin						5.10%	4.67%
Excess of average interest-earning assets over average interest-bearing liabilities								$	533,801	$	465,844
Average interest-earning assets to average interest-bearing liabilities ratio									109.89%		107.80%

C - CHANGES IN NET INTEREST INCOME DUE TO:
	Volume		Rate		Total
	(In thousands)
Interest Income:
Investments	$	(840)	$	(786)	$	(1,626)
Loans		(7,143)		3,642		(3,501)
Total interest income		(7,983)		2,856		(5,127)
Interest Expense:
Deposits		(73)		303		230
Repurchase agreements		(1,715)		(1,140)		(2,855)
Other borrowings		(2,111)		(34)		(2,145)
Total interest expense		(3,899)		(871)		(4,770)
Net Interest Income	$	(4,084)	$	3,727	$	(357)

Net Interest Income

Net interest income is a function of the difference between rates earned on the Company’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). The Company constantly monitors the composition and re-pricing of its assets and liabilities to maintain its net interest income at adequate levels.

Comparison for the quarters ended March 31, 2017 and 2016

Table 1 above shows the major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for the quarters ended March 31, 2017 and 2016.

Net interest income of $74.6 million slightly decreased 0.5% compared with $75.0 million, reflecting a decrease in interest income of 5.6%, partially offset by a decrease in interest expenses of 29.2%. The decrease in interest income was caused by decreases in interest income from investments of 16.0% and interest income from loans of 4.3%. Interest expenses decreased primarily as a result of decreases in interest expenses from securities sold under agreements to repurchase of 46.8% and interest expenses from other borrowings of 54.0%.

Interest rate spread increased 43 basis points from 4.59% to 5.02%. This increase is mainly due to the net effect of a 20 basis point increase in the average yield of interest-earning assets from 5.69% to 5.89% and to 23 basis point decrease in average costs of interest-bearing liabilities from 1.10% to 0.87%.

Interest income decreased to $86.2 million from $91.3 million. Such decrease reflects a decrease of $8.0 million in the volume of interest-earning assets partially offset by an increase of $2.9 million in the interest rate of interest-earning assets. Interest income from loans decreased 4.32% to $77.7 million, reflecting a decrease of $7.1 million in the volume, partially offset by an increase of $3.6 million in the interest rate, primarily due to lower loan balances, but higher yields. Interest income from investments decreased 16.0% to $8.5 million, reflecting a decrease in volume and interest rate of $840 thousand and $786 thousand, respectively.

Originated loans interest income increased 8.4% to $52.0 million, as average balances dropped 2.7% and yields increased to 6.99%, mainly from higher yields in commercial, mortgage and retail categories. Acquired BBVAPR loans interest income declined 25.6% to $19.1 million as average balances declined 19.6% and yields decreased 54 basis points to 7.76%. Acquired Eurobank loans interest income fell 12.8% to $6.6 million as average balances declined 10.7% and yields decreased 24 basis points to 20.86%.

The average balance of total interest-earning assets was $5.933 billion, a decrease of 7.8% from the same period in 2016. The decrease in average balance of interest-earning assets was mainly attributable to decreases of 8.3% and 7.6% in the average balances of investments and loans, respectively. The decreases in investments and loans reflect the sale of $277.2 million in mortgage-backed securities during the first quarter of 2016 and the sale of the $200.0 million participation in the Puerto Rico Electric Power Authority ("PREPA") line of credit on October 7, 2016, respectively.

Interest expense decreased 29.2% to $11.6 million, primarily because of a $3.9 million decrease in the volume and a $859 thousand decrease in interest rate of interest-bearing liabilities, mostly due to the decrease in repurchase agreements volume and rate of $1.7 million and of $1.1 million, respectively, and the decrease in other borrowings volume and rate of $2.1 million and $34 thousand, respectively. The decrease in borrowings balances resulted from the repayment at maturity of $227.0 million of short term FHLB advances during the second quarter of 2016, and also to the repayment at maturity of $232 million of repurchase agreements during the first quarter of 2017. The decrease in interest-bearing liabilities was partially offset by an increase in deposit interest rate of $315 thousand and a decrease in volume of $86 thousand. Total cost of borrowings decreased 60 basis points to 2.38% from 2.98%. The cost of deposits slightly increased 4 basis point to 0.64%, when compared to 0.60% for the same period in 2016.

Comparison of quarters ended March 31, 2016 and 2015

Net interest income of $75.0 million decreased 16.4% compared with $89.6 million reported in the first quarter of 2015, reflecting a decrease of 16.8% in interest income from loans.

Interest rate spread decreased 76 basis points from 5.35% to 4.59%. This decrease is mainly due to the net effect of a 78 basis points decrease in the average yield of interest-earning assets from 6.47% to 5.69%.

Interest income decreased to $91.3 million from $107.0 million in the first quarter of 2016. Such decrease reflects decreases of $12.2 million and $3.5 million in the volume and interest rate, respectively, of interest-earning assets. Interest income from loans decreased 16.8% to $81.2 million, reflecting a decrease in volume and interest rate by $12.5 million and a $3.9 million, respectively, primarily due to lower acquired loan balances and yields. Our loan portfolio is transitioning as originated loans with normal yields grow at a slower pace than higher-yielding acquired loans fall due to repayments and maturities.

Originated loans interest income increased 3.5% to $47.9 million as average balances grew 9.4% and yields decreased 43 basis points to 6.20%. During the first quarter of 2015, the revolving line of credit to PREPA was classified as non-accrual. Starting with the second quarter of 2015, quarterly interest payments of $3.6 million per quarter, have been applied to principal, reducing the yield on originated loans. In addition, as a result of the Company's efforts to reduce our risk in Puerto Rico government exposures, the outstanding balance of credit facilities to public corporations decreased as a result of a repayment in full of a $75 million loan by the Puerto Rico Aqueduct and Sewer Authority in the second quarter of 2015 and a repayment in full of a $78 million loan by the State Insurance Fund Corporation in the third quarter of 2015.

Acquired BBVAPR loans interest income declined 28.1% to $25.7 million as average balances declined 26.5% and yields decreased 28 basis points to 8.30%. Acquired Eurobank loans interest income fell 51.2% to $7.6 million as average balances declined 47.6% and yields decreased 183 basis points to 21.06%. Interest income from investments increased 6.7% to $10.2 million, reflecting increases in volume and interest rate of $219 thousand and $417 thousand, respectively. The average balance of total interest-earning assets was $6.437 billion, a decrease of 4.0% from the same period in 2015. The decrease in average balance of interest-earning assets was mainly attributable to a decrease of 6.5% in average loans, partially offset by an increase of 2.3% in average investments. The decrease in average loans is mostly related to the bulk sale on September 28, 2015, of a portion of covered non-performing commercial loans amounting to $ 197.1 million unpaid principal balance or UPB ($ 100.0 million carrying amount). The FDIC agreed to cover $20.0 million of losses as part of its loss-share agreement with the Company. Also, as part of this transaction, the Company sold certain non-performing commercial loans and real estate owned from the BBVAPR acquisition amounting to $ 38.1 million of unpaid principal balance ($ 9.9 million carrying amount).

Interest expense decreased 6.0% to $16.3 million, primarily because of a $1.3 million decrease in the volume of interest-bearing liabilities and an increase of $292 thousand in interest rate. The decrease in interest-bearing liabilities is mostly due to the decrease in repurchase agreements volume of $1.1 million and a decrease in deposit volume of $269 thousand which was offset by an increase in interest rate of $289 thousand. The decrease in repurchase agreement volume reflects a partial unwinding of repurchase agreements amounting to $268.0 million, which carried a cost of 4.78%. The cost of deposits before fair value amortization and core deposit intangible amortization slightly increased 1 basis point to 0.71% for the first quarter of 2016, compared to 0.70% for the first quarter of 2015. The cost of borrowings decreased 4 basis points to 2.98% from 3.02%.

TABLE 2 - NON-INTEREST INCOME SUMMARY

	Quarter Ended March 31,
	2017		2016		Variance
	(Dollars in thousands)
Banking service revenue	$	10,626	$	10,118	5.0%
Wealth management revenue		6,215		6,152	1.0%
Mortgage banking activities		587		855	-31.3%
Total banking and financial service revenue		17,428		17,125	1.8%
FDIC shared-loss benefit (expense), net		1,403		(4,029)	134.8%
Net gain (loss) on:
Sale of securities		-		11,996	-100.0%
Derivatives		81		(3)	2800.0%
Early extinguishment of debt		-		(12,000)	100.0%
Other non-interest income		162		414	-60.9%
		1,646		(3,622)	145.4%
Total non-interest income, net	$	19,074	$	13,503	41.3%

Non-Interest Income

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

Comparison of quarters ended March 31, 2017 and 2016

As shown in Table 2 above, the Company recorded non-interest income, net, in the amount of $19.1 million, compared to $13.5 million, an increase of 41.3%, or $5.6 million.

Banking service revenue, which consists primarily of fees generated by deposit accounts, electronic banking services, and customer services increased 5.0% to $10.6 million from $10.1 million. Increases in account analysis services fees, debit card interchange income and merchant business fees were reflected in the amounts of $263 thousand, $149 thousand and $129 thousand, respectively.

Wealth management revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and insurance activities, remained stable at $6.2 million.

Income generated from mortgage banking activities decreased 31.3% to $587 thousand, compared to $855 thousand, mainly from the decrease in price of the mortgage servicing asset.

During the first quarter of 2017, the Company entered into an agreement with the FDIC to terminate the shared-loss agreements, resulting in a benefit of $1.4 million, recorded in the consolidated statement of operations. During the first quarter of 2016, the Company recorded expenses of $4.0 million related to the FDIC shared-loss agreement.

D uring the first quarter of 2016, the Company capitalized on favorable market conditions to partially unwind a high-rate repurchase agreement amounting to $268.0 million at a cost of $12.0 million, included as a loss on early extinguishment of debt in the consolidated statements of operations. In addition, the Company sold $277.2 million in mortgage backed securities and $11.1 million in Puerto Rico government bonds, resulting in a gain on sale of securities of $12.0 million. No sales occurred during the quarter ended March 31, 2017.

Other non-interest income increased $252 thousand, as the Company recognized a $247 thousand gain during the first quarter of 2016, related to the mortgage servicing asset sold.

Comparison of quarters ended March 31, 2016 and 2015

The Company recorded non-interest income, net in the amount of $13.5 million, compared to $6.9 million for the same period in 2015, an increase of 96.2%, or $6.6 million.

Banking service revenue, which consists primarily of fees generated by deposit accounts, electronic banking services, and customer services, slightly decreased 1.0% to $10.1 million, from $10.2 million for the same period in 2015. The decrease is mainly due to a decrease in electronic banking fees of $242 thousand, partially offset by an increase of $195 thousand for prepayment penalty fees.

Wealth management revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and insurance activities, decreased 14.0% to $6.2 million, compared to $7.2 million for the same period in 2015. Such decrease reflects a reduction in some securities brokerage activities and the cancellation of various retirement plans. Client trading volumes in our broker-dealer subsidiary continued to fall due to the general investor uncertainty in the Puerto Rico market.

Income generated from mortgage banking activities decreased 54.1% to $855 thousand, compared to $1.9 million for the same period in 2015. The decrease in mortgage banking activities was mostly due to foregone gains on sales as a result of the Company retaining securitized GNMA pools. During the first quarter of 2016, the Company retained securitized GNMA pools totaling $23.0 million, amortized cost, at a yield of 3.06%, from its own originations.

The net FDIC shared-loss expense decreased to $4.0 million as compared to $13.1 million for the first quarter of 2015, primarily from the expiration of the FDIC commercial loss share coverage. The decrease is also related to the ongoing evaluation of expected cash flows of the covered loan portfolio and from changes in the fair value of the true-up payment obligation (also known as a clawback liability).

During the first quarter of 2016, the Company capitalized on favorable market conditions to partially unwind a high-rate repurchase agreement amounting to $268.0 million at a cost of $12 million, included as a loss on early extinguishment of debt in the unaudited statements of operations. In addition, the Company sold $272.1 million in mortgage backed securities and $11.1 million in Puerto Rico government bonds. As a result, the Company recorded a net gain on sale of securities of $12.0 million, compared to $2.6 million for the first quarter of 2015.

Other non-interest income increased $2.2 million, as the first quarter of 2015 included the recognition of $1.9 million loss in the valuation of part of the mortgage servicing asset subsequently sold to Scotiabank Puerto Rico.

TABLE 3 - NON-INTEREST EXPENSES SUMMARY

	Quarter Ended March 31,
	2017		2016		Variance %
	(Dollars in thousands)
Compensation and employee benefits	$	20,347	$	20,254	0.5%
Professional and service fees		3,237		2,985	8.4%
Occupancy and equipment		7,199		7,677	-6.2%
Insurance		1,600		3,150	-49.2%
Electronic banking charges		4,902		5,589	-12.3%
Information technology expenses		1,998		1,657	20.6%
Advertising, business promotion, and strategic initiatives		1,361		1,294	5.2%
Foreclosure, repossession and other real estate expenses		1,326		1,930	-31.3%
Loan servicing and clearing expenses		1,189		2,130	-44.2%
Taxes, other than payroll and income taxes		2,372		2,671	-11.2%
Communication		914		963	-5.1%
Printing, postage, stationery and supplies		637		725	-12.1%
Director and investor relations		280		278	0.7%
Credit related expenses		2,626		2,255	16.5%
Other operating expenses		1,696		1,299	30.6%
Total non-interest expenses	$	51,684	$	54,857	-5.8%
Relevant ratios and data:
Efficiency ratio		56.15%		59.56%
Compensation and benefits to non-interest expense		39.37%		36.98%
Compensation to average total assets owned (annualized)		1.27%		1.16%
Average number of employees		1,429		1,468
Average compensation per employee	$	14.2	$	13.8
Average loans per average employee	$	2,898	$	3,055

Non-Interest Expenses

Comparison of quarters ended March 31, 2017 and 2016

Non-interest expense was $51.7 million, representing a decrease of 5.8% compared to $54.9 million.

Insurance expense decreased $1.6 million, to $1.6 million, as a result of a change in the calculation method of the FDIC Savings Association Insurance Fund (SAIF) insurance. The change was effective beginning with the June 30, 2016 invoice, which was received during the third quarter of 2016.

Loan servicing and clearing expenses decreased $941 thousand, mainly due to mortgage servicing migration expenses amounting to $900 thousand during the first quarter of 2016.

Electronic banking charges decreased $687 thousand, primarily as a result of a decrease of $885 thousand in credit cards merchant fees, partially offset by an increase in debit card billing fees of $135 thousand.

The efficiency ratio improved to 56.15% from 59.56%. The efficiency ratio measures how much of the Company’s revenues is used to pay operating expenses. The Company 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, FDIC shared-loss benefit/expense, losses on the early extinguishment of debt, 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 efficiency ratio computation for the quarters ended March 31, 2017 and 2016 amounted to $1.6 million and a $3.6 million loss, respectively.

Comparison of quarters ended March 31, 2016 and 2015

Non-interest expense for the first quarter of 2016 was $54.9 million, representing a decrease of 2.6% compared to $56.3 million.

Professional and service fees decreased 13.3% or $555 thousand to $3.6 million, mostly due to a decrease of $522 thousand in legal expenses from reduced billings.

Occupancy and equipment decreased 9.4% to $7.8 million, reflecting decreases in rent expense and in depreciation expenses of $890 thousand and $227 thousand, respectively, and was partially offset by an increase of $332 thousand in new technology for clients.

Foreclosure, repossession and other real estate expenses decreased 48.5% to $2.8 million, as compared to $5.4 million in the same period for the previous year. The first quarter of 2015 included a loss of $2.1 million on the sale of repossessed assets, contrasting with 2016 which included a gain of $723 thousand on the sale of repossessed assets, as the unit count decreased from 1,195 to 928 mostly due to reduction in new entries and efficiencies in the selling process.

The decreases in the foregoing non-interest expenses were partially offset by increases in insurance and taxes, other than payroll and income taxes.

Insurance expense increased 61.3% to $3.2 million, as compared to $2.0 million in the same period of 2015, mainly due to an increase in the State Accident Insurance Fund (“SAIF”) premiums.

Taxes, other than payroll and income taxes increased 80.6% to $2.7 million from $1.5 million for the same quarter in 2015. The first quarter of 2015 included a $1.2 million adjustment related to a special gross receipts tax (“Patente Nacional”) taxes from a 2014 accrual, which reduced the expense balance in such period.

The efficiency ratio was 59.56% compared to 51.75% for the same period in 2015. The efficiency ratio measures how much of the Company’s revenues is used to pay operating expenses. The Company 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, FDIC shared-loss expense, losses on the early extinguishment of debt, 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 (losses) income that are excluded from the efficiency ratio computation for the quarter ended March 31, 2016 amounted to losses of $3.6 million, compared to income of $12.3 million for the quarter ended March 31, 2015.

Provision for Loan and Lease Losses

Comparison of quarters ended March 31, 2017 and 2016

Provision for loan and lease losses increased 28.0%, or $3.9 million, to $17.7 million. Based on an analysis of the credit quality and the composition of the Company’s loan portfolio, management determined that the provision for the quarter was adequate to maintain the allowance for loan and lease losses at an appropriate level to provide for probable losses based upon an evaluation of known and inherent risks.

Provision for originated and other loan and lease losses increased 10.1%, or $1.1 million, to $11.7 million from $10.7 million due to increases in the provision for mortgage loans of $1.6 million, for commercial loans of $1.3 million and for consumer loans of $1.1 million, partially offset by a decrease in the provision for auto loans of $2.4 million.

Total charge-offs on originated and other loans increased 5.9% to $14.2 million, as compared to $13.4 million as a result of increases in consumer charge-offs of $1.0 million, and mortgage charge-offs of $717 thousand to $2.4 million. Increases in charge-offs were offset by decreases in auto loan charge-offs of $799 thousand, and commercial loan charge-offs of $155 thousand. Total recoveries on originated and other loans increased from $13.4 million to $14.2 million. Net charge-off rate increased 10 basis points to 1.40%.

Provision for acquired loan and lease losses increased 89.2%, or $2.8 million, to $5.9 million from $3.2 million. Provision for acquired BBVAPR loan and lease losses increased $2.1 million to $4.3 million from $2.3 million. Provision for acquired Eurobank loan and lease losses increased $2.3 million due to increases in mortgage provision of $839 thousand, in commercial provision of $888 thousand, and in auto loans provision of $493 thousand.

Comparison of quarters ended March 31, 2016 and 2015

Provision for loan and lease losses decreased 67.3% or $28.4 million, to $13.8 million, as a result of a $24.0 million provision for loan and lease losses related to the PREPA line of credit recorded during the first quarter of 2015.

Based on an analysis of the credit quality and the composition of the Company’s loan portfolio, management determined that the provision for the quarter was adequate in order to maintain the allowance for loan and lease losses at an adequate level to provide for probable losses based upon an evaluation of known and inherent risks.

Provision for originated and other loan and lease losses decreased 68.6%, or $23.3 million, to $10.7 million from $33.9 million when compared with the same period in 2015. During the first quarter of 2015, the Company changed to non-accrual status of the PREPA line of credit recorded a $24.0 million provision for loan and lease losses related thereto. Management determined that no additional provision was required on the PREPA line of credit after the evaluation made during the first quarter of 2016.

Total charge-offs on originated and other loans increased 9.4% to $13.4 million, as compared to $12.2 million for the same quarter in 2015. Consumer charge-offs increased $651 thousand to $1.7 million. Mortgage charge-offs increased $248 thousand to $1.7 million. Auto and leasing charge-offs increased $226 thousand to $8.4 million. Commercial charge-offs increased $19 thousand to $1.0 million. Total recoveries on originated and other loans decreased from $3.6 million to $3.3 million. As a result, the recoveries to charge-offs ratio decreased from 29.68% to 24.80%. Net credit losses increased $1.5 million to $10.0 million, representing 1.30% of average originated and other loans outstanding versus 1.21% for the same quarter in 2015, annualized.

Provision for acquired loan and lease losses decreased 62.2%, or $5.2 million, to $3.1 million from $8.3 million when compared with the same period in 2015. Provision for acquired BBVAPR loan and lease losses decreased $1.1 million to $2.3 million from $3.5 million, when compared to the same period in 2015. Provision for acquired Eurobank loan and lease losses decreased $4.0 million

from $4.8 million to $805 thousand. Such decrease reflects an additional provision of $3.5 million in the first quarter of 2015 related to the commercial shared-loss coverage with the FDIC that ended on June 30, 2015.

Income Taxes

Comparison of quarters ended March 31, 2017 and 2016

Income tax expense was $9.2 million, compared to $5.7 million. The effective tax rate for 2017 was 37.8% compared to 28.5% for 2016.

Comparison of quarters ended March 31, 2016 and 2015

Income tax expense was $5.7 million, compared to $979 thousand for the same period in 2015. Income tax expense reflects the net income before income taxes of $19.8 million for the first quarter of 2016, compared to a net loss before income taxes of $2.0 million for the year-ago quarter.

Business Segments

The Company 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 the Company’s organization, nature of its products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. The Company 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. The Company’s methodology for allocating non-interest expenses among segments is based on several factors such as revenue, employee headcount, occupied space, dedicated services or time, among others. Following are the results of operations and the selected financial information by operating segment for the quarters ended March 31, 2017 and 2016.

	Quarter Ended March 31, 2017
				Wealth				Total Major				Consolidated
	Banking			Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	77,573	$	12	$	8,593	$	86,178	$	-	$	86,178
Interest expense		(6,814)		-		(4,746)		(11,560)		-		(11,560)
Net interest income		70,759		12		3,847		74,618		-		74,618
Provision for loan and lease losses		(17,642)		-		(12)		(17,654)		-		(17,654)
Non-interest income		13,227		5,928		(81)		19,074		-		19,074
Non-interest expenses		(46,054)		(4,220)		(1,410)		(51,684)		-		(51,684)
Intersegment revenue		464		-		71		535		(535)		-
Intersegment expenses		(71)		(311)		(153)		(535)		535		-
Income before income taxes	$	20,683	$	1,409		2,262	$	24,354	$	-	$	24,354
Total assets	$	5,485,678	$	24,866	$	1,861,616	$	7,372,160	$	(957,553)	$	6,414,607



	Quarter Ended March 31, 2016
				Wealth				Total Major				Consolidated
	Banking			Management		Treasury		Segments		Eliminations		Total
	(In thousands)
Interest income	$	81,152	$	18	$	10,136	$	91,306	$	-	$	91,306
Interest expense		(6,807)		-		(9,524)		(16,331)		-		(16,331)
Net interest income		74,345		18		612		74,975		-		74,975
Provision for loan and lease losses		(13,789)		-		-		(13,789)		-		(13,789)
Non-interest income		7,795		6,020		(312)		13,503		-		13,503
Non-interest expenses		(48,249)		(4,484)		(2,124)		(54,857)		-		(54,857)
Intersegment revenue		399		-		100		499		(499)		-
Intersegment expenses		(101)		(291)		(107)		(499)		499		-
Income (loss) before income taxes	$	20,400	$	1,263		(1,831)	$	19,832	$	-	$	19,832
Total assets	$	5,814,279	$	23,369	$	1,970,264	$	7,807,912	$	(933,340)	$	6,874,572

Comparison of quarters ended March 31, 2017 and 2016

Banking

Net interest income of the Company’s Banking segment de creased $3.6 million for the quarter ended 2017, or 4.8%, as a result of a decrease in interest income from loans of $3.5 million, or 4.3%. The decrease in interest income from loans reflects a decrease of $7.1 million in the volume and an increase of $3.6 million in the interest rate, representing lower average loan balances but higher yields.

Originated loans interest income increased 8.4% to $52.0 million as average balances dropped 2.7% and yields increased to 6.99%, mainly from higher yields in commercial, mortgage and retail categories. Acquired BBVAPR loans interest income declined 25.6% to $19.1 million as average balances declined 19.6% and yields decreased 54 basis points to 7.76%. Acquired Eurobank loans interest income fell 12.8% to $6.6 million as average balances declined 10.7% and yields decreased 24 basis points to 20.86%.

Provision for loan and lease losses increased 28.0%, or $3.9 million, to $17.7 million. Provision for originated loan and lease losses increased 10.1%, or $1.1 million, to $11.7 million, due to continued growth of the portfolio. Provision for acquired loan and lease losses increased 89.2%, or $2.8 million, to $5.9 million from $3.2 million, due to the periodic assessment of loans remaining in these portfolios.

Non-interest income was mainly affected by the FDIC shared-loss benefit of $1.4 million related to the termination of the FDIC shared-loss agreements during the first quarter of 2017, compared to an expense of $4.0 milli on in the year ago quarter.

Non-interest expense of $46.1 million decreased 4.5%, primarily reflecting a decrease in loan servicing and clearing expenses of $941 thousand, mainly due to mortgage servicing migration expenses amounting to $900 thousand during the first quarter of 2016 , and a decrease in electronic banking charges of $687 thousand, as a result of a decrease of $885 thousand in credit cards merchant fees, partially offset by an increase in debit card billing fees of $135 thousand.

Wealth Management

Wealth management revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and insurance activities, slightly increased $146 thousand to $1.4 million, mainly from changes in volume and market rates.

Treasury

Treasury's income before taxes, which consists of the Company's asset/liability management activities, such as purchase and sale of investment securities, interest rate risk management, derivatives, and borrowings, increased to $2.3 million, compared to a loss of $1.8 million.

Net interest income increased $3.2 million to $3.8 million, mainly from a reduction in interest expenses. Interest income from investments decreased 16.0% to $8.5 million, reflecting a decrease in volume and interest rate of $840 thousand and $786 thousand, respectively. Interest expenses decreased $4.8 million from $9.5 million to $4.7 million, mostly due to decreases in repurchase agreements volume and rate of $1.7 million and of $1.1 million, respectively, and decreases in other borrowings volume and rate of $2.1 million and of $34 thousand, respectively. The decrease in borrowings balances resulted from the repayment at maturity of $227.0 million of short term FHLB advances during the second quarter of 2016, and also to the repayment at maturity of $232 million of repurchase agreements during the first quarter of 2017.

Comparison of quarters ended March 31, 2016 and 2015

Banking

Net interest income of the Company’s Banking segment decreased $14.7 million for 2016, or 16.4%, reflecting a decrease of 16.8% in interest income from loans. Interest income from loans decreased 16.8% to $81.2 million, reflecting a decrease in volume and in interest rate by $12.5 million and $3.9 million, respectively, primarily due to lower acquired loan balances and yields. Our loan portfolio is transitioning as originated loans with normal yields grow at a slower pace than higher-yielding acquired loans fall due to repayments and maturities.

Originated loans interest income increased 3.5% to $47.9 million as average balances grew 9.4% and yields declined 43 basis points to 6.20%. During the first quarter of 2015, the revolving line of credit to PREPA was classified as non-accrual. Starting with the second quarter of 2015, quarterly interest payments of $3.6 million, have been applied to principal, reducing the yield on originated loans. In addition, as a result of the Company's efforts to reduce our risk in government exposures, the outstanding balance of credit facilities to public corporations decreased as a result of a repayment in full of a $75 million loan by the Puerto Rico Aqueduct and Sewer Authority in the second quarter of 2015 and a repayment in full of a $78 million loan by the State Insurance Fund Corporation in the third quarter of 2015.

Acquired BBVAPR loans interest income decreased 28.1% to $25.7 million as average balances declined 26.5% and yields declined 28 basis points to 8.30%. Acquired Eurobank loans interest income fell 51.2% to $7.6 million as average balances declined 47.6% and yields declined 183 basis points to 21.06%. The decrease in average loans is mostly related to the bulk sale on September 28, 2015, of a portion of covered non-performing commercial loans amounting to $197.1 million unpaid principal balance or UPB ($100.0 million carrying amount). The FDIC agreed to cover $20.0 million of losses as part of its loss-share agreement with the Company. Also, as part of this transaction, the Company sold certain non-performing commercial loans and real estate owned from the BBVAPR acquisition amounting to $38.1 million of unpaid principal balance ($9.9 million carrying amount).

Provision for originated and other loan and lease losses decreased 68.6%, or $23.3 million, to $10.7 million from $33.9 million when compared with the same period in 2015. During the first quarter of 2015, the Company recorded a $24.0 million provision for loan and lease losses for the PREPA line of credit. No additional provision was required on the PREPA line of credit during the first quarter of 2016. Provision for acquired loan and lease losses decreased 62.2%, or $5.2 million, when compared with the same period in 2015. Provision for acquired Eurobank loan and lease losses decreased $4.0 million, which reflects an additional provision of $3.5 million in the first quarter of 2015 related to the commercial shared-loss coverage with the FDIC that ended on June 30, 2015.

Non-interest income, net, is affected by the level of mortgage banking activities and fees generated from loans and deposit accounts. It is also affected by the FDIC shared-loss expense, which varies depending on the results of the on-going evaluation of expected cash flows of the loan portfolio acquired in the FDIC-assisted acquisition.

Non-interest expense of $48.3 million decreased 2.1% when compared to the first quarter of 2015, primarily reflecting a decrease in foreclosure, repossession and other real estate expenses of 48.5% to $2.8 million, as compared to $5.4 million in the same period for the previous year. The first quarter of 2015 included a loss of $2.1 million on the sale of repossessed assets, contrasting with the first quarter of 2016 which included a gain of $723 thousand due to efforts to sell units at a gain.

Wealth Management

Wealth management revenue, which consists of commissions and fees from fiduciary, securities brokerage and insurance activities decreased to $1.3 million, compared to $1.8 million in the first quarter of 2015. Such decrease reflects a reduction in some security

brokerage activities and the cancellation of various retirement plans. Client trading volumes in our broker-dealer subsidiary continued to fall due to the general investor uncertainty in the Puerto Rico market.

Treasury

Treasury revenue, which consists of the Company's asset/liability management activities, such as purchase and sale of investment securities, interest rate risk management, derivatives, and borrowings, increased to a loss of $1.8 million, compared to a loss of $539 thousand in the first quarter of 2015. Such increase reflects a gain of $2.6 million from the sale of $37.7 million in FNMA and FHLMC certificates during the first quarter of 2015.

During the first quarter of 2016, the Company capitalized on favorable market conditions to partially unwind a high-rate repurchase agreement amounting to $268.0 million, at a cost of $12.0 million, and sell $272.1 million in mortgage backed securities and $11.1 million in Puerto Rico government bonds, at a net gain on sale of securities of $12.0 million.

ANALYSIS OF FINANCIAL CONDITION

Assets Owned

At March 31, 2017, the Company’s total assets amounted to $6.415 billion representing a decrease of 1.3% when compared to $6.502 billion at December 31, 2016. This reduction is mainly due to a decrease in the loan portfolio of $58.0 million and the termination of the FDIC loss share agreement which decreased the total assets by $14.4 million. This decrease was partially offset by an increase in the investment portfolio of $33.0 million.

The Company’s loan portfolio is comprised of residential mortgage loans, commercial loans collateralized by mortgages on real estate located in Puerto Rico, other commercial and industrial loans, consumer loans, and auto loans. At March 31, 2017, the Company’s loan portfolio decreased $58.0 million from $4.148 billion at December 31, 2016 to $4.090 billion. Our loan portfolio is transitioning as originated loans grow at a slower pace than acquired loans decrease, due to repayments and maturities. At March 31, 2017, the originated loan portfolio increased $3.8 million. The acquired BBVAPR loan portfolio decreased $56 million from December 31, 2016 to $951.9 million. The Eurobank acquired loan portfolio decreased $9.2 million from December 31, 2016 to $125.4 million at March 31, 2017. Mortgage loans held for sale increased to $15.8 million from $12.5 million on December 31, 2016.

The investment portfolio increased $33.0 million from $1.363 billion at December 31, 2016 to $1.396 billion at March 31, 2017, reflecting increases in investment securities available-for-sale portfolio by $48.6 million and in FHLB stocks by $6.4 million, partially offset by decreases in investment securities held-to-maturity portfolio by $21.9 million. Investment securities available-for-sale portfolio increased primarily due to the purchases of mortgage-backed securities amounting to $51.0 million during the first quarter of 2017. Investment securities held-to-maturity portfolio decreased $21.9 million to $578.0 million reflecting $20.6 million paydowns of FNMA certificates during the first quarter of 2017.

At both March 31, 2017 and December 31, 2016, loans represented 75% of total interest-earning assets while investments represented 25%.

Financial Assets Managed

The Company’s financial assets include those managed by the Company’s trust division, retirement plan administration subsidiary, and assets gathered by its broker-dealer subsidiary. The Company’s trust division offers various types of individual retirement accounts ("IRA"s) and manages 401(k) and Keogh retirement plans and custodian and corporate trust accounts, while the retirement plan administration subsidiary, OPC, manages private retirement plans. At March 31, 2017, total assets managed by the Company’s trust division and OPC amounted to $2.929 billion, compared to $2.850 billion at December 31, 2016. Oriental Financial Services offers a wide array of investment alternatives to its client base, such as tax-advantaged fixed income securities, mutual funds, stocks, bonds and money management wrap-fee programs. At March 31, 2017, total assets gathered by Oriental Financial Services from its customer investment accounts amounted to $2.342 billion, compared to $2.351 billion at December 31, 2016. Changes in trust and broker-dealer related assets primarily reflect changes in portfolio balances and differences in market values.

Goodwill

Goodwill recorded in connection with the BBVAPR Acquisition and the FDIC-assisted Eurobank acquisition 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, the Company determines that the existence of events and circumstances indicate that it is more likely than not that goodwill is not impaired. The Company completes its annual goodwill impairment test as of October 31 of each year. The Company 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.

Reporting unit valuation is inherently subjective, with a number of factors based on assumptions and management judgments or estimates. Actual values may differ significantly from such estimates. Among these are future growth rates for the reporting units, selection of comparable market transactions, discount rates and earnings capitalization rates. Changes in assumptions and results due to economic conditions, industry factors, and reporting unit performance and cash flow projections could result in different assessments of the fair values of reporting units and could result in impairment charges. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, an interim impairment test is required.

Relevant events and circumstances for evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount may include macroeconomic conditions (such as a further deterioration of the Puerto Rico economy or the liquidity for Puerto Rico securities or loans secured by assets in Puerto Rico), adverse changes in legal factors or in the business climate, adverse actions by a regulator, unanticipated competition, the loss of key employees, or similar events. The Company’s loan portfolio, which is the largest component of its interest-earning assets, is concentrated in Puerto Rico and is directly affected by adverse local economic and fiscal conditions. Such conditions have generally affected the market demand for non-conforming loans secured by assets in Puerto Rico and, therefore, affect the valuation of the Company’s assets.

As of March 31, 2017, the Company had $86.1 million of goodwill allocated as follows: $84.1 million to the Banking unit and $2.0 million to the Wealth Management unit. During the last quarter of 2016, based on its annual goodwill impairment test, the Company determined that the Banking unit failed step one of the two-step impairment test and that the Wealth Management unit passed such step. As a result of step one; the Banking unit’s adjusted net book value exceeded its fair value by approximately $145.0 million, or 15%. Accordingly, the Company proceeded to perform step two of the analysis. Based on the results of step two, the Company determined that the carrying value of the goodwill allocated to the Banking unit was not impaired as of the valuation date. During the quarter ended March 31, 2017, the Company performed an assessment of events or circumstances that could trigger reductions in the book value of the goodwill. Based on this assessment, no events were identified that triggered changes in the book value of goodwill at March 31, 2017.

TABLE 4 - ASSETS SUMMARY AND COMPOSITION

	March 31,		December 31,		Variance
	2017		2016		%
	(Dollars in thousands)
Investments:
FNMA and FHLMC certificates	$	1,035,019	$	1,025,370	0.9%
Obligations of US government-sponsored agencies		3,585		3,884	-7.7%
US Treasury securities		49,004		49,054	-0.1%
CMOs issued by US government-sponsored agencies		96,486		101,831	-5.2%
GNMA certificates		187,897		165,235	13.7%
Puerto Rico government and public instrumentalities		4,247		4,073	4.3%
FHLB stock		17,161		10,793	59.0%
Other debt securities		1,801		1,921	-6.2%
Other investments		317		350	-9.4%
Total investments		1,395,517		1,362,511	2.4%
Loans		4,089,708		4,147,692	-1.4%
Total investments and loans		5,485,225		5,510,203	-0.5%
Other assets:
Cash and due from banks (including restricted cash)		476,616		507,863	-6.2%
Money market investments		6,685		5,606	19.2%
FDIC indemnification asset		-		14,411	-100.0%
Foreclosed real estate		47,551		47,520	0.1%
Accrued interest receivable		18,555		20,227	-8.3%
Deferred tax asset, net		121,442		124,200	-2.2%
Premises and equipment, net		69,786		70,407	-0.9%
Servicing assets		9,688		9,858	-1.7%
Derivative assets		1,123		1,330	-15.6%
Goodwill		86,069		86,069	0.0%
Other assets and customers' liability on acceptances		91,867		104,130	-11.8%
Total other assets		929,382		991,621	-6.3%
Total assets	$	6,414,607	$	6,501,824	-1.3%
Investments portfolio composition:
FNMA and FHLMC certificates		74.1%		75.2%
Obligations of US government-sponsored agencies		0.3%		0.3%
US Treasury securities		3.5%		3.6%
CMOs issued by US government-sponsored agencies		6.9%		7.5%
GNMA certificates		13.5%		12.1%
Puerto Rico government and public instrumentalities		0.3%		0.3%
FHLB stock		1.2%		0.8%
Other debt securities and other investments		0.2%		0.2%
		100.0%		100.0%

TABLE 5 — LOANS RECEIVABLE COMPOSITION

	March 31,		December 31,		Variance
	2017		2016		%
	(In thousands)
Originated and other loans and leases held for investment:
Mortgage	$	709,863	$	721,494	-1.6%
Commercial		1,253,712		1,277,866	-1.9%
Consumer		300,412		290,515	3.4%
Auto and leasing		786,606		756,395	4.0%
		3,050,593		3,046,270	0.1%
Allowance for loan and lease losses on originated and other loans and leases		(60,483)		(59,300)	-2.0%
		2,990,110		2,986,970	0.1%
Deferred loan costs, net		6,464		5,766	12.1%
Total originated and other loans loans held for investment, net		2,996,574		2,992,736	0.1%

Acquired loans:
Acquired BBVAPR loans:
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Commercial		5,436		5,562	-2.3%
Consumer		31,001		32,862	-5.7%
Auto		42,523		53,026	-19.8%
		78,960		91,450	-13.7%
Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-20		(3,615)		(4,300)	15.9%
		75,345		87,150	-13.5%

Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage		558,112		569,253	-2.0%
Commercial		278,665		292,564	-4.8%
Consumer		3,201		4,301	-25.6%
Auto		71,495		85,676	-16.6%
		911,473		951,794	-4.2%
Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-30		(34,930)		(31,056)	-12.5%
		876,543		920,738	-4.8%
Total acquired BBVAPR loans, net		951,888		1,007,888	-5.6%
Acquired Eurobank loans:
Loans secured by 1-4 family residential properties		72,966		73,018	-0.1%
Commercial		73,181		81,460	-10.2%
Consumer		1,268		1,372	-7.6%
		147,415		155,850	-5.4%
Allowance for loan and lease losses on Eurobank loans		(22,006)		(21,281)	-3.4%
Total acquired Eurobank loans, net		125,409		134,569	-6.8%
Total acquired loans, net		1,077,297		1,142,457	-5.7%
Total held for investment, net		4,073,871		4,135,193	-1.5%
Mortgage loans held for sale		15,837		12,499	26.7%
Total loans, net	$	4,089,708	$	4,147,692	-1.4%

As shown in Table 5 above, total loans, net, amounted to $4.090 billion at March 31, 2017 and $4.148 billion at December 31, 2016. The Company’s originated and other loans held-for-investment portfolio composition and trends were as follows:

· Mortgage loan portfolio amounted to $709.9 million (23.3% of the gross originated loan portfolio) compared to $721.5 million (23.7% of the gross originated loan portfolio) at December 31, 2016. Mortgage loan production totaled $43.5 million for the quarter ended March 31, 2017, which represents a decrease of 10.0%, from $48.3 million in the year ago quarter. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to $10.0 million and $9.7 million at March 31, 2017 and December 31, 2016, 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.

· Commercial loan portfolio amounted to $1.254 billion (41.1% of the gross originated loan portfolio) compared to $1.278 billion (42.0% of the gross originated loan portfolio) at December 31, 2016. Commercial loan production decreased 52.5% to $37.7 million for the quarter ended March 31, 2017, from $79.3 million for the same period in 2016.

· Consumer loan portfolio amounted to $300.4 million (9.8% of the gross originated loan portfolio) compared to $290.5 million (9.5% of the gross originated loan portfolio) at December 31, 2016. Consumer loan production increased 23.0% to $42.1 million for the quarter ended March 31, 2017, from $34.3 million for the same period in 2016.

· Auto and leasing portfolio amounted to $786.6 million (25.8% of the gross originated loan portfolio) compared to $756.4 million (24.8% of the gross originated loan portfolio) at December 31, 2016. Auto and leasing production increased by 37.1% to $86.8 million for the quarter ended March 31, 2017, compared to $64.3 million for the same period in 2016.

TABLE 6 — HIGHER RISK RESIDENTIAL MORTGAGE LOANS

	March 31, 2017
	Higher-Risk Residential Mortgage Loans*
											High Loan-to-Value Ratio Mortgages
	Junior Lien Mortgages					Interest Only Loans					LTV 90% and over
	Carrying					Carrying					Carrying
	Value		Allowance		Coverage	Value		Allowance		Coverage	Value		Allowance		Coverage
	(In thousands)
Delinquency:
0 - 89 days	$	10,371	$	267	2.57%	$	10,103	$	727	7.20%	$	77,754	$	1,616	2.08%
90 - 119 days		42		3	7.14%		299		26	8.70%		1,429		78	5.46%
120 - 179 days		-		-	0.00%		-		-	0.00%		861		37	4.30%
180 - 364 days		108		3	2.78%		897		212	23.63%		2,164		107	4.94%
365+ days		352		58	16.48%		2,324		549	23.62%		9,812		824	8.40%
Total	$	10,873	$	331	3.04%	$	13,623	$	1,514	11.11%	$	92,020	$	2,662	2.89%
Percentage of total loans excluding acquired loans accounted for under ASC 310-30		0.35%					0.44%					2.94%
Refinanced or Modified Loans:
Amount	$	2,115	$	198	9.36%	$	547	$	42	7.68%	$	17,675	$	1,150	6.51%
Percentage of Higher-Risk Loan Category		19.45%					4.02%					19.21%
Loan-to-Value Ratio:
Under 70%	$	7,026	$	191	2.72%	$	786	$	56	7.12%	$	-	$	-	-
70% - 79%		1,805		94	5.21%		2,721		241	8.86%		-		-	-
80% - 89%		168		18	10.71%		3,547		418	11.78%		-		-	-
90% and over		1,874		28	1.49%		6,569		799	12.16%		92,020		2,662	2.89%
	$	10,873	$	331	3.04%	$	13,623	$	1,514	11.11%	$	92,020	$	2,662	2.89%

* Loans may be included in more than one higher-risk loan category and excludes acquired residential mortgage loans.

The following table includes the Company's lending and investment exposure to the Puerto Rico government, including its agencies, instrumentalities, municipalities and public corporations:

TABLE 7 - PUERTO RICO GOVERNMENT RELATED LOANS AND SECURITIES

March 31, 2017
						Maturity
Loans and Securities:		Carrying Value		Less than 1 Year		1 to 3 Years		More than 3 Years	Comments
	(In thousands)
Central government	$	10,716	$	-	$	-	$	10,716		Remaining loan is to the Puerto Rico Housing Finance Authority ("PRHFA"). Repayment sources include abandoned and unclaimed funds escheated to the Commonwealth. At March 31, 2017, the allowance for loan and lease losses to PRHFA was $8.0 million.
Municipalities		191,856		307		69,258		122,291		Repayment from property taxes. Secured by ad valorem taxation, 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.
Investment securities		4,680		2,200		2,480		-		Remaining position is PRHTA security issued for P3 Project Teodoro Moscoso Bridge operated by private companies that have the payment obligation. Next scheduled principal payment for $2.2 million in July 1, 2017. Maturity date July 1, 2018.
Total	$	207,252	$	2,507	$	71,738	$	133,007

Some highlights follow regarding the data included above:

· Loans to municipalities are secured by a pledge of their unlimited taxing power for special additional real and personal property taxes.

· Deposits from the Puerto Rico government totaled $147.9 million at March 31, 2017.

Credit Risk Management

Allowance for Loan and Lease Losses

Tables 8 through 12 set forth an analysis of activity in the allowance for loan and lease losses and present selected loan loss statistics. In addition, Table 5 sets forth the composition of the loan portfolio.

At March 31, 2017, $60.5 million of the allowance corresponded to originated and other loans held for investment, or 1.98% of total originated and other loans held for investment, compared to $59.3 million, or 1.95% of total originated and other loans held for investment at December 31, 2016. Provision for loan and lease losses of $11.7 million and recoveries of $3.6 million, were offset by charge-offs of $14.2 million during the quarter ended March 31, 2017. The allowance for residential mortgage loans increased by 7.1% (or $1.2 million), when compared with the balances recorded at December 31, 2016. The allowance for commercial and consumer loans increased by 9.9% (or $893 thousand) and 2.5% (or $327 thousand), respectively, when compared with the balances recorded at December 31, 2016. The allowance for auto and leasing loans decreased 4.3% (or $842 thousand), when compared with the balances recorded at December 31, 2016.

Allowance for loan and lease losses recorded for acquired BBVAPR loans accounted for under the provisions of ASC 310-20 at March 31, 2017 was $3.6 million compared to $4.3 million at December 31, 2016, a 15.9% decrease. The allowance decreased as a result of $1.2 million in charge-offs and $33 thousand in recapture for loan and lease losses, which were partially offset by a $516 thousand of recoveries during the quarter ended March 31, 2017. The allowance for commercial loans increased by 8.3% (or $14 thousand), when compared with the balance recorded at December 31, 2016. The allowance for auto loans decreased by 23.8% (or $262 thousand) and consumer loans decreased by 14.4% (or $437 thousand) respectively, when compared with the balances recorded at December 31, 2016, due to the normal amortization of credit discount of these acquired loans.

Allowance for loan and lease losses recorded for acquired BBVAPR loans accounted for under ASC-310-30 at March 31, 2017 was $34.9 million as compared to $31.1 million at December 31, 2016. The allowance increased mainly as a result of a $4.3 million provision for loan and lease losses, slightly offset by $458 thousand in allowance de-recognition during the quarter ended March 31, 2017.

Allowance for loan and lease losses recorded for acquired Eurobank loans at March 31, 2017 was $22.0 million as compared to $21.3 million at December 31, 2016. The allowance increased as a result of $1.6 million in provision for loan and lease losses, partially offset by $895 thousand in allowance de-recognition. The allowance for loan and lease losses on acquired Eurobank loans is accounted for under the provisions of ASC 310-30.

Please refer to the “Provision for Loan and Lease Losses” section in this MD&A for a more detailed analysis of provisions for loan and lease losses.

Non-performing Assets

The Company’s non-performing assets include non-performing loans and foreclosed real estate (see Tables 11 and 12). At March 31, 2017 and December 31, 2016, the Company had $95.8 million and $104.1 million, respectively, of non-accrual loans, including acquired BBVAPR loans accounted for under ASC 310-20 (loans with revolving feature and/or acquired at a premium).

At March 31, 2017 and December 31, 2016, loans whose terms have been extended and which are classified as troubled-debt restructuring that are not included in non-performing assets amounted to $99.1 million and $98.1 million, respectively.

Acquired loans with credit deterioration are considered to be performing due to the application of the accretion method under ASC 310-30, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses. Credit related decreases in expected cash flows, compared to those previously forecasted are recognized by recording a provision for credit losses on these loans when it is probable that all cash flows expected at acquisition will not be collected.

At March 31, 2017, the Company’s non-performing assets decreased by 5.3% to $148.6 million (2.74% of total assets, excluding acquired loans with deteriorated credit quality) from $156.9 million (2.88% of total assets, excluding acquired loans with deteriorated credit quality) at December 31, 2016. The Company does not expect non-performing loans to result in significantly higher losses. At March 31, 2017, the allowance for originated loan and lease losses to non-performing loans coverage ratio was 62.47% (56.30% at December 31, 2016).

The Company 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, the Company has never been active in negative amortization loans or adjustable rate mortgage loans, including those with teaser rates.

The following items comprise non-performing assets:

· Originated and other loans held for investment:

Residential 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 18 months or more past due. At March 31, 2017, the Company’s originated non-performing mortgage loans totaled $66.8 million (67.3% of the Company’s non-performing loans), a 10.4% decrease from $74.5 million (68.9% of the Company’s non-performing loans) at December 31, 2016.

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. At March 31, 2017, the Company’s originated non-performing commercial loans amounted to $19.4 million (19.5% of the Company’s non-performing loans), a 2.0% decrease from $19.8 million at December 31, 2016 (18.3% of the Company’s non-performing loans).

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. At March 31, 2017, the Company’s originated non-performing consumer loans remained at $2.0 million (2.0% of the Company’s non-performing loans), a 1.9% decrease from $2.0 million at December 31, 2016 (1.8% of the Company’s non-performing loans).

Auto loans and leases — 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. At March 31, 2017, the Company’s originated non-performing auto loans and leases amounted to $8.7 million (8.8% of the Company’s total non-performing loans), a decrease of 3.8% from $9.1 million at December 31, 2016 (8.4% of the Company’s total non-performing loans).

· Acquired BBVAPR loans accounted for under ASC 310-20 (loans with revolving features and/or acquired at premium):

Commercial revolving lines of credit and credit cards — 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. At March 31, 2017, the Company’s acquired non-performing commercial lines of credit accounted for under ASC 310-20 amounted to $1.3 million (1.3% of the Company’s non-performing loans), a 9.0% decrease from $1.4 million at December 31, 2016 (1.3% of the Company’s non-performing loans).

Consumer revolving lines of credit and credit cards — are placed on non-accrual status when they become 90 days past due and written-off when payments are delinquent 180 days. At March 31, 2017, the Company’s acquired non-performing consumer lines of credit and credit cards accounted for under ASC 310-20 totaled $594 thousand (0.6% of the Company’s non-performing loans), a 28.3% decrease from $828 thousand at December 31, 2016 (0.8% of the Company’s non-performing loans).

Auto loans acquired at premium - 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. At March 31, 2017, the Company’s acquired non-performing auto loans accounted for under ASC 310-20 totaled $466 thousand (0.5% of the Company’s non-performing loans), a 15.6% decrease from $552 thousand at December 31, 2016 (0.5% of the Company’s non-performing loans).

The Company has two mortgage loan modification programs. These are the Loss Mitigation Program and the Non-traditional Mortgage Loan Program. Both programs are intended to help responsible homeowners to remain in their homes and avoid foreclosure, while also reducing the Company’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, PRHFA, (“Puerto Rico Housing Finance Authority”), conventional loans guaranteed by Mortgage Guaranty Insurance Corporation (MGIC), conventional loans sold to FNMA and FHLMC, and conventional loans retained by the Company. The program offers diversified alternatives such as regular or reduced payment plans, payment moratorium, mortgage loan modification, partial claims (only FHA), short sale, and payment in lieu of foreclosure.

The Non-traditional Mortgage Loan Program is for non-traditional mortgages, including balloon payment, interest only/interests first, variable interest rate, adjustable interest rate and other qualified loans. Non-traditional 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 by the Company’s current credit and underwriting guidelines. The Company 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 the loan modification programs, if the borrower is active in Chapter 13 bankruptcy, they 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 the Company grants a concession for legal or economic reasons due to the debtor’s financial difficulties.

TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN

	March 31,		December 31,		Variance
		2017	2016		%
	(Dollars in thousands)
Originated and other loans held for investment
Allowance balance:
Mortgage	$	18,578	$	17,344	7.1%
Commercial		9,888		8,995	9.9%
Consumer		13,394		13,067	2.5%
Auto and leasing		18,621		19,463	-4.3%
Unallocated allowance		2		431	-99.5%
Total allowance balance	$	60,483	$	59,300	2.0%
Allowance composition:
Mortgage		30.71%		29.26%	5.0%
Commercial		16.35%		15.17%	7.8%
Consumer		22.15%		22.04%	0.5%
Auto and leasing		30.79%		32.82%	-6.2%
Unallocated allowance		0.00%		0.73%	-100.0%
		100.00%		100.02%
Allowance coverage ratio at end of period applicable to:
Mortgage		2.62%		2.40%	9.2%
Commercial		0.79%		0.70%	12.9%
Consumer		4.46%		4.50%	-0.9%
Auto and leasing		2.37%		2.57%	-7.8%
Total allowance to total originated loans		1.98%		1.95%	1.5%
Allowance coverage ratio to non-performing loans:
Mortgage		27.82%		23.28%	19.5%
Commercial		51.00%		45.46%	12.2%
Consumer		687.58%		657.96%	4.5%
Auto and leasing		213.81%		215.01%	-0.6%
Total		62.47%		56.30%	11.0%
Acquired BBVAPR loans accounted for under ASC 310-20
Allowance balance:
Commercial	$	183	$	169	8.3%
Consumer		2,591		3,028	-14.4%
Auto		841		1,103	-23.8%
Total allowance balance	$	3,615	$	4,300	-15.9%
Allowance composition:
Commercial		5.06%		3.93%	28.8%
Consumer		71.67%		70.42%	1.8%
Auto		23.27%		25.65%	-9.3%
		100.00%		100.00%
Allowance coverage ratio at end of period applicable to:
Commercial		3.37%		3.04%	10.9%
Consumer		8.36%		9.21%	-9.2%
Auto		1.98%		2.08%	-4.8%
Total allowance to total acquired loans		4.58%		4.70%	-2.6%
Allowance coverage ratio to non-performing loans:
Commercial		14.21%		11.94%	19.0%
Consumer		436.20%		365.70%	19.3%
Auto		180.47%		199.82%	-9.7%
Total		153.96%		153.85%	0.1%

100

TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN (CONTINUED)
	March 31,		December 31,
		2017	2016		Variance %
	(Dollars in thousands)
Acquired BBVAPR loans accounted for under ASC 310-30
Allowance balance:
Mortgage	$	3,573	$	2,682	33.2%
Commercial		23,528		23,452	0.3%
Auto		7,829		4,922	59.1%
Total allowance balance	$	34,930	$	31,056	12.5%
Allowance composition:
Mortgage		10.23%		8.64%	18.4%
Commercial		67.36%		75.51%	-10.8%
Auto		22.41%		15.85%	41.4%
		100.00%		100.00%

Acquired Eurobank loans accounted for under ASC 310-30
Allowance balance:
Mortgage	$	14,168	$	11,947	18.6%
Commercial		7,833		9,328	-16.0%
Consumer		5		6	-16.7%
Total allowance balance	$	22,006	$	21,281	3.4%
Allowance composition:
Mortgage		64.38%		56.14%	14.7%
Commercial		35.58%		43.82%	-18.8%
Consumer		0.02%		0.03%	-33.3%
		100.0%		100.0%

101

TABLE 9 — ALLOWANCE FOR LOAN AND LEASE LOSSES SUMMARY

	Quarter Ended March 31,
					Variance
	2017		2016		%
	(Dollars in thousands)
Originated and other loans:
Balance at beginning of period	$	59,300	$	112,626	-47.3%
Provision for loan and lease losses		11,735		10,660	10.1%
Charge-offs		(14,156)		(13,362)	5.9%
Recoveries		3,604		3,314	8.8%
Balance at end of period	$	60,483	$	113,238	-46.6%
Acquired loans:
*BBVAPR loans*
Acquired loans accounted for under ASC 310-20:
Balance at beginning of period	$	4,300	$	5,542	-22.4%
(Recapture) provision for loan and lease losses		(33)		296	-111.1%
Charge-offs		(1,169)		(1,556)	-24.9%
Recoveries		517		711	-27.3%
Balance at end of period	$	3,615	$	4,993	-27.6%
Acquired loans accounted for under ASC 310-30:
Balance at beginning of period	$	31,056	$	25,785	20.4%
Provision for loan and lease losses		4,332		2,028	113.6%
Loan pools fully charged off		-		(4,352)	-100.0%
Allowance de-recognition		(458)		-	-100.0%
Balance at end of period	$	34,930	$	23,461	48.9%

*Eurobank loans*
Balance at beginning of period	$	21,281	$	90,178	-76.4%
Provision for loan and lease losses		1,620		805	101.2%
FDIC shared-loss portion on recapture of loan and lease losses		-		1,444	-100.0%
Loan pools fully charged off		-		(134)	-100.0%
Allowance de-recognition		(895)		-	-100.0%
Balance at end of period	$	22,006	$	92,293	-76.2%

Allowance for loans and lease losses on originated and other loans to:
Total originated loans		1.98%		3.63%	-45.5%
Non-performing originated loans		62.47%		37.94%	64.7%

Allowance for loans and lease losses on acquired loans accounted for under ASC 310-20 to:
Total acquired loans accounted for under ASC 310-20		4.58%		3.72%	23.1%
Non-performing acquired loans accounted for under ASC 310-20		153.96%		225.52%	-31.7%

102

TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING LOANS ACCOUNTED FOR UNDER ASC 310-30

	Quarter Ended March 31,
					Variance
	2017		2016		%
	(Dollar in thousands)
Originated and other loans and leases:
Mortgage
Charge-offs	$	(2,379)	$	(1,662)	43.1%
Recoveries		56		145	-61.4%
Total		(2,323)		(1,517)	53.1%
Commercial
Charge-offs		(856)		(1,011)	-15.3%
Recoveries		89		88	1.1%
Total		(767)		(923)	-16.9%
Consumer
Charge-offs		(3,358)		(2,327)	44.3%
Recoveries		165		102	61.8%
Total		(3,193)		(2,225)	43.5%
Auto
Charge-offs		(7,563)		(8,362)	-9.6%
Recoveries		3,294		2,979	10.6%
Total		(4,269)		(5,383)	-20.7%
Net credit losses
Total charge-offs		(14,156)		(13,362)	5.9%
Total recoveries		3,604		3,314	8.8%
Total	$	(10,552)	$	(10,048)	5.0%
Net credit losses to average loans outstanding:
Mortgage		1.31%		0.80%	63.8%
Commercial		0.25%		0.26%	-3.8%
Consumer		4.57%		3.80%	20.3%
Auto		2.19%		3.15%	-30.5%
Total		1.40%		1.30%	7.7%
Recoveries to charge-offs		25.46%		24.80%	2.7%
Average originated loans:
Mortgage	$	711,553	$	756,291	-5.9%
Commercial		1,245,530		1,425,332	-12.6%
Consumer		279,558		234,499	19.2%
Auto		778,815		684,035	13.9%
Total	$	3,015,456	$	3,100,157	-2.7%

103

TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING LOANS ACCOUNTED FOR UNDER ASC 310-30 (CONTINUED)

		Quarter Ended March 31,
					Variance
	2017		2016		%
	(Dollars in thousands)
Acquired loans accounted for under ASC 310-20:
Commercial
Charge-offs	$	(6)	$	(7)	-14.3%
Recoveries		1		32	-96.9%
Total		(5)		25	-120.0%
Consumer
Charge-offs		(885)		(812)	9.0%
Recoveries		64		81	-21.0%
Total		(821)		(731)	12.3%
Auto
Charge-offs		(278)		(737)	-62.3%
Recoveries		452		598	-24.4%
Total		174		(139)	-225.2%
Net credit losses
Total charge-offs		(1,169)		(1,556)	-24.9%
Total recoveries		517		711	-27.3%
Total	$	(652)	$	(845)	-22.8%
Net credit losses to average loans outstanding:
Commercial		4.88%		-16.67%	-129.3%
Consumer		5.60%		4.84%	15.7%
Auto		-1.42%		0.60%	-334.4%
Total		2.41%		2.21%	9.4%
Recoveries to charge-offs		44.23%		45.69%	-3.2%
Average loans accounted for under ASC 310-20:
Commercial	$	411	$	600	-31.5%
Consumer		58,614		60,389	-2.9%
Auto		49,115		92,026	-46.6%
Total	$	108,140	$	153,015	-29.3%

104

TABLE 11 — NON-PERFORMING ASSETS

	March 31,		December 31,		Variance
	2017		2016		(%)
	(Dollars in thousands)
Non-performing assets:
Non-accruing loans
Troubled-Debt Restructuring loans	$	27,931	$	32,408	-13.8%
Other loans		67,910		71,941	-5.6%
Accruing loans
Troubled-Debt Restructuring loans		2,708		2,706	0.1%
Other loans		624		1,067	-41.5%
Total non-performing loans	$	99,173	$	108,122	-8.3%
Foreclosed real estate not covered under the shared-loss agreements with the FDIC		46,109		45,587	1.1%
Other repossessed assets		3,269		3,224	1.4%
	$	148,551	$	156,933	-5.3%
Non-performing assets to total assets, excluding covered assets and acquired loans with deteriorated credit quality (including those by analogy)		2.74%		2.88%	-4.9%
Non-performing assets to total capital		15.95%		17.05%	-6.5%

	Quarter Ended March 31,
	2017		2016
	(In thousands)
Interest that would have been recorded in the period if the loans had not been classified as non-accruing loans	$	934	$	1,093

105

TABLE 12 — NON-PERFORMING LOANS

	March 31,		December 31,		Variance
	2017		2016		%
	(Dollars in thousands)
Non-performing loans:
Originated and other loans held for investment
Mortgage	$	66,781	$	74,503	-10.4%
Commercial		19,387		19,786	-2.0%
Consumer		1,948		1,986	-1.9%
Auto and leasing		8,709		9,052	-3.8%
		96,825		105,327	-8.1%
Acquired loans accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)
Commercial		1,288		1,415	-9.0%
Consumer		594		828	-28.3%
Auto		466		552	-15.6%
		2,348		2,795	-16.0%
Total	$	99,173	$	108,122	-8.3%
Non-performing loans composition percentages:
Originated loans
Mortgage		67.3%		68.9%
Commercial		19.5%		18.3%
Consumer		2.0%		1.8%
Auto and leasing		8.8%		8.4%
Acquired loans accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)
Commercial		1.3%		1.3%
Consumer		0.6%		0.8%
Auto		0.5%		0.5%
Total		100.0%		100.0%
Non-performing loans to:
Total loans, excluding loans accounted for under ASC 310-30 (including those by analogy)		3.17%		3.45%	-8.1%
Total assets, excluding loans accounted for under ASC 310-30 (including those by analogy)		1.83%		1.99%	-8.0%
Total capital		10.65%		11.75%	-9.4%
Non-performing loans with partial charge-offs to:
Total loans, excluding loans accounted for under ASC 310-30 (including those by analogy)		1.19%		1.17%	1.71%
Non-performing loans		37.64%		34.09%	10.4%
Other non-performing loans ratios:
Charge-off rate on non-performing loans to non-performing loans on which charge-offs have been taken		64.18%		63.58%	0.9%
Allowance for loan and lease losses to non-performing loans on which no charge-offs have been taken		103.64%		89.25%	16.1%

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FDIC Indemnification Asset

The Company recorded the FDIC indemnification asset, measured separately from the covered loans, as part of the Eurobank FDIC-assisted transaction. On February 6, 2017, the Bank and the FDIC agreed to terminate the single family and commercial shared-loss agreements related to the FDIC assisted acquisition.

TABLE 13 - ACTIVITY OF FDIC INDEMNIFICATION ASSET

	Quarter Ended March 31,
	2017		2016
	(In thousands)
FDIC indemnification asset:
Balance at beginning of period	$	14,411	$	22,599
Shared-loss agreements reimbursements from the FDIC		-		(406)
Increase in expected credit losses to be covered under shared-loss agreements, net		-		1,444
FDIC indemnification asset benefit (expense)		1,403		(2,865)
Net expenses incurred under shared-loss agreements		-		151
Shared-loss termination settlement		(15,814)
Balance at end of period	$	-	$	20,923

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TABLE 14 - LIABILITIES SUMMARY AND COMPOSITION
	March 31,		December 31,		Variance
	2017		2016		%
	(Dollars in thousands)
Deposits:
Non-interest bearing deposits	$	859,990	$	848,502	1.4%
NOW accounts		1,084,905		1,091,237	-0.6%
Savings and money market accounts		1,237,873		1,196,231	3.5%
Certificates of deposit		1,533,600		1,526,805	0.4%
Total deposits		4,716,368		4,662,775	1.1%
Accrued interest payable		1,460		1,712	-14.7%
Total deposits and accrued interest payable		4,717,828		4,664,487	1.1%
Borrowings:
Securities sold under agreements to repurchase		531,179		653,756	-18.7%
Advances from FHLB		104,948		105,454	-0.5%
Subordinated capital notes		36,083		36,083	0.0%
Other term notes		185		61	203.3%
Total borrowings		672,395		795,354	-15.5%
Total deposits and borrowings		5,390,223		5,459,841	-1.3%

Other Liabilities:
Derivative liabilities		1,967		2,437	-19.3%
Acceptances outstanding		24,288		23,765	2.2%
Other liabilities		66,700		95,371	-30.1%
Total liabilities	$	5,483,178	$	5,581,414	-1.8%
Deposits portfolio composition percentages:
Non-interest bearing deposits		18.2%		18.2%
NOW accounts		23.0%		23.4%
Savings and money market accounts		26.3%		25.7%
Certificates of deposit		32.5%		32.7%
		100.0%		100.0%
Borrowings portfolio composition percentages:
Securities sold under agreements to repurchase		79.0%		82.2%
Advances from FHLB		15.6%		13.3%
Other term notes		0.0%		0.0%
Subordinated capital notes		5.4%		4.5%
		100.0%		100.0%
Securities sold under agreements to repurchase (excluding accrued interest)
Amount outstanding at period-end	$	530,440	$	652,229
Daily average outstanding balance	$	575,126	$	663,845
Maximum outstanding balance at any month-end	$	655,790	$	902,500

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Liabilities and Funding Sources

As shown in Table 14 above, at March 31, 2017, the Company’s total liabilities were $5.483 billion, 1.8% less than the $5.581 billion reported at December 31, 2016. Deposits and borrowings, the Company’s funding sources, amounted to $5.390 billion at March 31, 2017 versus $5.460 billion at December 31, 2016, a 1.3% decrease.

At March 31, 2017 , deposits represented 86% and borrowings represented 14% of interest-bearing liabilities. At March 31, 2017 , deposits, the largest category of the Company’s interest-bearing liabilities, were $4.718 billion, an increase of 1.1% from $4.664 billion at December 31, 2016 . Demand and savings deposits increased 1.7% to $3.120 billion, time deposits, excluding brokered deposits, increased 0.2% to $1.022 billion, and brokered deposits decreased 0.1%, or $516 thousand, to $575.9 million, which averaged 0.64% at March 31, 2017 compared to 0.62% at December 31, 2016 .

Borrowings consist mainly of repurchase agreements, FHLB-NY advances and subordinated capital notes. At March 31, 2017, borrowings amounted to $672.4 million, representing a decrease of 15.5% when compared with the $795.4 million reported at December 31, 2016. The decrease in borrowings is attributed to decreases in repurchases agreements and to decrease in FHLB-NY advances. Repurchase agreements at March 31, 2017 decreased $280.9 million to $531.2 million from $653.8 million at December 31, 2016, reflecting the maturity of a repurchase agreement amounting to $232.0 million with a rate of 4.78% in March 2, 2017. As a member of the FHLB-NY, the Bank can obtain advances from the FHLB-NY secured by the FHLB-NY stock owned by the Bank as well as by certain mortgage loans and investment securities of the Bank.

Stockholders’ Equity

At March 31, 2017 , the Company’s total stockholders’ equity was $931.4 million, an 1.2% increase when compared to $920.4 million at December 31, 2016 . This increase in stockholders’ equity reflects increases in retained earnings of $7.6 million, in accumulated comprehensive income of $1.8 million, and in legal surplus of $1.5 million. Book value per share was $17.42 at March 31, 2017 compared to $17.18 at December 31, 2016 .

From December 31, 2016 to March 31, 2017, tangible common equity to total assets increased to 10.50% from 10.19%, Tier 1 Leverage capital ratio increased to 13.20% from 12.99%, Common Equity Tier 1 capital ratio increased to 14.30% from $14.05%, Tier 1 Risk-Based capital ratio increased to 18.77% from 18.35%, and Total Risk-Based capital ratio increased to 20.05% from 19.62%.

New Capital Rules to Implement Basel III Capital Requirements

In July 2013, the Board of Governors of the Federal Reserve System (the “Board”), the Office of the Comptroller of the Currency (the “OCC”) and the FDIC (together with the Board and the OCC, the “Agencies”) approved new rules (“New Capital Rules”) to establish a revised comprehensive regulatory capital framework for all U.S. banking organizations. The New Capital Rules generally implement the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. The New Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including the Company and the Bank, as compared to the previous U.S. general risk-based capital rules. The New Capital Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The New Capital Rules also address asset risk weights and other matters affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing general risk-weighting approach, which was derived from the Basel Committee’s 1988 “Basel I” capital accords, with a more risk-sensitive approach based, in part, on the “standardized approach” in the Basel Committee’s 2004 “Basel II” capital accords. In addition, the New Capital Rules implement certain provisions of Dodd-Frank Act, including the requirements of Section 939A to remove references to credit ratings from the federal agencies’ rules. The New Capital Rules became effective for the Company and the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions. Among other matters, the New Capital Rules: (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. Under the New Capital Rules, for most banking organizations, including the Company, the most common form of Additional Tier 1 capital is noncumulative perpetual preferred stock and the most common

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form of Tier 2 capital is subordinated notes and a portion of the allocation for loan and lease losses, in each case, subject to the New Capital Rules’ specific requirements.

Pursuant to the New Capital Rules, the minimum capital ratios as of January 1, 2015 are as follows:

• 4.5% CET1 to risk-weighted assets;

• 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;

• 8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and

• 4% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).

The New Capital Rules also introduce a new 2.5% “capital conservation buffer”, composed entirely of CET1, on top of the three minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. Thus, when fully phased-in on January 1, 2019, the Company and the Bank will be required to maintain an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.

The New Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.

In addition (as noted above), under the previous general risk-based capital rules, the effects of AOCI items included in shareholders’ equity (for example, mark-to-market adjustments to the value of securities held in the available for sale portfolio) under U.S. GAAP are reversed for the purposes of determining regulatory capital ratios. Pursuant to the New Capital Rules, the effects of certain AOCI items are not excluded; however, non-advanced approach banking organizations may make a one-time permanent election to continue to exclude these items. The Company and the Bank made the election to continue to exclude these items in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of their securities portfolio, concurrently with the first filing of the Company’s and the Bank’s periodic regulatory reports in the beginning of 2015. The New Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion in bank holding companies’ Tier 1 capital, subject to phase-out, in the case of bank holding companies that had $15 billion or more in total consolidated assets as of December 31, 2009. Therefore, the Company is permitted to continue to include its existing trust preferred securities as Tier 1 capital.

Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019.

With respect to the Bank, the New Capital Rules revise the “prompt corrective action” (“PCA”) regulations adopted pursuant to Section 38 of the Federal Deposit Insurance Act by: (i) introducing a CET1 ratio requirement at each PCA category (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The New Capital Rules do not change the total risk-based capital requirement for any PCA category.

The New Capital Rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, and resulting in higher risk weights for a variety of asset classes.

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The following are the consolidated capital ratios of the Company under the New Capital Rules at March 31, 2017 and December 31, 2016:

TABLE 15 — CAPITAL, DIVIDENDS AND STOCK DATA

	March 31,		December 31,		Variance
	2017		2016		%
	(Dollars in thousands, except per share data)
Capital data:
Stockholders’ equity	$	931,429	$	920,411	1.2%
Regulatory Capital Ratios data:
Common equity tier 1 capital ratio		14.30%		14.05%	1.8%
Minimum common equity tier 1 capital ratio required		4.50%		4.50%	0.0%
Actual common equity tier 1 capital	$	626,707		627,733	-0.2%
Minimum common equity tier 1 capital required	$	197,257		201,040	-1.9%
Minimum capital conservation buffer required	$	54,794		27,922	96.2%
Excess over regulatory requirement	$	374,656		398,770	-6.0%
Risk-weighted assets	$	4,383,493		4,467,556	-1.9%
Tier 1 risk-based capital ratio		18.77%		18.35%	2.3%
Minimum tier 1 risk-based capital ratio required		6.00%		6.00%	0.0%
Actual tier 1 risk-based capital	$	822,847	$	819,662	0.4%
Minimum tier 1 risk-based capital required	$	263,010	$	268,053	-1.9%
Excess over regulatory requirement	$	559,837	$	551,608	1.5%
Risk-weighted assets	$	4,383,493	$	4,467,556	-1.9%
Total risk-based capital ratio		20.05%		19.62%	2.2%
Minimum total risk-based capital ratio required		8.00%		8.00%	2.2%
Actual total risk-based capital	$	878,867	$	876,657	0.0%
Minimum total risk-based capital required	$	350,679	$	357,404	0.3%
Excess over regulatory requirement	$	528,187	$	519,252	-1.9%
Risk-weighted assets	$	4,383,493	$	4,467,556	-1.9%
Leverage capital ratio		13.20%		12.99%	1.6%
Minimum leverage capital ratio required		4.00%		4.00%	0.0%
Actual tier 1 capital	$	822,847	$	819,662	0.4%
Minimum tier 1 capital required	$	249,254	$	252,344	-1.2%
Excess over regulatory requirement	$	573,592	$	567,318	-1.2%
Tangible common equity to total assets		10.50%		10.19%	1.1%
Tangible common equity to risk-weighted assets		15.37%		14.82%	3.0%
Total equity to total assets		14.52%		14.16%	3.7%
Total equity to risk-weighted assets		21.25%		20.60%	2.5%
Stock data:
Outstanding common shares		43,947,442		43,914,844	0.1%
Book value per common share	$	17.42	$	17.18	1.4%
Tangible book value per common share	$	15.33	$	15.08	1.7%
Market price at end of period	$	11.80	$	13.10	-9.9%
Market capitalization at end of period	$	518,580	$	575,284	-9.9%

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The following table presents a reconciliation of the Company’s total stockholders’ equity to tangible common equity and total assets to tangible assets at March 31, 2017, and December 31, 2016:

	March 31,		December 31,
	2017		2016
	(In thousands, except share or per share information)
Total stockholders' equity	$	931,429	$	920,411
Preferred stock		(176,000)		(176,000)
Preferred stock issuance costs		10,130		10,130
Goodwill		(86,069)		(86,069)
Core deposit intangible		(4,029)		(4,260)
Customer relationship intangible		(1,763)		(1,900)
Total tangible common equity	$	673,698	$	662,312
Total assets		6,414,607		6,501,824
Goodwill		(86,069)		(86,069)
Core deposit intangible		(4,029)		(4,260)
Customer relationship intangible		(1,763)		(1,900)
Total tangible assets	$	6,322,746	$	6,409,595
Tangible common equity to tangible assets		10.66%		10.33%
Common shares outstanding at end of period		43,947,442		43,914,844
Tangible book value per common share	$	15.33	$	15.08

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 the Company 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, the Company 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 the Company’s capital adequacy information under the New Capital Rules:

	March 31,		December 31,		Variance
	2017		2016		%
	(Dollars in thousands)
Risk-based capital:
Common equity tier 1 capital	$	626,707	$	627,733	-0.2%
Additional tier 1 capital		196,140		191,929	2.2%
Tier 1 capital		822,847		819,662	0.4%
Additional Tier 2 capital		56,020		56,995	-1.7%
Total risk-based capital	$	878,867	$	876,657	0.3%
Risk-weighted assets:
Balance sheet items	$	4,244,737	$	4,307,817	-1.5%
Off-balance sheet items		138,756		159,739	-13.1%
Total risk-weighted assets	$	4,383,493	$	4,467,556	-1.9%
Ratios:
Common equity tier 1 capital (minimum required - 4.5%)		14.30%		14.05%	1.8%
Tier 1 capital (minimum required - 6%)		18.77%		18.35%	2.3%
Total capital (minimum required - 8%)		20.05%		19.62%	2.2%
Leverage ratio		13.20%		12.99%	1.6%
Equity to assets		14.52%		14.16%	2.5%
Tangible common equity to assets		10.50%		10.19%	3.0%

The Bank is considered “well capitalized” under the regulatory framework for prompt corrective action. The table below shows the Bank’s regulatory capital ratios at March 31, 2017 and December 31, 2016:


	March 31,		December 31,		Variance
	2017		2016		%
	(Dollars in thousands)
Oriental Bank Regulatory Capital Ratios:
Common Equity Tier 1 Capital to Risk-Weighted Assets		18.42%		17.96%	2.6%
Actual common equity tier 1 capital	$	806,972	$	800,544	0.8%
Minimum capital requirement (4.5%)	$	197,157	$	200,585	-1.7%
Minimum capital conservation buffer requirement (1.25% at March 31, 2017 - 0.625% at December 31, 2016)	$	54,766	$	27,859	96.6%
Minimum to be well capitalized (6.5%)	$	284,783	$	289,734	-1.7%
Tier 1 Capital to Risk-Weighted Assets		18.42%		17.96%	2.6%
Actual tier 1 risk-based capital	$	806,972	$	800,544	0.8%
Minimum capital requirement (6%)	$	262,877	$	267,447	-1.7%
Minimum to be well capitalized (8%)	$	350,502	$	356,596	-1.7%
Total Capital to Risk-Weighted Assets		19.69%		19.23%	2.4%
Actual total risk-based capital	$	862,768	$	857,259	0.6%
Minimum capital requirement (8%)	$	350,502	$	356,596	-1.7%
Minimum to be well capitalized (10%)	$	438,128	$	445,745	-1.7%
Total Tier 1 Capital to Average Total Assets		13.01%		12.75%	2.0%
Actual tier 1 capital	$	806,972	$	800,544	0.8%
Minimum capital requirement (4%)	$	248,133	$	251,200	-1.2%
Minimum to be well capitalized (5%)	$	310,167	$	314,000	-1.2%

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The Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG.” At March 31, 2017 and December 31, 2016, the Company’s market capitalization for its outstanding common stock was $518.6 million ($11.80 per share) and $575.3 million ($13.10 per share), respectively.

The following table provides the high and low prices and dividends per share of the Company’s common stock for each quarter of the last two calendar years:

					Cash
	Price				Dividend
	High		Low		Per share
2017
March 31, 2017	$	13.80	$	10.90	$	0.06
2016
December 31, 2016	$	14.30	$	9.56	$	0.06
September 30, 2016	$	11.09	$	8.07	$	0.06
June 30, 2016	$	9.14	$	6.32	$	0.06
March 31, 2016	$	7.32	$	4.77	$	0.06
2015
December 31, 2015	$	10.52	$	6.39	$	0.06
September 30, 2015	$	10.20	$	6.63	$	0.10
June 30, 2015	$	17.04	$	10.67	$	0.10
March 31, 2015	$	17.70	$	14.88	$	0.10

Under the Company’s current stock repurchase program, it is authorized to purchase in the open market up to $7.7 million of its outstanding shares of common stock. The shares of common stock repurchased are to be held by the Company as treasury shares. There were no repurchases during the quarter ended March 31, 2017 .

At March 31, 2017, the number of shares that may yet be purchased under such program is estimated at 655,157 and was calculated by dividing the remaining balance of $7.7 million by $11.80 (closing price of the Company common stock at March 31, 2017).

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Background

The Company’s risk management policies are established by its Board of Directors (the “Board”) and implemented by management through the adoption of a risk management program, which is overseen and monitored by the Chief Risk Officer and the Risk Management and Compliance Committee. The Company has continued to refine and enhance its risk management program by strengthening policies, processes and procedures necessary to maintain effective risk management.

All aspects of the Company’s business activities are susceptible to risk. Consequently, risk identification and monitoring are essential to risk management. As more fully discussed below, the Company’s primary risk exposures include, market, interest rate, credit, liquidity, operational and concentration risks.

Market Risk

Market risk is the risk to earnings or capital arising from adverse movements in market rates or prices, such as interest rates or prices. The Company evaluates market risk together with interest rate risk. The Company’s financial results and capital levels are constantly exposed to market risk. The Board and management are primarily responsible for ensuring that the market risk assumed by the Company complies with the guidelines established by policies approved by the Board. The Board has delegated the management of this risk to the Asset/Liability Management Committee (“ALCO”) which is composed of certain executive officers from the business, treasury and finance areas. One of ALCO’s primary goals is to ensure that the market risk assumed by the Company is within the parameters established in such policies.

Interest Rate Risk

Interest rate risk is the exposure of the Company’s earnings or capital to adverse movements in interest rates. It is a predominant market risk in terms of its potential impact on earnings. The Company manages its asset/liability position in order to limit the effects of changes in interest rates on net interest income. ALCO oversees interest rate risk, liquidity management and other related matters.

In executing its responsibilities, ALCO examines current and expected conditions in global financial markets, competition and prevailing rates in the local deposit market, liquidity, unrealized gains and losses in securities, recent or proposed changes to the investment portfolio, alternative funding sources and their costs, hedging and the possible purchase of derivatives such as swaps, and any tax or regulatory issues which may be pertinent to these areas.

On a quarterly basis, the Company performs a net interest income simulation analysis on a consolidated basis to estimate the potential change in future earnings from projected changes in interest rates. These simulations are carried out over a five-year time horizon, assuming certain gradual upward and downward interest rate movements, achieved during a twelve-month period. Instantaneous interest rate movements are also modeled. Simulations are carried out in two ways:

(i) using a static balance sheet as the Company had on the simulation date, and

(ii) using a dynamic balance sheet based on recent growth patterns and business strategies.

The balance sheet is divided into groups of assets and liabilities detailed by maturity or re-pricing and their corresponding interest yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future funding sources and costs, the possible exercise of options, changes in prepayment rates, deposits decay and other factors which may be important in projecting the future growth of net interest income.

The Company uses a software application to project future movements in the Company’s balance sheet and income statement. The starting point of the projections generally corresponds to the actual values of the balance sheet on the date of the simulations.

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These simulations are complex, and use many assumptions that are intended to reflect the general behavior of the Company over the period in question. There can be no assurance that actual events will match these assumptions in all cases. For this reason, the results of these simulations are only approximations of the true sensitivity of net interest income to changes in market interest rates. The following table presents the results of the simulations at March 31, 2017 for the most likely scenario, assuming a one-year time horizon:

	Net Interest Income Risk (one year projection)
	Static Balance Sheet			Growing Simulation
	Amount		Percent	Amount		Percent
	Change		Change	Change		Change
Change in interest rate	(Dollars in thousands)
+ 200 Basis points	$	10,964	4.03%	$	9,670	3.50%
+ 100 Basis points	$	5,547	2.04%	$	4,902	1.78%
- 50 Basis points	$	(2,615)	-0.96%	$	(2,263)	-0.82%

The impact of -100 and -200 basis point reductions in interest rates is not presented in view of current level of the federal funds rate and other short-term interest rates.

Future net interest income could be affected by the Company’s investments in callable securities, prepayment risk related to mortgage loans and mortgage-backed securities, and any structured repurchase agreements and advances from the FHLB-NY in which it may enter into from time to time. As part of the strategy to limit the interest rate risk and reduce the re-pricing gaps of the Company’s assets and liabilities, the Company has executed certain transactions which include extending the maturity and the re-pricing frequency of the liabilities to longer terms reducing the amounts of its structured repurchase agreements and entering into hedge-designated swaps to hedge the variability of future interest cash flows of forecasted wholesale borrowings that only consist of advances from the FHLB-NY as of March 31, 2017.

The Company maintains an overall interest rate risk management strategy that incorporates the use of derivative instruments to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. The Company’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain balance sheet assets and liabilities so that the net interest margin is not, on a material basis, adversely affected by movements in interest rates. As a result of interest rate fluctuations, hedged fixed-rate assets and liabilities will appreciate or depreciate in market value. Also, for some fixed-rate assets or liabilities, the effect of this variability in earnings is expected to be substantially offset by the Company’s gains and losses on the derivative instruments that are linked to the forecasted cash flows of these hedged assets and liabilities. The Company considers its strategic use of derivatives to be a prudent method of managing interest-rate sensitivity as it reduces the exposure of earnings and the market value of its equity to undue risk posed by changes in interest rates. The effect of this unrealized appreciation or depreciation is expected to be substantially offset by the Company’s gains or losses on the derivative instruments that are linked to these hedged assets and liabilities. Another result of interest rate fluctuations is that the contractual interest income and interest expense of hedged variable-rate assets and liabilities, respectively, will increase or decrease.

Derivative instruments that are used as part of the Company’s interest risk management strategy include interest rate swaps, forward-settlement swaps, futures contracts, and option contracts that have indices related to the pricing of specific balance sheet assets and liabilities. Interest rate swaps generally involve the exchange of fixed and variable-rate interest payments between two parties based on a common notional principal amount and maturity date. Interest rate futures generally involve exchanged-traded contracts to buy or sell U.S. Treasury bonds and notes in the future at specified prices. Interest rate options represent contracts that allow the holder of the option to (i) receive cash or (ii) purchase, sell, or enter into a financial instrument at a specified price within a specified period. Some purchased option contracts give the Company the right to enter into interest rate swaps and cap and floor agreements with the writer of the option. In addition, the Company enters into certain transactions that contain embedded derivatives. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated and carried at fair value. Please refer to Note 7 to the accompanying consolidated financial statements for further information concerning the Company’s derivative activities.

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Following is a summary of certain strategies, including derivative activities, currently used by the Company to manage interest rate risk:

Interest rate swaps — The Company entered into hedge-designated swaps to hedge the variability of future interest cash flows of forecasted wholesale borrowings attributable to changes in the one-month LIBOR rate. Once the forecasted wholesale borrowings transactions occurred, the interest rate swap effectively fixes the Company’s interest payments on an amount of forecasted interest expense attributable to the one-month LIBOR rate corresponding to the swap notional stated rate. A derivative liability of $822 thousand (notional amount of $36.2 million) was recognized at March 31, 2017 related to the valuation of these swaps.

In addition, the Company has certain derivative contracts, including interest rate swaps not designated as hedging instruments, which are utilized to convert certain variable rate loans to fixed-rate loans, and the mirror-images of these interest rate swaps in which the Company enters into to minimize its interest rate risk exposure that results from offering the derivatives to clients. These interest rate swaps are marked to market through earnings. At March 31, 2017 , interest rate swaps offered to clients not designated as hedging instruments represented a derivative asset of $1.0 million (notional amounts of $12.5 million), and the mirror-image interest rate swaps in which the Company entered into represented a derivative liability of $1.0 million (notional amounts of $12.5 million).

Wholesale borrowings — The Company uses interest rate swaps to hedge the variability of interest cash flows of certain advances from the FHLB-NY that are tied to a variable rate index. The interest rate swaps effectively fix the Company’s interest payments on these borrowings. As of March 31, 2017, the Company had $36.2 million in interest rate swaps at an average rate of 2.4% designated as cash flow hedges for $36.2 million in advances from the FHLB-NY that reprice or are being rolled over on a monthly basis.

Credit Risk

Credit risk is the possibility of loss arising from a borrower or counterparty in a credit-related contract failing to perform in accordance with its terms. The principal source of credit risk for the Company is its lending activities. In Puerto Rico, the Company’s principal market, economic conditions are challenging, as they have been for the last ten years, due to a shrinking population, a protracted economic recession, a housing sector that remains under pressure, the Puerto Rico government’s fiscal and liquidity crisis, and the payment defaults on various Puerto Rico government bonds, with severe austerity measures expected for the Puerto Rico government to be able to restructure its debts under the supervision of a federally created Fiscal Oversight Board.

The Company manages its credit risk through a comprehensive credit policy which establishes sound underwriting standards by monitoring and evaluating loan portfolio quality, and by the constant assessment of reserves and loan concentrations. The Company also employs proactive collection and loss mitigation practices.

The Company may also encounter risk of default in relation to its securities portfolio. The securities held by the Company are principally agency mortgage-backed securities. Thus, a substantial portion of these instruments are guaranteed by mortgages, a U.S. government-sponsored entity, or the full faith and credit of the U.S. government.

The Company’s executive Credit Risk Committee, composed of its Chief Executive Officer, Chief Operating Officer, Chief Credit Officer, Chief Risk officer, and other senior executives, has primary responsibility for setting strategies to achieve the Company’s credit risk goals and objectives. Those goals and objectives are set forth in the Company’s Credit Policy as approved by the Board.

Liquidity Risk

Liquidity risk is the risk of the Company not being able to generate sufficient cash from either assets or liabilities to meet obligations as they become due without incurring substantial losses. The Board has established a policy to manage this risk. The Company’s cash requirements principally consist of deposit withdrawals, contractual loan funding, repayment of borrowings as these mature, and funding of new and existing investments as required.

The Company’s business requires continuous access to various funding sources. While the Company is able to fund its operations through deposits as well as through advances from the FHLB-NY and other alternative sources, the Company’s business is dependent upon other external wholesale funding sources. The Company has selectively reduced its use of certain wholesale funding sources, such as repurchase agreements and brokered deposits. As of March 31, 2017, the Company had $530.4 million in repurchase agreements, excluding accrued interest, and $575.9 million in brokered deposits.

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Brokered deposits are typically offered through an intermediary to small retail investors. The Company’s ability to continue to attract brokered deposits is subject to variability based upon a number of factors, including volume and volatility in the global securities markets, the Company’s credit rating, and the relative interest rates that it is prepared to pay for these liabilities. Brokered deposits are generally considered a less stable source of funding than core deposits obtained through retail bank branches. Investors in brokered deposits are generally more sensitive to interest rates and will generally move funds from one depository institution to another based on small differences in interest rates offered on deposits.

Although the Company expects to have continued access to credit from the foregoing sources of funds, there can be no assurance that such financing sources will continue to be available or will be available on favorable terms. In a period of financial disruption or if negative developments occur with respect to the Company, the availability and cost of the Company’s funding sources could be adversely affected. In that event, the Company’s cost of funds may increase, thereby reducing its net interest income, or the Company may need to dispose of a portion of its investment portfolio, which depending upon market conditions, could result in realizing a loss or experiencing other adverse accounting consequences upon any such dispositions. The Company’s efforts to monitor and manage liquidity risk may not be successful to deal with dramatic or unanticipated changes in the global securities markets or other reductions in liquidity driven by the Company or market-related events. In the event that such sources of funds are reduced or eliminated and the Company is not able to replace these on a cost-effective basis, the Company may be forced to curtail or cease its loan origination business and treasury activities, which would have a material adverse effect on its operations and financial condition.

As of March 31, 2017, the Company had approximately $480.3 million in unrestricted cash and cash equivalents, $801.6 million in investment securities that are not pledged as collateral, $1.004 billion in borrowing capacity at the FHLB-NY.

Operational Risk

Operational risk is the risk of loss from inadequate or failed internal processes, personnel and systems or from external events. All functions, products and services of the Company are susceptible to operational risk.

The Company faces ongoing and emerging risk and regulatory pressure related to the activities that surround the delivery of banking and financial products and services. Coupled with external influences such as market conditions, security risks, and legal risks, the potential for operational and reputational loss has increased. In order to mitigate and control operational risk, the Company has developed, and continues to enhance, specific internal controls, policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization. The purpose of these policies and procedures is to provide reasonable assurance that the Company’s business operations are functioning within established limits.

The Company classifies operational risk into two major categories: business specific and corporate-wide affecting all business lines. For business specific risks, a risk assessment group works with the various business units to ensure consistency in policies, processes and assessments. With respect to corporate-wide risks, such as information security, business recovery, legal and compliance, the Company has specialized groups, such as Information Security, Enterprise Risk Management, Corporate Compliance, Information Technology, Legal and Operations. These groups assist the lines of business in the development and implementation of risk management practices specific to the needs of the business groups. All these matters are reviewed and discussed in the Information Technology Steering Committee and the Executive Risk and Compliance Committee.

The Company is subject to extensive United States federal and Puerto Rico regulations, and this regulatory scrutiny has been significantly increasing over the last several years. The Company has established and continues to enhance procedures based on legal and regulatory requirements that are reasonably designed to ensure compliance with all applicable statutory and regulatory requirements. The Company has a corporate compliance function headed by a Chief Compliance Officer who reports to the Chief Executive Officer and the BSA Officer who reports to the Chief Risk Officer. The Chief Compliance Officer is responsible for the oversight of regulatory compliance and implementation of a company-wide compliance program, except for the Bank Secrecy Act/Anti-Money Laundering compliance program, which is overseen and implemented by the BSA Officer.

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Concentration Risk

Substantially all of the Company’s business activities and a significant portion of its credit exposure are concentrated in Puerto Rico. As a consequence, the Company’s profitability and financial condition may be adversely affected by an extended economic slowdown, adverse political, fiscal or economic developments in Puerto Rico or the effects of a natural disaster, all of which could result in a reduction in loan originations, an increase in non-performing assets, an increase in foreclosure losses on mortgage loans, and a reduction in the value of its loans and loan servicing portfolio.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this quarterly report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon such evaluation, the CEO and the CFO have concluded that, as of the end of such period, the Company’s disclosure controls and procedures provided reasonable assurance of effectiveness in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2017, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART - II OTHER INFORMATION

ITEM 1 . LEGAL PROCEEDINGS

The Company and its subsidiaries are defendants in a number of legal proceedings incidental to their business. The Company is vigorously contesting such claims. Based upon a review by legal counsel and the development of these matters to date, management is of the opinion that the ultimate aggregate liability, if any, resulting from these claims will not have a material adverse effect on the Company’s financial condition or results of operations.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors previously disclosed in the Company's annual report on Form 10-K for the year ended December 31, 2016. In addition to other information set forth in this report, you should carefully consider the risk factors included in the Company’s annual report on Form 10-K, as updated by this report or other filings the Company makes with the SEC under the Exchange Act. Additional risks and uncertainties not presently known to the Company at this time or that the Company currently deems immaterial may also adversely affect the Company’s business, financial condition or results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibit No. Description of Document:

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101 The following materials from OFG Bancorp’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Consolidated Statements of Financial Condition, (ii) Unaudited Consolidated Statements of Operations, (iii) Unaudited Consolidated Statements of Comprehensive Income, (iv) Unaudited Consolidated Statements of Changes in Stockholders’ Equity, (v) Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Consolidated Financial Statements.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

OFG Bancorp

(Registrant)


By:	/s/ José Rafael Fernández	Date: May 5, 2017
	José Rafael Fernández
	President and Chief Executive Officer

By:	/s/ Maritza Arizmendi	Date: May 5, 2017
	Maritza Arizmendi
	Executive Vice President and Chief Financial Officer

By:	/s/ Vanessa de Armas	Date: May 5, 2017
	Vanessa de Armas
	Controller

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TABLE OF CONTENTS

Part I Financial Information Item 1. Financial Statements Note 1 Organization, Consolidation and Basis Of Presentation 7 Note 1 Organization, Consolidation and Basis Of Presentation Note 2 Restricted Cash 9 Note 2 Restricted Cash Note 3 Investment Securities 9 Note 3 Investment Securities Note 4 Loans 16 Note 4 Loans Note 5 Allowance For Loan and Lease Losses 38 Note 5 Allowance For Loan and Lease Losses Note 6 Fdic Indemnification Asset and True-up Payment Obligation 44 Note 6 Fdic Indemnification Asset and True-up Payment Obligation Note 7 Derivatives 45 Note 7 Derivatives Note 8 Accrued Interest Receivable and Other Assets 47 Note 8 Accrued Interest Receivable and Other Assets Note 9 Deposits and Related Interest 48 Note 9 Deposits and Related Interest Note 10 Borrowings and Related Interest 49 Note 10 Borrowings and Related Interest Note 11 Offsetting Of Financial Assets and Liabilities 52 Note 11 Offsetting Of Financial Assets and Liabilities Note 12 Related Party Transactions 54 Note 12 Related Party Transactions Note 13 Income Taxes 54 Note 13 Income Taxes Note 14 Regulatory Capital Requirements 55 Note 14 Regulatory Capital Requirements Note 15 Stockholders Equity 57 Note 15 Stockholders Equity Note 16 Accumulated Other Comprehensive Income 58 Note 16 Accumulated Other Comprehensive Income Note 17 Earnings (loss) Per Common Share 59 Note 17 Earnings (loss) Per Common Share Note 18 Guarantees 60 Note 18 Guarantees Note 19 Commitments and Contingencies 61 Note 19 Commitments and Contingencies Note 20 Fair Value Of Financial Instruments 63 Note 20 Fair Value Of Financial Instruments Note 21 Business Segments 70 Note 21 Business Segments Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations 72 Item 3. Quantitative and Qualitative Disclosures About Market Risk 115 Item 4. Controls and Procedures 119 Part II Other Information Item 1. Legal Proceedings 120 Item 1A. Risk Factors 120 Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds 120 Item 3. Default Upon Senior Securities 120 Item 4. Mine Safety Disclosures 120 Item 5. Other Information 120 Item 6. Exhibits 121 Note 4 - Loans Note 6- Fdic Indemnification Asset, True-up Payment Obligation, and Fdic Shared-loss Expense Note 16 - Accumulated Other Comprehensive Income Note 17 Earnings Per Common Share Note 20 - Fair Value Of Financial Instruments Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part - II Other Information Item 1 . Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securites and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

OFG 10-Q Quarter ended March 31, 2017