10-Q 1 ofg10q20140331.htm FORM 10-Q

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, 2014

or

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

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:

45,011,649 common shares ($1.00 par value per share) outstanding as of April 30, 2014

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 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 | 8
|  | Note 3 – Securities Purchased Under Agreements to Resell and Investments | 8
|  | Note 4 – Loans | 15
|  | Note 5 – Allowance for Loan and Lease Losses | 26
|  | Note 6 – FDIC Loss Share Asset and True-up Payment Obligation | 40
|  | Note 7 – Derivative Activities | 41
|  | Note 8 – Accrued Interest Receivable and Other Assets | 43
|  | Note 9 – Deposits and Related Interest | 44
|  | Note 10 – Borrowings | 45
|  | Note 11 – Offsetting Arrangements | 49
|  | Note 12 – Related Party Transactions | 51
|  | Note 13 – Income Taxes | 51
|  | Note 14 – Stockholders’ Equity and Earnings per Common Share | 52
|  | Note 15 – Guarantees | 57
|  | Note 16 – Commitments and Contingencies | 59
|  | Note 17 – Fair Value of Financial Instruments | 61
|  | Note 18 – Business Segments | 69
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 71
|  | Critical Accounting Policies and Estimates | 71
|  | Overview of Financial Performance | 72
|  | Selected Financial Data | 72
|  | Analysis of Results of Operations | 78
|  | Analysis of Financial Condition | 85
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 109
Item 4. | Control and Procedures | 113
PART II – OTHER INFORMATION |
Item 1. | Legal Proceedings | 114
Item 1A. | Risk Factors | 114
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 115
Item 3. | Default upon Senior Securities | 116
Item 4. | Mine Safety Disclosures | 116
Item 5. | Other Information | 116
Item 6. | Exhibits | 116
SIGNATURES | 117
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:

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

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

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

· a credit default by the government;

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

· the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) on the

Company’s businesses, business practices and cost of operations;

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

Puerto Rico;

· the performance of the stock and bond markets;

· competition in the financial services industry;

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

· possible legislative, tax or regulatory changes.

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, 2014 AND DECEMBER 31, 2013

|  | March 31, |  | December 31,
|  | 2014 |  | 2013
|  | (In thousands, except share data)
ASSETS |  |  |  |  |  |
Cash and cash equivalents: |  |  |  |  |  |
Cash and due from banks |  | $ | 616,984 |  | $ | 614,302
Money market investments |  |  | 7,652 |  |  | 6,967
Total cash and cash equivalents |  |  | 624,636 |  |  | 621,269
Restricted cash |  |  | 15,170 |  |  | 82,199
Securities purchased under agreements to resell |  |  | - |  |  | 60,000
Investments: |  |  |  |  |  |
Trading securities, at fair value, with amortized cost of $2,453 (December 31, 2013 - $2,448) |  |  | 1,910 |  |  | 1,869
Investment securities available-for-sale, at fair value, with amortized cost of $1,437,106 (December 31, 2013 - $1,575,043) |  |  | 1,455,685 |  |  | 1,588,425
Federal Home Loan Bank (FHLB) stock, at cost |  |  | 24,430 |  |  | 24,450
Other investments |  |  | 65 |  |  | 65
Total investments |  |  | 1,482,090 |  |  | 1,614,809
Loans: |  |  |  |  |  |
Mortgage loans held-for-sale, at lower of cost or fair value |  |  | 19,355 |  |  | 46,529
Loans not covered under shared-loss agreements with the FDIC, net of allowance for loan and lease losses of $56,183 (December 31, 2013 - $54,298) |  |  | 4,635,394 |  |  | 4,615,929
Loans covered under shared-loss agreements with the FDIC, net of allowance for loan and lease losses of $54,398 (December 31, 2013 - $52,729) |  |  | 347,865 |  |  | 356,961
Total loans, net |  |  | 5,002,614 |  |  | 5,019,419
Other assets: |  |  |  |  |  |
FDIC shared-loss indemnification asset |  |  | 166,194 |  |  | 189,240
Foreclosed real estate covered under shared-loss agreements with the FDIC |  |  | 37,785 |  |  | 33,209
Foreclosed real estate not covered under shared-loss agreements with the FDIC |  |  | 59,099 |  |  | 56,815
Accrued interest receivable |  |  | 18,969 |  |  | 18,734
Deferred tax asset, net |  |  | 127,657 |  |  | 137,564
Premises and equipment, net |  |  | 83,029 |  |  | 82,903
Customers' liability on acceptances |  |  | 28,152 |  |  | 23,042
Servicing assets |  |  | 13,970 |  |  | 13,801
Derivative assets |  |  | 15,861 |  |  | 20,502
Goodwill |  |  | 86,069 |  |  | 86,069
Other assets |  |  | 94,343 |  |  | 98,440
Total assets |  | $ | 7,855,638 |  | $ | 8,158,015
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |  |
Deposits: |  |  |  |  |  |
Demand deposits |  | $ | 2,188,458 |  |  | 2,138,005
Savings accounts |  |  | 1,267,290 |  |  | 1,194,567
Time deposits |  |  | 1,845,244 |  |  | 2,050,693
Total deposits |  |  | 5,300,992 |  |  | 5,383,265
Borrowings: |  |  |  |  |  |
Securities sold under agreements to repurchase |  |  | 1,012,240 |  |  | 1,267,618
Advances from FHLB |  |  | 335,689 |  |  | 336,143
Subordinated capital notes |  |  | 100,404 |  |  | 100,010
Federal funds purchased |  |  | 23,712 |  |  | -
Other borrowings |  |  | 3,708 |  |  | 3,663
Total borrowings |  |  | 1,475,753 |  |  | 1,707,434
Other liabilities: |  |  |  |  |  |
Derivative liabilities |  |  | 13,830 |  |  | 14,937
Acceptances executed and outstanding |  |  | 28,535 |  |  | 23,042
Accrued expenses and other liabilities |  |  | 140,037 |  |  | 144,424
Total liabilities |  |  | 6,959,147 |  |  | 7,273,102
Commitments and contingencies (See Note 16) |  |  |  |  |  |
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, 2013 - 1,340,000; 1,380,000; and 960,000) $25 liquidation value |  |  | 92,000 |  |  | 92,000
84,000 shares of Series C issued and outstanding (December 31, 2013 - 84,000); $1,000 liquidation value |  |  | 84,000 |  |  | 84,000
Common stock, $1 par value; 100,000,000 shares authorized; 52,713,673 shares issued: |  |  |  |  |  |
45,003,924 shares outstanding (December 31, 2013 - 52,707,023; 45,676,922) |  |  | 52,714 |  |  | 52,707
Additional paid-in capital |  |  | 538,287 |  |  | 538,071
Legal surplus |  |  | 64,292 |  |  | 61,957
Retained earnings |  |  | 147,919 |  |  | 133,629
Treasury stock, at cost, 7,709,749 shares (December 31, 2013 - 7,030,101 shares) |  |  | (90,743) |  |  | (80,642)
Accumulated other comprehensive income, net of tax of $87 (December 31, 2013 - $831) |  |  | 8,022 |  |  | 3,191
Total stockholders’ equity |  |  | 896,491 |  |  | 884,913
Total liabilities and stockholders’ equity |  | $ | 7,855,638 |  | $ | 8,158,015
See notes to unaudited consolidated financial statements.

1

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE QUARTERS ENDED MARCH 31, 2014 AND 2013

| Quarter Ended March 31,
| 2014 |  | 2013
| (In thousands, except per share data)
Interest income: |  |  |  |  |
Loans not covered under shared-loss agreements with the FDIC | $ | 85,243 |  | $ | 80,807
Loans covered under shared-loss agreements with the FDIC |  | 23,388 |  |  | 20,229
Total interest income from loans |  | 108,631 |  |  | 101,036
Mortgage-backed securities |  | 12,417 |  |  | 10,818
Investment securities and other |  | 2,026 |  |  | 2,318
Total interest income |  | 123,074 |  |  | 114,172
Interest expense: |  |  |  |  |
Deposits |  | 8,978 |  |  | 9,935
Securities sold under agreements to repurchase |  | 7,411 |  |  | 7,248
Advances from FHLB and other borrowings |  | 2,295 |  |  | 1,713
Subordinated capital notes |  | 992 |  |  | 1,660
Total interest expense |  | 19,676 |  |  | 20,556
Net interest income |  | 103,398 |  |  | 93,616
Provision for non-covered loan and lease losses |  | 10,062 |  |  | 7,916
Provision for covered loan and lease losses, net |  | 1,629 |  |  | 672
Total provision for loan and lease losses |  | 11,691 |  |  | 8,588
Net interest income after provision for loan and lease losses |  | 91,707 |  |  | 85,028
Non-interest income: |  |  |  |  |
Banking service revenue |  | 10,606 |  |  | 11,838
Financial service revenue |  | 6,867 |  |  | 7,660
Mortgage banking activities |  | 1,950 |  |  | 3,153
Total banking and financial service revenues |  | 19,423 |  |  | 22,651
FDIC shared-loss expense, net: |  |  |  |  |
FDIC shared-loss indemnification asset |  | (17,622) |  |  | (12,201)
True-up payment obligation |  | (865) |  |  | (670)
|  | (18,487) |  |  | (12,871)
Net gain (loss) on: |  |  |  |  |
Sale of securities |  | 4,366 |  |  | -
Derivatives |  | (478) |  |  | (788)
Early extinguishment of debt |  | - |  |  | 1,061
Other non-interest income |  | 454 |  |  | 46
Total non-interest income, net |  | 5,278 |  |  | 10,099
Non-interest expense: |  |  |  |  |
Compensation and employee benefits |  | 21,787 |  |  | 23,249
Professional and service fees |  | 4,206 |  |  | 6,478
Occupancy and equipment |  | 8,309 |  |  | 9,216
Insurance |  | 2,074 |  |  | 2,678
Electronic banking charges |  | 4,743 |  |  | 3,728
Information technology expenses |  | 1,815 |  |  | 2,643
Advertising, business promotion, and strategic initiatives |  | 1,781 |  |  | 1,409
Merger and restructuring charges |  | - |  |  | 5,534
Foreclosure, repossession and other real estate expenses |  | 6,436 |  |  | 3,382
Loan servicing and clearing expenses |  | 2,060 |  |  | 1,475
Taxes, other than payroll and income taxes |  | 3,735 |  |  | 2,622
Communication |  | 957 |  |  | 864
Printing, postage, stationary and supplies |  | 554 |  |  | 1,166
Director and investor relations |  | 251 |  |  | 236
Other |  | 2,745 |  |  | 2,129
Total non-interest expense |  | 61,453 |  |  | 66,809
Income before income taxes |  | 35,532 |  |  | 28,318
Income tax expense |  | 11,785 |  |  | 7,126
Net income |  | 23,747 |  |  | 21,192
Less: dividends on preferred stock |  | (3,465) |  |  | (3,465)
Income available to common shareholders | $ | 20,282 |  | $ | 17,727
Earnings per common share: |  |  |  |  |
Basic | $ | 0.45 |  | $ | 0.39
Diluted | $ | 0.42 |  | $ | 0.37
Average common shares outstanding and equivalents |  | 52,598 |  |  | 52,892
Cash dividends per share of common stock | $ | 0.08 |  | $ | 0.06
See notes to unaudited consolidated financial statements.

2

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE QUARTERS ENDED MARCH 31, 2014 AND 2013

| Quarter Ended March 31,
| 2014 |  | 2013
| (In thousands)
Net income | $ | 23,747 |  | $ | 21,192
Other comprehensive income (loss) before tax: |  |  |  |  |
Unrealized gain (loss) on securities available-for-sale |  | 9,563 |  |  | (10,992)
Realized gain on investment securities included in net income |  | (4,366) |  |  | -
Unrealized gain on cash flow hedges |  | 378 |  |  | 1,462
Other comprehensive income (loss) before taxes |  | 5,575 |  |  | (9,530)
Income tax effect |  | (744) |  |  | 701
Other comprehensive income (loss) after taxes |  | 4,831 |  |  | (8,829)
Comprehensive income | $ | 28,578 |  | $ | 12,363
See notes to unaudited consolidated financial statements.

3

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE QUARTERS ENDED MARCH 31, 2014 AND 2013

| Quarter Ended March 31,
| 2014 |  | 2013
| (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 |  | 52,707 |  |  | 52,671
Exercised stock options |  | 7 |  |  | -
Balance at end of period |  | 52,714 |  |  | 52,671
Additional paid-in capital: |  |  |  |  |
Balance at beginning of period |  | 538,071 |  |  | 537,453
Stock-based compensation expense |  | 439 |  |  | 437
Exercised stock options |  | 71 |  |  | -
Lapsed restricted stock units |  | (294) |  |  | (351)
Common stock issuance costs |  | - |  |  | (23)
Preferred stock issuance costs |  | - |  |  | (16)
Balance at end of period |  | 538,287 |  |  | 537,500
Legal surplus: |  |  |  |  |
Balance at beginning of period |  | 61,957 |  |  | 52,143
Transfer from retained earnings |  | 2,335 |  |  | 1,985
Balance at end of period |  | 64,292 |  |  | 54,128
Retained earnings: |  |  |  |  |
Balance at beginning of period |  | 133,629 |  |  | 70,734
Net income |  | 23,747 |  |  | 21,192
Cash dividends declared on common stock |  | (3,657) |  |  | (2,737)
Cash dividends declared on preferred stock |  | (3,465) |  |  | (3,465)
Transfer to legal surplus |  | (2,335) |  |  | (1,985)
Balance at end of period |  | 147,919 |  |  | 83,739
Treasury stock: |  |  |  |  |
Balance at beginning of period |  | (80,642) |  |  | (81,275)
Stock repurchased |  | (10,393) |  |  | -
Lapsed restricted stock units |  | 292 |  |  | 351
Stock used to match defined contribution plan |  | - |  |  | 77
Balance at end of period |  | (90,743) |  |  | (80,847)
Accumulated other comprehensive income, net of tax: |  |  |  |  |
Balance at beginning of period |  | 3,191 |  |  | 55,880
Other comprehensive income (loss), net of tax |  | 4,831 |  |  | (8,829)
Balance at end of period |  | 8,022 |  |  | 47,051
Total stockholders’ equity | $ | 896,491 |  | $ | 870,242
See notes to unaudited consolidated financial statements.

4

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE QUARTERS ENDED MARCH 31, 2014 AND 2013

| Quarter Ended March 31,
| 2014 |  | 2013
| (In thousands)
Cash flows from operating activities: |  |  |  |  |
Net income | $ | 23,747 |  | $ | 21,192
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |
Amortization of deferred loan origination fees, net of costs |  | 601 |  |  | 256
Amortization of fair value discounts on acquired loans |  | 3,634 |  |  | 2,579
Amortization of investment securities premiums, net of accretion of discounts |  | 412 |  |  | 6,200
Amortization of core deposit and customer relationship intangibles |  | 542 |  |  | 644
Amortization of fair value premiums on acquired deposits |  | 1,897 |  |  | 5,267
FDIC shared-loss expense, net |  | 18,487 |  |  | 12,871
Amortization of prepaid FDIC assessment |  | - |  |  | 860
Other impairments on securities |  | - |  |  | 7
Depreciation and amortization of premises and equipment |  | 2,399 |  |  | 3,092
Deferred income taxes, net |  | (826) |  |  | 5,265
Provision for covered and non-covered loan and lease losses, net |  | 11,691 |  |  | 8,588
Stock-based compensation |  | 439 |  |  | 437
(Gain) loss on: |  |  |  |  |
Sale of securities |  | (4,366) |  |  | -
Sale of mortgage loans held-for-sale |  | (1,242) |  |  | (1,631)
Derivatives |  | 478 |  |  | 788
Early extinguishment of debt |  | - |  |  | (1,061)
Foreclosed real estate |  | 1,500 |  |  | 1,793
Sale of other repossessed assets |  | 1,973 |  |  | 84
Sale of premises and equipment |  | (2) |  |  | -
Originations of loans held-for-sale |  | (50,843) |  |  | (68,493)
Proceeds from sale of loans held-for-sale |  | 24,653 |  |  | 29,347
Net (increase) decrease in: |  |  |  |  |
Trading securities |  | (41) |  |  | (1,292)
Accrued interest receivable |  | (235) |  |  | (2,677)
Servicing assets |  | (169) |  |  | (748)
Other assets |  | 4,935 |  |  | 1,446
Net increase (decrease) in: |  |  |  |  |
Accrued interest on deposits and borrowings |  | (1,382) |  |  | (391)
Accrued expenses and other liabilities |  | 2,362 |  |  | (2,518)
Net cash provided by operating activities |  | 40,644 |  |  | 21,905
Cash flows from investing activities: |  |  |  |  |
Purchases of: |  |  |  |  |
Investment securities available-for-sale |  | (127,373) |  |  | (1,383)
FHLB stock |  | (48,600) |  |  | (3,150)
Maturities and redemptions of: |  |  |  |  |
Investment securities available-for-sale |  | 153,340 |  |  | 163,940
FHLB stock |  | 48,620 |  |  | 8,103
Proceeds from sales of: |  |  |  |  |
Investment securities available-for-sale |  | 139,152 |  |  | 29,062
Foreclosed real estate and other repossessed assets |  | 13,392 |  |  | 6,036
Premises and equipment |  | 10 |  |  | 155
Origination and purchase of loans, excluding loans held-for-sale |  | (161,182) |  |  | (206,229)
Principal repayment of loans, including covered loans |  | 141,118 |  |  | 161,912
Reimbursements from the FDIC on shared-loss agreements |  | 8,236 |  |  | 6,650
Additions to premises and equipment |  | (2,532) |  |  | (1,711)
Net change in securities purchased under agreements to resell |  | 60,000 |  |  | 20,000
Net change in restricted cash |  | 67,029 |  |  | 5,060
Net cash provided by investing activities |  | 291,210 |  |  | 188,445

5

OFG BANCORP

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)

FOR THE QUARTERS ENDED MARCH 31, 2014 AND 2013

| Quarter Ended March 31,
| 2014 |  | 2013
| (In thousands)
Cash flows from financing activities: |  |  |  |  |
Net increase (decrease) in: |  |  |  |  |
Deposits |  | (79,572) |  |  | (133,055)
Short term borrowings |  | - |  |  | (31,382)
Securities sold under agreements to repurchase |  | (255,000) |  |  | (203,636)
FHLB advances, federal funds purchased, and other borrowings |  | 23,311 |  |  | (91,185)
Subordinated capital notes |  | 394 |  |  | (46,541)
Exercise of stock options and restricted units lapsed, net |  | 76 |  |  | -
Purchase of treasury stock |  | (10,393) |  |  | -
Termination of derivative instruments |  | (181) |  |  | (9)
Dividends paid on preferred stock |  | (3,465) |  |  | (3,465)
Dividends paid on common stock |  | (3,657) |  |  | (2,737)
Other financing activities |  | - |  |  | (39)
Net cash used in financing activities |  | (328,487) |  |  | (512,049)
Net change in cash and cash equivalents |  | 3,367 |  |  | (301,699)
Cash and cash equivalents at beginning of period |  | 621,269 |  |  | 868,695
Cash and cash equivalents at end of period | $ | 624,636 |  | $ | 566,996
Supplemental Cash Flow Disclosure and Schedule of Non-cash Activities: |  |  |  |  |
Interest paid | $ | 22,620 |  | $ | 21,243
Mortgage loans securitized into mortgage-backed securities | $ | 23,228 |  | $ | 27,679
Transfer from loans to foreclosed real estate and other repossessed assets | $ | 25,106 |  | $ | 15,459
Reclassification of loans held-for-investment portfolio to held-for-sale portfolio | $ | 1,747 |  | $ | -
Reclassification of loans held-for-sale portfolio to held-for-investment portfolio | $ | 33,125 |  | $ | -
See notes to unaudited consolidated financial statements.

6

OFG BANCORP

NOTES TO UNAUDITED 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 (or the “Bank”), a securities broker-dealer, Oriental Financial Services Corp. (“Oriental Financial Services”), an insurance agency, Oriental Insurance, Inc. (“Oriental Insurance”) and a retirement plan administrator, Caribbean Pension Consultants, Inc. (“CPC”). The Company also has a special purpose entity, Oriental Financial (PR) Statutory Trust II (the “Statutory Trust II”). 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, leasing, auto loans, financial planning, insurance sales, money management and investment banking and brokerage services, as well as corporate and individual trust services. On April 25, 2013, the Company changed its corporate name from Oriental Financial Group Inc. to OFG Bancorp.

On April 30, 2010, the Bank acquired certain assets and assumed certain deposits and other liabilities in the FDIC-assisted acquisition of Eurobank. On December 18, 2012, the Company purchased Banco Bilbao Vizcaya Argentaria Puerto Rico (“BBVAPR”), referred to as the “BBVAPR Acquisition.”

Recent Accounting Developments

Reclassification of Defaulted Consumer Mortgage Loans upon Foreclosure - In January 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. This ASU clarifies when an in-substance repossession or foreclosure occurs that would require a transfer of the mortgage loan to other real estate owned (OREO). Under the ASU, repossession or foreclosure is deemed to have occurred when (1) the creditor obtains legal title to the residential real estate property or (2) the borrower conveys all interest in the residential real estate property to the creditor to satisfy the mortgage loan through completion of a deed in lieu of foreclosure or a similar legal agreement. The ASU will become effective for annual and interim periods beginning after December 15, 2014. The ASU can be adopted using either a modified retrospective method or a prospective transition method with the cumulative effect being recognized in the beginning retained earnings of the earliest annual period for which the ASU is adopted. The adoption of this guidance will not have a material effect on our consolidated financial statements, since the Company already follows the same basis approach.

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry-forward Exists In July 2013, FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carry-forward, a Similar Tax Loss, or a Tax Credit Carry-forward Exists (a consensus of the FASB Emerging Issues Task, which requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. When a net operating loss, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purposes, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. Currently, there is no explicit guidance under U.S. GAAP on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendment of this guidance does not require new recurring disclosures. ASU 2013-11 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted. The amendments of this ASU should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of this guidance did not have a material effect on our consolidated financial statements, since the Company already followed the same basis approach.

7

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 2 – RESTRICTED CASH

The following table includes the composition of the restricted cash:

| March 31, |  | December 31,
| 2014 |  | 2013
| (In thousands)
Deposits pledged as collateral to other financial institutions to secure: |  |  |  |  |
Securities sold under agreements to repurchase | $ | - |  | $ | 67,029
Derivatives |  | 2,980 |  |  | 2,980
Obligations under agreement of loans sold with recourse |  | 12,190 |  |  | 12,190
| $ | 15,170 |  | $ | 82,199

The Company delivers cash as collateral to meet margin calls for some long term securities sold under agreements to repurchase. An alternative to cash delivery is entering into securities purchased under agreements to resell and use the securities collateral received as collateral to be delivered. At December 31, 2013, the possibility of entering into securities purchased under agreements to resell to receive securities collateral and then deliver it to counterparties securities sold under agreements to repurchase was very limited for market reasons. Therefore, at December 31, 2013, the Company had $67.0 million in cash collateral delivered. At March 31, 2014, the Company did not have cash collateral delivered.

As part of the BBVAPR 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, 2014 and December 31, 2013, the Company delivered cash amounting to $12.2 million.

NOTE 3 – SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND INVESTMENTS

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, 2014 and December 31, 2013, money market instruments included as part of cash and cash equivalents amounted to $7.7 million and $7.0 million, respectively.

Securities Purchased Under Agreements to Resell

Securities purchased under agreements to resell consist of short-term investments and are carried at the amounts at which the assets will be subsequently resold as specified in the respective agreements. At December 31, 2013, securities purchased under agreements to resell amounted to $60.0 million. At March 31, 2014, there were no securities purchased under agreements to resell.

The amounts advanced under those agreements are reflected as assets in the consolidated statements of financial condition. It is the Company’s policy to take possession of securities purchased under agreements to resell. Agreements with third parties specify the Company’s right to request additional collateral based on its monitoring of the fair value of the underlying securities on a daily basis. The fair value of the collateral securities held by the Company on these transactions as of December 31, 2013 was approximately $64.6 million.

8

OFG BANCORP

NOTES TO UNAUDITED 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, 2014 and December 31, 2013 were as follows:

| March 31, 2014
|  |  | 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 | $ | 1,093,717 |  | $ | 31,769 |  | $ | 4,690 |  | $ | 1,120,796 |  | 3.03%
GNMA certificates |  | 6,146 |  |  | 426 |  |  | 23 |  |  | 6,549 |  | 4.93%
CMOs issued by US Government-sponsored agencies |  | 211,308 |  |  | 351 |  |  | 4,139 |  |  | 207,520 |  | 1.78%
Total mortgage-backed securities |  | 1,311,171 |  |  | 32,546 |  |  | 8,852 |  |  | 1,334,865 |  | 2.84%
Investment securities |  |  |  |  |  |  |  |  |  |  |  |  |
US Treasury securities |  | 70,000 |  |  | - |  |  | - |  |  | 70,000 |  | 0.03%
Obligations of US Government-sponsored agencies |  | 9,539 |  |  | - |  |  | 42 |  |  | 9,497 |  | 1.23%
Obligations of Puerto Rico Government and political subdivisions |  | 22,367 |  |  | - |  |  | 5,298 |  |  | 17,069 |  | 5.32%
Other debt securities |  | 24,029 |  |  | 225 |  |  | - |  |  | 24,254 |  | 3.46%
Total investment securities |  | 125,935 |  |  | 225 |  |  | 5,340 |  |  | 120,820 |  | 1.72%
Total securities available for sale | $ | 1,437,106 |  | $ | 32,771 |  | $ | 14,192 |  | $ | 1,455,685 |  | 2.74%

| December 31, 2013
|  |  | 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 | $ | 1,190,910 |  | $ | 33,089 |  | $ | 6,669 |  | $ | 1,217,330 |  | 2.93%
GNMA certificates |  | 7,406 |  |  | 433 |  |  | 24 |  |  | 7,815 |  | 4.92%
CMOs issued by US Government-sponsored agencies |  | 220,801 |  |  | 407 |  |  | 6,814 |  |  | 214,394 |  | 1.78%
Total mortgage-backed securities |  | 1,419,117 |  |  | 33,929 |  |  | 13,507 |  |  | 1,439,539 |  | 2.76%
Investment securities |  |  |  |  |  |  |  |  |  |  |  |  |
Obligations of US Government-sponsored agencies |  | 10,691 |  |  | - |  |  | 42 |  |  | 10,649 |  | 1.21%
Obligations of Puerto Rico Government and political subdivisions |  | 121,035 |  |  | - |  |  | 6,845 |  |  | 114,190 |  | 4.38%
Other debt securities |  | 24,200 |  |  | 167 |  |  | 320 |  |  | 24,047 |  | 3.46%
Total investment securities |  | 155,926 |  |  | 167 |  |  | 7,207 |  |  | 148,886 |  | 2.99%
Total securities available-for-sale | $ | 1,575,043 |  | $ | 34,096 |  | $ | 20,714 |  | $ | 1,588,425 |  | 2.89%

9

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The amortized cost and fair value of the Company’s investment securities at March 31, 2014, 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, 2014
| Available-for-sale
| Amortized Cost |  | Fair Value
| (In thousands)
Mortgage-backed securities |  |  |  |  |
Due after 5 to 10 years |  |  |  |  |
FNMA and FHLMC certificates | $ | 26,294 |  | $ | 26,625
Total due after 5 to 10 years |  | 26,294 |  |  | 26,625
Due after 10 years |  |  |  |  |
FNMA and FHLMC certificates |  | 1,067,423 |  |  | 1,094,171
GNMA certificates |  | 6,146 |  |  | 6,549
CMOs issued by US Government-sponsored agencies |  | 211,308 |  |  | 207,520
Total due after 10 years |  | 1,284,877 |  |  | 1,308,240
Total mortgage-backed securities |  | 1,311,171 |  |  | 1,334,865
Investment securities |  |  |  |  |
Due in less than one year |  |  |  |  |
US Treasury securities |  | 70,000 |  |  | 70,000
Other debt securities |  | 20,000 |  |  | 20,053
Total due in less than one year |  | 90,000 |  |  | 90,053
Due from 1 to 5 years |  |  |  |  |
Obligations of Puerto Rico Government and political subdivisions |  | 11,903 |  |  | 9,827
Total due from 1 to 5 years |  | 11,903 |  |  | 9,827
Due after 5 to 10 years |  |  |  |  |
Obligations of US Government and sponsored agencies |  | 9,539 |  |  | 9,497
Total due after 5 to 10 years |  | 9,539 |  |  | 9,497
Due after 10 years |  |  |  |  |
Obligations of Puerto Rico Government and political subdivisions |  | 10,464 |  |  | 7,242
Other debt securities |  | 4,029 |  |  | 4,201
Total due after 10 years |  | 14,493 |  |  | 11,443
Total investment securities |  | 125,935 |  |  | 120,820
Total securities available-for-sale | $ | 1,437,106 |  | $ | 1,455,685

10

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At December 31, 2013 obligations of Puerto Rico Government and political subdivisions included a $98.7 million principal amount, LIBOR floating rate bond with maturity date of July 1, 2024, that was subject to mandatory tender for purchase by the end of the third year anniversary of the closing date, which was June 1, 2014. The bond was also subject to optional demand tender for purchase upon the occurrence and continuance of certain events, including (among others) the withdrawal, suspension or reduction below investment grade of the credit rating on any general obligation of the Commonwealth by any of the three major rating agencies. This bond was repaid by the issuer on March 1, 2014.

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, 2014, the Company sold $24.0 million of available-for-sale GNMA certificates that were sold as part of its recurring mortgage loan origination and securitization activities. These sales did not realize any gains or losses during such period. In addition, during the quarter ended March 31, 2014, there were certain sales of available-for-sale securities because the Company believed that gains could be realized and that there were good opportunities to invest the proceeds in other investment securities with attractive yields and terms that would allow the Company to continue protecting its net interest margin.

For the quarter ended March 31, 2014 the Company recorded a net gain on sale of securities of $4.4 million. The tables below present the gross realized gains by category for such period. There was no realized gain or loss for the quarter ended March 31, 2013.

| Quarter Ended March 31, 2014
|  |  | Book Value |  | Gross |  | Gross
Description | Sale Price |  | at Sale |  | Gains |  | Losses
| (In thousands)
Sale of securities available-for-sale |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed securities |  |  |  |  |  |  |  |  |  |  |
FNMA and FHLMC certificates | $ | 115,159 |  | $ | 110,792 |  | $ | 4,366 |  | $ | -
GNMA certificates |  | 23,993 |  |  | 23,993 |  |  | - |  |  | -
Total | $ | 139,152 |  | $ | 134,785 |  | $ | 4,366 |  | $ | -

11

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables show the Company’s gross unrealized losses and fair value of investment securities available-for-sale, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2014 and December 31, 2013:

| March 31, 2014
| 12 months or more
| Amortized |  | Unrealized |  | Fair
| Cost |  | Loss |  | Value
| (In thousands)
Securities available-for-sale |  |  |  |  |  |  |  |
CMOs issued by US Government-sponsored agencies | $ | 1,897 |  | $ | 163 |  | $ | 1,734
Obligations of Puerto Rico Government and political subdivisions |  | 22,367 |  |  | 5,298 |  |  | 17,069
GNMA certificates |  | 80 |  |  | 10 |  |  | 70
| $ | 24,344 |  | $ | 5,471 |  | $ | 18,873
| Less than 12 months
| Amortized |  | Unrealized |  | Fair
| Cost |  | Loss |  | Value
| (In thousands)
Securities available-for-sale |  |  |  |  |  |  |  |
CMOs issued by US Government-sponsored agencies | $ | 177,882 |  | $ | 3,976 |  | $ | 173,906
FNMA and FHLMC certificates |  | 214,926 |  |  | 4,690 |  |  | 210,236
Obligations of US government and sponsored agencies |  | 9,539 |  |  | 42 |  |  | 9,497
GNMA certificates |  | 121 |  |  | 13 |  |  | 108
| $ | 402,468 |  | $ | 8,721 |  | $ | 393,747
| Total
| Amortized |  | Unrealized |  | Fair
| Cost |  | Loss |  | Value
| (In thousands)
Securities available-for-sale |  |  |  |  |  |  |  |
CMOs issued by US Government-sponsored agencies | $ | 179,779 |  | $ | 4,139 |  | $ | 175,640
FNMA and FHLMC certificates |  | 214,926 |  |  | 4,690 |  |  | 210,236
Obligations of Puerto Rico Government and political subdivisions |  | 22,367 |  |  | 5,298 |  |  | 17,069
Obligations of US government and sponsored agencies |  | 9,539 |  |  | 42 |  |  | 9,497
GNMA certificates |  | 201 |  |  | 23 |  |  | 178
| $ | 426,812 |  | $ | 14,192 |  | $ | 412,620

12

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

| December 31, 2013
| 12 months or more
| Amortized |  | Unrealized |  | Fair
| Cost |  | Loss |  | Value
| (In thousands)
Securities available-for-sale |  |  |  |  |  |  |  |
Obligations of Puerto Rico Government and political subdivisions | $ | 20,845 |  | $ | 5,470 |  | $ | 15,375
CMOs issued by US Government-sponsored agencies |  | 2,559 |  |  | 237 |  |  | 2,322
GNMA certificates |  | 81 |  |  | 11 |  |  | 70
| $ | 23,485 |  | $ | 5,718 |  | $ | 17,767
| Less than 12 months
| Amortized |  | Unrealized |  | Fair
| Cost |  | Loss |  | Value
| (In thousands)
Securities available-for-sale |  |  |  |  |  |  |  |
Obligations of Puerto Rico Government and political subdivisions | $ | 100,190 |  | $ | 1,375 |  | $ | 98,815
CMOs issued by US Government-sponsored agencies |  | 182,661 |  |  | 6,577 |  |  | 176,084
GNMA certificates |  | 122 |  |  | 13 |  |  | 109
FNMA and FHLMC certificates |  | 220,913 |  |  | 6,669 |  |  | 214,244
Obligations of US Government and sponsored agencies |  | 10,691 |  |  | 42 |  |  | 10,649
Other debt securities |  | 20,000 |  |  | 320 |  |  | 19,680
| $ | 534,577 |  | $ | 14,996 |  | $ | 519,581
| Total
| Amortized |  | Unrealized |  | Fair
| Cost |  | Loss |  | Value
| (In thousands)
Securities available-for-sale |  |  |  |  |  |  |  |
Obligations of Puerto Rico Government and political subdivisions | $ | 121,035 |  | $ | 6,845 |  | $ | 114,190
CMOs issued by US Government-sponsored agencies |  | 185,220 |  |  | 6,814 |  |  | 178,406
GNMA certificates |  | 203 |  |  | 24 |  |  | 179
FNMA and FHLMC certificates |  | 220,913 |  |  | 6,669 |  |  | 214,244
Obligations of US Government and sponsored agencies |  | 10,691 |  |  | 42 |  |  | 10,649
Other debt securities |  | 20,000 |  |  | 320 |  |  | 19,680
| $ | 558,062 |  | $ | 20,714 |  | $ | 537,348

13

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The valuations of the investment securities are performed 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 income with the remaining noncredit-related component recognized in other comprehensive income. 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 in an unrealized loss position at March 31, 2014 ($404.4 million or 95%) 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 investments in an unrealized loss position at March 31, 2014 ($22.4 million or 5%) consist of obligations issued or collateralized by the government of Puerto Rico and its political subdivisions or instrumentalities. The recent decline in the market value of these securities is mainly attributed to an increase in volatility as a result of changes in market conditions that reflect the significant economic and fiscal challenges that Puerto Rico is facing, including a protracted economic recession, sizable government debt-service obligations and structural budget deficits, high unemployment and a shrinking population. As of March 31, 2014, the Company analyzed these investments under a plausible set of scenarios that included the possibility of a further downgrade in the credit ratings of the Commonwealth, and also considered numerous factors that, in the Company’s view, support the ability of the Commonwealth to continue servicing its debt obligations. Such factors include (i) the collateralization and sources of repayment for such debt obligations; (ii) the government’s efforts to increase revenues and reduce expenses to tackle its recurrent budget deficits; (iii) the Commonwealth’s constitutional framework that provides that “public debt” (e.g., general obligation bonds such as the $98.7 million principal amount Puerto Rico government bond owned by the Company, and repaid by the issuer on March 1, 2014) constitutes a first claim on available Commonwealth resources; and (iv) the Commonwealth’s compliance and commitment to its contractual debt obligations. In addition, the Company believes it is probable that it will collect all amounts due according to the contractual terms of its Puerto Rico government bonds. Based on these factors, the Company expects that such bonds will be repaid in full when due, and given that the Company does not have the intent to sell any such bonds in an unrealized loss position, the Company does not consider them to be other-than-temporarily impaired as of March 31, 2014.

14

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 4 - LOANS

The Company’s loan portfolio is composed of covered loans and non-covered loans. The Company presents loans subject to the loss sharing agreements as “covered loans” in the tables below, and loans that are not subject to FDIC loss sharing agreements as “non-covered loans.” The risks of the FDIC-assisted Eurobank acquisition acquired loans are different from those loans not covered under the FDIC loss sharing agreements because of the loss protection provided by the FDIC. Also, loans acquired in the BBVAPR Acquisition are included as non-covered loans in the unaudited consolidated statements of financial condition. Non-covered loans are further segregated between originated and other loans, acquired loans accounted for under ASC 310-20 (loans with revolving feature and/or acquired at a premium), and acquired loans accounted for under ASC 310-30 (loans acquired with deteriorated credit quality, including those by analogy).

The composition of the Company’s loan portfolio at March 31, 2014 and December 31, 2013 was as follows:

| March 31, |  | December 31,
| 2014 |  | 2013
| (In thousands)
Loans not covered under shared-loss agreements with FDIC: |  |  |  |  |
Originated and other loans and leases held for investment: |  |  |  |  |
Mortgage | $ | 782,150 |  | $ | 766,265
Commercial |  | 1,170,145 |  |  | 1,127,657
Consumer |  | 142,492 |  |  | 127,744
Auto and leasing |  | 447,940 |  |  | 379,874
|  | 2,542,727 |  |  | 2,401,540
Acquired loans: |  |  |  |  |
Accounted for under ASC 310-20 (Loans with revolving feature and/or |  |  |  |  |
acquired at a premium) |  |  |  |  |
Commercial |  | 71,577 |  |  | 77,681
Consumer |  | 52,049 |  |  | 56,174
Auto |  | 268,865 |  |  | 301,584
|  | 392,491 |  |  | 435,439
Accounted for under ASC 310-30 (Loans acquired with deteriorated |  |  |  |  |
credit quality, including those by analogy) |  |  |  |  |
Mortgage |  | 703,454 |  |  | 717,904
Commercial |  | 532,695 |  |  | 545,117
Construction |  | 122,693 |  |  | 126,427
Consumer |  | 53,310 |  |  | 63,620
Auto |  | 341,889 |  |  | 379,145
|  | 1,754,041 |  |  | 1,832,213
|  | 4,689,259 |  |  | 4,669,192
Deferred loan cost , net |  | 2,318 |  |  | 1,035
Loans receivable |  | 4,691,577 |  |  | 4,670,227
Allowance for loan and lease losses on non-covered loans |  | (56,183) |  |  | (54,298)
Loans receivable, net |  | 4,635,394 |  |  | 4,615,929
Mortgage loans held-for-sale |  | 19,355 |  |  | 46,529
Total loans not covered under shared-loss agreements with FDIC, net |  | 4,654,749 |  |  | 4,662,458
Loans covered under shared-loss agreements with FDIC: |  |  |  |  |
Loans secured by 1-4 family residential properties |  | 124,239 |  |  | 121,748
Construction and development secured by 1-4 family residential properties |  | 18,254 |  |  | 17,304
Commercial and other construction |  | 253,804 |  |  | 264,249
Consumer |  | 5,769 |  |  | 6,119
Leasing |  | 197 |  |  | 270
Total loans covered under shared-loss agreements with FDIC |  | 402,263 |  |  | 409,690
Allowance for loan and lease losses on covered loans |  | (54,398) |  |  | (52,729)
Total loans covered under shared-loss agreements with FDIC, net |  | 347,865 |  |  | 356,961
Total loans, net | $ | 5,002,614 |  | $ | 5,019,419

During the quarter ended March 31, 2014, the Company reclassified $23.5 million in mortgage loans held-for-sale to held-for-investment.

15

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Non-covered Loans

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 as of March 31, 2014 and December 31, 2013 by class of loans. Mortgage loans past due included 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, 2014
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Loans 90+
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Days Past
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Due and
| 30-59 Days |  | 60-89 Days |  | 90+ Days |  | Total Past |  |  |  |  |  | Still
| Past Due |  | Past Due |  | Past Due |  | Due |  | Current |  | Total Loans |  | Accruing
| (In thousands) |  |  |
Mortgage |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Traditional (by origination year): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Up to the year 2002 | $ | 5,330 |  | $ | 2,620 |  | $ | 2,877 |  | $ | 10,827 |  | $ | 61,269 |  | $ | 72,096 |  | $ | 91
Years 2003 and 2004 |  | 5,494 |  |  | 2,445 |  |  | 2,342 |  |  | 10,281 |  |  | 53,234 |  |  | 63,515 |  |  | -
Year 2005 |  | 6,620 |  |  | 2,288 |  |  | 6,289 |  |  | 15,197 |  |  | 72,621 |  |  | 87,818 |  |  | -
Year 2006 |  | 10,151 |  |  | 4,376 |  |  | 4,474 |  |  | 19,001 |  |  | 97,903 |  |  | 116,904 |  |  | -
Years 2007, 2008 and 2009 |  | 3,807 |  |  | 2,025 |  |  | 4,850 |  |  | 10,682 |  |  | 87,158 |  |  | 97,840 |  |  | -
Years 2010, 2011, 2012, 2013 and 2014 |  | 3,890 |  |  | 1,122 |  |  | 4,939 |  |  | 9,951 |  |  | 172,216 |  |  | 182,167 |  |  | 167
|  | 35,292 |  |  | 14,876 |  |  | 25,771 |  |  | 75,939 |  |  | 544,401 |  |  | 620,340 |  |  | 258
Non-traditional |  | 1,744 |  |  | 470 |  |  | 2,425 |  |  | 4,639 |  |  | 35,151 |  |  | 39,790 |  |  | -
Loss mitigation program |  | 8,149 |  |  | 6,485 |  |  | 12,559 |  |  | 27,193 |  |  | 58,812 |  |  | 86,005 |  |  | 2,254
|  | 45,185 |  |  | 21,831 |  |  | 40,755 |  |  | 107,771 |  |  | 638,364 |  |  | 746,135 |  |  | 2,512
Home equity secured personal loans |  | - |  |  | - |  |  | 138 |  |  | 138 |  |  | 595 |  |  | 733 |  |  | -
GNMA's buy-back option program |  | - |  |  | - |  |  | 35,282 |  |  | 35,282 |  |  | - |  |  | 35,282 |  |  | -
|  | 45,185 |  |  | 21,831 |  |  | 76,175 |  |  | 143,191 |  |  | 638,959 |  |  | 782,150 |  |  | 2,512
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate |  | - |  |  | - |  |  | - |  |  | - |  |  | 62,935 |  |  | 62,935 |  |  | -
Institutional |  | - |  |  | - |  |  | - |  |  | - |  |  | 9,833 |  |  | 9,833 |  |  | -
Middle market |  | - |  |  | - |  |  | 1,531 |  |  | 1,531 |  |  | 168,222 |  |  | 169,753 |  |  | -
Retail |  | 1,241 |  |  | 277 |  |  | 4,780 |  |  | 6,298 |  |  | 150,396 |  |  | 156,694 |  |  | -
Floor plan |  | - |  |  | - |  |  | - |  |  | - |  |  | 1,699 |  |  | 1,699 |  |  | -
Real estate |  | - |  |  | - |  |  | - |  |  | - |  |  | 11,837 |  |  | 11,837 |  |  | -
|  | 1,241 |  |  | 277 |  |  | 6,311 |  |  | 7,829 |  |  | 404,922 |  |  | 412,751 |  |  | -
Other commercial and industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate |  | - |  |  | - |  |  | - |  |  | - |  |  | 28,475 |  |  | 28,475 |  |  | -
Institutional |  | - |  |  | - |  |  | - |  |  | - |  |  | 553,249 |  |  | 553,249 |  |  | -
Middle market |  | - |  |  | - |  |  | 513 |  |  | 513 |  |  | 82,420 |  |  | 82,933 |  |  | -
Retail |  | 609 |  |  | 292 |  |  | 1,622 |  |  | 2,523 |  |  | 64,532 |  |  | 67,055 |  |  | -
Floor plan |  | - |  |  | - |  |  | - |  |  | - |  |  | 25,682 |  |  | 25,682 |  |  | -
|  | 609 |  |  | 292 |  |  | 2,135 |  |  | 3,036 |  |  | 754,358 |  |  | 757,394 |  |  | -
|  | 1,850 |  |  | 569 |  |  | 8,446 |  |  | 10,865 |  |  | 1,159,280 |  |  | 1,170,145 |  |  | -

16

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

| March 31, 2014
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Loans 90+
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Days Past
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Due and
| 30-59 Days |  | 60-89 Days |  | 90+ Days |  | Total Past |  |  |  |  |  | Still
| Past Due |  | Past Due |  | Past Due |  | Due |  | Current |  | Total Loans |  | Accruing
| (In thousands) |  |  |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit cards |  | 263 |  |  | 171 |  |  | 354 |  |  | 788 |  |  | 14,702 |  |  | 15,490 |  |  | -
Overdrafts |  | 28 |  |  | 11 |  |  | 4 |  |  | 43 |  |  | 288 |  |  | 331 |  |  | -
Personal lines of credit |  | 60 |  |  | 99 |  |  | 57 |  |  | 216 |  |  | 1,718 |  |  | 1,934 |  |  | -
Personal loans |  | 1,418 |  |  | 524 |  |  | 248 |  |  | 2,190 |  |  | 105,847 |  |  | 108,037 |  |  | -
Cash collateral personal loans |  | 375 |  |  | 46 |  |  | 16 |  |  | 437 |  |  | 16,263 |  |  | 16,700 |  |  | -
|  | 2,144 |  |  | 851 |  |  | 679 |  |  | 3,674 |  |  | 138,818 |  |  | 142,492 |  |  | -
Auto and leasing |  | 33,788 |  |  | 8,559 |  |  | 5,872 |  |  | 48,219 |  |  | 399,721 |  |  | 447,940 |  |  | -
Total | $ | 82,967 |  | $ | 31,810 |  | $ | 91,172 |  | $ | 205,949 |  | $ | 2,336,778 |  | $ | 2,542,727 |  | $ | 2,512

17

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

| December 31, 2013
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Loans 90+
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Days Past
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Due and
| 30-59 Days |  | 60-89 Days |  | 90+ Days |  | Total Past |  |  |  |  |  | Still
| Past Due |  | Past Due |  | Past Due |  | Due |  | Current |  | Total Loans |  | Accruing
| (In thousands) |  |  |
Mortgage |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Traditional (by origination year): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Up to the year 2002 | $ | 6,697 |  | $ | 1,635 |  | $ | 3,408 |  | $ | 11,740 |  | $ | 64,772 |  | $ | 76,512 |  | $ | 79
Years 2003 and 2004 |  | 4,722 |  |  | 2,163 |  |  | 1,845 |  |  | 8,730 |  |  | 56,387 |  |  | 65,117 |  |  | -
Year 2005 |  | 8,527 |  |  | 2,119 |  |  | 4,808 |  |  | 15,454 |  |  | 74,087 |  |  | 89,541 |  |  | -
Year 2006 |  | 12,055 |  |  | 4,312 |  |  | 4,418 |  |  | 20,785 |  |  | 99,537 |  |  | 120,322 |  |  | -
Years 2007, 2008 and 2009 |  | 3,464 |  |  | 1,104 |  |  | 4,663 |  |  | 9,231 |  |  | 91,919 |  |  | 101,150 |  |  | 152
Years 2010, 2011, 2012 and 2013 |  | 3,923 |  |  | 1,609 |  |  | 4,453 |  |  | 9,985 |  |  | 139,561 |  |  | 149,546 |  |  | 459
|  | 39,388 |  |  | 12,942 |  |  | 23,595 |  |  | 75,925 |  |  | 526,263 |  |  | 602,188 |  |  | 690
Non-traditional |  | 3,217 |  |  | 1,162 |  |  | 2,311 |  |  | 6,690 |  |  | 35,412 |  |  | 42,102 |  |  | -
Loss mitigation program |  | 9,759 |  |  | 5,560 |  |  | 13,191 |  |  | 28,510 |  |  | 57,808 |  |  | 86,318 |  |  | 2,185
|  | 52,364 |  |  | 19,664 |  |  | 39,097 |  |  | 111,125 |  |  | 619,483 |  |  | 730,608 |  |  | 2,875
Home equity secured personal loans |  | - |  |  | - |  |  | 138 |  |  | 138 |  |  | 598 |  |  | 736 |  |  | -
GNMA's buy-back option program |  | - |  |  | - |  |  | 34,921 |  |  | 34,921 |  |  | - |  |  | 34,921 |  |  | -
|  | 52,364 |  |  | 19,664 |  |  | 74,156 |  |  | 146,184 |  |  | 620,081 |  |  | 766,265 |  |  | 2,875
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate |  | - |  |  | - |  |  | - |  |  | - |  |  | 54,796 |  |  | 54,796 |  |  | -
Institutional |  | - |  |  | - |  |  | - |  |  | - |  |  | 4,050 |  |  | 4,050 |  |  | -
Middle market |  | 1,356 |  |  | - |  |  | 10,294 |  |  | 11,650 |  |  | 149,933 |  |  | 161,583 |  |  | -
Retail |  | 4,253 |  |  | 1,015 |  |  | 3,190 |  |  | 8,458 |  |  | 158,184 |  |  | 166,642 |  |  | -
Floor plan |  | - |  |  | - |  |  | - |  |  | - |  |  | 1,835 |  |  | 1,835 |  |  | -
Real estate |  | - |  |  | - |  |  | - |  |  | - |  |  | 11,655 |  |  | 11,655 |  |  | -
|  | 5,609 |  |  | 1,015 |  |  | 13,484 |  |  | 20,108 |  |  | 380,453 |  |  | 400,561 |  |  | -
Other commercial and industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate |  | 236 |  |  | - |  |  | - |  |  | 236 |  |  | 32,362 |  |  | 32,598 |  |  | -
Institutional |  | - |  |  | - |  |  | - |  |  | - |  |  | 536,445 |  |  | 536,445 |  |  | -
Middle market |  | - |  |  | 299 |  |  | 1,134 |  |  | 1,433 |  |  | 57,464 |  |  | 58,897 |  |  | -
Retail |  | 1,830 |  |  | 552 |  |  | 539 |  |  | 2,921 |  |  | 58,589 |  |  | 61,510 |  |  | -
Floor plan |  | 39 |  |  | - |  |  | - |  |  | 39 |  |  | 37,607 |  |  | 37,646 |  |  | -
|  | 2,105 |  |  | 851 |  |  | 1,673 |  |  | 4,629 |  |  | 722,467 |  |  | 727,096 |  |  | -
|  | 7,714 |  |  | 1,866 |  |  | 15,157 |  |  | 24,737 |  |  | 1,102,920 |  |  | 1,127,657 |  |  | -

18

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

| December 31, 2013
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Loans 90+
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Days Past
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Due and
| 30-59 Days |  | 60-89 Days |  | 90+ Days |  | Total Past |  |  |  |  |  | Still
| Past Due |  | Past Due |  | Past Due |  | Due |  | Current |  | Total Loans |  | Accruing
| (In thousands) |  |  |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit cards |  | 287 |  |  | 168 |  |  | 232 |  |  | 687 |  |  | 14,554 |  |  | 15,241 |  |  | -
Overdrafts |  | 46 |  |  | 4 |  |  | - |  |  | 50 |  |  | 322 |  |  | 372 |  |  | -
Personal lines of credit |  | 33 |  |  | 38 |  |  | 66 |  |  | 137 |  |  | 1,844 |  |  | 1,981 |  |  | -
Personal loans |  | 1,324 |  |  | 399 |  |  | 352 |  |  | 2,075 |  |  | 92,485 |  |  | 94,560 |  |  | -
Cash collateral personal loans |  | 324 |  |  | 43 |  |  | - |  |  | 367 |  |  | 15,223 |  |  | 15,590 |  |  | -
|  | 2,014 |  |  | 652 |  |  | 650 |  |  | 3,316 |  |  | 124,428 |  |  | 127,744 |  |  | -
Auto and leasing |  | 25,531 |  |  | 9,437 |  |  | 5,089 |  |  | 40,057 |  |  | 339,817 |  |  | 379,874 |  |  | -
Total | $ | 87,623 |  | $ | 31,619 |  | $ | 95,052 |  | $ | 214,294 |  | $ | 2,187,246 |  | $ | 2,401,540 |  | $ | 2,875

At March 31, 2014, the increase in delinquencies in the consumer and the auto and leasing portfolios compared to December 31, 2013 is mainly attributed to the fact that non-performing loans of acquired non-covered loan portfolio were accounted for under ASC 310-30. At March 31, 2014 such portfolios are increasing as new originations are ramping up the balances outstanding. More than a year from the acquisition, those portfolios are beginning to reflect normal delinquency levels as seasoned portfolios.

At March 31, 2014, the Company had $539.9 million in loans granted to the Puerto Rico government, including its instrumentalities, public corporations and municipalities as part of the institutional commercial loan segment. This entire amount was current at March 31, 2014.

19

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Acquired 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 as part of the non-covered portfolio 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. Loans acquired in the non-covered portfolio 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 table presents the aging of the recorded investment in gross acquired loans accounted for under ASC 310-20 as of March 31, 2014 and December 31, 2013, by class of loans:

| March 31, 2014
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Loans 90+
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Days Past
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Due and
| 30-59 Days |  | 60-89 Days |  | 90+ Days |  | Total Past |  |  |  |  |  | Still
| Past Due |  | Past Due |  | Past Due |  | Due |  | Current |  | Total Loans |  | Accruing
| (In thousands) |  |  |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial secured by real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate | $ | - |  | $ | - |  | $ | - |  | $ | - |  | $ | 11,079 |  | $ | 11,079 |  | $ | -
Retail |  | 47 |  |  | - |  |  | 603 |  |  | 650 |  |  | 3,651 |  |  | 4,301 |  |  | -
Floor plan |  | - |  |  | - |  |  | 101 |  |  | 101 |  |  | 2,651 |  |  | 2,752 |  |  | -
|  | 47 |  |  | - |  |  | 704 |  |  | 751 |  |  | 17,381 |  |  | 18,132 |  |  | -
Other commercial and industrial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate |  | 14 |  |  | - |  |  | 82 |  |  | 96 |  |  | 2,851 |  |  | 2,947 |  |  | -
Institutional |  | - |  |  | - |  |  | - |  |  | - |  |  | 221 |  |  | 221 |  |  | -
Retail |  | 645 |  |  | 128 |  |  | 716 |  |  | 1,489 |  |  | 15,727 |  |  | 17,216 |  |  | -
Floor plan |  | 84 |  |  | - |  |  | 126 |  |  | 210 |  |  | 32,851 |  |  | 33,061 |  |  | -
|  | 743 |  |  | 128 |  |  | 924 |  |  | 1,795 |  |  | 51,650 |  |  | 53,445 |  |  | -
|  | 790 |  |  | 128 |  |  | 1,628 |  |  | 2,546 |  |  | 69,031 |  |  | 71,577 |  |  | -
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit cards |  | 1,413 |  |  | 781 |  |  | 2,078 |  |  | 4,272 |  |  | 44,109 |  |  | 48,381 |  |  | -
Personal loans |  | 105 |  |  | 83 |  |  | 57 |  |  | 245 |  |  | 3,423 |  |  | 3,668 |  |  | -
|  | 1,518 |  |  | 864 |  |  | 2,135 |  |  | 4,517 |  |  | 47,532 |  |  | 52,049 |  |  | -
Auto |  | 13,161 |  |  | 3,522 |  |  | 1,342 |  |  | 18,025 |  |  | 250,840 |  |  | 268,865 |  |  | -
Total | $ | 15,469 |  | $ | 4,514 |  | $ | 5,105 |  | $ | 25,088 |  | $ | 367,403 |  | $ | 392,491 |  | $ | -

20

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

| December 31, 2013
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Loans 90+
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Days Past
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Due and
| 30-59 Days |  | 60-89 Days |  | 90+ Days |  | Total Past |  |  |  |  |  | Still
| Past Due |  | Past Due |  | Past Due |  | Due |  | Current |  | Total Loans |  | Accruing
| (In thousands) |  |  |
Commercial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial secured by real estate |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate | $ | - |  | $ | - |  | $ | - |  | $ | - |  | $ | 10,166 |  | $ | 10,166 |  | $ | -
Retail |  | 431 |  |  | 331 |  |  | 868 |  |  | 1,630 |  |  | 4,140 |  |  | 5,770 |  |  | -
Floor plan |  | - |  |  | - |  |  | 101 |  |  | 101 |  |  | 2,576 |  |  | 2,677 |  |  | -
|  | 431 |  |  | 331 |  |  | 969 |  |  | 1,731 |  |  | 16,882 |  |  | 18,613 |  |  | -
Other commercial and industrial |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate |  | 14 |  |  | 83 |  |  | - |  |  | 97 |  |  | 9,696 |  |  | 9,793 |  |  | -
Retail |  | 1,717 |  |  | 1,418 |  |  | 659 |  |  | 3,794 |  |  | 23,544 |  |  | 27,338 |  |  | -
Floor plan |  | 35 |  |  | 193 |  |  | 18 |  |  | 246 |  |  | 21,691 |  |  | 21,937 |  |  | -
|  | 1,766 |  |  | 1,694 |  |  | 677 |  |  | 4,137 |  |  | 54,931 |  |  | 59,068 |  |  | -
|  | 2,197 |  |  | 2,025 |  |  | 1,646 |  |  | 5,868 |  |  | 71,813 |  |  | 77,681 |  |  | -
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit cards |  | 2,217 |  |  | 1,200 |  |  | 2,068 |  |  | 5,485 |  |  | 46,714 |  |  | 52,199 |  |  | -
Personal loans |  | 196 |  |  | 7 |  |  | 91 |  |  | 294 |  |  | 3,681 |  |  | 3,975 |  |  | -
|  | 2,413 |  |  | 1,207 |  |  | 2,159 |  |  | 5,779 |  |  | 50,395 |  |  | 56,174 |  |  | -
Auto |  | 12,534 |  |  | 3,616 |  |  | 1,608 |  |  | 17,758 |  |  | 283,826 |  |  | 301,584 |  |  | -
Total | $ | 17,144 |  | $ | 6,848 |  | $ | 5,413 |  | $ | 29,405 |  | $ | 406,034 |  | $ | 435,439 |  | $ | -

21

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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

Loans acquired as part of the non-covered portfolio, 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 non-covered loans acquired with deteriorated credit quality, including those accounted under ASC 310-30 by analogy, in the statements of financial condition at March 31, 2014 and December 31, 2013 is as follows:

|  | March 31, |  | December 31,
|  | 2014 |  | 2013
|  | (In thousands)
Contractual required payments receivable |  | $ 2,799,336 |  | $ 2,929,353
Less: Non-accretable discount |  | 563,294 |  | 579,587
Cash expected to be collected |  | 2,236,042 |  | 2,349,766
Less: Accretable yield |  | 482,001 |  | 517,553
Carrying amount |  | $ 1,754,041 |  | $ 1,832,213

At March 31, 2014 and December 31, 2013, the Company had $196.1 million and $180.5 million, respectively, in loans granted to the Puerto Rico government, including its instrumentalities, public corporations and municipalities as part of its non-covered acquired loans accounted for under ASC 310-30.

The following tables describe the accretable yield and non-accretable discount activity of acquired loans accounted for under ASC 310-30 for the quarters ended March 31, 2014 and 2013, excluding covered loans:

| Quarter Ended March 31,
| 2014 |  | 2013
Accretable Yield Activity |  |  |  |  |
Balance at beginning of period | $ | 517,553 |  | $ | 655,833
Accretion |  | (40,269) |  |  | (47,668)
Transfer from non-accretable discount |  | 4,717 |  |  | -
Balance at end of period | $ | 482,001 |  | $ | 608,165
| Quarter Ended March 31,
| 2014 |  | 2013
Non-Accretable Discount Activity |  |  |  |  |
Balance at beginning of period | $ | 579,587 |  | $ | 714,462
Principal losses |  | (11,576) |  |  | (8,746)
Transfer to accretable yield |  | (4,717) |  |  | -
Balance at end of period | $ | 563,294 |  | $ | 705,716

22

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Covered Loans

The carrying amount of covered loans at March 31, 2014 and December 31, 2013 is as follows:

| March 31, |  | December 31,
| 2014 |  | 2013
| (In thousands)
Contractual required payments receivable | $ | 657,353 |  | $ | 702,126
Less: Non-accretable discount |  | 107,323 |  |  | 129,477
Cash expected to be collected |  | 550,030 |  |  | 572,649
Less: Accretable yield |  | 147,767 |  |  | 162,959
Carrying amount, gross |  | 402,263 |  |  | 409,690
Less: Allowance for covered loan and lease losses |  | 54,398 |  |  | 52,729
Carrying amount, net | $ | 347,865 |  | $ | 356,961

The following tables describe the accretable yield and non-accretable discount activity of covered loans for the quarters ended March 31, 2014 and 2013:

| Quarter Ended March 31,
| 2014 |  | 2013
| (In thousands)
Accretable yield activity |  |  |  |  |
Balance at beginning of period | $ | 162,959 |  | $ | 188,008
Accretion |  | (23,388) |  |  | (20,229)
Transfer from non-accretable discount |  | 8,196 |  |  | 6,328
Balance at end of period | $ | 147,767 |  | $ | 174,107
| Quarter Ended March 31,
| 2014 |  | 2013
| (In thousands)
Non-accretable discount activity |  |  |  |  |
Balance at beginning of period | $ | 129,477 |  | $ | 237,555
Principal losses |  | (13,958) |  |  | (16,991)
Transfer to accretable yield |  | (8,196) |  |  | (6,328)
Balance at end of period | $ | 107,323 |  | $ | 214,236

23

OFG BANCORP

NOTES TO UNAUDITED 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, 2014 and December 31, 2013:

| March 31, |  | December 31,
| 2014 |  | 2013
| (In thousands)
Originated and other loans and leases held for investment |  |  |  |  |
Mortgage |  |  |  |  |
Traditional (by origination year): |  |  |  |  |
Up to the year 2002 | $ | 2,884 |  | $ | 3,428
Years 2003 and 2004 |  | 2,359 |  |  | 1,845
Year 2005 |  | 6,667 |  |  | 4,922
Year 2006 |  | 4,555 |  |  | 4,418
Years 2007, 2008 and 2009 |  | 4,943 |  |  | 4,511
Years 2010, 2011, 2012, 2013 and 2014 |  | 8,342 |  |  | 7,818
|  | 29,750 |  |  | 26,942
Non-traditional |  | 2,425 |  |  | 2,311
Loss mitigation program |  | 16,903 |  |  | 18,792
|  | 49,078 |  |  | 48,045
Home equity secured personal loans |  | 138 |  |  | 138
|  | 49,216 |  |  | 48,183
Commercial |  |  |  |  |
Commercial secured by real estate |  |  |  |  |
Middle market |  | 11,596 |  |  | 11,895
Retail |  | 8,760 |  |  | 7,208
|  | 20,356 |  |  | 19,103
Other commercial and industrial |  |  |  |  |
Middle market |  | 513 |  |  | 1,134
Retail |  | 2,923 |  |  | 2,485
Floor plan |  | - |  |  | 108
|  | 3,436 |  |  | 3,727
|  | 23,792 |  |  | 22,830
Consumer |  |  |  |  |
Credit cards |  | 354 |  |  | 232
Overdrafts |  | 4 |  |  | -
Personal lines of credit |  | 161 |  |  | 84
Personal loans |  | 547 |  |  | 485
Cash collateral personal loans |  | 18 |  |  | 4
|  | 1,084 |  |  | 805
Auto and leasing |  | 6,047 |  |  | 5,089
| $ | 80,139 |  | $ | 76,907

24

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

| March 31, |  | December 31,
| 2014 |  | 2013
| (In thousands)
Acquired loans accounted under ASC 310-20 |  |  |  |  |
Commercial |  |  |  |  |
Commercial secured by real estate |  |  |  |  |
Retail | $ | 688 |  | $ | 956
Floor plan |  | 101 |  |  | 101
|  | 789 |  |  | 1,057
Other commercial and industrial |  |  |  |  |
Corporate |  | 96 |  |  | 97
Retail |  | 851 |  |  | 1,371
Floor plan |  | 126 |  |  | 18
|  | 1,073 |  |  | 1,486
|  | 1,862 |  |  | 2,543
Consumer |  |  |  |  |
Credit cards |  | 2,076 |  |  | 2,068
Personal loans |  | 58 |  |  | 151
|  | 2,134 |  |  | 2,219
Auto |  | 1,515 |  |  | 1,608
|  | 5,511 |  |  | 6,370
Total non-accrual loans | $ | 85,650 |  | $ | 83,277

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.

Effective April 24, 2013, delinquent residential mortgage loans insured or guaranteed under applicable FHA and VA programs are placed in non-accrual when they become 18 months or more past due, since they are insured loans. Before that date, they were placed in non-accrual when they became 90 days or more past due.

At March 31, 2014 and December 31, 2013, loans whose terms have been extended and which are classified as troubled-debt restructurings that are not included in non-accrual loans amounted to $70.8 million and $66.5 million, respectively, as they are performing under their new terms.

25

OFG BANCORP

NOTES TO UNAUDITED 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, 2014 and December 31, 2013 was as follows:

| March 31, |  | December 31,
| 2014 |  | 2013
| (In thousands)
Allowance for loans and lease losses on non-covered loans: |  |  |  |  |
Originated and other loans and leases held for investment: |  |  |  |  |
Mortgage | $ | 19,511 |  | $ | 19,937
Commercial |  | 13,994 |  |  | 14,897
Consumer |  | 7,135 |  |  | 6,006
Auto and leasing |  | 8,731 |  |  | 7,866
Unallocated |  | 136 |  |  | 375
|  | 49,507 |  |  | 49,081
Acquired loans: |  |  |  |  |
Accounted for under ASC 310-20 (Loans with revolving feature and/or |  |  |  |  |
acquired at a premium) |  |  |  |  |
Commercial |  | 867 |  |  | 926
Consumer |  | 504 |  |  | -
Auto |  | 2,247 |  |  | 1,428
|  | 3,618 |  |  | 2,354
Accounted for under ASC 310-30 (Loans acquired with deteriorated |  |  |  |  |
credit quality, including those by analogy) |  |  |  |  |
Commercial |  | 2,653 |  |  | 1,713
Consumer |  | 405 |  |  | 418
Auto |  | - |  |  | 732
|  | 3,058 |  |  | 2,863
|  | 56,183 |  |  | 54,298
Allowance for loans and lease losses on covered loans: |  |  |  |  |
Loans secured by 1-4 family residential properties |  | 14,221 |  |  | 12,495
Commercial and other construction |  | 39,562 |  |  | 39,619
Consumer |  | 615 |  |  | 615
|  | 54,398 |  |  | 52,729
Total allowance for loan and lease losses | $ | 110,581 |  | $ | 107,027

Non-Covered Loans

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. As part of the Company’s continuous enhancement to the allowance for loan and lease losses methodology, during the quarter ended March 31, 2014, an assessment of the look-back period and historical loss factor was performed for auto and leasing and consumer loan portfolios based on the trends observed and their relation with the economic cycle as of the period ended March 31, 2014. As a result, the period was changed to 24 months from the previously determined 12 months. This change in the allowance for loan and lease losses’ look back period for the consumer and auto and leasing portfolios is considered a change in accounting estimate as per ASC 250-10 provisions, where adjustments should be made prospectively.

26

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Originated and Other Loans and Leases Held for Investment

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

| Quarter Ended March 31, 2014
|  |  |  |  |  |  |  |  |  | Auto and |  |  |  |  |  |
| Mortgage |  | Commercial |  | Consumer |  | Leasing |  | Unallocated |  | Total
| (In thousands)
Allowance for loan and lease losses for non-covered originated and other loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance at beginning of period | $ | 19,937 |  | $ | 14,897 |  | $ | 6,006 |  | $ | 7,866 |  | $ | 375 |  | $ | 49,081
Charge-offs |  | (1,214) |  |  | (419) |  |  | (838) |  |  | (4,645) |  |  | - |  |  | (7,116)
Recoveries |  | 148 |  |  | 98 |  |  | 147 |  |  | 1,524 |  |  | - |  |  | 1,917
Provision for non-covered originated and other loan and lease losses |  | 640 |  |  | (582) |  |  | 1,820 |  |  | 3,986 |  |  | (239) |  |  | 5,625
Balance at end of period | $ | 19,511 |  | $ | 13,994 |  | $ | 7,135 |  | $ | 8,731 |  | $ | 136 |  | $ | 49,507

| March 31, 2014
| Mortgage |  | Commercial |  | Consumer |  | Auto and Leasing |  | Unallocated |  | Total
| (In thousands)
Allowance for loan and lease losses on non-covered originated and other loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment | $ | 8,001 |  | $ | 1,704 |  | $ | - |  | $ | - |  | $ | - |  | $ | 9,705
Collectively evaluated for impairment |  | 11,510 |  |  | 12,290 |  |  | 7,135 |  |  | 8,731 |  |  | 136 |  |  | 39,802
Total ending allowance balance | $ | 19,511 |  | $ | 13,994 |  | $ | 7,135 |  | $ | 8,731 |  | $ | 136 |  | $ | 49,507
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment | $ | 87,744 |  | $ | 27,767 |  | $ | - |  | $ | - |  | $ | - |  | $ | 115,511
Collectively evaluated for impairment |  | 694,406 |  |  | 1,142,378 |  |  | 142,492 |  |  | 447,940 |  |  | - |  |  | 2,427,216
Total ending loan balance | $ | 782,150 |  | $ | 1,170,145 |  | $ | 142,492 |  | $ | 447,940 |  | $ | - |  | $ | 2,542,727

27

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

| Quarter Ended March 31, 2013
| Mortgage |  | Commercial |  | Consumer |  | Auto and Leasing |  | Unallocated |  | Total
| (In thousands)
Allowance for loan and lease losses for non-covered originated and other loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance at beginning of period | $ | 21,092 |  | $ | 17,072 |  | $ | 856 |  | $ | 533 |  | $ | 368 |  | $ | 39,921
Charge-offs |  | (2,588) |  |  | (557) |  |  | (246) |  |  | (91) |  |  | - |  |  | (3,482)
Recoveries |  | - |  |  | 28 |  |  | 65 |  |  | 7 |  |  | - |  |  | 100
Provision for (recapture of) non-covered originated and other loan and lease losses |  | 4,385 |  |  | (229) |  |  | 638 |  |  | 1,292 |  |  | (291) |  |  | 5,795
Balance at end of period | $ | 22,889 |  | $ | 16,314 |  | $ | 1,313 |  | $ | 1,741 |  | $ | 77 |  | $ | 42,334

| December 31, 2013
| Mortgage |  | Commercial |  | Consumer |  | Auto and Leasing |  | Unallocated |  | Total
| (In thousands)
Allowance for loan and lease losses for non-covered originated and other loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment | $ | 8,708 |  | $ | 1,431 |  | $ | - |  | $ | - |  | $ | - |  | $ | 10,139
Collectively evaluated for impairment |  | 11,229 |  |  | 13,466 |  |  | 6,006 |  |  | 7,866 |  |  | 375 |  |  | 38,942
Total ending allowance balance | $ | 19,937 |  | $ | 14,897 |  | $ | 6,006 |  | $ | 7,866 |  | $ | 375 |  | $ | 49,081
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment | $ | 84,494 |  | $ | 28,145 |  | $ | - |  | $ | - |  | $ | - |  | $ | 112,639
Collectively evaluated for impairment |  | 681,771 |  |  | 1,099,512 |  |  | 127,744 |  |  | 379,874 |  |  | - |  |  | 2,288,901
Total ending loans balance | $ | 766,265 |  | $ | 1,127,657 |  | $ | 127,744 |  | $ | 379,874 |  | $ | - |  | $ | 2,401,540

28

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Acquired 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 non-covered acquired loan portfolio, excluding loans accounted for under ASC 310-30, for the quarter ended March 31, 2014:

| Quarter Ended March 31, 2014
| Commercial |  | Consumer |  | Auto |  | Unallocated |  | Total
Allowance for loan and lease losses for non-covered acquired loans accounted for under ASC 310-20: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance at beginning of period | $ | 926 | $ 1 | $ | - |  | $ | 1,428 |  | $ | - |  | $ | 2,354
Charge-offs |  | (174) |  |  | (2,058) |  |  | (1,296) |  |  | - |  |  | (3,528)
Recoveries |  | - |  |  | 100 |  |  | 450 |  |  | - |  |  | 550
Provision for non-covered acquired loan and lease losses accounted for under ASC 310-20 |  | 115 |  |  | 2,462 |  |  | 1,665 |  |  | - |  |  | 4,242
Balance at end of period | $ | 867 |  | $ | 504 |  | $ | 2,247 |  | $ | - |  | $ | 3,618

| March 31, 2014
| Commercial |  | Consumer |  | Auto |  | Unallocated |  | Total
Allowance for loan and lease losses on non-covered acquired loans accounted for under ASC 310-20: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collectively evaluated for impairment |  | 867 |  |  | 504 |  |  | 2,247 |  |  | - |  |  | 3,618
Total ending allowance balance | $ | 867 |  | $ | 504 |  | $ | 2,247 |  | $ | - |  | $ | 3,618
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collectively evaluated for impairment |  | 71,577 |  |  | 52,049 |  |  | 268,865 |  |  | - |  |  | 392,491
Total ending loan balance | $ | 71,577 |  | $ | 52,049 |  | $ | 268,865 |  | $ | - |  | $ | 392,491

| Quarter Ended March 31, 2013
| Commercial |  | Consumer |  | Auto |  | Unallocated |  | Total
Allowance for loan and lease losses for non-covered acquired loans accounted for under ASC 310-20: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance at beginning of period | $ | - | $ 1 | $ | - |  | $ | - |  | $ | - |  | $ | -
Charge-offs |  | - |  |  | (1,456) |  |  | (1,715) |  |  | - |  |  | (3,171)
Recoveries |  | - |  |  | 207 |  |  | 1,230 |  |  | - |  |  | 1,437
Provision for non-covered acquired loan and lease losses accounted for under ASC 310-20 |  | 386 |  |  | 1,249 |  |  | 485 |  |  | - |  |  | 2,120
Balance at end of period | $ | 386 |  | $ | - |  | $ | - |  | $ | - |  | $ | 386

29

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

| December 31, 2013
| Commercial |  | Consumer |  | Auto |  | Unallocated |  | Total
Allowance for loan and lease losses on non-covered acquired loans accounted for under ASC 310-20: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collectively evaluated for impairment |  | 926 |  |  | - |  |  | 1,428 |  |  | - |  |  | 2,354
Total ending allowance balance | $ | 926 |  | $ | - |  | $ | 1,428 |  | $ | - |  | $ | 2,354
Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Collectively evaluated for impairment |  | 77,681 |  |  | 56,174 |  |  | 301,584 |  |  | - |  |  | 435,439
Total ending loan balance | $ | 77,681 |  | $ | 56,174 |  | $ | 301,584 |  | $ | - |  | $ | 435,439

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

The following tables present the activity in our allowance for loan losses and related recorded investment of the associated loans in our non-covered acquired loan portfolio accounted for under ASC 310-30, for the quarter ended March 31, 2014:

| Quarter Ended March 31, 2014
| Mortgage |  | Commercial |  | Construction |  | Consumer |  | Auto |  | Total
Allowance for loan and lease losses for non-covered loans accounted for under ASC 310-30: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance at beginning of period | $ | - | $ 1 | $ | 1,713 | $ 1 | $ | - | $ 1 | $ | 418 |  | $ | 732 |  | $ | 2,863
Provision for non-covered acquired loan and lease losses accounted for under ASC 310-30 |  | - |  |  | 940 |  |  | - |  |  | (13) |  |  | (732) |  |  | 195
Balance at end of period | $ | - |  | $ | 2,653 |  | $ | - |  | $ | 405 |  | $ | - |  | $ | 3,058

Non-covered loans acquired accounted for under ASC 310-30 were recognized at fair value as of December 18, 2012, which included the impact of expected credit losses and, therefore, no allowance for credit losses was recorded during the quarter ended March 31, 2013.

30

OFG BANCORP

NOTES TO UNAUDITED 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 was $27.8 million and $28.1 million at March 31, 2014 and December 31, 2013, respectively. The impaired 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 valuation allowance for impaired commercial loans amounted to approximately $1.4 million at March 31, 2014 and December 31, 2013. The total investment in impaired mortgage loans was $87.7 million and $84.5 million at March 31, 2014 and December 31, 2013, respectively. Impairment on mortgage loans assessed as troubled-debt restructurings was measured using the present value of cash flows. The valuation allowance for impaired mortgage loans amounted to approximately $8.0 million and $8.7 million at March 31, 2014 and December 31, 2013, respectively.

The Company’s recorded investment in commercial and mortgage loans that were individually evaluated for impairment, excluding loans accounted for under ASC 310-30, and the related allowance for loan and lease losses at March 31, 2014 and December 31, 2013 are as follows:

Originated and Other Loans and Leases Held for Investment

| March 31, 2014
| Unpaid |  | Recorded |  | Related |  |
| Principal |  | Investment |  | Allowance |  | Coverage
| (In thousands)
Impaired loans with specific allowance: |  |  |  |  |  |  |  |  |  |
Commercial | $ | 7,856 |  | $ | 6,686 |  | $ | 1,704 |  | 25%
Residential troubled-debt restructuring |  | 92,870 |  |  | 87,744 |  |  | 8,002 |  | 9%
Impaired loans with no specific allowance: |  |  |  |  |  |  |  |  |  |
Commercial |  | 26,744 |  |  | 21,081 |  |  | N/A |  | N/A
Total investment in impaired loans | $ | 127,470 |  | $ | 115,511 |  | $ | 9,706 |  | 8%

| December 31, 2013
| Unpaid |  | Recorded |  | Related |  |
| Principal |  | Investment |  | Allowance |  | Coverage
| (In thousands)
Impaired loans with specific allowance |  |  |  |  |  |  |  |  |  |
Commercial | $ | 6,600 |  | $ | 5,553 |  | $ | 1,431 |  | 26%
Residential troubled-debt restructuring |  | 89,539 |  |  | 84,494 |  |  | 8,708 |  | 10%
Impaired loans with no specific allowance |  |  |  |  |  |  |  |  |  |
Commercial |  | 27,914 |  |  | 22,592 |  |  | N/A |  | N/A
Total investment in impaired loans | $ | 124,053 |  | $ | 112,639 |  | $ | 10,139 |  | 9%

31

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Acquired Loans Accounted for under ASC-310-20 (Loans with revolving feature and/or acquired at a premium)
| March 31, 2014
| Unpaid |  | Recorded |  | Related |  |
| Principal |  | Investment |  | Allowance |  | Coverage
| (In thousands)
Impaired loans with no specific allowance |  |  |  |  |  |  |  |  |  |
Commercial |  | 208 |  |  | 208 |  |  | N/A |  | N/A
Total investment in impaired loans | $ | 208 |  | $ | 208 |  | $ | - |  | 0%
| December 31, 2013
| Unpaid |  | Recorded |  | Specific |  |
| Principal |  | Investment |  | Allowance |  | Coverage
| (In thousands)
Impaired loans with no specific allowance |  |  |  |  |  |  |  |  |  |
Commercial |  | 208 |  |  | 208 |  |  | N/A |  | N/A
Total investment in impaired loans | $ | 208 |  | $ | 208 |  | $ | - |  | 0%

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

The Company’s recorded investment in non-covered acquired loan pools accounted for under ASC 310-30 and their related allowance for non-covered loan and lease losses at March 31, 2014 and December 31, 2013 are as follows:

| March 31, 2014
| Unpaid |  | Recorded |  |  |  |
| Principal |  | Investment |  | Allowance |  | Coverage
| (In thousands)
Impaired non-covered loan pools: |  |  |  |  |  |  |  |  |  |
Mortgage | $ | 5,008 |  | $ | 4,510 |  | $ | 57 |  | 1%
Commercial |  | 89,496 |  |  | 78,742 |  |  | 879 |  | 1%
Construction |  | 46,256 |  |  | 40,397 |  |  | 1,773 |  | 4%
Consumer |  | 61,584 |  |  | 53,307 |  |  | 349 |  | 1%
Total investment in impaired non-covered loan pools | $ | 202,344 |  | $ | 176,956 |  | $ | 3,058 |  | 2%

| December 31, 2013
| Unpaid |  | Recorded |  |  |  |
| Principal |  | Investment |  | Allowance |  | Coverage
| (In thousands)
Impaired non-covered loan pools: |  |  |  |  |  |  |  |  |  |
Mortgage | $ | 5,183 |  | $ | 4,718 |  | $ | 57 |  | 1%
Commercial |  | 48,100 |  |  | 40,411 |  |  | 394 |  | 1%
Construction |  | 21,526 |  |  | 17,818 |  |  | 1,319 |  | 7%
Consumer |  | 73,043 |  |  | 63,606 |  |  | 361 |  | 1%
Auto |  | 379,236 |  |  | 377,316 |  |  | 732 |  | 0%
Total investment in impaired non-covered loan pools | $ | 527,088 |  | $ | 503,869 |  | $ | 2,863 |  | 1%

32

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents the interest recognized in commercial and mortgage loans that were individually evaluated for impairment, excluding loans accounted for under ASC 310-30, for the quarters ended March 31, 2014 and 2013:

| Quarter Ended March 31,
| 2014 |  | 2013
| Interest Income Recognized |  | Average Recorded Investment |  | Interest Income Recognized |  | Average Recorded Investment
| (In thousands)
Impaired loans with specific allowance |  |  |  |  |  |  |  |  |  |  |
Commercial | $ | 24 |  | $ | 6,259 |  | $ | 4 |  | $ | 15,472
Residential troubled-debt restructuring |  | 645 |  |  | 87,052 |  |  | 443 |  |  | 78,748
Impaired loans with no specific allowance |  |  |  |  |  |  |  |  |  |  |
Commercial |  | 78 |  |  | 21,629 |  |  | 293 |  |  | 30,360
Total interest income from impaired loans | $ | 747 |  | $ | 114,940 |  | $ | 740 |  | $ | 124,580

Modifications

The following table presents the troubled-debt restructurings during the quarters ended March 31, 2014 and 2013:

| Quarter Ended March 31, 2014
| 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 | 34 |  | $ | 4,009 |  | 6.43% |  | 347 |  | $ | 3,910 |  | 4.35% |  | 375
Consumer | 5 |  |  | 42 |  | 12.97% |  | 67 |  |  | 44 |  | 12.95% |  | 66
| Quarter Ended March 31, 2013
| 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 | 57 |  | $ | 7,518 |  | 6.28% |  | 331 |  | $ | 8,040 |  | 4.35% |  | 409

33

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents troubled-debt restructurings for which there was a payment default during the twelve-month period ended March 31, 2014 and 2013:

| Twelve-Month Period Ended March 31,
| 2014 |  | 2013
| Number of Contracts |  | Recorded Investment |  | Number of Contracts |  | Recorded Investment
| (Dollars in thousands)
Mortgage | 19 |  | $ | 2,592 |  | 32 |  | $ | 4,295
Commercial | - |  | $ | - |  | 1 |  | $ | 18
Consumer | 1 |  | $ | 11 |  | - |  | $ | -

Credit Quality Indicators

The Company categorizes non-covered originated 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:

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.

34

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of March 31, 2014 and December 31, 2013, and based on the most recent analysis performed, the risk category of gross non-covered originated and other loans and acquired loans accounted for under ASC 310-20 subject to risk rating by class of loans is as follows:

| March 31, 2014
| 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 | $ | 62,935 |  | $ | 62,935 |  | $ | - |  | $ | - |  | $ | - |  | $ | -
Institutional |  | 9,833 |  |  | 9,833 |  |  | - |  |  | - |  |  | - |  |  | -
Middle market |  | 169,753 |  |  | 141,537 |  |  | 16,619 |  |  | - |  |  | - |  |  | 11,597
Retail |  | 156,694 |  |  | 139,971 |  |  | 1,929 |  |  | 1,892 |  |  | - |  |  | 12,902
Floor plan |  | 1,699 |  |  | 1,699 |  |  | - |  |  | - |  |  | - |  |  | -
Real estate |  | 11,837 |  |  | 11,837 |  |  | - |  |  | - |  |  | - |  |  | -
|  | 412,751 |  |  | 367,812 |  |  | 18,548 |  |  | 1,892 |  |  | - |  |  | 24,499
Other commercial and industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate |  | 28,475 |  |  | 28,475 |  |  | - |  |  | - |  |  | - |  |  | -
Institutional |  | 553,249 |  |  | 553,249 |  |  | - |  |  | - |  |  | - |  |  | -
Middle market |  | 82,933 |  |  | 77,566 |  |  | 3,336 |  |  | 771 |  |  | - |  |  | 1,260
Retail |  | 67,055 |  |  | 63,366 |  |  | 119 |  |  | 1,562 |  |  | - |  |  | 2,008
Floor plan |  | 25,682 |  |  | 25,372 |  |  | 202 |  |  | 108 |  |  | - |  |  | -
|  | 757,394 |  |  | 748,028 |  |  | 3,657 |  |  | 2,441 |  |  | - |  |  | 3,268
Total |  | 1,170,145 |  |  | 1,115,840 |  |  | 22,205 |  |  | 4,333 |  |  | - |  |  | 27,767
Commercial - acquired loans (under ASC 310-20) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate |  | 11,079 |  |  | 11,079 |  |  | - |  |  | - |  |  | - |  |  | -
Retail |  | 4,301 |  |  | 3,490 |  |  | 245 |  |  | 566 |  |  | - |  |  | -
Floor plan |  | 2,752 |  |  | 2,651 |  |  | - |  |  | 101 |  |  | - |  |  | -
|  | 18,132 |  |  | 17,220 |  |  | 245 |  |  | 667 |  |  | - |  |  | -
Other commercial and industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate |  | 2,947 |  |  | 2,851 |  |  | - |  |  | 96 |  |  | - |  |  | -
Institutional |  | 221 |  |  | 221 |  |  | - |  |  | - |  |  | - |  |  | -
Retail |  | 17,216 |  |  | 16,460 |  |  | 100 |  |  | 656 |  |  | - |  |  | -
Floor plan |  | 33,061 |  |  | 32,998 |  |  | 63 |  |  | - |  |  | - |  |  | -
|  | 53,445 |  |  | 52,530 |  |  | 163 |  |  | 752 |  |  | - |  |  | -
Total |  | 71,577 |  |  | 69,750 |  |  | 408 |  |  | 1,419 |  |  | - |  |  | -
Total | $ | 1,241,722 |  | $ | 1,185,590 |  | $ | 22,613 |  | $ | 5,752 |  | $ | - |  | $ | 27,767

35

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

| December 31, 2013
| 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 | $ | 54,796 |  | $ | 54,796 |  | $ | - |  | $ | - |  | $ | - |  | $ | -
Institutional |  | 4,050 |  |  | 4,050 |  |  | - |  |  | - |  |  | - |  |  | -
Middle market |  | 161,583 |  |  | 133,061 |  |  | 16,627 |  |  | 118 |  |  | - |  |  | 11,777
Retail |  | 166,642 |  |  | 149,018 |  |  | 2,182 |  |  | 2,258 |  |  | - |  |  | 13,184
Floor plan |  | 1,835 |  |  | 1,835 |  |  | - |  |  | - |  |  | - |  |  | -
Real estate |  | 11,655 |  |  | 11,655 |  |  | - |  |  | - |  |  | - |  |  | -
|  | 400,561 |  |  | 354,415 |  |  | 18,809 |  |  | 2,376 |  |  | - |  |  | 24,961
Other commercial and industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate |  | 32,598 |  |  | 32,598 |  |  | - |  |  | - |  |  | - |  |  | -
Institutional |  | 536,445 |  |  | 536,445 |  |  | - |  |  | - |  |  | - |  |  | -
Middle market |  | 58,897 |  |  | 53,868 |  |  | 3,466 |  |  | 198 |  |  | - |  |  | 1,365
Retail |  | 61,510 |  |  | 58,742 |  |  | 257 |  |  | 691 |  |  | - |  |  | 1,820
Floor plan |  | 37,646 |  |  | 37,350 |  |  | 188 |  |  | 108 |  |  | - |  |  | -
|  | 727,096 |  |  | 719,003 |  |  | 3,911 |  |  | 997 |  |  | - |  |  | 3,185
Total |  | 1,127,657 |  |  | 1,073,418 |  |  | 22,720 |  |  | 3,373 |  |  | - |  |  | 28,146
Commercial - acquired loans (under ASC 310-20) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial secured by real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate |  | 10,166 |  |  | 10,166 |  |  | - |  |  | - |  |  | - |  |  | -
Retail |  | 5,770 |  |  | 4,378 |  |  | 443 |  |  | 949 |  |  | - |  |  | -
Floor plan |  | 2,677 |  |  | 2,576 |  |  | - |  |  | 101 |  |  | - |  |  | -
|  | 18,613 |  |  | 17,120 |  |  | 443 |  |  | 1,050 |  |  | - |  |  | -
Other commercial and industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Corporate |  | 9,793 |  |  | 9,696 |  |  | - |  |  | 97 |  |  | - |  |  | -
Retail |  | 27,338 |  |  | 26,044 |  |  | 150 |  |  | 1,144 |  |  | - |  |  | -
Floor plan |  | 21,937 |  |  | 21,769 |  |  | 168 |  |  | - |  |  | - |  |  | -
|  | 59,068 |  |  | 57,509 |  |  | 318 |  |  | 1,241 |  |  | - |  |  | -
Total |  | 77,681 |  |  | 74,629 |  |  | 761 |  |  | 2,291 |  |  | - |  |  | -
Total | $ | 1,205,338 |  | $ | 1,148,047 |  | $ | 23,481 |  | $ | 5,664 |  | $ | - |  | $ | 28,146

At March 31, 2014 and December 31, 2013, we had approximately $766.7 million and $763.4 million, respectively, of credit facilities granted to the Puerto Rico government, including its instrumentalities, public corporations and municipalities, of which $718.8 million and $696.0, respectively, were outstanding as of such dates. A substantial portion of our credit exposure to the government of Puerto Rico consists of collateralized loans or obligations that have a specific source of income or revenues identified for its repayment. Some of these obligations consist of senior and subordinated loans to public corporations that obtain revenues from rates charged for services, such as water and electric power utilities. Public corporations have varying degrees of independence from the central government and many receive appropriations or other payments from it. We also have loans to various municipalities for which the good faith, credit and unlimited taxing power of the applicable municipality has been pledged to their repayment. These municipalities are required by law to levy special property taxes in such amounts as shall be required for the payment of all their general obligation bonds and notes. Another portion of these loans consists of special obligations of various municipalities that are payable from the basic real and personal property taxes collected within such municipalities. The good faith and credit obligations of the municipalities have a first lien on the basic property taxes.

36

OFG BANCORP

NOTES TO UNAUDITED 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, 2014 and December 31, 2013, and based on the most recent analysis performed, the risk category of non-covered gross originated and other loans and acquired loans accounted for under ASC 310-20 not subject to risk rating by class of loans is as follows:

| March 31, 2014
| 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 | $ | 72,096 |  | $ | 61,268 |  | $ | 5,230 |  | $ | 2,621 |  | $ | 382 |  | $ | 1,037 |  | $ | 1,459 |  | $ | 99
Years 2003 and 2004 |  | 63,515 |  |  | 53,170 |  |  | 5,494 |  |  | 2,445 |  |  | 484 |  |  | 1,246 |  |  | 612 |  |  | 64
Year 2005 |  | 87,818 |  |  | 72,414 |  |  | 6,448 |  |  | 2,288 |  |  | 1,233 |  |  | 3,576 |  |  | 1,324 |  |  | 535
Year 2006 |  | 116,904 |  |  | 97,822 |  |  | 10,151 |  |  | 4,376 |  |  | 1,169 |  |  | 2,410 |  |  | 850 |  |  | 126
Years 2007, 2008 and 2009 |  | 97,840 |  |  | 87,065 |  |  | 3,807 |  |  | 2,025 |  |  | 223 |  |  | 3,619 |  |  | 875 |  |  | 226
Years 2010, 2011, 2012 2013 and 2014 |  | 182,167 |  |  | 164,134 |  |  | 2,126 |  |  | 721 |  |  | 1,070 |  |  | 1,004 |  |  | 1,064 |  |  | 12,048
|  | 620,340 |  |  | 535,873 |  |  | 33,256 |  |  | 14,476 |  |  | 4,561 |  |  | 12,892 |  |  | 6,184 |  |  | 13,098
Non-traditional |  | 39,790 |  |  | 35,078 |  |  | 1,744 |  |  | 470 |  |  | - |  |  | 1,439 |  |  | 986 |  |  | 73
Loss mitigation program |  | 86,005 |  |  | 8,366 |  |  | 1,001 |  |  | 171 |  |  | 219 |  |  | 779 |  |  | 896 |  |  | 74,573
|  | 746,135 |  |  | 579,317 |  |  | 36,001 |  |  | 15,117 |  |  | 4,780 |  |  | 15,110 |  |  | 8,066 |  |  | 87,744
Home equity secured personal loans |  | 733 |  |  | 595 |  |  | - |  |  | - | - |  | - |  |  | 126 |  |  | 12 |  |  | -
GNMA's buy-back option program |  | 35,282 |  |  | - |  |  | - |  |  | - | - |  | 5,529 |  |  | 16,742 |  |  | 13,011 |  |  | -
|  | 782,150 |  |  | 579,912 |  |  | 36,001 |  |  | 15,117 |  |  | 10,309 |  |  | 31,978 |  |  | 21,089 |  |  | 87,744
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit cards |  | 15,490 |  |  | 14,701 |  |  | 263 |  |  | 171 |  |  | 136 |  |  | 219 |  |  | - |  |  | -
Overdrafts |  | 331 |  |  | 289 |  |  | 28 |  |  | 11 |  |  | 1 |  |  | 2 |  |  | - |  |  | -
Unsecured personal lines of credit |  | 1,934 |  |  | 1,718 |  |  | 60 |  |  | 99 |  |  | 15 |  |  | 35 |  |  | 7 |  |  | -
Unsecured personal loans |  | 108,037 |  |  | 105,369 |  |  | 1,397 |  |  | 512 |  |  | 195 |  |  | 42 |  |  | 12 |  |  | 510
Cash collateral personal loans |  | 16,700 |  |  | 16,263 |  |  | 375 |  |  | 46 |  |  | 13 |  |  | 3 |  |  | - |  |  | -
|  | 142,492 |  |  | 138,340 |  |  | 2,123 |  |  | 839 |  |  | 360 |  |  | 301 |  |  | 19 |  |  | 510
Auto and Leasing |  | 447,940 |  |  | 399,721 |  |  | 33,788 |  |  | 8,559 |  |  | 3,461 |  |  | 2,411 |  |  | - |  |  | -
|  | 1,372,582 |  |  | 1,117,973 |  |  | 71,912 |  |  | 24,515 |  |  | 14,130 |  |  | 34,690 |  |  | 21,108 |  |  | 88,254
Acquired loans (accounted for under ASC 310-20) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit cards |  | 48,381 |  |  | 44,111 |  |  | 1,413 |  |  | 781 |  |  | 743 |  |  | 1,333 |  |  | - |  |  | -
Personal loans |  | 3,668 |  |  | 3,423 |  |  | 105 |  |  | 83 |  |  | 4 |  |  | 53 |  |  | - |  |  | -
|  | 52,049 |  |  | 47,534 |  |  | 1,518 |  |  | 864 |  |  | 747 |  |  | 1,386 |  |  | - |  |  | -
Auto |  | 268,865 |  |  | 250,840 |  |  | 13,161 |  |  | 3,522 |  |  | 804 |  |  | 538 |  |  | - |  |  | -
|  | 320,914 |  |  | 298,374 |  |  | 14,679 |  |  | 4,386 |  |  | 1,551 |  |  | 1,924 |  |  | - |  |  | -
Total | $ | 1,693,496 |  | $ | 1,416,347 |  | $ | 86,591 |  | $ | 28,901 |  | $ | 15,681 |  | $ | 36,614 |  | $ | 21,108 |  | $ | 88,254

37

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

| December 31, 2013
| 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 | $ | 76,512 |  | $ | 64,743 |  | $ | 6,594 |  | $ | 1,634 |  | $ | 868 |  | $ | 1,082 |  | $ | 1,458 |  | $ | 133
Years 2003 and 2004 |  | 65,117 |  |  | 56,283 |  |  | 4,722 |  |  | 1,938 |  |  | 56 |  |  | 1,437 |  |  | 352 |  |  | 329
Year 2005 |  | 89,541 |  |  | 74,016 |  |  | 8,414 |  |  | 2,119 |  |  | 1,198 |  |  | 3,037 |  |  | 573 |  |  | 184
Year 2006 |  | 120,322 |  |  | 99,243 |  |  | 12,055 |  |  | 4,312 |  |  | 1,148 |  |  | 2,755 |  |  | 515 |  |  | 294
Years 2007, 2008 and 2009 |  | 101,150 |  |  | 91,920 |  |  | 3,464 |  |  | 1,104 |  |  | 1,264 |  |  | 2,844 |  |  | 554 |  |  | -
Years 2010, 2011, 2012 and 2013 |  | 149,546 |  |  | 134,577 |  |  | 3,192 |  |  | 1,609 |  |  | 115 |  |  | 974 |  |  | 989 |  |  | 8,090
|  | 602,188 |  |  | 520,782 |  |  | 38,441 |  |  | 12,716 |  |  | 4,649 |  |  | 12,129 |  |  | 4,441 |  |  | 9,030
Non-traditional |  | 42,102 |  |  | 35,168 |  |  | 3,217 |  |  | 1,162 |  |  | - |  |  | 1,324 |  |  | 833 |  |  | 398
Loss mitigation program |  | 86,318 |  |  | 7,762 |  |  | 1,376 |  |  | 149 |  |  | 624 |  |  | 312 |  |  | 1,029 |  |  | 75,066
|  | 730,608 |  |  | 563,712 |  |  | 43,034 |  |  | 14,027 |  |  | 5,273 |  |  | 13,765 |  |  | 6,303 |  |  | 84,494
Home equity secured personal loans |  | 736 |  |  | 598 |  |  | - |  |  | - | - |  | - |  |  | 126 |  |  | 12 |  |  | -
GNMA's buy-back option program |  | 34,921 |  |  | - |  |  | - |  |  | - | - |  | 7,670 |  |  | 14,425 |  |  | 12,826 |  |  | -
|  | 766,265 |  |  | 564,310 |  |  | 43,034 |  |  | 14,027 |  |  | 12,943 |  |  | 28,316 |  |  | 19,141 |  |  | 84,494
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit cards |  | 15,241 |  |  | 14,555 |  |  | 287 |  |  | 168 |  |  | 118 |  |  | 113 |  |  | - |  |  | -
Overdrafts |  | 372 |  |  | 322 |  |  | 46 |  |  | 4 |  |  | - |  |  | - |  |  | - |  |  | -
Unsecured personal lines of credit |  | 1,981 |  |  | 1,844 |  |  | 33 |  |  | 38 |  |  | 25 |  |  | 34 |  |  | 7 |  |  | -
Unsecured personal loans |  | 94,560 |  |  | 92,102 |  |  | 1,272 |  |  | 399 |  |  | 300 |  |  | 39 |  |  | 13 |  |  | 435
Cash collateral personal loans |  | 15,590 |  |  | 15,223 |  |  | 324 |  |  | 43 |  |  | - |  |  | - |  |  | - |  |  | -
|  | 127,744 |  |  | 124,046 |  |  | 1,962 |  |  | 652 |  |  | 443 |  |  | 186 |  |  | 20 |  |  | 435
Auto and Leasing |  | 379,874 |  |  | 339,817 |  |  | 25,532 |  |  | 9,437 |  |  | 3,397 |  |  | 1,691 |  |  | - |  |  | -
|  | 1,273,883 |  |  | 1,028,173 |  |  | 70,528 |  |  | 24,116 |  |  | 16,783 |  |  | 30,193 |  |  | 19,161 |  |  | 84,929
Acquired loans (accounted for under ASC 310-20) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consumer |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Credit cards |  | 52,199 |  |  | 46,713 |  |  | 2,217 |  |  | 1,200 |  |  | 828 |  |  | 1,241 |  |  | - |  |  | -
Personal loans |  | 3,975 |  |  | 3,681 |  |  | 196 |  |  | 7 |  |  | 60 |  |  | 31 |  |  | - |  |  | -
|  | 56,174 |  |  | 50,394 |  |  | 2,413 |  |  | 1,207 |  |  | 888 |  |  | 1,272 |  |  | - |  |  | -
Auto |  | 301,584 |  |  | 283,825 |  |  | 12,534 |  |  | 3,616 |  |  | 1,095 |  |  | 514 |  |  | - |  |  | -
|  | 357,758 |  |  | 334,219 |  |  | 14,947 |  |  | 4,823 |  |  | 1,983 |  |  | 1,786 |  |  | - |  |  | -
Total | $ | 1,631,641 |  | $ | 1,362,392 |  | $ | 85,475 |  | $ | 28,939 |  | $ | 18,766 |  | $ | 31,979 |  | $ | 19,161 |  | $ | 84,929

38

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Covered Loans

For covered loans, 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 changes in the allowance for loan and lease losses on covered loans for the quarters ended March 31, 2014 and 2013 were as follows:

| Quarter Ended March 31,
| 2014 |  | 2013
| (In thousands)
Balance at beginning of the period | $ | 52,729 |  | $ | 54,124
Provision for covered loan and lease losses, net |  | 1,629 |  |  | 672
FDIC shared-loss portion of provision for (recapture of) |  |  |  |  |
covered loan and lease losses, net |  | 40 |  |  | (1,822)
Balance at end of the period | $ | 54,398 |  | $ | 52,974

FDIC shared-loss portion of provision for (recapture of) covered loans and lease losses net, represents the credit impairment losses to be covered under the FDIC loss-share agreement which is increasing (decreasing) the FDIC loss-share indemnification asset.

Net provision for covered loans includes both additional reserves and reserve releases for different pools. The pools for which there were releases are also subject to a reduction to the FDIC shared-loss indemnification asset because of lower expected losses which are recognized as recaptures.

The Company’s recorded investment in covered loan pools that have recorded impairments and their related allowance for covered loan and lease losses as of March 31, 2014 and December 31, 2013 are as follows:

| March 31, 2014
| Unpaid |  | Recorded |  |  |  |
| Principal |  | Investment |  | Allowance |  | Coverage
| (In thousands)
Impaired covered loan pools: |  |  |  |  |  |  |  |  |  |
Loans secured by 1-4 family residential properties | $ | 147,597 |  | $ | 111,410 |  | $ | 14,221 |  | 13%
Construction and development secured by 1-4 family residential properties |  | 65,747 |  |  | 18,254 |  |  | 6,866 |  | 38%
Commercial and other construction |  | 192,095 |  |  | 111,679 |  |  | 32,696 |  | 29%
Consumer |  | 9,671 |  |  | 5,503 |  |  | 615 |  | 11%
Total investment in impaired covered loan pools | $ | 415,110 |  | $ | 246,846 |  | $ | 54,398 |  | 22%

| December 31, 2013
| Unpaid |  | Recorded |  | Specific |  |
| Principal |  | Investment |  | Allowance |  | Coverage
| (In thousands)
Impaired covered loan pools with specific allowance |  |  |  |  |  |  |  |  |  |
Loans secured by 1-4 family residential properties | $ | 52,142 |  | $ | 38,179 |  | $ | 12,495 |  | 33%
Construction and development secured by 1-4 family residential properties |  | 66,037 |  |  | 17,304 |  |  | 6,866 |  | 40%
Commercial and other construction |  | 209,566 |  |  | 111,946 |  |  | 32,753 |  | 29%
Consumer |  | 10,512 |  |  | 5,857 |  |  | 615 |  | 11%
Total investment in impaired covered loan pools | $ | 338,257 |  | $ | 173,286 |  | $ | 52,729 |  | 30%

39

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 6- FDIC LOSS SHARE ASSET AND TRUE-UP PAYMENT OBLIGATION

As part of the Purchase and Assumption Agreement between the Bank and the FDIC (the “Purchase and Assumption Agreement”), the Bank and the FDIC entered into shared-loss agreements whereby the FDIC in connection with the Eurobank acquisition, covers a substantial portion of any losses on loans (and related unfunded loan commitments), foreclosed real estate and other repossessed properties.

The acquired loans, foreclosed real estate, and other repossessed properties subject to the shared-loss agreements are collectively referred to as “covered assets.” Under the terms of the shared-loss agreements, the FDIC absorbs 80% of losses and shares in 80% of loss recoveries on covered assets. The term of the shared-loss agreement covering single family residential mortgage loans is ten years with respect to losses and loss recoveries, while the term of the shared-loss agreement covering commercial loans is five years with respect to losses and eight years with respect to loss recoveries, from the April 30, 2010 acquisition date. The shared-loss agreements also provide for certain costs directly related to the collection and preservation of covered assets to be reimbursed at an 80% level. The indemnification asset represents the portion of estimated losses covered by the shared-loss agreements between the Bank and the FDIC.

The following table presents the activity in the FDIC loss share asset and true-up payment obligation for the quarters ended March 31, 2014 and 2013:

| Quarter Ended March 31,
| 2014 |  | 2013
| (In thousands)
FDIC share-loss indemnification asset: |  |  |  |  |
Balance at beginning of period | $ | 189,240 |  | $ | 302,295
Shared-loss agreements reimbursements from the FDIC |  | (8,236) |  |  | (6,650)
Increase (decrease) in expected credit losses to be covered under shared-loss agreements, net |  | 40 |  |  | (1,822)
FDIC shared-loss expense |  | (17,622) |  |  | (12,201)
Incurred expenses to be reimbursed under shared-loss agreements |  | 2,772 |  |  | 1,502
Balance at end of period | $ | 166,194 |  | $ | 283,124
True-up payment obligation: |  |  |  |  |
Balance at beginning of period | $ | 18,510 |  | $ | 15,496
FDIC shared-loss expense |  | 865 |  |  | 670
Balance at end of period | $ | 19,375 |  | $ | 16,166

The FDIC shared-loss expense increased as the Company continues to forecast better performance and cash flows from covered loans than previously expected resulting in a minor increase in the amortization of the FDIC shared-loss indemnification asset.

The FDIC shared-loss expense of $18.5 million for the quarter ended March 31, 2014 compared to $12.9 million for the same period in 2013, resulted from the ongoing evaluation of expected cash flows of the covered loan portfolio, which resulted in reduced projected losses expected to be collected from the FDIC and the improved accretable yield on the covered loans. Forecasted losses show a decreasing trend during the quarter ended March 31, 2014 as compared to the projections in 2013.The reduction in claimable losses amortizes the shared-loss indemnification asset through the shorter of the life of the shared loss agreement or the loan holding period. This amortization is net of the accretion of the discount recorded to reflect the expected claimable loss at its net present value. During the quarter ended March 31, 2014, the net amortization included $3.5 million of additional amortization of the FDIC indemnification asset from stepped up cost recoveries on certain construction, commercial, and leasing loan pools. Additional amortization of the FDIC indemnification asset may be recorded, should the Company continue to experience reduced expected losses. The majority of the FDIC indemnification asset is recorded for projected claimable losses on non-single family residential loans whose loss share period ends in the second quarter of 2015, although the recovery share period extends for an additional three-year period.

40

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Bank agreed to make a true-up payment, also known as clawback liability or clawback provision, to the FDIC on the date that is 45 days following the last day (such day, the “True-Up Measurement Date”) of the final shared-loss month, or upon the final disposition of all covered assets under the shared-loss agreements in the event losses thereunder fail to reach expected levels. Under the shared-loss agreements, the Bank will pay to the FDIC 50% of the excess, if any, of: (i) 20% of the Intrinsic Loss Estimate of $906.0 million (or $181.2 million) (as determined by the FDIC) less (ii) the sum of: (A) 25% of the asset discount (per bid) (or $227.5 million); plus (B) 25% of the cumulative shared-loss payments (defined as the aggregate of all of the payments made or payable to the Bank minus the aggregate of all of the payments made or payable to the FDIC); plus (C) the sum of the period servicing amounts for every consecutive twelve-month period prior to and ending on the True-Up Measurement Date in respect of each of the shared-loss agreements during which the shared-loss provisions of the applicable shared-loss agreement is in effect (defined as the product of the simple average of the principal amount of shared-loss loans and shared-loss assets at the beginning and end of such period times 1%). The true-up payment represents an estimated liability of $19.4 million and $18.5 million, net of discount, as of March 31, 2014 and December 31, 2013, respectively. The estimated liability is included within other liabilities in the unaudited consolidated statements of financial condition.

NOTE 7 — DERIVATIVE ACTIVITIES

During the quarter ended March 31, 2014, losses of $478 thousand were recognized and reflected as “Derivative Activities” in the unaudited consolidated statements of operations, which were mainly related to the options tied to the Standard & Poor’s 500 stock market index. During the quarter ended March 31, 2013, losses of $788 thousand were recognized and were mainly related to the options tied to the Standard & Poor’s 500 stock market index

The following table details “Derivative Assets” and “Derivative Liabilities” as reflected in the unaudited consolidated statements of financial condition at March 31, 2014 and December 31, 2013:

| March 31, |  | December 31,
| 2014 |  | 2013
| (In thousands)
Derivative assets: |  |  |  |  |
Options tied to S&P 500 Index | $ | 12,555 |  | $ | 16,430
Interest rate swaps designated as cash flow hedges |  | 166 |  |  | 850
Interest rate swaps not designated as hedges |  | 2,755 |  |  | 2,861
Interest rate caps |  | 374 |  |  | 319
Other |  | 11 |  |  | 42
| $ | 15,861 |  | $ | 20,502
Derivative liabilities: |  |  |  |  |
Interest rate swaps designated as cash flow hedges |  | 10,695 |  |  | 11,757
Interest rate swaps not designated as hedges |  | 2,755 |  |  | 2,861
Interest rate caps |  | 374 |  |  | 319
Other |  | 6 |  |  | -
| $ | 13,830 |  | $ | 14,937

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 and are properly documented as such, and therefore, qualify for cash flow hedge accounting. Any gain or loss associated with the effective portion of our cash flow hedges was recognized in other comprehensive income and is subsequently reclassified into earnings 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 related to these interest rate swaps to earnings in the next twelve months.

41

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table shows a summary of these swaps and their terms at March 31, 2014:

|  | Notional |  | Fixed |  | Variable |  | Trade |  | Settlement |  | Maturity
Type |  | Amount |  | Rate |  | Rate Index |  | Date |  | Date |  | Date
|  | (In thousands) |  |  |  |  |  |  |  |  |  |
Interest Rate Swaps |  | $ | 25,000 |  | 2.4365% |  | 1-Month LIBOR |  | 05/05/11 |  | 05/04/12 |  | 05/04/16
|  |  | 25,000 |  | 2.6200% |  | 1-Month LIBOR |  | 05/05/11 |  | 07/24/12 |  | 07/24/16
|  |  | 25,000 |  | 2.6350% |  | 1-Month LIBOR |  | 05/05/11 |  | 07/30/12 |  | 07/30/16
|  |  | 50,000 |  | 2.6590% |  | 1-Month LIBOR |  | 05/05/11 |  | 08/10/12 |  | 08/10/16
|  |  | 100,000 |  | 2.6750% |  | 1-Month LIBOR |  | 05/05/11 |  | 08/16/12 |  | 08/16/16
|  |  | 40,277 |  | 2.4210% |  | 1-Month LIBOR |  | 07/03/13 |  | 07/03/13 |  | 08/01/23
|  | $ | 265,277 |  |  |  |  |  |  |  |  |  |

An unrealized loss of $10.5 million was recognized in accumulated other comprehensive income related to the valuation of these swaps at March 31, 2014, and the related asset and liability are being reflected in the accompanying unaudited consolidated statements of financial condition.

At March 31, 2014 and December 31, 2013, interest rate swaps not designated as hedging instruments that were offered to clients represented an asset of $2.8 million and $2.9 million, respectively, and were included as part of derivative assets in the unaudited consolidated statements of financial position. The credit risk to these clients stemming from these derivatives, if any, is not material. At March 31, 2014 and December 31, 2013, interest rate swaps not designated as hedging instruments that are the mirror-images of the derivatives offered to clients represented a liability of $2.8 million and $2.9 million, respectively, and were included as part of derivative liabilities in the unaudited consolidated statements of financial condition.

The following table shows a summary of these interest rate swaps not designated as hedging instruments and their terms at March 31, 2014:

|  | Notional |  | Fixed |  | Variable |  | Settlement |  | Maturity
Type |  | Amount |  | Rate |  | Rate Index |  | Date |  | Date
|  | (In thousands) |  |  |  |  |  |  |  |
Interest Rate Swaps - Derivatives Offered to Clients |  | $ | 4,094 |  | 5.1300% |  | 1-Month LIBOR |  | 07/03/06 |  | 07/03/16
|  |  | 12,500 |  | 5.5050% |  | 1-Month LIBOR |  | 04/11/09 |  | 04/11/19
|  | $ | 16,594 |  |  |  |  |  |  |  |
Interest Rate Swaps - Mirror Image Derivatives |  | $ | 4,094 |  | 5.1300% |  | 1-Month LIBOR |  | 07/03/06 |  | 07/03/16
|  |  | 12,500 |  | 5.5050% |  | 1-Month LIBOR |  | 04/11/09 |  | 04/11/19
|  | $ | 16,594 |  |  |  |  |  |  |  |

42

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Options Tied to Standard & Poor’s 500 Stock Market Index

The Company has offered its customers certificates of deposit with an option tied to the performance of the S&P 500 Index. The Company uses option agreements with major broker-dealers to manage its exposure to changes in this index. Under the terms of the option agreements, the Company receives the average increase in the month-end value of the index in exchange for a fixed premium. The changes in fair value of the option agreements used to manage the exposure in the stock market in the certificates of deposit are recorded in earnings. At March 31, 2014 and December 31, 2013, the purchased options used to manage exposure to the S&P 500 Index on stock indexed deposits represented an asset of $12.6 million (notional amount of $23.8 million) and $16.4 million (notional amount of $28.0 million), respectively, and the options sold to customers embedded in the certificates of deposit and recorded as deposits in the unaudited consolidated statements of financial condition, represented a liability of $12.1 million (notional amount of $22.9 million) and $15.7 million (notional amount of $26.9 million), respectively.

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; therefore, they are marked to market through earnings. The outstanding total notional amount of interest rate caps was $110.0 million at both March 31, 2014 and December 31, 2013. At March 31, 2014 and December 31, 2013, the interest rate caps sold to clients represented a liability of $374 thousand and $319 thousand, respectively, and were included as part of derivative liabilities in the unaudited consolidated statements of financial condition. At March 31, 2014 and December 31, 2013, the interest rate caps purchased as mirror-images represented an asset of $374 thousand and $319 thousand, respectively, and were included as part of derivative assets in the unaudited consolidated statements of financial condition.

NOTE 8 — ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS

Accrued interest receivable at March 31, 2014 and December 31, 2013 consists of the following:

| March 31, |  | December 31,
| 2014 |  | 2013
| (In thousands)
Non-covered loans | $ | 14,440 |  | $ | 13,378
Investments |  | 4,529 |  |  | 5,356
| $ | 18,969 |  | $ | 18,734

Other assets at March 31, 2014 and December 31, 2013 consist of the following:

|  | March 31, |  |  | December 31,
| 2014 |  | 2013
| (In thousands)
Prepaid expenses | $ | 15,531 |  | $ | 15,439
Core deposit and customer relationship intangibles |  | 11,370 |  |  | 11,912
Other repossessed assets |  | 13,964 |  |  | 12,583
Mortgage tax credits |  | 8,706 |  |  | 8,706
Investment in Statutory Trust |  | 1,083 |  |  | 1,083
Accounts receivable and other assets |  | 43,689 |  |  | 48,717
| $ | 94,343 |  | $ | 98,440

43

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Prepaid expenses amounting to $15.5 million and $15.4 million at March 31, 2014 and December 31, 2013, respectively, include prepaid municipal, property and income taxes aggregating to $9.0 million and $9.6 million, respectively.

As part of the FDIC-assisted acquisition of Eurobank and BBVAPR Acquisition, the Company recorded a core deposit intangible representing the value of checking and savings deposits acquired. At March 31, 2014 and December 31, 2013, this core deposit intangible amounted to $7.5 million and $7.8 million, respectively. In addition, as part of the BBVAPR Acquisition on December 18, 2012, the Company recorded a customer relationship intangible amounting to $5.0 million representing the value of customer relationships acquired in the broker-dealer and insurance subsidiaries as of December 31, 2012. At March 31, 2014 and December 31, 2013, this customer relationship intangible amounted to $3.9 million and $4.1million, respectively.

Other repossessed assets totaled $14.0 million and $12.6 million at March 31, 2013 and December 31, 2013, respectively, include repossessed automobiles amounting to $13.7 million and $12.3 million, respectively.

At March 31, 2014 and December 31, 2013, tax credits for the Company amounted $8.7 million. These tax credits do not have an expiration date.

NOTE 9 — DEPOSITS AND RELATED INTEREST

Total deposits as of March 31, 2014 and December 31, 2013 consist of the following:

| March 31, |  | December 31,
| 2014 |  | 2013
| (In thousands)
Non-interest bearing demand deposits | $ | 755,909 |  | $ | 550,302
Interest-bearing savings and demand deposits |  | 2,604,664 |  |  | 2,683,996
Individual retirement accounts |  | 338,719 |  |  | 347,262
Retail certificates of deposit |  | 556,928 |  |  | 598,367
Institutional certificates of deposit |  | 331,859 |  |  | 375,224
Total core deposits |  | 4,588,079 |  |  | 4,555,151
Brokered deposits |  | 712,913 |  |  | 828,114
Total deposits | $ | 5,300,992 |  | $ | 5,383,265

Brokered deposits include $617.7 million in certificates of deposits and $95.2 million in money market accounts at March 31, 2014, and $729.8 million in certificates of deposits and $98.3 million in money market accounts at December 31, 2013.

The weighted average interest rate of the Company’s deposits was 0.68% at March 31, 2014 and 0.73% at December 31, 2013, inclusive of non-interest bearing deposits of $755.9 million and $550.3 million, respectively. Interest expense for the quarters ended March 31, 2014 and 2013 was as follows:

| Quarter Ended March 31,
| 2014 |  | 2013 |
| (In thousands)
Demand and savings deposits | $ | 5,028 |  | $ | 5,962 |
Certificates of deposit |  | 3,950 |  |  | 3,973 |
| $ | 8,978 |  | $ | 9,935 |

44

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At March 31, 2014 and December 31, 2013, demand and interest-bearing deposits and certificates of deposit included deposits of Puerto Rico Cash & Money Market Fund, Inc., which amounted to $97.9 million and $93.1 million, respectively, with a weighted average rate of 0.77% in both years, and were collateralized with investment securities with a fair value of $77.2 million and $67.5 million, respectively.

At March 31, 2014 and December 31, 2013, time deposits in denominations of $100 thousand or higher, excluding accrued interest and unamortized discounts, amounted to $769.1 million and $845.8 million, including public fund time deposits from various Puerto Rico government municipalities, agencies, and corporations of $6.8 million and $26.7 million, respectively, at a weighted average rate of 0.49% at March 31, 2014 and 0.32% at December 31, 2013.

At December 31, 2013, public fund deposits from various Puerto Rico government agencies were collateralized with investment securities with a fair value of $97.8 million, and with commercial loans amounting to $547.3 million at March 31, 2014 and $549.0 million at December 31, 2013.

Excluding equity indexed options in the amount of $11.1 million, which are used by the Company to manage its exposure to the S&P 500 Index, and also excluding accrued interests of $1.7 million and unamortized deposit discount in the amount of $3.3 million, the scheduled maturities of certificates of deposit at March 31, 2014 are as follows:

| March 31, 2014
| (In thousands)
Within one year: |  |
Three (3) months or less | $ | 303,340
Over 3 months through 1 year |  | 780,260
|  | 1,083,600
Over 1 through 2 years |  | 351,142
Over 2 through 3 years |  | 257,750
Over 3 through 4 years |  | 84,607
Over 4 through 5 years |  | 52,029
| $ | 1,829,128

The aggregate amount of overdraft in demand deposit accounts that were reclassified to loans amounted to $734 thousand and $1.8 million as of March 31, 2014 and December 31, 2013, respectively.

NOTE 10 — BORROWINGS

Securities Sold under Agreements to Repurchase

At March 31, 2014, 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.

45

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At March 31, 2014 and December 31, 2013, securities sold under agreements to repurchase (classified by counterparty), excluding accrued interest in the amount of $2.2 million and $2.6 million, respectively, were as follows:

| March 31, |  | December 31,
| 2014 |  | 2013
|  |  |  | Fair Value of |  |  |  |  | Fair Value of
| Borrowing |  | Underlying |  | Borrowing |  | Underlying
| Balance |  | Collateral |  | Balance |  | Collateral
| (In thousands)
JP Morgan Chase Bank NA |  | 255,000 |  |  | 273,834 |  |  | 255,000 |  |  | 273,250
Credit Suisse Securities (USA) LLC |  | 755,000 |  |  | 860,088 |  |  | 755,000 |  |  | 864,232
Deutsche Bank |  | - |  |  | - |  |  | 255,000 |  |  | 272,053
Total | $ | 1,010,000 |  | $ | 1,133,922 |  | $ | 1,265,000 |  | $ | 1,409,535

The following table shows a summary of the Company’s repurchase agreements and their terms, excluding accrued interest in the amount of $2.2 million, at March 31, 2014:

|  |  |  |  | Weighted- |  |  |  |
|  | Borrowing |  | Average |  |  |  | Maturity
Year of Maturity |  | Balance |  | Coupon |  | Settlement Date |  | Date
|  | (In thousands) |  |  |  |  |  |
2014 |  | $ | 85,000 |  | 0.675% |  | 12/3/2012 |  | 12/3/2014
|  |  | 85,000 |  |  |  |  |  |
2015 |  |  | 255,000 |  | 0.840% |  | 12/10/2012 |  | 6/13/2015
|  |  | 255,000 |  |  |  |  |  |
2016 |  |  | 170,000 |  | 1.500% |  | 12/6/2012 |  | 12/8/2016
|  |  | 170,000 |  |  |  |  |  |
2017 |  |  | 500,000 |  | 4.78% |  | 3/2/2007 |  | 3/2/2017
|  | $ | 1,010,000 |  | 2.89% |  |  |  |

The Company’s repurchase agreement in the amount of $500 million with an original term of ten years, maturing on March 2, 2017, was modified in December 2013 to (i) eliminate the optional early termination clause that allowed the counterparty to terminate it before maturity, (ii) increase the interest rate paid by the Company from 4.67% to 4.78%; and (iii) substitute the counterparty.

46

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents the liability associated with the repurchase transactions (excluding accrued interest), their maturities and weighted average interest rates. Also, it includes the carrying value and approximate market value of collateral (excluding accrued interest) at March 31, 2014 and December 31, 2013. The information excludes repurchase agreements transactions which were collateralized with securities or cash or which have been obtained under agreements to resell:

| March 31, 2014
|  |  |  |  |  |  | Market Value of Underlying Collateral
|  |  |  |  |  |  |  |  |  |  | CMOs |  | Obligations |  |
|  |  |  | Weighted |  | FNMA and |  |  |  |  | issued by US |  | of US |  |  |
| Repurchase |  | Average | FHLMC |  | GNMA |  | Government |  | Government |  |
| Liability |  | Rate |  | Certificates |  | Certificates |  | Sponsored Agencies |  | Sponsored Agencies |  | Total
| (Dollars in thousands)
Over 90 days |  | 1,010,000 |  |  | 2.89% |  |  | 1,061,519 |  |  | 2,403 |  |  | - |  |  | 70,000 |  |  | 1,133,922
Total | $ | 1,010,000 |  |  | 2.89% |  | $ | 1,061,519 |  | $ | 2,403 |  | $ | - |  | $ | 70,000 |  | $ | 1,133,922

| December 31, 2013
|  |  |  |  |  |  | Market Value of Underlying Collateral
|  |  |  |  |  |  |  |  |  |  | CMOs |  | Obligations |  |
|  |  |  | Weighted |  | FNMA and |  |  |  |  | issued by US |  | of US |  |  |
| Repurchase |  | Average | FHLMC |  | GNMA |  | Government |  | Government |  |
| Liability |  | Rate |  | Certificates |  | Certificates |  | Sponsored Agencies |  | Sponsored Agencies |  | Total
| (Dollars in thousands)
Within 30 days | $ | 255,000 |  |  | 0.50% |  | $ | 216,201 |  | $ | - |  | $ | 48,923 |  | $ | 6,929 |  | $ | 272,053
Over 90 days |  | 1,010,000 |  |  | 2.89% |  |  | 1,018,632 |  |  | 3,000 |  |  | 45,100 |  |  | 3,720 |  |  | 1,070,452
Total | $ | 1,265,000 |  |  | 2.41% |  | $ | 1,234,833 |  | $ | 3,000 |  | $ | 94,023 |  | $ | 10,649 |  | $ | 1,342,505

Advances from the Federal Home Loan Bank of New York

Advances are received from 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, 2014 and December 31, 2013, these advances were secured by mortgage and commercial loans amounting to $1.2 billion and $1.3 billion, respectively. Also, at March 31, 2014 and December 31, 2013 the Company had an additional borrowing capacity with the FHLB-NY of $614.1 million and $674.2 million, respectively. At March 31, 2014 and December 31, 2013, the weighted average remaining maturity of FHLB’s advances was 10.7 months and 11.3 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, 2014.

47

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table shows a summary of these advances and their terms, excluding accrued interest in the amount of $327 thousand, at March 31, 2014:

|  |  |  |  | Weighted- |  |  |  |
|  |  | Borrowing |  | Average |  |  |  | Maturity
Year of Maturity |  |  | Balance |  | Coupon |  | Settlement Date |  | Date
|  |  | (In thousands) |  |  |  |  |  |
2014 |  | $ | 25,000 |  | 0.37% |  | 3/4/2014 |  | 4/4/2014
|  |  | 50,000 |  | 0.39% |  | 3/10/2014 |  | 4/10/2014
|  |  | 100,000 |  | 0.38% |  | 3/17/2014 |  | 4/16/2014
|  |  | 25,000 |  | 0.36% |  | 3/24/2014 |  | 4/24/2014
|  |  | 25,000 |  | 0.36% |  | 3/31/2014 |  | 4/30/2014
|  |  | 40,277 |  | 0.37% |  | 3/3/2014 |  | 4/1/2014
|  |  | 265,277 |  |  |  |  |  |
2017 |  |  | 4,673 |  | 1.24% |  | 4/3/2012 |  | 4/3/2017
2018 |  |  | 30,000 |  | 2.19% |  | 1/16/2013 |  | 1/16/2018
|  |  | 25,000 |  | 2.18% |  | 1/16/2013 |  | 1/16/2018
|  |  | 55,000 |  |  |  |  |  |
2020 |  |  | 10,413 |  | 2.59% |  | 7/19/2013 |  | 7/20/2020
|  | $ | 335,363 |  | 0.75% |  |  |  |

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 $100.4 million at March 31, 2014 and $100.0 million at December 31, 2013.

Under the requirements of Puerto Rico Banking Act, the Bank must establish a redemption fund for the subordinated capital notes by transferring from undivided profits pre-established amounts as follows:

| Redemption fund
| (In thousands)
Redemption fund - March 31, 2014 | $ | 48,575
2014 |  | 6,700
2015 |  | 6,700
2016 |  | 5,025
| $ | 67,000

Federal Funds Purchased

Federal funds purchased, presented in the unaudited consolidated statement of financial condition amounted to $23.7 million as of March 31, 2014. The weighted average interest rate during such period was 0.24%.

48

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Other borrowings

Other borrowings, presented in the unaudited consolidated statement of financial condition amounted to $3.7 million at March 31, 2014 and December 31, 2013, which mainly consists of unsecured fixed-rate borrowings and term notes tied to the appreciation of the S&P index. For both periods, the unsecured fixed rate borrowings amounted to $1.7 million at a fixed rate of 3.0%. The term notes tied to the S&P index amounted to $1.0 million at March 31, 2014 and at December 31, 2013 with an index appreciation of $995 thousand and $957 thousand, respectively.

NOTE 11 – OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES

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, 2014 and December 31, 2013:

March 31, 2014
|  |  |  |  |  |  |  |  |  |  | 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 |  | Condition |  | Instruments |  | Received |  | Amount
|  | (In thousands)
Derivatives |  | $ | 15,861 |  | $ | - |  | $ | 15,861 |  | $ | 6,814 |  | $ | - |  | $ | 9,047
Total |  | $ | 15,861 |  | $ | - |  | $ | 15,861 |  | $ | 6,814 |  | $ | - |  | $ | 9,047
December 31, 2013
|  |  |  |  |  |  |  |  |  |  | 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 |  | Condition |  | Instruments |  | Received |  | Amount
|  |  |  |  |  |  |  | (In thousands)
Derivatives |  | $ | 20,502 |  | $ | - |  | $ | 20,502 |  | $ | 2,450 |  | $ | 6,780 |  | $ | 11,272
Securities purchased under agreements to resell |  |  | 60,000 |  |  | - |  |  | 60,000 |  |  | 64,587 |  |  | - |  |  | (4,587)
Total |  | $ | 80,502 |  | $ | - |  | $ | 80,502 |  | $ | 67,037 |  | $ | 6,780 |  | $ | 6,685

49

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

March 31, 2014
|  |  |  |  |  |  |  |  |  |  | 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 |  | $ | 25,950 |  | $ | - |  | $ | 25,950 |  | $ | - |  | $ | 2,980 |  | $ | 22,970
Securities sold under agreements to repurchase |  |  | 1,010,000 |  |  | - |  |  | 1,010,000 |  |  | 1,133,922 |  |  | - |  |  | (123,922)
Total |  | $ | 1,035,950 |  | $ | - |  | $ | 1,035,950 |  | $ | 1,133,922 |  | $ | 2,980 |  | $ | (100,952)
December 31, 2013
|  |  |  |  |  |  |  |  |  |  | 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 |  | $ | 30,672 |  | $ | - |  | $ | 30,672 |  | $ | - |  | $ | 2,349 |  | $ | 28,323
Securities sold under agreements to repurchase |  |  | 1,265,000 |  |  | - |  |  | 1,265,000 |  |  | 1,277,919 |  |  | 67,029 |  |  | (79,948)
Total |  | $ | 1,295,672 |  | $ | - |  | $ | 1,295,672 |  | $ | 1,277,919 |  | $ | 69,378 |  | $ | (51,625)

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 tri-party Account Control Agreement.

50

OFG BANCORP

NOTES TO UNAUDITED 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. As of March 31, 2014 and December 31, 2013, these loan balances amounted to $19.3 million and $19.0 million, respectively. The activity and balance of these loans for the quarters ended March 31, 2014 and 2013 were as follows:

| Quarter Ended March 31,
| 2014 |  | 2013
| (In thousands)
Balance at the beginning of year | $ | 18,963 |  | $ | 3,772
New loans |  | - |  |  | 2,435
Repayments and sales |  | 304 |  |  | (95)
Credits of persons no longer considered related parties |  | - |  |  | (57)
Balance at the end of year | $ | 19,267 |  | $ | 6,055

NOTE 13 — INCOME TAXES

On June 30, 2013 the Governor signed Act No. 40-2013, known as “Ley de Redistribución y Ajuste de la Carga Contributiva” (Act of Redistribution and Adjustment of Tax Burden), as amended. The main purpose of the Act is to increase government collections in order to alleviate the structural deficit. The most relevant provisions of the Act, as applicable to the Company, and effective for taxable years beginning after December 31,2012 are as follows: (1) the maximum Corporate Income Tax rate was increased from 30% to 39%; (2) the deduction allowed for determining the income subject to surtax was reduced from $750,000 to $25,000 (which must be allocated among the members of a controlled group of corporations); (3) the allowable Net Operating Loss (“NOL”) deduction was reduced to (i) 90% of the corporation’s net income subject to regular tax for purposes of computing the regular income tax, and (ii) 80% of the alternative minimum taxable income for purposes of computing the alternative minimum tax (“AMT”); (4) the NOL carryover period was extended from 10 to 12 years for NOLs incurred in taxable years beginning after December 31, 2004 and before January 1, 2013, and from 7 to 10 years for losses incurred in taxable years beginning after December 31, 2012; (5) a new special tax based on gross income (the “Special Tax”) was added to the Puerto Rico Internal Revenue Code of 2011, as further described below; and (6) a special tax of 1% was imposed on insurance premiums earned after June 30, 2013.

In the case of non-financial institutions, the Special Tax is paid as part of the AMT and thus is accounted for under the provisions of ASC 740. The applicable Special Tax rate for non-financial institutions increases gradually from 0.2% for gross income equal to or in excess of $1.0 million up to 0.85% for gross income in excess of $1.5 billion. In the case of a controlled group of corporations, the tax rate for all members of the group is determined by the aggregate gross income of all members in the group. In the case of financial institutions, the Special Tax is not part of the AMT calculation thus is accounted for as other tax not subject to the provisions of ASC 740 since the same is based on gross income. The applicable Special Tax rate for financial institutions is 1% of its gross income of a taxable year, of which fifty percent (50%) may be claimed as a credit against the financial institution’s applicable income tax of that year.

At March 31, 2014 and December 31, 2013, the Company’s net deferred tax asset amounted to $127.7 million and $137.6 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 entire deferred tax asset, net of the existing valuation allowances recorded at March 31, 2014 and December 31, 2013. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

51

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At March 31, 2014 and December 31, 2013, Oriental International Bank Inc. (“OIB”), the Bank’s international banking entity subsidiary, had $219 thousand and $356 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 the quarters ended March 31, 2014 and 2013, $137 thousand and $47 thousand, respectively, related to this residual tax effect from OIB was reclassified from accumulated other comprehensive income into income tax provision.

The Company classifies unrecognized tax benefits in income taxes payable. These gross unrecognized tax benefits would affect the effective tax rate if realized. The balance of unrecognized tax benefits at March 31, 2014 was $4.0 million (December 31, 2013 - $4.0 million). The Company had accrued $1.6 million at March 31, 2014 (December 31, 2013 - $1.2 million) for the payment of interest and penalties relating to unrecognized tax benefits.

Income tax expense was $11.8 million for the quarter ended March 31, 2014, compared to $7.1 million for the same period in 2013. The increase in enacted tax rate from 30% to 39% from the second quarter 2013 amendment to the Puerto Rico tax Code resulted in the increased quarterly income tax expense for this quarter as compared to the same quarter of 2013.

NOTE 14 — STOCKHOLDERS’ EQUITY AND EARNINGS PER COMMON SHARE

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 and the Bank’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 have adopted new capital rules that became effective January 1, 2014 for advanced approaches banking organizations and will become effective January 1, 2015 for all other covered organizations (subject to certain phase-in periods through January 1, 2019) and that will replace their general risk-based capital rules, advanced approaches rule, market risk rule, and leverage rules.

Quantitative measures established by regulation to ensure capital adequacy currently require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations) and of Tier 1 capital to average total assets (as defined in the regulations). As of March 31, 2014 and December 31, 2013, the Company and the Bank met all capital adequacy requirements to which they are subject. As of March 31, 2014 and December 31, 2013, the Bank is “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables.

52

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company’s and the Bank’s actual capital amounts and ratios as of March 31, 2014 and December 31, 2013 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, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital to risk-weighted assets | $ | 836,168 |  | 16.56% |  | $ | 404,054 |  | 8.00% |  | $ | 505,067 |  | 10.00%
Tier 1 capital to risk-weighted assets | $ | 745,619 |  | 14.76% |  | $ | 202,027 |  | 4.00% |  | $ | 303,040 |  | 6.00%
Tier 1 capital to average total assets | $ | 745,619 |  | 9.51% |  | $ | 313,594 |  | 4.00% |  | $ | 391,993 |  | 5.00%
As of December 31, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital to risk-weighted assets | $ | 827,460 |  | 16.16% |  | $ | 409,514 |  | 8.00% |  | $ | 511,893 |  | 10.00%
Tier 1 capital to risk-weighted assets | $ | 736,930 |  | 14.35% |  | $ | 204,757 |  | 4.00% |  | $ | 307,136 |  | 6.00%
Tier 1 capital to average total assets | $ | 736,930 |  | 9.11% |  | $ | 324,910 |  | 4.00% |  | $ | 406,138 |  | 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, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital to risk-weighted assets | $ | 805,900 |  | 16.02% |  | $ | 402,495 |  | 8.00% |  | $ | 503,119 |  | 10.00%
Tier 1 capital to risk-weighted assets | $ | 715,591 |  | 14.22% |  | $ | 201,248 |  | 4.00% |  | $ | 301,871 |  | 6.00%
Tier 1 capital to average total assets | $ | 715,591 |  | 9.18% |  | $ | 311,659 |  | 4.00% |  | $ | 389,574 |  | 5.00%
As of December 31, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total capital to risk-weighted assets | $ | 779,413 |  | 15.30% |  | $ | 407,637 |  | 8.00% |  | $ | 509,547 |  | 10.00%
Tier 1 capital to risk-weighted assets | $ | 688,350 |  | 13.51% |  | $ | 203,819 |  | 4.00% |  | $ | 305,728 |  | 6.00%
Tier 1 capital to average total assets | $ | 688,350 |  | 8.54% |  | $ | 322,395 |  | 4.00% |  | $ | 402,993 |  | 5.00%

Additional paid-in capital

Additional paid-in capital represents contributed capital in excess of par value of common and preferred stock net of costs of the issuance. As of March 31, 2014, accumulated issuance costs charged against additional paid in capital amounted to $10.1 million and $13.6 million for preferred and common stock, respectively.

53

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Earnings per Common Share

The calculation of earnings per common share for the quarters ended March 31, 2014 and 2013 is as follows:

| Quarter Ended March 31,
| 2014 |  | 2013
| (In thousands, except per share data)
Net income | $ | 23,747 |  | $ | 21,192
Less: Dividends on preferred stock |  |  |  |  |
Non-Convertible Preferred Stock (Series A, B, and D) |  | (1,628) |  |  | (1,628)
Convertible preferred stock (Series C) |  | (1,837) |  |  | (1,837)
Income available to common shareholders | $ | 20,282 |  | $ | 17,727
Effect of assumed conversion of the Convertible Preferred Stock |  | 1,837 |  |  | 1,837
Income available to common shareholders assuming conversion | $ | 22,119 |  | $ | 19,564
Weighted average common shares and share equivalents: |  |  |  |  |
Average common shares outstanding |  | 45,329 |  |  | 45,595
Effect of dilutive securities: |  |  |  |  |
Average potential common shares-options |  | 131 |  |  | 159
Average potential common shares-assuming conversion of ' ' convertible preferred stock |  | 7,138 |  |  | 7,138
Total weighted average common shares outstanding ' 'and equivalents |  | 52,598 |  |  | 52,892
Earnings per common share - basic | $ | 0.45 |  | $ | 0.39
Earnings per common share - diluted | $ | 0.42 |  | $ | 0.37

In computing diluted earnings per common share, the 84,000 shares of convertible preferred stock, which remain outstanding at March 31, 2014, with a conversion rate, subject to certain conditions, of 84.9798 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, 2014 and 2013 on the convertible preferred stock were added back as income available to common shareholders.

For the quarters ended March 31, 2014 and 2013, weighted-average stock options with an anti-dilutive effect on earnings per share not included in the calculation amounted to 254,662, and 653,843, respectively.

Treasury Stock

Under the Company’s current stock repurchase program it is authorized to purchase in the open market up to $70 million of its outstanding shares of common stock, of which approximately $23.1 million of authority remains. The shares of common stock repurchased are to be held by the Company as treasury shares. During the quarter ended March 31, 2014, the Company purchased 707,400 shares under this program for a total of $10.4 million, at an average price of $14.66 per share. There were no repurchases during 2013.

54

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents the shares repurchased for each month in the quarter ended March 31, 2014, excluding the month ended March 31, 2014, during which no shares were purchased as part of the stock repurchase program:

| Total number of |  |  |  |  | Dollar amount of
| shares purchased as |  | Average |  | shares repurchased
|  | part of stock |  | price paid |  | (excluding
| repurchase programs |  | per share |  | commissions paid)
|  |  |  |  |  |  |  | (In thousands)
Period |  |  |  |  |  |  |  |
January 2014 |  | 57,700 |  | $ | 14.73 |  | $ | 850
February 2014 |  | 649,700 |  | $ | 14.66 |  | $ | 9,522
Quarter ended March 31, 2014 |  | 707,400 |  |  | 14.66 |  |  | 10,372

The number of shares that may yet be purchased under the $70 million program is estimated at 1,341,002 and was calculated by dividing the remaining balance of $23.1 million by $17.19 (closing price of the Company common stock at March 31, 2014). The Company did not purchase any shares of its common stock other than through its publicly announced stock repurchase program during the quarter ended March 31, 2014.

The activity in connection with common shares held in treasury by the Company for quarters ended March 31, 2014 and 2013 is set forth below:

| Quarter Ended March 31,
| 2014 |  | 2013
|  |  | Dollar |  |  |  | Dollar
| Shares |  | Amount |  | Shares |  | Amount
| (In thousands, except shares data)
Beginning of year | 7,030,101 |  | $ | 80,642 |  | 7,090,597 |  | $ | 81,275
Common shares used upon lapse of restricted stock units | (27,752) |  |  | (292) |  | (33,600) |  |  | (351)
Common shares repurchased as part of the stock repurchase program | 707,400 |  |  | 10,393 |  | - |  |  | -
Common shares used to match defined contribution plan, net | - |  |  | - |  | (7,318) |  |  | (77)
End of year | 7,709,749 |  | $ | 90,743 |  | 7,049,679 |  | $ | 80,847

Accumulated Other Comprehensive Income

Accumulated other comprehensive income, net of income tax, as of March 31, 2014 and December 31, 2013 consisted of:

| March 31, |  | December 31,
| 2014 |  | 2013
| (In thousands)
Unrealized gain on securities available-for-sale which are not other-than-temporarily impaired | $ | 18,464 |  | $ | 13,267
Income tax effect of unrealized gain on securities available-for-sale |  | (2,429) |  |  | (1,834)
Net unrealized gain on securities available-for-sale which are not other-than-temporarily impaired |  | 16,035 |  |  | 11,433
Unrealized loss on cash flow hedges |  | (10,529) |  |  | (10,907)
Income tax effect of unrealized loss on cash flow hedges |  | 2,516 |  |  | 2,665
Net unrealized loss on cash flow hedges |  | (8,013) |  |  | (8,242)
Accumulated other comprehensive income, net of taxes | $ | 8,022 |  | $ | 3,191

55

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table presents changes in accumulated other comprehensive income by component, net of taxes, for the quarters ended March 31, 2014 and 2013:

| Quarter Ended March 31,
| 2014 |  | 2013
| Net unrealized |  | Net unrealized |  | Accumulated |  | Net unrealized |  | Net unrealized |  | Accumulated
| gains on |  | loss on |  | other |  | gains on |  | loss on |  | other
| securities |  | cash flow |  | comprehensive |  | securities |  | cash flow |  | comprehensive
| available-for-sale |  | hedges |  | income |  | available-for-sale |  | hedges |  | income
| (In thousands) |  | (In thousands)
Beginning balance | $ | 11,433 |  | $ | (8,242) |  | $ | 3,191 |  | $ | 68,245 |  | $ | (12,365) |  | $ | 55,880
Other comprehensive income before reclassifications |  | 4,465 |  |  | (1,392) |  |  | 3,073 |  |  | (9,899) |  |  | (313) |  |  | (10,212)
Amounts reclassified out of accumulated other comprehensive income |  | 137 |  |  | 1,621 |  |  | 1,758 |  |  | 47 |  |  | 1,336 |  |  | 1,383
Other comprehensive income (loss) |  | 4,602 |  |  | 229 |  |  | 4,831 |  |  | (9,852) |  |  | 1,023 |  |  | (8,829)
Ending balance | $ | 16,035 |  | $ | (8,013) |  | $ | 8,022 |  | $ | 58,393 |  | $ | (11,342) |  | $ | 47,051

The following table presents reclassifications out of accumulated other comprehensive income for the quarters ended March 31, 2014 and 2013:

|  |  |  |  |  |  | Affected Line Item in
| Quarter ended March 31, |  | Consolidated Statement
| 2014 |  | 2013 |  | of Operations
| (In thousands) |  |
Cash flow hedges: |  |  |  |  |  |  |
Interest-rate contracts | $ | 1,621 |  | $ | 1,336 |  | Net interest expense
Available-for-sale securities: |  |  |  |  |  |  |
Residual tax effect from OIB's change in applicable tax rate |  | 137 |  |  | 47 |  | Income tax expense
| $ | 1,758 |  | $ | 1,383 |  |

56

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 15 – GUARANTEES

At March 31, 2014 the unamortized balance of the obligations undertaken in issuing the guarantees under standby letters of credit represented a liability of $38.9 million (December 31, 2013 - $38.6 million).

The Company assumed a liability for residential mortgage loans sold by BBVAPR Bank subject to credit recourse, principally loans associated with FNMA residential mortgage loan sales and securitization programs. At March 31, 2014 and December 31, 2013, the unpaid principal balance of residential mortgage loans sold subject to credit recourse was $118.2 million and $122.3 million, respectively. In the event of any customer default, 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 in the event of nonperformance by the borrowers is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During the quarter ended March 31, 2014, the Company repurchased approximately $1.6 million of unpaid principal balance in mortgage loans subject to the credit recourse provisions. In the event of nonperformance by the borrower, the Company has rights to the underlying collateral securing the mortgage loan. The Company suffers ultimate losses on these loans when the proceeds from a foreclosure sale of the property underlying a defaulted mortgage loan are less than the outstanding principal balance of the loan plus any uncollected interest advanced and the costs of holding and disposing the related property. At March 31, 2014 and December 31, 2013 the Company’s liability established to cover the estimated credit loss exposure related to loans sold with credit recourse amounted to $1.5 million (December 31, 2013 – $2.0 million). The following table shows the changes in the Company’s liability of estimated loss from these credit recourse agreements, included in the unaudited consolidated statements of financial condition during the quarters ended March 31, 2014 and 2013.

| Quarter Ended March 31,
| 2014 |  | 2013
| (In thousands)
Balance at beginning of year | $ | 1,955 |  | $ | -
Additions from BBVAPR Acquisition |  | - |  |  | 2,460
Net charge-offs/terminations |  | (406) |  |  | -
Balance at end of year | $ | 1,549 |  | $ | 2,460

The estimated losses to be absorbed under the credit recourse arrangements are recorded as a liability when the loans are sold or credit recourse is 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. At March 31, 2014, $86.5 million or 73% of the recourse obligation will be extinguished during the next two years.

57

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 the loans. Repurchases during the quarter ended March 31, 2014 under the Company’s representation and warranty arrangements, excluding mortgage loans subject to credit recourse provisions referred to above, approximated $2.8 million in unpaid principal balance (December 31, 2013 - $12.5 million). A substantial amount of these loans reinstate to performing status or have mortgage insurance, and thus the ultimate losses on the loans are not deemed significant.

During the quarter ended March 31, 2014, the Company recognized $50 thousand in losses from the repurchase of residential mortgage loans sold, subject to credit recourse and $434 thousand not subject to credit recourse. In addition, during the quarter ended March 31, 2013, the Company recognized $25 thousand in losses from the repurchase of residential mortgage loans sold, subject to credit recourse and $2 thousand not subject to credit recourse.

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 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, 2014, the Company serviced $1.1 billion 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, 2014, the outstanding balance of funds advanced by the Company under such mortgage loan servicing agreements was approximately $323 thousand (December 31, 2013 - $243 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.

58

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

NOTE 16 — 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.

Summarized credit-related financial instruments at March 31, 2014 and December 31, 2013 were as follows:

| March 31, |  | December 31,
| 2014 |  | 2013
| (In thousands)
Commitments to extend credit | $ | 494,327 |  | $ | 520,269
Commercial letters of credit |  | 1,740 |  |  | 1,096

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.

At March 31, 2014 and December 31, 2013, 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 $900 thousand at both March 31, 2014 and December 31, 2013.

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.

59

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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, 2014 and December 31, 2013, is as follows:

| March 31, |  | December 31,
| 2014 |  | 2013
| (In thousands)
Standby letters of credit and financial guarantees | $ | 38,875 |  | $ | 38,577
Loans sold with recourse |  | 118,163 |  |  | 122,291
Commitments to sell or securitize mortgage loans |  | 34,220 |  |  | 99,307

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, 2014 and 2013, amounted to $2.5 million, and $2.7 million, respectively, and is included in the “occupancy and equipment” caption in the unaudited consolidated statements of operations. Future rental commitments under leases in effect at March 31, 2014, exclusive of taxes, insurance, and maintenance expenses payable by the Company, are summarized as follows:

Quarter Ending March 31, | Minimum Rent
| (In thousands)
2014 | $ | 6,170
2015 |  | 8,013
2016 |  | 7,388
2017 |  | 6,761
2018 |  | 5,864
Thereafter |  | 22,004
| $ | 56,200

60

OFG BANCORP

NOTES TO UNAUDITED 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 17 - FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company follows the fair value measurement framework under 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 (an exit price) 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. The standard describes three levels of inputs previously described that may be used to measure 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 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 Company holds two securities categorized as other debt that are classified as Level 3. The estimated fair value of the other debt securities is determined by using a third-party model to calculate the present value of projected future cash flows. The assumptions are highly uncertain and include primarily market discount rates, current spreads, and an indicative pricing. The assumptions used are drawn from similar securities that are actively traded in the market and have similar characteristics as the collateral underlying the debt securities being evaluated. The valuation is performed on a monthly basis.

61

OFG BANCORP

NOTES TO UNAUDITED 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. The Company has offered its customers certificates of deposit with an option tied to the performance of the S&P Index and uses equity indexed option agreements with major broker-dealers to manage its exposure to changes in this index. Their fair value is 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 is linked to the average value of the S&P Index on a specific set of dates during the life of the option. The methodology uses an average rate option or a cash-settled option whose payoff is 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 are uncertain and require a degree of judgment, include primarily S&P Index volatility, forward interest rate projections, estimated index dividend payout, and leverage.

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.

Loans receivable considered impaired that are collateral dependent

The impairment is measured 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. 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.

62

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Assets and liabilities measured at fair value on a recurring and non-recurring basis, including financial liabilities for which the Company has elected the fair value option, are summarized below:

| March 31, 2014
| Fair Value Measurements
| Level 1 |  | Level 2 |  | Level 3 |  | Total
| (In thousands)
Recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for-sale | $ | - |  | $ | 1,435,632 |  | $ | 20,053 |  | $ | 1,455,685
Money market investments |  | 7,652 |  |  | - |  |  | - |  |  | 7,652
Derivative assets |  | - |  |  | 3,306 |  |  | 12,555 |  |  | 15,861
Servicing assets |  | - |  |  | - |  |  | 13,970 |  |  | 13,970
Derivative liabilities |  | - |  |  | (13,830) |  |  | (12,120) |  |  | (25,950)
| $ | 7,652 |  | $ | 1,425,108 |  | $ | 34,458 |  | $ | 1,467,218
Non-recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |
Impaired commercial loans | $ | - |  | $ | - |  | $ | 27,975 |  | $ | 27,975
Foreclosed real estate |  | - |  |  | - |  |  | 96,884 |  |  | 96,884
| $ | - |  | $ | - |  | $ | 124,859 |  | $ | 124,859

| December 31, 2013
| Fair Value Measurements
| Level 1 |  | Level 2 |  | Level 3 |  | Total
| (In thousands)
Recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for-sale | $ | - |  | $ | 1,568,745 |  | $ | 19,680 |  | $ | 1,588,425
Securities purchased under agreements to resell |  | - |  |  | 60,000 |  |  | - |  |  | 60,000
Money market investments |  | 6,967 |  |  | - |  |  | - |  |  | 6,967
Derivative assets |  | - |  |  | 4,072 |  |  | 16,430 |  |  | 20,502
Servicing assets |  | - |  |  | - |  |  | 13,801 |  |  | 13,801
Derivative liabilities |  | - |  |  | (14,937) |  |  | (15,736) |  |  | (30,673)
| $ | 6,967 |  | $ | 1,617,880 |  | $ | 34,175 |  | $ | 1,659,022
Non-recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |
Impaired commercial loans | $ | - |  | $ | - |  | $ | 28,353 |  | $ | 28,353
Foreclosed real estate |  | - |  |  | - |  |  | 90,024 |  |  | 90,024
| $ | - |  | $ | - |  | $ | 118,377 |  | $ | 118,377

63

OFG BANCORP

NOTES TO UNAUDITED 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, 2014 and 2013:

| Quarter Ended March 31, 2014
|  |  |  | Derivative |  |  |  |  | Derivative |  |  |
|  | Other |  | asset |  |  |  |  | liability |  |  |
|  | debt |  | (S&P |  |  |  |  | (S&P |  |  |
|  | securities |  | Purchased |  | Servicing |  | Embedded |  |  |
Level 3 Instruments Only |  | available-for-sale |  | Options) |  | assets |  | Options) |  | Total
Balance at beginning of year |  | $ | 19,680 |  | $ | 16,430 |  | $ | 13,801 |  | $ | (15,736) |  | $ | 34,175
Gains (losses) included in earnings |  |  | - |  |  | (3,875) |  |  | - |  |  | 3,373 |  |  | (502)
Changes in fair value of investment securities available for sale included in other comprehensive income |  |  | 373 |  |  | - |  |  | - |  |  | - |  |  | 373
New instruments acquired |  |  | - |  |  | - |  |  | 563 |  |  | - |  |  | 563
Principal repayments |  |  | - |  |  | - |  |  | (196) |  |  | - |  |  | (196)
Amortization |  |  | - |  |  | - |  |  | - |  |  | 243 |  |  | 243
Changes in fair value of servicing assets |  |  | - |  |  | - |  |  | (198) |  |  | - |  |  | (198)
Balance at end of year |  | $ | 20,053 |  | $ | 12,555 |  | $ | 13,970 |  | $ | (12,120) |  | $ | 34,458

| Quarter Ended March 31, 2013
| Investment securities |  |  |  |  |  |  |  |  |  |  |  |
| available-for-sale |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  | Derivative |  |  |  |  | Derivative |  |  |
|  |  |  |  |  | asset |  |  |  |  | liability |  |  |
|  |  |  | Other |  | (S&P |  |  |  |  | (S&P |  |  |
|  |  |  | debt |  | Purchased |  | Servicing |  | Embedded |  |  |
Level 3 Instruments Only | CLOs |  | securities |  | Options) |  | assets |  | Options) |  | Total
Balance at beginning of period | $ | 27,280 |  | $ | 10,016 |  | $ | 11,367 |  | $ | 10,776 |  | $ | (10,912) |  | $ | 48,527
Gains (losses) included in earnings |  | - |  |  | - |  |  | 1,721 |  |  | - |  |  | (1,707) |  |  | 14
Changes in fair value of investment securities available for sale included in other comprehensive income |  | 1,705 |  |  | 1 |  |  | - |  |  | - |  |  | - |  |  | 1,706
New instruments acquired |  | - |  |  | - |  |  | - |  |  | 487 |  |  | - |  |  | 487
Principal repayments |  | - |  |  | - |  |  | - |  |  | (307) |  |  | - |  |  | (307)
Amortization |  | 17 |  |  | - |  |  | - |  |  | - |  |  | 50 |  |  | 67
Changes in fair value of servicing assets |  | - |  |  | - |  |  | - |  |  | (314) |  |  | - |  |  | (314)
Balance at end of period | $ | 29,002 |  | $ | 10,017 |  | $ | 13,088 |  | $ | 10,642 |  | $ | (12,569) |  | $ | 50,180

During the quarter ended March 31, 2014 and 2013, 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.

64

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The table below presents quantitative information for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at March 31, 2014:

|  | March 31, 2014
|  | Fair Value |  | Valuation Technique |  | Unobservable Input |  | Range
|  | (In thousands) |  |  |  |  |  |
Investment securities available-for-sale: |  |  |  |  |  |  |  |  |
Other debt securities |  | $ | 20,053 |  | Market comparable bonds |  | Indicative pricing |  | 97.125% - 98.975%
|  |  |  |  |  |  | Option adjusted spread |  | 683.7% - 1602.0%
|  |  |  |  |  |  | Yield to maturity |  | 7.05% - 15.89%
|  |  |  |  |  |  | Spread to maturity |  | 689.9% - 1579.0%
Derivative assets (S&P Purchased Options) |  | $ | 12,555 |  | Option pricing model |  | Implied option volatility |  | 22.887% - 53.615%
|  |  |  |  |  |  | Counterparty credit risk (based on 5-year credit default swap ("CDS") spread) |  | 56.360% - 86.490%
Servicing assets |  | $ | 13,970 |  | Cash flow valuation |  | Constant prepayment rate |  | 5.60% - 10.08%
|  |  |  |  |  |  | Discount rate |  | 10.00% - 12.00%
Derivative liability (S&P Embedded Options) |  | $ | (12,120) |  | Option pricing model |  | Implied option volatility |  | 22.887% - 53.615%
|  |  |  |  |  |  | Counterparty credit risk (based on 5-year CDS spread) |  | 56.360% - 86.490%
Collateral dependant impaired loans |  | $ | 27,975 |  | Fair value of property or collateral |  | Appraised value less disposition costs |  | 21.30% - 28.30%

65

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Information about Sensitivity to Changes in Significant Unobservable Inputs

Other debt securities – The significant unobservable inputs used in the fair value measurement of one of the Company’s other debt securities are indicative comparable pricing, option adjusted spread (“OAS”), yield to maturity, and spread to maturity. Significant changes in any of those inputs in isolation would result in a significantly different fair value measurement. Generally, a change in the assumption used for indicative comparable pricing is accompanied by a directionally opposite change in the assumption used for OAS and a directionally, although not equally proportional, opposite change in the assumptions used for yield to maturity and spread to maturity.

Derivative asset (S&P Purchased Options) – The significant unobservable inputs used in the fair value measurement of the Company’s derivative assets related to S&P purchased options are implied option volatility and counterparty credit risk. Significant changes in any of those inputs in isolation would result in a significantly different fair value measurement. Generally, a change in the assumption used for implied option volatility is not necessarily accompanied by directionally similar or opposite changes in the assumption used for counterparty credit risk.

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.

Derivative liability (S&P Embedded Options) – The significant unobservable inputs used in the fair value measurement of the Company’s derivative liability related to S&P purchased options are implied option volatility and counterparty credit risk. Significant changes in any of those inputs in isolation would result in a significantly different fair value measurement. Generally, a change in the assumption used for implied option volatility is not necessarily accompanied by directionally similar or opposite changes in the assumption used for counterparty credit risk.

The table below presents a detail of investment securities available-for-sale classified as Level 3 at March 31, 2014:

|  | March 31, 2014
|  |  |  |  |  |  |  |  |  | Weighted |  |
|  | Amortized |  | Unrealized |  |  |  |  | Average |  | Principal
Type |  | Cost |  | Gains (Losses) |  | Fair Value |  | Yield |  | Protection
|  | (In thousands)
Other debt securities |  | $ | 20,000 |  | $ | 53 |  | $ | 20,053 |  | 3.50% |  | N/A

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.

66

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The estimated fair value and carrying value of the Company’s financial instruments at March 31, 2014 and December 31, 2013 is as follows:

| March 31, |  | December 31,
| 2014 |  | 2013
| Fair |  | Carrying |  | Fair |  | Carrying
| Value |  | Value |  | Value |  | Value
| (In thousands)
Level 1 |  |  |  |  |  |  |  |  |  |  |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents | $ | 624,636 |  | $ | 624,636 |  | $ | 621,269 |  | $ | 621,269
Restricted cash |  | 15,170 |  |  | 15,170 |  |  | 82,199 |  |  | 82,199
Level 2 |  |  |  |  |  |  |  |  |  |  |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |
Securities purchased under agreements to resell |  | - |  |  | - |  |  | 60,000 |  |  | 60,000
Trading securities |  | 1,910 |  |  | 1,910 |  |  | 1,869 |  |  | 1,869
Investment securities available-for-sale |  | 1,435,632 |  |  | 1,435,632 |  |  | 1,568,745 |  |  | 1,568,745
Federal Home Loan Bank (FHLB) stock |  | 24,430 |  |  | 24,430 |  |  | 24,450 |  |  | 24,450
Derivative assets |  | 3,306 |  |  | 3,306 |  |  | 4,072 |  |  | 4,072
Derivative liabilities |  | 13,830 |  |  | 13,830 |  |  | 14,937 |  |  | 14,937
Level 3 |  |  |  |  |  |  |  |  |  |  |
Financial Assets: |  |  |  |  |  |  |  |  |  |  |
Investment securities available-for-sale |  | 20,053 |  |  | 20,053 |  |  | 19,680 |  |  | 19,680
Total loans (including loans held-for-sale) |  |  |  |  |  |  |  |  |  |  |
Non-covered loans, net |  | 4,737,604 |  |  | 4,654,749 |  |  | 4,857,505 |  |  | 4,662,458
Covered loans, net |  | 400,355 |  |  | 347,865 |  |  | 459,444 |  |  | 356,961
Derivative assets |  | 12,555 |  |  | 12,555 |  |  | 16,430 |  |  | 16,430
FDIC shared-loss indemnification asset |  | 106,170 |  |  | 166,194 |  |  | 152,965 |  |  | 189,240
Accrued interest receivable |  | 18,969 |  |  | 18,969 |  |  | 18,734 |  |  | 18,734
Servicing assets |  | 13,970 |  |  | 13,970 |  |  | 13,801 |  |  | 13,801
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |
Deposits |  | 5,247,226 |  |  | 5,300,992 |  |  | 5,409,540 |  |  | 5,383,265
Securities sold under agreements to repurchase |  | 1,076,000 |  |  | 1,012,240 |  |  | 1,323,903 |  |  | 1,267,618
Advances from FHLB |  | 340,805 |  |  | 335,689 |  |  | 335,324 |  |  | 336,143
Federal funds purchased |  | 23,712 |  |  | 23,712 |  |  | - |  |  | -
Term notes |  | 3,583 |  |  | 3,708 |  |  | 3,638 |  |  | 3,663
Subordinated capital notes |  | 87,240 |  |  | 100,404 |  |  | 99,316 |  |  | 100,010
Accrued expenses and other liabilities |  | 140,037 |  |  | 140,037 |  |  | 144,424 |  |  | 144,424

67

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following methods and assumptions were used to estimate the fair values of significant financial instruments at March 31, 2014 and December 31, 2013:

• Cash and cash equivalents (including money market investments and time deposits with other banks), restricted cash, accrued interest receivable, securities purchased under agreements to resell, securities sold but not yet delivered, 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, is based on quoted market prices, when available, 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 estimated fair value of the structured credit investments is determined by using a third-party cash flow valuation model to calculate the present value of projected future cash flows. The assumptions used which are highly uncertain and require a high degree of judgment, include primarily market discount rates, current spreads, duration, leverage, default, home price depreciation, and loss rates. The assumptions used are drawn from a wide array of data sources, including the performance of the collateral underlying each deal. The external-based valuation, which is obtained at least on a quarterly basis, is analyzed and its assumptions are evaluated and incorporated in either an internal-based valuation model when deemed necessary, or compared to counterparties’ prices and agreed by management.

• The fair value of the FDIC shared-loss indemnification asset represents 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 pool and the loss sharing percentages. The ultimate collectability of the FDIC shared-loss indemnification asset is dependent upon the performance of the underlying covered loans, the passage of time and claims paid by the FDIC which are impacted by the Bank’s adherence to certain guidelines established by the FDIC.

• The fair value of servicing assets 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. The Company has offered its customers certificates of deposit with an option tied to the performance of the S&P Index, and uses equity indexed option agreements with major broker-dealers to manage its exposure to changes in this index. Their fair value is 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 is linked to the average value of the S&P Index on a specific set of dates during the life of the option. The methodology uses an average rate option or a cash-settled option whose payoff is 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 are uncertain and require a degree of judgment, include primarily S&P Index volatility, forward interest rate projections, estimated index dividend payout, and leverage.

• 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 covered and non-covered 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.

• 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.

68

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

• For short term borrowings and federal funds purchased, the carrying amount is considered a reasonable estimate of fair value. The fair value of long-term borrowings, which include securities sold under agreements to repurchase, advances from FHLB-NY, FDIC-guaranteed term notes, other term notes, 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.

• The fair value of commitments to extend credit and unused lines of credit is based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings.

NOTE 18 – 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 CPC. 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 pension 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.

69

OFG BANCORP

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Following are the results of operations and the selected financial information by operating segment as of and for the quarters ended March 31, 2014 and 2013:

| Quarter Ended March 31, 2014
|  |  |  | Wealth |  |  |  |  | Total Major |  |  |  |  | Consolidated
| Banking |  | Management |  | Treasury |  | Segments |  | Eliminations |  | Total
| (In thousands)
Interest income | $ | 108,631 |  | $ | 40 |  | $ | 14,403 |  | $ | 123,074 |  | $ | - |  | $ | 123,074
Interest expense |  | (7,516) |  |  | - |  |  | (12,160) |  |  | (19,676) |  |  | - |  |  | (19,676)
Net interest income |  | 101,115 |  |  | 40 |  |  | 2,243 |  |  | 103,398 |  |  | - |  |  | 103,398
Provision for non-covered loan and lease losses |  | (10,062) |  |  | - |  |  | - |  |  | (10,062) |  |  | - |  |  | (10,062)
Provision for covered loan and lease losses |  | (1,629) |  |  | - |  |  | - |  |  | (1,629) |  |  | - |  |  | (1,629)
Non-interest income (loss) |  | (5,047) |  |  | 6,522 |  |  | 3,803 |  |  | 5,278 |  |  | - |  |  | 5,278
Non-interest expenses |  | (53,596) |  |  | (4,779) |  |  | (3,078) |  |  | (61,453) |  |  | - |  |  | (61,453)
Intersegment revenue |  | 544 |  |  | - |  |  | - |  |  | 544 |  |  | (544) |  |  | -
Intersegment expenses |  | - |  |  | (432) |  |  | (112) |  |  | (544) |  |  | 544 |  |  | -
Income before income taxes | $ | 31,325 |  | $ | 1,351 |  | $ | 2,856 |  | $ | 35,532 |  | $ | - |  | $ | 35,532
Total assets | $ | 7,351,839 |  | $ | 24,345 |  | $ | 1,643,569 |  | $ | 9,019,753 |  | $ | (1,164,115) |  | $ | 7,855,638

| Quarter Ended March 31, 2013
|  |  |  | Wealth |  |  |  |  | Total Major |  |  |  |  | Consolidated
| Banking |  | Management |  | Treasury |  | Segments |  | Eliminations |  | Total
| (In thousands)
Interest income | $ | 102,068 |  | $ | 86 |  | $ | 12,018 |  | $ | 114,172 |  | $ | - |  | $ | 114,172
Interest expense |  | (6,971) |  |  | (60) |  |  | (13,525) |  |  | (20,556) |  |  | - |  |  | (20,556)
Net interest income |  | 95,097 |  |  | 26 |  |  | (1,507) |  |  | 93,616 |  |  | - |  |  | 93,616
Provision for non-covered loan and lease losses |  | (7,916) |  |  | - |  |  | - |  |  | (7,916) |  |  | - |  |  | (7,916)
Provision for covered loan and lease losses, net |  | (672) |  |  | - |  |  | - |  |  | (672) |  |  | - |  |  | (672)
Non-interest income(loss) |  | 2,537 |  |  | 7,700 |  |  | (138) |  |  | 10,099 |  |  | - |  |  | 10,099
Non-interest expenses |  | (61,932) |  |  | (4,462) |  |  | (415) |  |  | (66,809) |  |  | - |  |  | (66,809)
Intersegment revenue |  | 383 |  |  | - |  |  | - |  |  | 383 |  |  | (383) |  |  | -
Intersegment expenses |  | - |  |  | (302) |  |  | (81) |  |  | (383) |  |  | 383 |  |  | -
Income before income taxes | $ | 27,497 |  | $ | 2,962 |  | $ | (2,141) |  | $ | 28,318 |  | $ | - |  | $ | 28,318
Total assets | $ | 6,989,744 |  | $ | 39,511 |  | $ | 2,539,649 |  | $ | 9,568,904 |  | $ | (866,353) |  | $ | 8,702,551

70

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 unaudited 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 2013 Form 10-K for the year ended December 31, 2013 (the “2013 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, Financial Services, and Treasury, and distinguishes itself based on quality service. The Company has 55 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 U.S. Generally Accepted Accounting Principles (“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 annual report on the 2013 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 2013 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:

| • |  | Business combination |
| • |  | 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 and Compliance Committee of our Board of Directors. As part of the Company’s continuous enhancement to the allowance for loan and lease losses methodology, during the quarter ended March 31, 2014, an assessment of the look-back period and historical loss factor was performed for auto and leasing and consumer loan portfolios based on the trends observed and their relation with the economic cycle as of the period ended March 31, 2014. As a result, the period was changed to 24 months from the previously determined 12 months. This change in the allowance for loan and lease losses’ look back period for the consumer and auto and leasing portfolios is considered a change in accounting estimate as per ASC 250-10 provisions, where adjustments should be made prospectively. Apart from this change, there have been no other material changes in the methods used to formulate these critical accounting estimates from those discussed in our 2013 Form 10-K.

71

OVERVIEW OF FINANCIAL PERFORMANCE

SELECTED FINANCIAL DATA
| Quarter Ended March 31,
|  |  |  |  |  |  | Variance
| 2014 |  | 2013 |  | %
EARNINGS DATA: | (In thousands, except per share data)
Interest income | $ | 123,074 |  | $ | 114,172 |  | 7.8%
Interest expense |  | 19,676 |  |  | 20,556 |  | -4.3%
Net interest income |  | 103,398 |  |  | 93,616 |  | 10.4%
Provision for non-covered loan and lease losses |  | 10,062 |  |  | 7,916 |  | 27.1%
Provision for covered loan and lease losses, net |  | 1,629 |  |  | 672 |  | 142.4%
Total provision for loan and lease losses, net |  | 11,691 |  |  | 8,588 |  | 36.1%
Net interest income after provision for loan and lease losses |  | 91,707 |  |  | 85,028 |  | 7.9%
Non-interest income |  | 5,278 |  |  | 10,099 |  | -47.7%
Non-interest expenses |  | 61,453 |  |  | 66,809 |  | -8.0%
Income before taxes |  | 35,532 |  |  | 28,318 |  | 25.5%
Income tax expense (benefit) |  | 11,785 |  |  | 7,126 |  | 65.4%
Net income |  | 23,747 |  |  | 21,192 |  | 12.1%
Less: dividends on preferred stock |  | (3,465) |  |  | (3,465) |  | 153.0%
Income available to common shareholders | $ | 20,282 |  | $ | 17,727 |  | 14.4%
PER SHARE DATA: |  |  |  |  |  |  |
Basic | $ | 0.45 |  | $ | 0.39 |  | 15.4%
Diluted | $ | 0.42 |  | $ | 0.37 |  | 13.5%
Average common shares outstanding |  | 45,329 |  |  | 45,595 |  | -0.6%
Average common shares outstanding and equivalents |  | 52,598 |  |  | 52,898 |  | -0.6%
Cash dividends declared per common share | $ | 0.08 |  | $ | 0.06 |  | 0.0%
Cash dividends declared on common shares | $ | 3,657 |  | $ | 2,737 |  | 33.6%
PERFORMANCE RATIOS: |  |  |  |  |  |  |
Return on average assets (ROA) |  | 1.18% |  |  | 0.96% |  | 22.9%
Return on average tangible common equity |  | 12.86% |  |  | 11.92% |  | 7.9%
Return on average common equity (ROE) |  | 11.13% |  |  | 10.20% |  | 9.1%
Equity-to-assets ratio |  | 11.41% |  |  | 9.98% |  | 14.4%
Efficiency ratio |  | 50.03% |  |  | 57.46% |  | -12.9%
Interest rate spread |  | 5.87% |  |  | 4.91% |  | 19.6%
Interest rate margin |  | 5.90% |  |  | 4.90% |  | 20.4%

72

SELECTED FINANCIAL DATA - (Continued) |  |  |  |  |  |  |
| March 31, |  | December 31, |  | Variance
| 2014 |  | 2013 |  | %
PERIOD END BALANCES AND CAPITAL RATIOS: | (In thousands, except per share data)
Investments and loans |  |  |  |  |  |  |
Investments securities | $ | 1,482,090 |  | $ | 1,614,809 |  | -8.2%
Loans and leases not covered under shared-loss agreements with the FDIC, net |  | 4,654,749 |  |  | 4,662,458 |  | -0.2%
Loans and leases covered under shared-loss agreements with the FDIC, net |  | 347,865 |  |  | 356,961 |  | -2.5%
Total investments and loans | $ | 6,484,704 |  | $ | 6,634,228 |  | -2.3%
Deposits and borrowings |  |  |  |  |  |  |
Deposits | $ | 5,300,992 |  | $ | 5,383,265 |  | -1.5%
Securities sold under agreements to repurchase |  | 1,012,240 |  |  | 1,267,618 |  | -20.1%
Other borrowings |  | 463,513 |  |  | 439,816 |  | 5.4%
Total deposits and borrowings | $ | 6,776,745 |  | $ | 7,090,699 |  | -4.4%
Stockholders’ equity |  |  |  |  |  |  |
Preferred stock | $ | 176,000 |  | $ | 176,000 |  | 0.0%
Common stock |  | 52,714 |  |  | 52,707 |  | 0.0%
Additional paid-in capital |  | 538,287 |  |  | 538,071 |  | 0.0%
Legal surplus |  | 64,292 |  |  | 61,957 |  | 3.8%
Retained earnings |  | 147,919 |  |  | 133,629 |  | 10.7%
Treasury stock, at cost |  | (90,743) |  |  | (80,642) |  | -12.5%
Accumulated other comprehensive income |  | 8,022 |  |  | 3,191 |  | 151.4%
Total stockholders' equity | $ | 896,491 |  | $ | 884,913 |  | 1.3%
Per share data |  |  |  |  |  |  |
Book value per common share | $ | 16.23 |  | $ | 15.74 |  | 3.1%
Tangible book value per common share | $ | 14.07 |  | $ | 13.60 |  | 3.5%
Market price at end of period | $ | 17.19 |  | $ | 17.34 |  | -0.9%
Capital ratios |  |  |  |  |  |  |
Leverage capital |  | 9.51% |  |  | 9.11% |  | 4.4%
Tier 1 risk-based capital |  | 14.76% |  |  | 14.35% |  | 2.9%
Total risk-based capital |  | 16.56% |  |  | 16.14% |  | 2.6%
Tier 1 common equity to risk-weighted assets |  | 10.79% |  |  | 10.44% |  | 3.4%
Financial assets managed |  |  |  |  |  |  |
Trust assets managed | $ | 2,797,778 |  | $ | 2,796,923 |  | 0.0%
Broker-dealer assets gathered | $ | 2,576,991 |  | $ | 2,493,324 |  | 3.4%

73

FINANCIAL HIGHLIGHTS

Income available to common shareholders for the quarter ended March 31, 2014, increased to $20.3 million, or $0.42 per diluted share, when compared to the same period in 2013.

During the quarter ended March 31, 2014, the Company’s return on assets was 1.18% and its return on equity was 11.13%. The Company improved its efficiency ratio, which decreased to 50.03% from 57.46% when compared with the same period in 2013.

Operating revenues for the quarter ended March 31, 2014 increased 4.8%, or $5.0 million, to $108.7 million when compared to the same period in 2013.

| Quarter Ended March 31,
| 2014 |  | 2013
| (In thousands)
OPERATING REVENUE |  |  |  |  |
Net interest income | $ | 103,398 |  | $ | 93,616
Non-interest income |  | 5,278 |  |  | 10,099
Total operating revenue | $ | 108,676 |  | $ | 103,715

Interest Income

Total interest income for the quarter ended March 31, 2014 increased 7.8% to $123.1 million, as compared to the same period in 2013. This was mainly related to an increase in interest income from loans of $7.6 million, or 7.5% when compared to the same period in 2013. The yield on covered loans increased from 20.98% in the quarter ended March 31, 2013 to 26.68% for the quarter ended March 31, 2014. This increase in yield is the result of higher projected cash flows on certain pools of covered loans, as credit losses have been lower than initially estimated for these pools. The covered portfolio is having cost recoveries on pools with lower carrying amounts, and these have the effect of increasing net interest income. In addition, the yield on non-covered loans increased from 6.98% in the quarter ended March 31, 2013 to 7.43% for the quarter ended March 31, 2014.

Interest income from investments reflects a 9.9% increase for the quarter ended March 31, 2014, as compared to the same period in 2013. The increase is mainly due to the increase in the investments yield to 2.79% for the quarter ended March 31, 2014 as compared to 2.0% for the same period in 2013 driven by lower premium amortization.

Interest Expense

Total interest expense for the quarter ended March 31, 2014, decreased 4.3% to $19.7 million, as compared to the quarter ended March 31, 2013. This reflects the lower cost of deposits (0.68% vs. 72%) for the quarter ended March 31, 2014, as compared to the same period in 2013. Such lower cost reflects continuing progress in the repricing of the Company’s core retail deposits.

Net Interest Income

Net interest income for the quarter ended March 31, 2014, was $103.4 million, an increase of 10.4% when compared with the same period in 2013. The increase was mostly due the net effect of a 7.8% increase in total interest income and a decrease of 4.3% in interest expense due to lower cost of funds. Net interest margin of 5.90% for the quarter ended March 31, 2014, increased 100 basis points when compared to the quarter ended March 31, 2013.

Provision for Loan and Lease Losses

Provision for non-covered loans losses for the quarter ended March 31, 2014 increased $2.1 million when compared to the quarter ended March 31, 2013. Provision for covered loans losses for the quarter ended March 31, 2014 increased $957 thousand when compared to the quarter ended March 31, 2013.

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Non-Interest Income

During the first quarter of 2014, core banking and financial services revenues decreased 14.3% to $19.4 million as compared to the quarter ended March 31, 2013, primarily reflecting a $1.2 million decrease in both, banking services revenue to $10.6 million and mortgage banking activities to $2.0 million for the first quarter of 2014. Decrease in banking services revenues is mostly due to the reclassification of loan late charges into interest income. Decrease in mortgage banking activities is mainly due to higher losses in repurchased loans, lower cost or market adjustment made to mortgage loans held for sale during such quarter of 2014 and decrease in sales, when compared to same period in 2013.

The FDIC shared-loss expense of $18.5 million for the first quarter of 2014 compared to $12.9 million for the first quarter of 2013, resulted from the ongoing evaluation of expected cash flows of the covered loan portfolio, which resulted in reduced projected losses expected to be collected from the FDIC and the improved accretable yield on the covered loans. During the quarter ended March 31, 2014, the net amortization included $3.5 million of additional amortization of the FDIC indemnification asset from stepped up cost recoveries on certain construction and leasing loan pools.

Results from the quarter ended March 31, 2014 included a gain on sale of securities of $4.4 million. During the quarter ended March 31, 2013, the Company did not have any gain or loss on sale of securities. Losses from derivative activities were $478 thousand for the quarter ended March 31, 2014, compared to $788 thousand for the same period in 2013. There was no gain or loss on extinguishment of debt for the quarter ended March 31 2014, compared to a gain of $1.1 million for the same period in 2013.

Non-Interest Expense

Non-interest expense for the quarter ended March 31, 2014 decreased to $61.5 million, compared to $66.8 million for the same period in 2013. During the quarter ended March 31 2014, there were no merger and restructuring charges compared to $5.5 million for the same period in 2013. The efficiency ratio for the first quarter of 2014 was 50.03% compared to 57.46% for the same period in 2013 driven mostly by a decrease in non-interest expenses and an increase in net income.

Income Tax Expense

Income tax expense was $11.8 million for the first quarter of 2014 compared to $7.1 million for the first quarter of 2013. The increase for the first quarter of 2014 was primarily due to the recent amendments to the Puerto Rico tax code that increases the corporate income tax rate to 39% from 30%.

Income Available to Common Shareholders

For the first quarter of 2014, the Company’s income available to common shareholders amounted to $20.3 million compared to $17.7 million for the first quarter of 2013. Income per basic common share and fully diluted common share was $0.45 and $0.42, respectively, for the first quarter of 2014, compared to income per basic common share and fully diluted common share of $0.39 and $0.37, respectively, for the first quarter of 2013.

Interest Earning Assets

The loan portfolio declined to $5.003 billion at March 31, 2014, compared to $5.019 billion at December 31, 2013, primarily due to the early pay down of some commercial loans. The investment portfolio of $1.482 billion at March 31, 2014 decreased 8.2% compared to $1.615 billion at December 31, 2013. During the quarter ended March 31, 2014, the Company sold $110.8 million of mortgage-backed available for sale securities taking advantage of market opportunities to realize gains and reduce some interest rate sensitivity.

Interest Bearing Liabilities

Total deposits amounted to $5.301 billion at March 31, 2014, a decrease of 1.5% compared to $5.383 billion at December 31, 2013. Non-maturing deposit balances increased 3.7%, to $3.5 billion, while higher-priced time deposits declined 10.0% as part of efforts to reduce the cost of deposits, which averaged 0.68% at March 31, 2014 compared to 0.72% at March 31, 2013. Securities sold under agreements to repurchase decreased 20.1%, or $255.3 million, as the Company used available cash to pay off $255.0 million of repurchase agreements at maturity.

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Stockholders’ Equity

Stockholders’ equity at March 31, 2014 was $896.5 million compared to $884.9 million at December 31, 2013, an increase of 1.3%. This increase reflects the net income for the first quarter of 2014 and an increase in other comprehensive income, partially offset by treasury stock repurchases.

Book value per share was $16.23 at March 31, 2014 compared to $15.74 at December 31, 2013.

The Company maintains capital ratios in excess of regulatory requirements. At March 31, 2014, Tier 1 Leverage Capital Ratio was 9.51%, Tier 1 Risk-Based Capital Ratio was 14.76%, and Total Risk-Based Capital Ratio was 16.56%.

Return on Average Assets and Common Equity

Return on average common equity (“ROE”) for the quarter ended March 31, 2014 was 11.13% compared to 10.20% for the quarter ended March 31, 2013. Return on average assets (“ROA”) for the quarter ended March 31, 2014 was 1.18% compared to 0.96% for the same period in 2013. The increases in ROE and ROA are mostly due to 12.1% increase in net income from $21.2 million in the quarter ended March 31, 2013 to $23.7 million in the quarter ended March 31, 2014, and to the decrease of 8.0% in average assets and 4.8% in average common equity from the same period in 2013.

Assets under Management

At March 31, 2014, total assets managed by the Company’s trust division and CPC remained leveled at $2.798 billion compared to December 31, 2013. At March 31, 2014, total assets managed by the securities broker-dealer subsidiary from its customer investment accounts increased 3.4% to $2.577 billion, compared to $2.493 billion at December 31, 2013. Changes in trust and broker-dealer related assets primarily reflect a slight increase in portfolio and differences in market values.

Lending

Total loan production of $212.0 million for the quarter ended March 31, 2014 decreased 22.8% from the quarter ended March 31, 2013. Generally, loan demand for the quarter ended March 31, 2014 was lower compared to the same period of 2013. Total commercial loan production of $39.8 million for the quarter ended March 31, 2014, decreased 46.3% from $77.1 million in the quarter ended March 31, 2013.

Mortgage loan production of $50.8 million for the quarter ended March 31, 2014 decreased 34.1% from the quarter ended March 31, 2013. The Company sells most of its conforming mortgage loans in the secondary market and retains the servicing rights.

In the aggregate, consumer loan and auto and leasing production for the quarter ended March 31, 2014, totaled $121.4 million, a slight decrease of 1.8% from the quarter ended March 31, 2013.

Total loan portfolio declined by $16.8 million from $5.019 billion at December 31, 2013 to $5.002 billion at March 31, 2014, mostly as the result of scheduled pay downs and maturities in both the non-covered and covered loan portfolios.

Credit Quality on Non-Covered Loans

Net credit losses, excluding acquired loans, increased $1.8 million to $5.2 million for the quarter ended March 31, 2014, representing 0.86% of average non-covered loans outstanding versus 1.06% for the quarter ended March 31, 2013. The allowance for loan and lease losses on non-covered loans at March 31, 2014, increased to $56.2 million compared to $54.3 million at December 31, 2013. The allowances for loan and lease losses, excluding acquired loans, increased to $49.5 million (1.95% of total non-covered loans, excluding acquired loans) at March 31, 2014, compared to $49.1 million (2.4% of total non-covered loans, excluding acquired loans) at December 31, 2013. The allowance for loan and lease losses on acquired loans accounted for under ASC 310-20 increased to $3.6 million at March 31, 2014, compared to $2.4 million at December 31, 2014.

Non-performing loans (“NPLs”), which exclude loans covered under shared-loss agreements with the FDIC and loans acquired in the BBVAPR Acquisition accounted under ASC 310-30, increased to $88.2 million at March 31, 2014 compared to $86.2 million at December 31, 2013. The increase is due mainly to increase in non-performing consumer and auto loans.

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Non-GAAP Measures

The Company uses certain non-GAAP measures of financial performance to supplement the unaudited consolidated financial statements presented in accordance with GAAP. The Company presents non-GAAP measures that management believes are useful and meaningful to investors. Non-GAAP measures do not have any standardized meaning, are not required to be uniformly applied, and are not audited. Therefore, they are unlikely to be comparable to similar measures presented by other companies. The presentation of non-GAAP measures is not intended to be a substitute for, and should not be considered in isolation from, the financial measures reported in accordance with GAAP.

The Company’s management has reported and discussed the results of operations herein both on a GAAP basis and on a pre-tax pre-provision operating income basis (defined as net interest income, plus banking and financial services revenue, less non-interest expenses, as calculated on the table below). The Company’s management believes that, given the nature of the items excluded from the definition of pre-tax pre-provision operating income, it is useful to state what the results of operations would have been without them so that investors can see the financial trends from the Company’s continuing business.

During the quarter ended March 31, 2014, the Company’s pre-tax pre-provision operating income was approximately $61.4 million, an increase of 11.6% from $55.0 million for the same quarter in 2013. Pre-tax pre-provision operating income is calculated as follows:

| Quarter Ended March 31, |
| 2014 |  | 2013 |
| (In thousands) |
PRE-TAX PRE-PROVISION OPERATING INCOME |  |  |  |  |  |
Net interest income | $ | 103,398 |  | $ | 93,616 |
Core non-interest income: |  |  |  |  |  |
Banking service revenue |  | 10,606 |  |  | 11,838 |
Financial service revenue |  | 6,867 |  |  | 7,660 |
Mortgage banking activities |  | 1,950 |  |  | 3,153 |
Total core non-interest income |  | 19,423 |  |  | 22,651 |
Non-interest expenses |  | 61,453 |  |  | 66,809 |
Less merger and restructuring charges |  | - |  |  | (5,534) |
|  | 61,453 |  |  | 61,275 |
Total pre-tax pre-provision operating income | $ | 61,368 |  | $ | 54,992 |

Tangible common equity consists of common equity less goodwill, core deposit intangibles and customer relationship intangible. Tier 1 common equity consists of common equity less goodwill, core deposit intangibles, net unrealized gains on available for sale securities, net unrealized losses on cash flow hedges, and disallowed deferred tax asset and servicing assets. Tangible book value per common share consists of tangible common equity divided by common stock outstanding at the end of the period. Ratios of tangible common equity to total assets, tangible common equity to risk-weighted assets, total equity to risk-weighted assets, and Tier 1 common equity to risk-weighted assets and tangible book value per common share are non-GAAP measures.

At March 31, 2014, tangible common equity to total assets and tangible common equity to risk-weighted assets increased to 8.06% and 12.54%, respectively, from 7.61% and 12.10%, respectively, at December 31, 2013. Total equity to risk-weighted assets and Tier 1 common equity to risk-weighted assets at March 31, 2014 increased to 17.75% and 10.79%, respectively, from 17.23% and 10.44%, respectively, at December 31, 2013.

Ratios calculated based upon Tier 1 common equity have become a focus of regulators and investors, and management believes ratios based on Tier 1 common equity assist investors in analyzing the Company’s capital position. Furthermore, management and many stock analysts use tangible common equity in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations. Neither Tier 1 common equity nor tangible common equity 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.

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ANALYSIS OF RESULTS OF OPERATIONS

The following tables show major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for the quarters ended March 31, 2014 and 2013:

TABLE 1 - QUARTERLY ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE
FOR THE QUARTERS ENDED MARCH 31, 2014 AND 2013
| Interest |  | Average rate |  | Average balance
| March |  | March |  | March |  | March |  | March |  | March
| 2014 |  | 2013 |  | 2014 | 2013 |  | 2014 |  | 2013
| (Dollars in thousands)
A - TAX EQUIVALENT SPREAD |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-earning assets | $ | 123,074 |  | $ | 114,172 |  | 7.02% |  | 5.98% |  | $ | 7,108,864 |  | $ | 7,747,452
Tax equivalent adjustment |  | 10,134 |  |  | 7,090 |  | 0.58% |  | 0.37% |  |  | - |  |  | -
Interest-earning assets - tax equivalent |  | 133,208 |  |  | 121,262 |  | 7.60% |  | 6.35% |  |  | 7,108,864 |  |  | 7,747,452
Interest-bearing liabilities |  | 19,676 |  |  | 20,556 |  | 1.15% |  | 1.07% |  |  | 6,965,299 |  |  | 7,792,327
Tax equivalent net interest income / spread |  | 113,532 |  |  | 100,706 |  | 6.45% |  | 5.28% |  |  | 143,565 |  |  | (44,875)
Tax equivalent interest rate margin |  |  |  |  |  |  | 6.48% |  | 5.27% |  |  |  |  |  |
B - NORMAL SPREAD |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities |  | 14,122 |  |  | 12,809 |  | 3.54% |  | 2.47% |  |  | 1,617,135 |  |  | 2,107,361
Trading securities |  | 38 |  |  | 19 |  | 8.18% |  | 9.74% |  |  | 1,885 |  |  | 791
Interest bearing cash and money market investments |  | 283 |  |  | 308 |  | 0.24% |  | 0.23% |  |  | 482,497 |  |  | 551,242
Total investments |  | 14,443 |  |  | 13,136 |  | 2.79% |  | 2.00% |  |  | 2,101,517 |  |  | 2,659,394
Loans not covered under shared-loss agreements with the FDIC: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Originated |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage |  | 10,458 |  |  | 11,427 |  | 5.63% |  | 6.26% |  |  | 753,248 |  |  | 740,072
Commercial |  | 14,417 |  |  | 4,890 |  | 5.21% |  | 5.32% |  |  | 1,121,953 |  |  | 372,941
Consumer |  | 3,139 |  |  | 1,212 |  | 9.93% |  | 8.34% |  |  | 128,239 |  |  | 58,908
Auto and leasing |  | 10,989 |  |  | 2,845 |  | 10.66% |  | 11.65% |  |  | 418,074 |  |  | 99,048
Total originated non-covered loans |  | 39,003 |  |  | 20,374 |  | 6.53% |  | 6.50% |  |  | 2,421,514 |  |  | 1,270,968
Acquired |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage |  | 9,369 |  |  | 11,170 |  | 5.33% |  | 5.71% |  |  | 713,345 |  |  | 793,274
Commercial |  | 18,769 |  |  | 26,597 |  | 10.30% |  | 7.32% |  |  | 738,910 |  |  | 1,474,420
Consumer |  | 4,089 |  |  | 5,871 |  | 12.79% |  | 12.53% |  |  | 129,665 |  |  | 190,013
Auto |  | 14,013 |  |  | 16,795 |  | 8.76% |  | 7.03% |  |  | 648,382 |  |  | 968,380
Total acquired non-covered loans |  | 46,240 |  |  | 60,433 |  | 8.41% |  | 7.15% |  |  | 2,230,301 |  |  | 3,426,087
Total non-covered loans |  | 85,243 |  |  | 80,807 |  | 7.43% |  | 6.98% |  |  | 4,651,816 |  |  | 4,697,055
Loans covered under shared loss agreements with the FDIC |  | 23,388 |  |  | 20,229 |  | 26.68% |  | 20.98% |  |  | 355,531 |  |  | 391,002
Total loans |  | 108,631 |  |  | 101,036 |  | 8.80% |  | 8.05% |  |  | 5,007,347 |  |  | 5,088,057
Total interest earning assets |  | 123,074 |  |  | 114,172 |  | 7.02% |  | 5.98% |  |  | 7,108,864 |  |  | 7,747,451

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| Interest |  |  | Average rate |  | Average balance
| March |  | March |  |  | March | March | March |  | March
| 2014 |  | 2013 |  |  | 2014 |  | 2013 |  | 2014 |  | 2013
| (Dollars in thousands)
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-interest bearing deposits |  | - |  |  | - |  |  | 0.00% |  | 0.00% |  |  | 499,384 |  |  | 766,233
Now Accounts |  | 2,324 |  |  | 3,739 |  |  | 0.57% |  | 1.04% |  |  | 1,661,244 |  |  | 1,453,622
Savings and money market |  | 2,296 |  |  | 1,807 |  |  | 0.83% |  | 0.85% |  |  | 1,126,987 |  |  | 859,254
Individual retirement accounts |  | 1,058 |  |  | 1,367 |  |  | 1.25% |  | 1.49% |  |  | 343,762 |  |  | 372,929
Retail certificates of deposits |  | 1,939 |  |  | 3,189 |  |  | 1.37% |  | 1.87% |  |  | 572,054 |  |  | 692,899
Total core deposits |  | 7,617 |  |  | 10,102 |  |  | 0.73% |  | 0.99% |  |  | 4,203,431 |  |  | 4,144,937
Institutional deposits |  | 1,408 |  |  | 2,696 |  |  | 1.51% |  | 1.85% |  |  | 377,528 |  |  | 592,340
Brokered deposits |  | 1,516 |  |  | 1,989 |  |  | 0.82% |  | 0.94% |  |  | 751,558 |  |  | 856,451
Total wholesale deposits |  | 2,924 |  |  | 4,685 |  |  | 1.05% |  | 1.31% |  |  | 1,129,086 |  |  | 1,448,791
Deposits fair value premium amortization |  | (1,898) |  |  | (5,267) |  |  | 0.00% |  | 0.00% |  |  | - |  |  | -
Core deposit intangible amortization |  | 335 |  |  | 415 |  |  | 0.00% |  | 0.00% |  |  | - |  |  | -
Total deposits |  | 8,978 |  |  | 9,935 |  |  | 0.68% |  | 0.72% |  |  | 5,332,517 |  |  | 5,593,728
Borrowings: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities sold under agreements to repurchase |  | 7,411 |  |  | 7,248 |  |  | 2.60% |  | 1.93% |  |  | 1,156,747 |  |  | 1,525,575
Advances from FHLB and other borrowings |  | 2,295 |  |  | 1,713 |  |  | 2.48% |  | 1.31% |  |  | 375,862 |  |  | 529,365
Subordinated capital notes |  | 992 |  |  | 1,660 |  |  | 4.02% |  | 4.69% |  |  | 100,173 |  |  | 143,659
Total borrowings |  | 10,698 |  |  | 10,621 |  |  | 2.66% |  | 1.96% |  |  | 1,632,782 |  |  | 2,198,599
Total interest bearing liabilities |  | 19,676 |  |  | 20,556 |  |  | 1.15% |  | 1.07% |  |  | 6,965,299 |  |  | 7,792,327
Net interest income / spread | $ | 103,398 |  | $ | 93,616 |  |  | 5.87% |  | 4.91% |  |  |  |  |  |
Interest rate margin |  |  |  |  |  |  |  | 5.90% |  | 4.90% |  |  |  |  |  |
Excess of average interest-earning assets over average interest-bearing liabilities |  |  |  |  |  |  |  |  |  |  |  | $ | 143,565 |  | $ | (44,876)
Average interest-earning assets to average interest-bearing liabilities ratio |  |  |  |  |  |  |  |  |  |  |  |  | 102.06% |  |  | 99.42%
C - CHANGES IN NET INTEREST INCOME DUE TO: |  |  |  |  |  |  |
| Volume |  | Rate |  | Total |  |  |  |  |  |  |  |
| (In thousands) |  |  |  |  |  |  |  |
Interest Income: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investments | $ | (2,756) |  | $ | 4,063 |  | $ | 1,307 |  |  |  |  |  |  |  |
Loans |  | (2,613) |  |  | 10,208 |  |  | 7,595 |  |  |  |  |  |  |  |
Total interest income |  | (5,369) |  |  | 14,271 |  |  | 8,902 |  |  |  |  |  |  |  |
Interest Expense: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | (464) |  |  | (493) |  |  | (957) |  |  |  |  |  |  |  |
Repurchase agreements |  | (1,752) |  |  | 1,915 |  |  | 163 |  |  |  |  |  |  |  |
Other borrowings |  | (987) |  |  | 901 |  |  | (86) |  |  |  |  |  |  |  |
Total interest expense |  | (3,203) |  |  | 2,323 |  |  | (880) |  |  |  |  |  |  |  |
Net Interest Income | $ | (2,166) |  | $ | 11,948 |  | $ | 9,782 |  |  |  |  |  |  |  |

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Net Interest Income

Net interest income amounted to $103.4 million for the first quarter of 2014, a 10.4% increase from $93.6 million in the first quarter of 2013. These changes reflect a decrease of 4.3% in interest expense and an increase of 7.5% in interest income from loans and of 9.9% in interest income from investment securities when comparing both quarters.

Interest rate spread for the first quarter of 2014, increased 96 basis points to 5.87% from 4.91% in the same period for 2013. This increase is mainly due to the net effect of a 104 basis point increase in the average yield of interest-earning assets from 5.98% to 7.02%, and an 8 basis point decrease in the average cost of funds from 1.07% to 1.15%.

The increase in interest income was primarily the result of an increase of $14.3 million in interest rate partially offset by a $5.4 million decrease in volume of interest-earning assets. Interest income from loans increased 7.5% to $108.6 million for the quarter ended March 31, 2014. Interest income from investments increased 9.9% to $14.4 million for the quarter ended March 31, 2014, reflecting a lower premium amortization in the investment securities portfolio as conditional prepayment rates “CPRs” on mortgage-backed securities fell.

Interest expense decreased 4.3% to $19.7 million for the quarter ended March 31, 2014. The decrease was primarily the result of a $3.2 million decrease in volume of interest-bearing liabilities, partially offset by a $2.3 million increase in interest rate. The decrease in interest-bearing liabilities is mostly due to the decrease in repurchase agreement volume of $1.8 million during the first quarter of 2014, as the Company repaid $255 million of repurchase agreements at maturity. The increase in interest rate is due to an increase in the cost of borrowings, which increased 70 basis points to 2.66% in the first quarter of 2014, compared to 1.96% for the first quarter of 2013. The cost of deposits decreased 4 basis points to 0.68% for the first quarter of 2014, compared to 0.72% for the first quarter of 2013, primarily due to continuing progress in repricing core deposits and to the maturity of higher cost brokered deposits and time deposits during the period.

For the quarter ended March 31, 2014, the average balance of total interest-earning assets was $7.109 billion, a decrease of 8.2% from the quarter ended March 31, 2013. The decrease in average balance of interest-earning assets was mainly attributable to a decrease of 21.0% in average investments for the quarter ended March 31, 2014, resulting from redemptions and maturities and to the sale of available for sale securities during the current quarter amounting to $110.8 million, and a reduction of 1.6% in the average loan portfolio for the quarter ended March 31, 2014, primarily due to the early paydown of some commercial loans. For the quarter ended March 31, 2014, the average yield on interest-earning assets was 7.02% compared to 5.98% for the same quarter in 2013. This was mainly due to higher average yields in the covered and non-covered loan portfolios, which their average yield increased to 26.68% and 7.43%, respectively, for the quarter ended March 31, 2014, compared to 20.98% and 6.98 % for the quarter ended March 31, 2013.

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TABLE 2 - NON-INTEREST INCOME SUMMARY |  |  |  |  |  |  |  |
| Quarter Ended March 31, |  |  |
| 2014 |  | 2013 |  | Variance |
| (Dollars in thousands) |
Banking service revenue | $ | 10,606 |  | $ | 11,838 |  | -10.4% |
Financial service revenue |  | 6,867 |  |  | 7,660 |  | -10.4% |
Mortgage banking activities |  | 1,950 |  |  | 3,153 |  | -38.2% |
Total banking and financial service revenue |  | 19,423 |  |  | 22,651 |  | -14.3% |
FDIC shared-loss expense, net |  | (18,487) |  |  | (12,871) |  | -43.6% |
Sale of securities available for sale |  | 4,366 |  |  | - |  | 100.0% |
Derivatives |  | (478) |  |  | (788) |  | 39.3% |
Early extinguishment of debt |  | - |  |  | 1,061 |  | -100.0% |
Other non-interest income |  | 454 |  |  | 46 |  | 887.0% |
|  | (14,145) |  |  | (12,552) |  | -12.7% |
Total non-interest income, net | $ | 5,278 |  | $ | 10,099 |  | -47.7% |

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. 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. In addition, it is affected by the amount of securities, derivatives and trading transactions.

As shown in Table 2 above, the Company recorded non-interest income in the amount of $5.3 million for the quarter ended March 31, 2014, compared to $10.1 million for the quarter ended March 31, 2014, a decrease of $4.8 million.

FDIC shared-loss expense increased to $18.5 million for the quarter ended March 31, 2014, compared to $12.9 million for the quarter ended March 31, 2013, resulted from the ongoing evaluation of expected cash flows of the covered loan portfolio, which resulted in reduced projected losses expected to be collected from the FDIC and the improved accretable yield on the covered loans. The reduction in claimable losses amortizes the shared-loss indemnification asset through the life of the shared loss agreements. This amortization is net of the accretion of the discount recorded to reflect the expected claimable loss at its net present value. During the quarter ended March 31, 2014, the net amortization included $3.5 million of additional amortization of the FDIC indemnification asset from stepped up cost recoveries on certain construction and leasing loan pools. Additional amortization of the FDIC indemnification asset may be recorded, should the Company continue to experience reduced expected losses. The majority of the FDIC indemnification asset is recorded for projected claimable losses on non-single family residential loans whose loss share period ends by the second quarter of 2015, although the recovery share period extends for an additional three-year period.

Banking service revenue, which consists primarily of fees generated by deposit accounts, electronic banking services, and customer services, decreased 10.4% to $10.6 million for the quarter ended March 31, 2014, from $11.8 million for the quarter ended March 31, 2013. Decrease in banking services revenues is mostly due to the reclassification of loan late charges into interest income.

Financial service revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and insurance activities, decreased 10.4% to $6.9 million for the quarter ended March 31, 2014, compared to $7.7 million for the quarter ended March 31, 2013. This decrease is mainly due to local market conditions.

Income generated from mortgage banking activities decreased 38.2% to $2.0 million for the quarter ended March 31, 2014 compared to $3.2 million for the quarter ended March 31, 2013. Decrease in mortgage banking activities is mainly due to higher losses in repurchased loans, lower cost or market adjustment made to mortgage loans held for sale during such quarter and a decrease in sales, when compared to same period in 2013.

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Gains from sale of securities were $4.4 million for the quarter ended March 31, 2014, compared to the same quarter in 2013, in which no gain or loss from sale of securities was recorded. Losses from derivative activities were $478 thousand for the quarter ended March 31, 2014, compared to $788 thousand for the same period in 2013. During the quarter ended March 31, 2014, the Company did not have a gain or loss on extinguishment of debt, as compared to the quarter ended March 31, 2013 in which the Company had a gain $1.1 million.

TABLE 3 - NON-INTEREST EXPENSES SUMMARY |  |  |  |  |  |  |  |
| Quarter Ended March 31, |  |  |
| 2014 |  | 2013 |  | Variance % |
| (Dollars in thousands) |
Compensation and employee benefits | $ | 21,787 |  | $ | 23,249 |  | -6.3% |
Professional and service fees |  | 4,206 |  |  | 6,478 |  | -35.1% |
Occupancy and equipment |  | 8,309 |  |  | 9,216 |  | -9.8% |
Merger and restructuring charges |  | - |  |  | 5,534 |  | -100.0% |
Taxes, other than payroll and income taxes |  | 3,735 |  |  | 2,622 |  | 42.4% |
Electronic banking charges |  | 4,743 |  |  | 3,728 |  | 27.2% |
Information technology expenses |  | 1,815 |  |  | 2,643 |  | -31.3% |
Insurance |  | 2,074 |  |  | 2,678 |  | -22.6% |
Foreclosure, repossession and other real estate expenses |  | 6,436 |  |  | 3,382 |  | 90.3% |
Loan servicing and clearing expenses |  | 2,060 |  |  | 1,475 |  | 39.7% |
Advertising, business promotion, and strategic initiatives |  | 1,781 |  |  | 1,409 |  | 26.4% |
Printing, postage, stationery and supplies |  | 554 |  |  | 1,166 |  | -52.5% |
Communication |  | 957 |  |  | 864 |  | 10.8% |
Director and investor relations |  | 251 |  |  | 236 |  | 6.4% |
Other operating expenses |  | 2,745 |  |  | 2,129 |  | 28.9% |
Total non-interest expenses | $ | 61,453 |  | $ | 66,809 |  | -8.0% |
Relevant ratios and data: |  |  |  |  |  |  |  |
Efficiency ratio |  | 50.03% |  |  | 57.46% |  |  |
Compensation and benefits to non-interest expense |  | 35.45% |  |  | 34.80% |  |  |
Compensation to average total assets owned |  | 0.27% |  |  | 0.27% |  |  |
Average number of employees |  | 1,546 |  |  | 1,565 |  |  |
Average compensation per employee | $ | 14.1 |  | $ | 14.9 |  |  |
Average loans per average employee | $ | 3,239 |  | $ | 3,251 |  |  |

Non-Interest Expenses

Non-interest expense for the quarter ended March 31, 2014 reached $61.5 million, representing a decrease of 8.0% compared to $66.8 million for the quarter ended March 31, 2013. The decrease is due mainly to the merger and restructuring charges incurred during the quarter ended March 31, 2013, for the BBVAPR Acquisition, compared to no charges for the quarter ended March 31, 2014.

Compensation and employee benefits decreased 6.3% to $21.8 million for the quarter ended March 31, 2014, from $23.2 million for the quarter ended March 31, 2013. The decrease is due mainly to a lower headcount related to employee consolidation.

Professional and service fees decreased 35.1% to $4.2 million for the quarter ended March 31, 2014 as compared to $6.5 million for the quarter ended March 31, 2013. Professional and service fees are primarily composed of legal expenses and consulting and outsourcing expenses. For the quarter ended March 31, 2014 these fees amounted to $1.1 million and $1.1 million, respectively, compared to $1.2 million and $1.5 million, respectively, for the quarter ended March 31, 2013. Decrease in professional and service fees is mainly related to loan servicing fees amounting to $1.8 million during the quarter ended March 31, 2013 for a third party loan servicer that was terminated during the quarter ended June 30, 2013.

Occupancy and equipment expenses decreased 9.8% to $8.3 million for the quarter ended March 31, 2014, as compared to $9.2 million for the quarter ended March 31, 2013. The decrease is mainly related to a lower rent expense due to closed branches and lower depreciation expenses for office building and leasehold improvement.

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Taxes, other than payroll and income taxes, for the quarter ended March 31, 2014 increased to $3.7 million, as compared to $2.6 million for the quarter ended March 31, 2013. The increase primarily reflects a $1.3 million impact for 2014 from the application of the 1.0% tax on gross revenues which was part of the Act. No. 40-2013, known as “Ley de Redistribución y Ajuste de la Carga Contributiva”, signed into law on June 30, 2013.

Electronic banking charges increased 27.2% to $4.7 million for the quarter ended March 31,2014 as compared to $3.7 million for the quarter ended March 31, 2013, mostly due to the increase in expenses related to merchant business and card interchange transactions resulting from the continued growth of our banking business as a result of the BBVAPR Acquisition.

Foreclosure, repossession and other real estate expenses for the quarter ended March 31, 2014 increased 90.3% to $6.4 million, as compared to $3.4 million for the same quarter in 2013, principally due to an increase in foreclosures and decrease in fair value of real estate during the first quarter of 2014 as compared to the same quarter in 2013.

The increase in the Company’s net-interest income resulted in a decrease in the efficiency ratio to 50.03% for the quarter ended March 31, 2014 from 57.46% from the same quarter in 2013. The efficiency ratio measures how much of a company’s revenue 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 investments securities, derivatives gains or losses, credit-related other-than-temporary impairment 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 greater comparability. Amounts presented as part of non-interest income that are excluded from the efficiency ratio computation amounted to losses of $14.1 million for the quarter ended March 31, 2014, compared to losses of $12.6 million for the quarter ended March 31, 2013. Revenue for purposes of the efficiency ratio for the quarter ended March 31, 2014 amounted to $122.8 million, compared to $116.3 million for the same period in 2013.

Provision for Loan and Lease Losses

The provision for non-covered loan and lease losses for the quarter ended March 31, 2014 totaled $10.1 million, an increase of 27.1% from the $7.9 million for the quarter ended March 31, 2013, mostly related to the provision recorded on non-covered loans acquired accounted for under ASC 310-20 amounting to $4.2 million during the quarter ended March 31, 2014 as compared to no provision for these loans for the same period in 2013. Provision for originated loan and lease losses for the quarter ended March 31, 2014 was $5.6 million, a 2.9 % decrease when compared to the quarter ended March 31, 2013, mainly related to decrease in the loan average balance. 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 ended March 31, 2014 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.

During the first quarter of 2014, net credit losses, excluding acquired loans, amounted to $5.2 million, representing an increase of 53.7%, when compared to $3.4 million reported for the same quarter in 2013.

Total charge-offs on non-covered loans, excluding acquired loans, increased 104.4% to $7.1 million in the first quarter of 2014, as compared to $3.5 million for the same quarter in 2013, and total recoveries increased from $99 thousand in the first quarter of 2013, to $1.9 million in the first quarter of 2014. As a result, the recoveries to charge-offs ratio increased from 2.84% in the first quarter of 2013 to 26.94% in the first quarter of 2014. The increase in net credit losses was primarily due to an increase of $3.0 million in the auto portfolio during the first quarter of 2014, compared to the same period in 2013.

The non-covered loans acquired accounted for under ASC 310-20 required a provision for loan and lease losses of $4.2 million for the quarter ended March 31, 2014. No provision was required for the quarter ended March 31, 2013. Non-covered loans acquired accounted for under ASC 310-30 required a provision for loan and lease losses of $195 thousand for the quarter ended March 31, 2014, reflecting the Company’s revision of the expected cash flows in the non-covered acquired loan portfolio considering actual experiences and changes in the Company’s expectations for the remaining term of the loan pools. No provision was required for the quarter ended March 31, 2013, as the portfolio was recently acquired during the fourth quarter of 2012.

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Provision for covered loans and lease losses for the first quarter of 2014 was $1.6 million, reflecting the Company’s revision of the expected cash flows in the covered loan portfolio considering actual experiences and changes in the Company’s expectations for the remaining terms of the loan pools.

Please refer to the “Allowance for Loan and Lease Losses and Non-Performing Assets” section in this MD&A and Table 8 through Table 13 below for more detailed information concerning the allowances for loan and lease losses, net credit losses and credit quality statistics.

Income Taxes

Income tax expense increase to $11.8 million for the quarter ended March 31, 2014 compared to an income tax expense of $7.1 million for the same quarter in 2013. The increase for the first quarter of 2014 was due to the recent amendments to the Puerto Rico tax code that increases the corporate income tax rate to 39% from 30%.

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ANALYSIS OF FINANCIAL CONDITION

Assets Owned

At March 31, 2014, the Company’s total assets amounted to $7.856 billion, a decrease of 3.7% when compared to $8.158 billion at December 31, 2013, and interest-earning assets decreased 3.1% from $6.694 billion at December 31, 2013 to $6.485 billion at March 31, 2014, mostly as a result of a decrease in investment securities.

At March 31, 2014, loans represented 77% of total interest-earning assets while investments represented 23%, compared to 75% and 25%, respectively, at December 31, 2013.

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, leases, and auto loans. Auto loans were added as part of the BBVAPR Acquisition. At March 31, 2014, the Company’s loan portfolio slightly decreased by 0.3% to $5.003 billion compared to $5.019 billion at December 31, 2013. At March 31, 2014, the covered loan portfolio decreased $9.1 million, or 2.5%, from December 31, 2013 as the loans continue to pay down. At March 31, 2014, the non-covered loan portfolio decreased $7.7 million, or 0.2%, primarily due to the early pay down of some commercial loans.

The FDIC shared-loss indemnification asset amounted to $166.2 million at March 31, 2014 and $189.2 million as of December 31, 2013, representing a 12.2% reduction. The decrease in the FDIC shared-loss indemnification asset is mainly related to reimbursements of $8.2 million received from the FDIC, and the amortization of $17.6 million during the quarter ended March 31, 2014.

Investments principally consist of U.S. treasury securities, U.S. government and agency bonds, mortgage-backed securities, and Puerto Rico government and agency bonds. At March 31, 2014, the investment portfolio decreased 8.2% to $1.482 billion from $1.615 billion at December 31, 2013. This decrease is mostly due to the reduction of $96.5 million in FNMA and FHLMC certificates and $97.1 million in Puerto Rico government obligations due to redemptions and maturities. In addition, during the quarter ended March 31, 2014, the Company sold $110.8 million of mortgage-backed available for sale securities taking advantage of market opportunities to realize gains and reduce some interest rate sensitivity. During the quarter ended March 31, 2014, the Company also had normal prepayment of mortgage-backed securities of approximately $55 million. The decrease in investments was partially offset by the increase of $70.0 million in US Treasury securities.

At March 31, 2014 and December 31, 2013, the Company’s net deferred tax asset amounted to $127.7 million and $137.6 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 entire deferred tax asset, net of the existing valuation allowances recorded at March 31, 2014 and December 31, 2013. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

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Company’s Financial Assets Managed

The Company’s financial assets managed include those managed by the Company’s trust division, retirement plan administration subsidiary, and its broker-dealer subsidiary. The Company’s trust division offers various types of IRAs and manages 401(k) and Keogh retirement plans and custodian and corporate trust accounts, while the retirement plan administration subsidiary, CPC, manages private retirement plans. At March 31, 2014, total assets managed by the Company’s trust division and CPC amounted to $2.798 billion, compared to $2.797 billion at December 31, 2013. 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, 2014, total assets gathered by Oriental Financial Services from its customer investment accounts increased to $2.577 billion, compared to $2.493 billion in assets gathered at December 31, 2013. Changes in trust and broker-dealer related assets primarily reflect an increase in portfolio and differences in market values.

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TABLE 4 - ASSETS SUMMARY AND COMPOSITION |
| March 31, |  | December 31, |  |  |
| 2014 |  | 2013 |  | Variance % |
| (Dollars in thousands)
Investments: |  |  |  |  |  |  |  |
FNMA and FHLMC certificates | $ | 1,120,795 |  | $ | 1,217,330 |  | -7.9% |
Obligations of US Government -sponsored agencies |  | 9,497 |  |  | 10,649 |  | -10.8% |
US Treasury securities |  | 70,000 |  |  | - |  | 100.0% |
CMOs issued by US Government -sponsored agencies |  | 207,520 |  |  | 214,394 |  | -3.2% |
GNMA certificates |  | 6,549 |  |  | 7,816 |  | -16.2% |
Puerto Rico Government and political subdivisions |  | 17,069 |  |  | 114,190 |  | -85.1% |
FHLB stock |  | 24,430 |  |  | 24,450 |  | -0.1% |
Other debt securities |  | 24,255 |  |  | 24,047 |  | 0.9% |
Other investments |  | 1,975 |  |  | 1,933 |  | 2.2% |
Total investments |  | 1,482,090 |  |  | 1,614,809 |  | -8.2% |
Loans: |  |  |  |  |  |  |  |
Loans not covered under shared-loss agreements with the FDIC |  | 4,691,577 |  |  | 4,670,227 |  | 0.5% |
Allowance for loan and lease losses on non covered loans |  | (56,183) |  |  | (54,298) |  | -3.5% |
Non covered loans receivable, net |  | 4,635,394 |  |  | 4,615,929 |  | 0.4% |
Mortgage loans held for sale |  | 19,355 |  |  | 46,529 |  | -58.4% |
Total loans not covered under shared-loss agreements with the FDIC, net |  | 4,654,749 |  |  | 4,662,458 |  | -0.2% |
Loans covered under shared-loss agreements with the FDIC |  | 402,263 |  |  | 409,690 |  | -1.8% |
Allowance for loan and lease losses on covered loans |  | (54,398) |  |  | (52,729) |  | -3.2% |
Total loans covered under shared-loss agreements with the FDIC, net |  | 347,865 |  |  | 356,961 |  | -2.5% |
Total loans, net |  | 5,002,614 |  |  | 5,019,419 |  | -0.3% |
Securities purchased under agreements to resell |  | - |  |  | 60,000 |  | -100.0% |
Total securities and loans |  | 6,484,704 |  |  | 6,694,228 |  | -3.1% |
Other assets: |  |  |  |  |  |  |  |
Cash and due from banks |  | 632,154 |  |  | 696,501 |  | -9.2% |
Money market investments |  | 7,652 |  |  | 6,967 |  | 9.8% |
FDIC shared-loss indemnification asset |  | 166,194 |  |  | 189,240 |  | -12.2% |
Foreclosed real estate |  | 96,884 |  |  | 90,024 |  | 7.6% |
Accrued interest receivable |  | 18,969 |  |  | 18,734 |  | 1.3% |
Deferred tax asset, net |  | 127,657 |  |  | 137,564 |  | -7.2% |
Premises and equipment, net |  | 83,029 |  |  | 82,903 |  | 0.2% |
Servicing assets |  | 13,970 |  |  | 13,801 |  | 1.2% |
Derivative assets |  | 15,861 |  |  | 20,502 |  | -22.6% |
Goodwill |  | 86,069 |  |  | 86,069 |  | 0.0% |
Other assets |  | 122,495 |  |  | 121,482 |  | 0.8% |
Total other assets |  | 1,370,934 |  |  | 1,463,787 |  | -6.3% |
Total assets | $ | 7,855,638 |  | $ | 8,158,015 |  | -3.7% |
Investments portfolio composition: |  |  |  |  |  |  |  |
FNMA and FHLMC certificates |  | 75.6% |  |  | 75.4% |  |  |
Obligations of US Government-sponsored agencies |  | 0.6% |  |  | 0.7% |  |  |
US Treasury securities |  | 4.7% |  |  | 0.0% |  |  |
CMOs issued by US Government-sponsored agencies |  | 14.0% |  |  | 13.3% |  |  |
GNMA certificates |  | 0.4% |  |  | 0.5% |  |  |
Puerto Rico Government and political subdivisions |  | 1.2% |  |  | 7.1% |  |  |
FHLB stock |  | 1.7% |  |  | 1.5% |  |  |
Other debt securities and other investments |  | 1.8% |  |  | 1.5% |  |  |
|  | 100.0% |  |  | 100.0% |  |  |

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TABLE 5 — LOANS RECEIVABLE COMPOSITION
| March 31, |  | December 31, |  | Variance
| 2014 |  | 2013 |  | %
| (Dollars in thousands)
Loans not covered under shared-loss agreements with FDIC: |  |  |  |  |  |  |
Originated and other loans and leases held for investment: |  |  |  |  |  |  |
Mortgage | $ | 782,150 |  | $ | 766,265 |  | 2.1%
Commercial |  | 1,170,145 |  |  | 1,127,657 |  | 3.8%
Consumer |  | 142,492 |  |  | 127,744 |  | 11.5%
Auto and leasing |  | 447,940 |  |  | 379,874 |  | 17.9%
Total originated and other loans and leases held for investment |  | 2,542,727 |  |  | 2,401,540 |  | 5.9%
Acquired loans: |  |  |  |  |  |  |
Accounted for under ASC 310-20 |  |  |  |  |  |  |
Commercial |  | 71,577 |  |  | 77,681 |  | -7.9%
Consumer |  | 52,049 |  |  | 56,174 |  | -7.3%
Auto |  | 268,865 |  |  | 301,584 |  | -10.8%
|  | 392,491 |  |  | 435,439 |  | -9.9%
Accounted for under ASC 310-30 |  |  |  |  |  |  |
Mortgage |  | 703,454 |  |  | 717,904 |  | -2.0%
Commercial |  | 655,388 |  |  | 671,544 |  | -2.4%
Consumer |  | 53,310 |  |  | 63,620 |  | -16.2%
Auto |  | 341,889 |  |  | 379,145 |  | -9.8%
|  | 1,754,041 |  |  | 1,832,213 |  | -4.3%
|  | 2,146,532 |  |  | 2,267,652 |  | -5.3%
|  | 4,689,259 |  |  | 4,669,192 |  | 0.4%
Deferred loans fees, net |  | 2,318 |  |  | 1,035 |  | 124.0%
Loans receivable |  | 4,691,577 |  |  | 4,670,227 |  | 0.5%
Allowance for loan and lease losses on non-covered loans |  | (56,183) |  |  | (54,298) |  | -3.5%
Loans receivable, net |  | 4,635,394 |  |  | 4,615,929 |  | 0.4%
Mortgage loans held-for-sale |  | 19,355 |  |  | 46,529 |  | -58.4%
Total loans not covered under shared-loss agreements with FDIC, net |  | 4,654,749 |  |  | 4,662,458 |  | -0.2%
Loans covered under shared-loss agreements with FDIC: |  |  |  |  |  |  |
Loans secured by 1-4 family residential properties |  | 124,239 |  |  | 121,748 |  | 2.0%
Construction and development secured by 1-4 family residential properties |  | 18,254 |  |  | 17,304 |  | 5.5%
Commercial and other construction |  | 253,804 |  |  | 264,249 |  | -4.0%
Consumer |  | 5,769 |  |  | 6,119 |  | -5.7%
Leasing |  | 197 |  |  | 270 |  | -27.0%
Total loans covered under shared-loss agreements with FDIC |  | 402,263 |  |  | 409,690 |  | -1.8%
Allowance for loan and lease losses on covered loans |  | (54,398) |  |  | (52,729) |  | -3.2%
Total loans covered under shared-loss agreements with FDIC, net |  | 347,865 |  |  | 356,961 |  | -2.5%
Total loans receivable, net | $ | 5,002,614 |  | $ | 5,019,419 |  | -0.3%

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As shown in Table 5 above, total loans, net amounted to $5.002 billion at March 31, 2014 and $5.019 at December 31, 2013.

The Company’s originated and other loans held-for-investment portfolio composition and trends were as follows:

· Mortgage loan portfolio amounted to $782.2 million (30.8% of the gross originated loan portfolio) compared to $766.3 million (31.9% of the gross originated loan portfolio) at December 31, 2013. Mortgage loan production totaled $50.8 million for the quarter ended March 31, 2014, which represents a decrease of 34.1% from $77.1 million for the same period in 2013. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to $35.3 million and $34.9 million for the periods ended March 31, 2014 and December 31, 2013, 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 $1.170 billion (46.0% of the gross originated loan portfolio) compared to $1.128 billion (47.0% of the gross originated loan portfolio) at December 31, 2013. Commercial loan production decreased 46.3% to $39.8 million for the first quarter of 2014 from $74.1 million for the first quarter of 2013.

· Consumer loan portfolio amounted to $142.5 million (5.6% of the gross originated loan portfolio) compared to $127.7 million (5.3% of the gross originated loan portfolio) at December 31, 2013. Consumer loan production increased 22.9% to $27.8 million for the quarter ended March 31, 2014 from $22.6 million for the same period in 2013.

· Auto loans and leasing portfolio amounted to $447.9 million (17.6% of the gross originated loan portfolio) compared to $379.9 million (15.8% of the gross originated loan portfolio) at December 31, 2013. Auto production was $93.6 million for the quarter ended March 31, 2014, compared to $101.0 million for the same period in 2013.

At March 31, 2014 and December 31, 2013 the Company's non-covered acquired loan portfolio composition was as follows:
| March 31, 2014 |  | December 31, 2013
Portfolio Type |  | Carrying Amounts |  | % of Gross Non-Covered Acquired Portfolio |  |  | Carrying Amounts |  | % of Gross Non-Covered Acquired Portfolio
| (Dollars in thousands)
Mortgage | $ | 703,454 |  | 32.8% |  | $ | 717,904 |  | 31.7%
Commercial |  | 726,965 |  | 33.9% |  |  | 749,225 |  | 33.0%
Consumer |  | 105,359 |  | 4.9% |  |  | 119,794 |  | 5.3%
Auto |  | 610,754 |  | 28.5% |  |  | 680,729 |  | 30.0%
| $ | 2,146,532 |  | 100.00% |  | $ | 2,267,652 |  | 100.00%

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TABLE 6 — HIGHER RISK RESIDENTIAL MORTGAGE LOANS
| March 31, 2014
| 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 | $ | 12,996 |  | $ | 305 |  | 2.35% |  | $ | 23,737 |  | $ | 1,135 |  | 4.78% |  | $ | 84,654 |  | $ | 2,010 |  | 2.37%
90 - 119 days |  | 72 |  |  | 2 |  | 2.78% |  |  | - |  |  | - |  | 0.00% |  |  | 1,340 |  |  | 13 |  | 0.97%
120 - 179 days |  | - |  |  | - |  | 0.00% |  |  | 510 |  |  | 76 |  | 14.90% |  |  | 543 |  |  | 29 |  | 5.34%
180 - 364 days |  | 153 |  |  | 10 |  | 6.54% |  |  | 148 |  |  | 22 |  | 14.86% |  |  | 783 |  |  | 50 |  | 6.39%
365+ days |  | 386 |  |  | 48 |  | 12.44% |  |  | 423 |  |  | 226 |  | 53.43% |  |  | 1,169 |  |  | 201 |  | 17.19%
Total | $ | 13,607 |  | $ | 365 |  | 2.68% |  | $ | 24,818 |  | $ | 1,459 |  | 5.88% |  | $ | 88,489 |  | $ | 2,303 |  | 2.60%
Percentage of total loans excluding acquired loans accounted for under ASC 310-30 |  | 0.46% |  |  |  |  |  |  |  | 0.84% |  |  |  |  |  |  |  | 2.99% |  |  |  |  |
Refinanced or Modified Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Amount | $ | 2,297 |  | $ | 206 |  | 8.97% |  | $ | - |  | $ | - |  | 0.00% |  | $ | 12,888 |  | $ | 1,043 |  | 8.09%
Percentage of Higher-Risk Loan Category |  | 16.88% |  |  |  |  |  |  |  | 0.00% |  |  |  |  |  |  |  | 14.56% |  |  |  |  |
Loan-to-Value Ratio: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Under 70% | $ | 9,789 |  | $ | 265 |  | 2.71% |  | $ | 2,460 |  | $ | 249 |  | 10.12% |  | $ | - |  | $ | - |  | -
70% - 79% |  | 2,736 |  |  | 74 |  | 2.70% |  |  | 3,856 |  |  | 199 |  | 5.16% |  |  | - |  |  | - |  | -
80% - 89% |  | 883 |  |  | 25 |  | 2.83% |  |  | 7,279 |  |  | 400 |  | 5.50% |  |  | - |  |  | - |  | -
90% and over |  | 199 |  |  | 1 |  | 0.50% |  |  | 11,223 |  |  | 611 |  | 5.44% |  |  | 88,489 |  |  | 2,303 |  | 2.60%
| $ | 13,607 |  | $ | 365 |  | 2.68% |  | $ | 24,818 |  | $ | 1,459 |  | 5.88% |  | $ | 88,489 |  | $ | 2,303 |  | 2.60%
* Loans may be included in more than one higher-risk loan category and excludes acquired residential mortgage loans.

90

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, 2014 |  |
|  |  |  |  |  |  |  |  | Maturity |  |  |  |  |  |  |  |  |  |
Loans and Securities: |  |  | Carrying Value |  |  | Less than 1 Year |  |  | 1 to 3 Years |  |  | More than 3 Years |  | Comments |  |
|  | (In thousands) |  |  |  |  |  |  |
Central government |  | $ | 146,728 |  | $ | 117,982 |  | $ | - |  | $ | 28,746 |  |  | Repayment sources include all available revenues of the Commonwealth |  |
Public corporations |  |  | 350,354 |  |  | 191,183 |  |  | 75,000 |  |  | 84,171 |  |  | $84.2 million which mature in more than 3 years, with pledged securities (rating > A) |  |
Municipalities |  |  | 221,741 |  |  | - |  |  | 507 |  |  | 221,234 |  |  | Repayment from property taxes |  |
Investment securities |  |  | 42,368 |  |  | 20,000 |  |  | - |  |  | 22,368 |  |  |  |  |
Total |  | $ | 761,191 |  | $ | 329,165 |  | $ | 75,507 |  | $ | 356,519 |  |  |  |  |  |  |

Some highlights follow on the data included above:

· Loans to Puerto Rico central government and public corporations are collateralized or have specific repayment sources.

· Loans to municipalities are backed by their unlimited taxing power or real and personal property taxes.

· 43% of loans and securities balances mature in 12-months or less.

· Deposits from municipalities, central government and other government entities totaled $370.7 million at March 31, 2014. However, this amount may decline as a result of recently enacted legislation to improve the liquidity of the Government Development Bank for Puerto Rico (“GDB”) by requiring the Commonwealth’s agencies, instrumentalities and public corporations to maintain certain deposits at GDB.

91

Allowance for Loan and Lease Losses and Non-Performing Assets

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. 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. As part of the Company’s continuous enhancement to the allowance for loan and lease losses methodology, during the quarter ended March 31, 2014, an assessment of the look-back period and historical loss factor was performed for auto and leasing and consumer loan portfolios based on the trends observed and their relation with the economic cycle as of the period ended March 31, 2014. As a result, the period was changed to 24 months from the previously determined 12 months. This change in the allowance for loan and lease losses’ look back period for the consumer and auto and leasing portfolios is considered a change in accounting estimate as per ASC 250-10 provisions, where adjustments should be made prospectively.

Non-covered Loans

At March 31, 2014, the Company’s allowance for non-covered loan and lease losses amounted to $56.2 million, $49.5 million of such allowance corresponded to originated and other loans held for investment, or 1.95% of total non-covered originated and other loans held for investment at March 31, 2014, compared to $49.1 million or 2.04% of total non-covered originated and other loans held for investment at December 31, 2013. The allowance for residential mortgage loans and commercial loans decreased by 2.1% ($426 thousand), and 6.1% (or $903 thousand), respectively, when compared with the balances recorded at December 31, 2013. The allowance for consumer loans and auto and leases increased by 18.8% (or $1.1 million) and 11.0% (or $865 thousand), respectively, when compared with balances recorded at December 31, 2013. The unallocated allowance at March 31, 2014 decreased by 63.7%, or $239 thousand, when compared with the balance recorded at December 31, 2013.

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.

Allowance for loan and lease losses recorded for acquired loans accounted for under the provisions of ASC 310-20 at March 31, 2014 was $3.6 million compared to $2.4 million at December 31, 2013, a 53.7% increase. The allowance for commercial loans decreased by 6.4% ($59 thousand), when compared with the balance recorded at December 31, 2013. The allowance for consumer and auto loans increased by 100% (or $504 thousand) and 57.4% (or $819 thousand), respectively, when compared with balances recorded at December 31, 2013.

Allowance for loan and lease losses recorded for acquired loans accounted for under ASC-310-30 at March 31, 2014 was $3.1 million as compared to $2.9 million at December 31, 2013.

The Company’s non-performing assets include non-performing loans and foreclosed real estate (see Tables 11 and 12). At March 31, 2014 and December 31, 2013, the Company had $88.2 million and $86.2 million, respectively, of non-accrual loans, including acquired loans accounted under ASC 310-20 (loans with revolving feature and/or acquired at a premium). Covered loans and loans acquired from BBVAPR with credit deterioration are considered to be performing due to the application of the accretion method under ASC 310-30. At March 31, 2014 and December 31 2013, loans whose terms have been extended and which are classified as troubled-debt restructuring that are not included in non-performing assets amounted to $70.8 million and $66.5 million, respectively.

At March 31, 2014, the Company’s non-performing assets increased by 4.6% to $162.5 million (2.84% of total assets, excluding covered assets and acquired loans with deteriorated credit quality) from $155.3 million (2.61% of total assets, excluding covered assets and acquired loans with deteriorated credit quality) at December 31, 2013. The Company does not expect non-performing loans to result in significantly higher losses as most are well-collateralized with adequate loan-to-value ratios. At March 31, 2014, the allowance for non-covered originated loans and lease losses to non-performing loans coverage ratio was 59.90% (61.52% at December 31, 2013).

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:

92

1. Originated and other loans held for investment:

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, 2014, the Company’s originated non-performing mortgage loans totaled $51.7 million (58.7% of the Company’s non-performing loans), a 1.3% increase from $51.1 million (59.4% of the Company’s non-performing loans) at December 31, 2013. Non-performing loans in this category are primarily residential mortgage loans.

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, 2014, the Company’s originated non-performing commercial loans amounted to $23.8 million (27.0% of the Company’s non-performing loans), a 4.2% increase when compared to non-performing commercial loans of $22.8 million at December 31, 2013 (26.5% of the Company’s non-performing loans). Most of this portfolio is collateralized by commercial real estate properties.

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, 2014, the Company’s originated non-performing consumer loans amounted to $1.1 million (1.2% of the Company’s total non-performing loans), a 34.7% increase from $805 thousand at December 31, 2013 (0.9% of the Company’s total non-performing loans).

Auto and leases — are placed on non-accrual status when they become 90 days past due and 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, 2014, the Company’s originated non-performing auto and leases amounted to $6.0 million (6.9% of the Company’s total non-performing loans), an increase of 18.8% from $5.1 million at December 31, 2013 (5.9% of the Company’s total non-performing loans).

· Acquired 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, 2014, the Company’s acquired non-performing commercial lines of credit accounted for under ASC 310-20 amounted to $1.9 million (2.1% of the Company’s non-performing loans), a 26.8% decrease when compared to non-performing commercial lines of credit accounted for under ASC 310-20 of $2.5 million at December 31, 2013 (3.0% 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, 2014, the Company’s acquired non-performing consumer lines of credit and credit cards accounted for under ASC 310-20 totaled $2.1 million (2.4% of the Company’s non-performing loans), an 3.8% decrease when compared to non-performing consumer lines of credit and credit cards accounted for under ASC 310-20 of $2.2 million at December 31, 2013 (2.6% 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 and 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, 2014, the Company’s acquired non-performing auto loans accounted for under ASC 310-20 totaled $1.5 million (1.7% of the Company’s non-performing loans), a 5.8% decrease when compared to non-performing auto loans accounted for under ASC 310-20 of $1.6 million at December 31, 2013 (1.9% of the Company’s non-performing loans).

· Acquired loans accounted for under ASC 310-30 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. Credit related decreases in expected cash flows, compared to those previously forecasted, are recognized by recording a provision for credit losses on non-covered loans when it is probable that all cash flows expected at acquisition will not be collected.

· Foreclosed real estate is initially recorded at the lower of the related loan balance or fair value less cost to sell as of the date of foreclosure. Any excess of the loan balance over the fair value of the property is charged against the allowance for loan and lease losses. Subsequently, any excess of the carrying value over the estimated fair value less disposition cost is charged to operations.

93

Net losses on foreclosed real estate and other repossessed assets for the quarter ended March 31, 2014 amounted to $3.5 million, compared to $1.9 million for the same period in 2013.

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, RHS, “Banco de la Vivienda de Puerto Rico,” conventional loans guaranteed by Mortgage Guaranty Insurance Corporation (MGIC), conventional loans sold to the 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 / interest 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 by the credit underwriting guidelines of FHA/VA/FNMA/ FMAC, 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.

There may not be a foreclosure sale scheduled within 60 days prior to a loan modification under any such programs. This requirement does not apply to loans where the foreclosure process has been stopped by the Company. In order to apply for any of the loan modification programs, the borrower may not be in active bankruptcy or have been discharged from Chapter 7 bankruptcy since the loan was originated. Loans in these programs are to be evaluated by management for troubled-debt restructuring classification if the Company grants a concession for legal or economic reasons due to the debtor’s financial difficulties.

Covered Loans

The allowance for loan and lease losses on covered loans acquired in the FDIC-assisted acquisition of Eurobank is accounted under the provisions of ASC 310-30. Under this accounting guidance, the allowance for loan and lease losses on covered loans is evaluated at each financial reporting period, based on forecasted cash flows. Credit related decreases in expected cash flows, compared to those previously forecasted, are recognized by recording a provision for credit losses on covered loans when it is probable that all cash flows expected at acquisition will not be collected. The portion of the loss on covered loans reimbursable from the FDIC is recorded as an offset to the provision for credit losses and increases the FDIC shared-loss indemnification asset.

For the quarter ended March 31, 2014, the net provision for covered loans amounted to $1.6 million, reflecting the Company’s revision of the expected cash flows in the covered loan portfolio considering actual experiences and changes in the Company’s expectations for the remaining terms of the loan pools. The allowance for covered loans increased from $52.7 million at December 31, 2013 to $54.4 million at March 31, 2014.

94

TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES SUMMARY |  |  |  |  |  |  |
| Quarter Ended March 31, |  | Variance
| 2014 |  | 2013 |  | %
Non-covered loans |  |  |  |  |  |  |
Originated and other loans: |  |  |  |  |  |  |
Balance at beginning of period | $ | 49,081 |  | $ | 39,921 |  | 22.9%
Provision for non-covered loan and lease losses |  | 5,625 |  |  | 5,795 |  | -2.9%
Charge-offs |  | (7,116) |  |  | (3,482) |  | 104.4%
Recoveries |  | 1,917 |  |  | 100 |  | 1817.0%
|  | 49,507 |  |  | 42,334 |  | 16.9%
Acquired loans accounted for under ASC 310-20: |  |  |  |  |  |  |
Balance at beginning of period | $ | 2,354 |  | $ | - |  | 0.0%
Provision for non-covered loan and lease losses |  | 4,242 |  |  | 2,120 |  | 100.0%
Charge-offs |  | (3,528) |  |  | (3,171) |  | 100.0%
Recoveries |  | 550 |  |  | 1,437 |  | 100.0%
|  | 3,618 |  |  | 386 |  | 100.0%
Acquired loans accounted for under ASC 310-30: |  |  |  |  |  |  |
Balance at beginning of period | $ | 2,863 |  | $ | - |  | 0.0%
Provision for non-covered loan and lease losses |  | 195 |  |  | - |  | 100.0%
|  | 3,058 |  |  | - |  | 100.0%
Total non-covered loans balance at end of period | $ | 56,183 |  | $ | 42,720 |  | 31.5%
Allowance for loans and lease losses on originated and other loans to: |  |  |  |  |  |  |
Total originated loans |  | 1.95% |  |  | 2.91% |  | -33.1%
Non-performing originated loans |  | 59.90% |  |  | 32.45% |  | 84.6%
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 |  | 0.92% |  |  | 0.05 |  | 100.0%
Non-performing acquired loans accounted for under ASC 310-20 |  | 65.65% |  |  | 21.94 |  | 100.0%
Covered loans |  |  |  |  |  |  |
Balance at beginning of period | $ | 52,729 |  | $ | 54,124 |  | -2.6%
Provision for covered loan and lease losses, net |  | 1,629 |  |  | 672 |  | 142.4%
FDIC shared-loss portion on (provision for) recapture of loan and lease losses |  | 40 |  |  | (1,822) |  | -102.2%
Balance at end of period | $ | 54,398 |  | $ | 52,974 |  | 2.7%

95

TABLE 9 — ALLOWANCE FOR NON-COVERED LOAN AND LEASE LOSSES BREAKDOWN
|  | March 31, 2014 |  | December 31, 2013 |  | Variance %
| (Dollars in thousands)
Originated and other loans held for investment |  |  |  |  |  |  |
Allowance balance: |  |  |  |  |  |  |
Mortgage | $ | 19,511 |  | $ | 19,937 |  | -2.1%
Commercial |  | 13,994 |  |  | 14,897 |  | -6.1%
Consumer |  | 7,135 |  |  | 6,006 |  | 18.8%
Auto and leasing |  | 8,731 |  |  | 7,866 |  | 11.0%
Unallocated allowance |  | 136 |  |  | 375 |  | -63.7%
Total allowance balance | $ | 49,507 |  | $ | 49,081 |  | 0.9%
Allowance composition: |  |  |  |  |  |  |
Mortgage |  | 39.41% |  |  | 40.62% |  | -3.0%
Commercial |  | 28.27% |  |  | 30.35% |  | -6.9%
Consumer |  | 14.41% |  |  | 12.24% |  | 17.7%
Auto and leasing |  | 17.64% |  |  | 16.03% |  | 10.0%
Unallocated allowance |  | 0.27% |  |  | 0.76% |  | -64.5%
|  | 100.00% |  |  | 100.00% |  |
Allowance coverage ratio at end of period applicable to: |  |  |  |  |  |  |
Mortgage |  | 2.49% |  |  | 2.60% |  | -4.1%
Commercial |  | 1.20% |  |  | 1.32% |  | -9.5%
Consumer |  | 5.01% |  |  | 4.70% |  | 6.5%
Auto and leasing |  | 1.95% |  |  | 2.07% |  | -5.9%
Unallocated allowance to total originated loans |  | 0.01% |  |  | 0.02% |  | -65.7%
Total allowance to total originated loans |  | 1.95% |  |  | 2.04% |  | -4.7%
Allowance coverage ratio to non-performing loans: |  |  |  |  |  |  |
Mortgage |  | 37.72% |  |  | 39.05% |  | -3.4%
Commercial |  | 58.82% |  |  | 65.25% |  | -9.9%
Consumer |  | 658.21% |  |  | 746.09% |  | -11.8%
Auto and leasing |  | 144.39% |  |  | 154.57% |  | -6.6%
Total |  | 59.90% |  |  | 61.52% |  | -2.6%
Acquired loans accounted for under ASC 310-20 |  |  |  |  |  |  |
Allowance balance: |  |  |  |  |  |  |
Commercial | $ | 867 |  | $ | 926 |  | -6.4%
Consumer |  | 504 |  |  | - |  | 100.0%
Auto |  | 2,247 |  |  | 1,428 |  | 57.4%
Total allowance balance | $ | 3,618 |  | $ | 2,354 |  | 53.7%
Allowance composition: |  |  |  |  |  |  |
Commercial |  | 23.96% |  |  | 39.34% |  | -39.1%
Consumer |  | 13.93% |  |  | 0.00% |  | 100.0%
Auto |  | 62.11% |  |  | 60.66% |  | 2.4%
|  | 100.00% |  |  | 100.00% |  |
Allowance coverage ratio at end of period applicable to: |  |  |  |  |  |  |
Commercial |  | 1.21% |  |  | 1.19% |  | 1.6%
Consumer |  | 0.97% |  |  | 0.00% |  | 100.0%
Auto |  | 0.84% |  |  | 0.47% |  | 76.5%
Total allowance to total acquired loans |  | 0.92% |  |  | 0.54% |  | 70.5%
Allowance coverage ratio to non-performing loans: |  |  |  |  |  |  |
Commercial |  | 46.56% |  |  | 36.41% |  | 27.9%
Consumer |  | 23.62% |  |  | 0.00% |  | 100.0%
Auto |  | 148.32% |  |  | 88.81% |  | 67.0%
Total |  | 65.65% |  |  | 36.95% |  | 77.7%

96

TABLE 9 — ALLOWANCE FOR NON-COVERED LOAN AND LEASE LOSSES BREAKDOWN (CONTINUED)
|  | March 31, 2014 |  | December 31, 2013 |  | Variance %
| (Dollars in thousands)
Acquired loans accounted for under ASC 310-30 |  |  |  |  |  |  |
Allowance balance: |  |  |  |  |  |  |
Commercial | $ | 2,653 |  | $ | 1,713 |  | 54.9%
Consumer |  | 405 |  |  | 418 |  | 100.0%
Auto |  | - |  |  | 732 |  | -100.0%
Total allowance balance | $ | 3,058 |  | $ | 2,863 |  | 6.8%
Allowance composition: |  |  |  |  |  |  |
Commercial |  | 86.76% |  |  | 59.83% |  | 45.0%
Consumer |  | 13.24% |  |  | 14.60% |  | 100.0%
Auto |  | 0.00% |  |  | 25.57% |  | -100.0%
|  | 100.00% |  |  | 100.00% |  |

97

TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING LOANS ACCOUNTED FOR UNDER ASC 310-30
| Quarter Ended March 31, |  | Variance |
| 2014 |  | 2013 |  | % |
| (Dollar in thousands)
Originated and other loans and leases: |  |  |  |  |  |  |  |
Mortgage |  |  |  |  |  |  |  |
Charge-offs | $ | (1,214) |  | $ | (2,588) |  | -53.1% |
Recoveries |  | 148 |  |  | - |  | 100.0% |
Total |  | (1,066) |  |  | (2,588) |  | -58.8% |
Commercial |  |  |  |  |  |  |  |
Charge-offs |  | (419) |  |  | (557) |  | -24.8% |
Recoveries |  | 98 |  |  | 28 |  | 250.0% |
Total |  | (321) |  |  | (529) |  | -39.3% |
Consumer |  |  |  |  |  |  |  |
Charge-offs |  | (838) |  |  | (246) |  | 240.7% |
Recoveries |  | 147 |  |  | 65 |  | 126.2% |
Total |  | (691) |  |  | (181) |  | 281.8% |
Auto |  |  |  |  |  |  |  |
Charge-offs |  | (4,645) |  |  | (91) |  | 5004.4% |
Recoveries |  | 1,524 |  |  | 6 |  | 25300.0% |
Total |  | (3,121) |  |  | (85) |  | 3572% |
Net credit losses |  |  |  |  |  |  |  |
Total charge-offs |  | (7,116) |  |  | (3,482) |  | 104.4% |
Total recoveries |  | 1,917 |  |  | 99 |  | 1836.4% |
Total | $ | (5,199) |  | $ | (3,383) |  | 53.7% |
Net credit losses to average loans outstanding: |  |  |  |  |  |  |  |
Mortgage |  | 0.57% |  |  | 1.40% |  | -59.3% |
Commercial |  | 0.11% |  |  | 0.57% |  | -80.7% |
Consumer |  | 2.16% |  |  | 1.23% |  | 75.6% |
Auto |  | 2.99% |  |  | 0.34% |  | 779.4% |
Total |  | 0.86% |  |  | 1.06% |  | -18.9% |
Recoveries to charge-offs |  | 26.94% |  |  | 2.84% |  | 847.5% |
Average originated loans: |  |  |  |  |  |  |  |
Mortgage | $ | 753,248 |  | $ | 740,072 |  | 1.8% |
Commercial |  | 1,121,953 |  |  | 372,941 |  | 200.8% |
Consumer |  | 128,239 |  |  | 58,908 |  | 117.7% |
Auto |  | 418,074 |  |  | 99,048 |  | 322.1% |
Total | $ | 2,421,514 |  | $ | 1,270,969 |  | 90.5% |

98

TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING LOANS ACCOUNTED FOR UNDER ASC 310-30 (CONTINUED)
| Quarter Ended March 31, |  |  | Variance |
| 2014 |  | 2013 |  |  | % |
| (Dollars in thousands) |
Acquired loans accounted for under ASC 310-20: |  |  |  |  |  |  |  |  |
Commercial |  |  |  |  |  |  |  |  |
Charge-offs | $ | (174) |  | $ | - |  | $ | 100.0% |
Total |  | (174) |  |  | - |  |  | 100.0% |
Consumer |  |  |  |  |  |  |  |  |
Charge-offs |  | (2,058) |  |  | (1,456) |  |  | 41.3% |
Recoveries |  | 100 |  |  | 207 |  |  | -51.7% |
Total |  | (1,958) |  |  | (1,249) |  |  | 56.8% |
Auto |  |  |  |  |  |  |  |  |
Charge-offs |  | (1,296) |  |  | (1,715) |  |  | -24.4% |
Recoveries |  | 450 |  |  | 1,230 |  |  | -63.4% |
Total |  | (846) |  |  | (485) |  |  | 74.4% |
Net credit losses |  |  |  |  |  |  |  |  |
Total charge-offs |  | (3,528) |  |  | (3,171) |  |  | 11.3% |
Total recoveries |  | 550 |  |  | 1,437 |  |  | -61.7% |
Total | $ | (2,978) |  | $ | (1,734) |  |  | 71.7% |
Net credit losses to average loans outstanding: |  |  |  |  |  |  |  |  |
Commercial |  | 0.95% |  |  | 0.00% |  |  | 100.0% |
Consumer |  | 11.20% |  |  | 7.01% |  |  | 59.7% |
Auto |  | 1.20% |  |  | 0.45% |  |  | 167.1% |
Total |  | 2.80% |  |  | 0.80% |  |  | 252.1% |
Recoveries to charge-offs |  | 15.59% |  |  | 0.00% |  |  | 100.0% |
Average loans accounted for under ASC 310-20: |  |  |  |  |  |  |  |  |
Commercial | $ | 73,148 |  | $ | 368,278 |  | $ | -80.1% |
Consumer |  | 69,916 |  |  | 71,245 |  |  | -1.9% |
Auto |  | 281,703 |  |  | 431,348 |  |  | -34.7% |
Total | $ | 424,767 |  | $ | 870,871 |  | $ | -51.2% |

99

TABLE 11 — NON-PERFORMING ASSETS |
| March 31, |  | December 31, |  | Variance |
| 2014 |  | 2013 |  | (%) |
| (Dollars in thousands)
Non-performing assets: |  |  |  |  |  |  |  |
Non-accruing loans |  |  |  |  |  |  |  |
Troubled-Debt Restructuring loans | $ | 25,748 |  | $ | 26,847 |  | -4.1% |
Other loans |  | 59,902 |  |  | 56,430 |  | 6.2% |
Accruing loans |  |  |  |  |  |  |  |
Troubled-Debt Restructuring loans |  | 1,948 |  |  | 1,898 |  | 100.0% |
Other loans |  | 564 |  |  | 977 |  | 100.0% |
Total non-performing loans | $ | 88,162 |  | $ | 86,152 |  | 2.3% |
Foreclosed real estate not covered under the shared-loss agreements with the FDIC |  | 59,099 |  |  | 56,815 |  | 4.0% |
Other repossessed assets |  | 13,677 |  |  | 12,314 |  | 11.1% |
Mortgage loans held for sale |  | 1,554 |  |  | - |  | 100.0% |
| $ | 162,492 |  | $ | 155,281 |  | 4.6% |
Non-performing assets to total assets, excluding covered assets and acquired loans with deteriorated credit quality (including those by analogy) |  | 2.84% |  |  | 2.61% |  | 8.6% |
Non-performing assets to total capital |  | 18.13% |  |  | 17.55% |  | 3.3% |

| Quarter Ended March 31,
| 2014 |  | 2013
| (In thousands)
Interest that would have been recorded in the period if the loans had not been classified as non-accruing loans | $ | 655 |  | $ | 1,524

100

TABLE 12 — NON-PERFORMING LOANS |
| March 31, |  | December 31, |  | Variance |
| 2014 |  | 2013 |  | % |
| (Dollars in thousands)
Non-performing loans: |  |  |  |  |  |  |  |
Originated and other loans held for investment |  |  |  |  |  |  |  |
Mortgage | $ | 51,728 |  | $ | 51,058 |  | 1.3% |
Commercial |  | 23,792 |  |  | 22,830 |  | 4.2% |
Consumer |  | 1,084 |  |  | 805 |  | 34.7% |
Auto and leasing |  | 6,047 |  |  | 5,089 |  | 18.8% |
|  | 82,651 |  |  | 79,782 |  | 3.6% |
Acquired loans accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium) |  |  |  |  |  |  |  |
Commercial |  | 1,862 |  |  | 2,543 |  | -26.8% |
Consumer |  | 2,134 |  |  | 2,219 |  | -3.8% |
Auto |  | 1,515 |  |  | 1,608 |  | -5.8% |
|  | 5,511 |  |  | 6,370 |  | -13.5% |
Total | $ | 88,162 |  | $ | 86,152 |  | 2.3% |
Non-performing loans composition percentages: |  |  |  |  |  |  |  |
Originated loans |  |  |  |  |  |  |  |
Mortgage |  | 58.7% |  |  | 59.4% |  |  |
Commercial |  | 27.0% |  |  | 26.5% |  |  |
Consumer |  | 1.2% |  |  | 0.9% |  |  |
Auto and leasing |  | 6.9% |  |  | 5.9% |  |  |
Acquired loans accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium) |  |  |  |  |  |  |  |
Commercial |  | 2.1% |  |  | 3.0% |  |  |
Consumer |  | 2.4% |  |  | 2.6% |  |  |
Auto |  | 1.7% |  |  | 1.9% |  |  |
Total |  | 100.0% |  |  | 100.0% |  |  |
Non-performing loans to: |  |  |  |  |  |  |  |
Total loans, excluding covered loans and loans accounted for under ASC 310-30 (including those by analogy) |  | 3.00% |  |  | 3.04% |  | -1.3% |
Total assets, excluding covered assets and loans accounted for under ASC 310-30 (including those by analogy) |  | 1.54% |  |  | 1.45% |  | 6.2% |
Total capital |  | 9.83% |  |  | 9.74% |  | 1.0% |
Non-performing loans with partial charge-offs to: |  |  |  |  |  |  |  |
Total loans, excluding covered loans and loans accounted for under ASC 310-30 (including those by analogy) |  | 0.89% |  |  | 0.83% |  | 7.2% |
Non-performing loans |  | 29.77% |  |  | 27.35% |  | 8.8% |
Other non-performing loans ratios: |  |  |  |  |  |  |  |
Charge-off rate on non-performing loans to non-performing loans on which charge-offs have been taken |  | 48.65% |  |  | 56.05% |  | -13.2% |
Allowance for loan and lease losses to non-performing loans on which no charge-offs have been taken |  | 85.80% |  |  | 82.18% |  | 4.4% |

101

TABLE 13 - LIABILITIES SUMMARY AND COMPOSITION
|  | March 31, |  |  | December 31, |  |
| 2014 |  | 2013 |  | Variance %
| (Dollars in thousands)
Deposits: |  |  |  |  |  |  |
Non-interest bearing deposits | $ | 755,909 |  | $ | 550,303 |  | 37.4%
NOW accounts |  | 1,432,511 |  |  | 1,587,670 |  | -9.8%
Savings and money market accounts |  | 1,267,289 |  |  | 1,194,566 |  | 6.1%
Certificates of deposit |  | 1,843,578 |  |  | 2,048,040 |  | -10.0%
Total deposits |  | 5,299,287 |  |  | 5,380,579 |  | -1.5%
Accrued interest payable |  | 1,705 |  |  | 2,686 |  | -36.5%
Total deposits and accrued interest payable |  | 5,300,992 |  |  | 5,383,265 |  | -1.5%
Borrowings: |  |  |  |  |  |  |
Securities sold under agreements to repurchase |  | 1,012,240 |  |  | 1,267,618 |  | -20.1%
Advances from FHLB |  | 335,689 |  |  | 336,143 |  | -0.1%
Federal funds purchased |  | 23,712 |  |  | - |  | 100.0%
Other term notes |  | 3,708 |  |  | 3,663 |  | 1.2%
Subordinated capital notes |  | 100,404 |  |  | 100,010 |  | 0.4%
Total borrowings |  | 1,475,753 |  |  | 1,707,434 |  | -13.6%
Total deposits and borrowings |  | 6,776,745 |  |  | 7,090,699 |  | -4.4%
Derivative liabilities |  | 13,830 |  |  | 14,937 |  | -7.4%
Acceptances outstanding |  | 28,535 |  |  | 23,042 |  | 23.8%
Other liabilities |  | 140,037 |  |  | 144,424 |  | -3.0%
Total liabilities | $ | 6,959,147 |  | $ | 7,273,102 |  | -4.3%
Deposits portfolio composition percentages: |  |  |  |  |  |  |
Non-interest bearing deposits |  | 14.3% |  |  | 10.2% |  |
NOW accounts |  | 27.0% |  |  | 29.5% |  |
Savings and money market accounts |  | 23.9% |  |  | 22.2% |  |
Certificates of deposit |  | 34.8% |  |  | 38.1% |  |
|  | 100.0% |  |  | 100.0% |  |
Borrowings portfolio composition percentages: |  |  |  |  |  |  |
Securities sold under agreements to repurchase |  | 68.6% |  |  | 74.2% |  |
Advances from FHLB |  | 22.7% |  |  | 19.7% |  |
Federal funds purchased |  | 1.6% |  |  | 0.0% |  |
Other term notes |  | 0.3% |  |  | 0.2% |  |
Subordinated capital notes |  | 6.8% |  |  | 5.9% |  |
|  | 100.0% |  |  | 100.0% |  |
Securities sold under agreements to repurchase (excluding accrued interest) |  |  |  |  |  |  |
Amount outstanding at period-end | $ | 1,010,000 |  | $ | 1,265,000 |  |
Daily average outstanding balance | $ | 1,156,747 |  | $ | 1,353,011 |  |
Maximum outstanding balance at any month-end | $ | 1,149,167 |  | $ | 1,552,269 |  |

102

Liabilities and Funding Sources

As shown in Table 13 above, at March 31, 2014, the Company’s total liabilities were $6.959 billion, 4.3% less than the $7.273 billion reported at December 31, 2013. Deposits and borrowings, the Company’s funding sources, amounted to $6.777 billion at March 31, 2014 versus $7.091 billion at December 31, 2013, a 4.4% decrease.

At March 31, 2014, deposits represented 78% and borrowings represented 22% of interest-bearing liabilities, compared to 76% and 24%, respectively, at December 31, 2013. At March 31, 2014, deposits, the largest category of the Company’s interest-bearing liabilities, were $5.301 billion, down 1.5% from $5.383 billion at December 31, 2013. Non-maturing deposit balances increased 3.7%, to $3.456 billion, while time deposits, higher-priced deposits, declined 10.0% as part of efforts to reduce the cost of deposits, which averaged 0.68% as of March 31, 2014 compared to 0.72% at December 31, 2013.

Borrowings consist mainly of funding sources through the use of repurchase agreements, FHLB-NY advances, subordinated capital notes, and short-term borrowings. At March 31, 2014, borrowings amounted to $1.476 billion, 13.6% lower than the $1.707 billion reported at December 31, 2013. Repurchase agreements as of March 31, 2014 decreased $255.4 million to $1.012 billion from $1.268 billion at December 31, 2013, as the Company used available cash to pay off repurchase agreements at maturity.

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 of the Bank’s mortgage loans and investment securities. Advances from FHLB-NY amounted to $335.7 million and $336.1 million as of March 31, 2014 and December 31, 2013, respectively. These advances mature from April 2014 through July 2020.

Stockholders’ Equity

At March 31, 2014, the Company’s total stockholders’ equity was $896.5 million, a 1.3% increase when compared to $884.9 million at December 31, 2013. Increase in stockholders’ equity was mainly driven by the income for the quarter, partially offset by an increase in treasury stock. During the quarter ended March 31, 2014, the Company repurchased 707,400 of its outstanding shares of common stock.

At March 31, 2014, tangible common equity to total assets increased to 8.06% from 7.61%. Tier 1 Leverage Capital Ratio increased to 9.51% from 9.11%, Tier 1 Risk-Based Capital Ratio increased to 14.76% from 14.35%, and Total Risk-Based Capital Ratio increased to 16.56% from 16.14% on December 31, 2013.

Taking into consideration the strong capital position, in the fourth quarter of the fiscal year 2013, the Company increased the cash dividend per common share to $0.08, as compared to $0.06 in the first quarter of 2013.

103

The following are the consolidated capital ratios of the Company at March 31, 2014 and December 31, 2013

TABLE 14 — CAPITAL, DIVIDENDS AND STOCK DATA
| March 31, | December 31, |  | Variance
| 2014 |  | 2013 |  | %
| (Dollars in thousands, except per share data)
Capital data: |  |  |  |  |  |  |
Stockholders’ equity | $ | 896,491 |  | $ | 884,913 |  | 1.3%
Regulatory Capital Ratios data: |  |  |  |  |  |  |
Leverage capital ratio |  | 9.51% |  |  | 9.11% |  | 4.4%
Minimum leverage capital ratio required |  | 4.00% |  |  | 4.00% |  |
Actual tier 1 capital | $ | 745,619 |  | $ | 736,930 |  | 1.2%
Minimum tier 1 capital required | $ | 313,594 |  | $ | 323,476 |  | -3.1%
Excess over regulatory requirement | $ | 432,024 |  | $ | 413,455 |  | 4.5%
Tier 1 risk-based capital ratio |  | 14.76% |  |  | 14.35% |  | 2.9%
Minimum tier 1 risk-based capital ratio required |  | 4.00% |  |  | 4.00% |  |
Actual tier 1 risk-based capital | $ | 745,619 |  | $ | 736,930 |  | 1.2%
Minimum tier 1 risk-based capital required | $ | 202,027 |  | $ | 205,382 |  | -1.6%
Excess over regulatory requirement | $ | 543,592 |  | $ | 531,548 |  | 2.3%
Risk-weighted assets | $ | 5,050,672 |  | $ | 5,134,538 |  | -1.6%
Total risk-based capital ratio |  | 16.56% |  |  | 16.14% |  | 2.6%
Minimum total risk-based capital ratio required |  | 8.00% |  |  | 8.00% |  |
Actual total risk-based capital | $ | 836,168 |  | $ | 828,476 |  | 0.9%
Minimum total risk-based capital required | $ | 404,054 |  | $ | 410,763 |  | -1.6%
Excess over regulatory requirement | $ | 432,114 |  | $ | 417,713 |  | 3.4%
Risk-weighted assets | $ | 5,050,672 |  | $ | 5,134,538 |  | -1.6%
Tangible common equity to total assets |  | 8.06% |  |  | 7.61% |  | 5.9%
Tangible common equity to risk-weighted assets |  | 12.54% |  |  | 12.10% |  | 3.6%
Total equity to total assets |  | 11.41% |  |  | 10.85% |  | 5.2%
Total equity to risk-weighted assets |  | 17.75% |  |  | 17.23% |  | 3.0%
Tier 1 common equity to risk-weighted assets |  | 10.79% |  |  | 10.44% |  | 3.4%
Tier 1 common equity capital | $ | 544,749 |  | $ | 536,062 |  | 1.6%
Stock data: |  |  |  |  |  |  |
Outstanding common shares |  | 45,003,924 |  |  | 45,676,922 |  | -1.5%
Book value per common share | $ | 16.23 |  | $ | 15.74 |  | 3.1%
Tangible book value per common share | $ | 14.07 |  | $ | 13.60 |  | 3.5%
Market price at end of period | $ | 17.19 |  | $ | 17.34 |  | -0.9%
Market capitalization at end of period | $ | 773,617 |  | $ | 792,038 |  | -2.3%

| Quarter ended March 31, |  | Variance
|  | 2014 |  | 2013 |  | %
| (Dollars in thousands, except per share data)
Common dividend data: |  |  |  |  |  |  |  |
Cash dividends declared |  | $ | 3,657 |  | $ | 2,737 |  | 33.6%
Cash dividends declared per share |  | $ | 0.08 |  | $ | 0.06 |  | 33.3%
Payout ratio |  |  | 17.78% |  |  | 16.22% |  | 9.6%
Dividend yield |  |  | 1.86% |  |  | 1.55% |  | 20.1%

104

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, 2014 and December 31, 2013:

| March 31, |  | December 31,
| 2014 |  | 2013
|  | (In thousands, except share or per share information)
Total stockholders' equity | $ | 896,491 |  | $ | 884,913
Preferred stock |  | (176,000) |  |  | (176,000)
Preferred stock issuance costs |  | 10,130 |  |  | 10,130
Goodwill |  | (86,069) |  |  | (86,069)
Core deposit intangible |  | (7,468) |  |  | (7,804)
Customer relationship intangible |  | (3,902) |  |  | (4,108)
Total tangible common equity | $ | 633,182 |  | $ | 621,062
Total assets |  | 7,855,638 |  |  | 8,158,015
Goodwill |  | (86,069) |  |  | (86,069)
Core deposit intangible |  | (7,469) |  |  | (7,804)
Customer relationship intangible |  | (3,902) |  |  | (4,108)
Total tangible assets | $ | 7,758,198 |  | $ | 8,060,034
Tangible common equity to tangible assets |  | 8.16% |  |  | 7.71%
Common shares outstanding at end of period |  | 45,003,924 |  |  | 45,676,922
Tangible book value per common share | $ | 14.07 |  | $ | 13.60

The tangible common equity ratio and tangible book value per common share are non-GAAP measures. 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.

The Tier 1 common equity to risk-weighted assets ratio is another non-GAAP measure. Ratios calculated based upon Tier 1 common equity have become a focus of regulators and investors, and management believes ratios based on Tier 1 common equity assist investors in analyzing the Company’s capital position. In connection with the 2009 Supervisory Capital Assessment Program, the Federal Reserve Board supplemented its assessment of the capital adequacy of certain large bank holding companies based on a variation of Tier 1 capital, known as Tier 1 common equity.

Because Tier 1 common equity is not formally defined by GAAP or, unlike Tier 1 capital, codified in the federal banking regulations, this measure is considered to be a non-GAAP financial measure. 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.

105

The table below presents a reconciliation of the Company’s total common equity (GAAP) at March 31, 2014 and December 31, 2013 to Tier 1 common equity (non-GAAP):

| March 31, |  | December 31, |
| 2014 |  | 2013 |
| (Dollars in thousands)
Common stockholders' equity | $ | 730,621 |  | $ | 719,043 |
Unrealized gains on available-for-sale securities, net of income tax |  | (16,034) |  |  | (11,434) |
Unrealized losses on cash flow hedges, net of income tax |  | 8,013 |  |  | 8,243 |
Disallowed deferred tax assets |  | (79,016) |  |  | (80,430) |
Disallowed servicing assets |  | (1,397) |  |  | (1,380) |
Intangible assets: |  |  |  |  |  |
Goodwill |  | (86,069) |  |  | (86,069) |
Other intangible assets |  | (11,370) |  |  | (11,912) |
Total Tier 1 common equity | $ | 544,748 |  | $ | 536,062 |
Tier 1 common equity to risk-weighted assets |  | 10.79% |  |  | 10.44% |

The following table presents the Company’s capital adequacy information at March 31, 2014 and December 31, 2013:

| March 31, |  | December 31,
| 2014 |  | 2013
| (Dollars in thousands)
Risk-based capital: |  |  |  |  |
Tier 1 capital | $ | 745,619 |  | $ | 736,930
Supplementary (Tier 2) capital |  | 90,549 |  |  | 91,546
Total risk-based capital | $ | 836,168 |  | $ | 828,476
Risk-weighted assets: |  |  |  |  |
Balance sheet items | $ | 4,872,822 |  | $ | 4,969,531
Off-balance sheet items |  | 177,850 |  |  | 165,007
Total risk-weighted assets | $ | 5,050,672 |  | $ | 5,134,538
Ratios: |  |  |  |  |
Tier 1 capital (minimum required - 4%) |  | 14.76% |  |  | 14.35%
Total capital (minimum required - 8%) |  | 16.56% |  |  | 16.14%
Leverage ratio |  | 9.51% |  |  | 9.11%
Equity to assets |  | 11.41% |  |  | 10.85%
Tangible common equity to assets |  | 8.06% |  |  | 7.61%

The Federal Reserve Board has risk-based capital guidelines for bank holding companies. Under the guidelines, the minimum ratio of qualifying total capital to risk-weighted assets is 8%. At least half of the total capital is to be comprised of qualifying common stockholders’ equity, qualifying noncumulative perpetual preferred stock (including related surplus), minority interests related to qualifying common or noncumulative perpetual preferred stock directly issued by a consolidated U.S. depository institution or foreign bank subsidiary, and restricted core capital elements (collectively, “Tier 1 Capital”). Banking organizations are expected to maintain at least 50% of their Tier 1 Capital as common equity. Except for certain debt or equity instruments issued on or after May 19, 2010, which are excluded from Tier 1 Capital , not more than 25% of qualifying Tier 1 Capital may consist of qualifying cumulative perpetual preferred stock, trust preferred securities or other so-called restricted core capital elements. “Tier 2 Capital” may consist, subject to certain limitations, of allowance for loan and lease losses; perpetual preferred stock and related surplus; hybrid capital instruments, perpetual debt, and mandatory convertible debt securities; term subordinated debt and intermediate-term preferred stock, including related surplus; and unrealized holding gains on equity securities. “Tier 3 Capital” consists of qualifying unsecured subordinated debt. The sum of Tier 2 and Tier 3 Capital may not exceed the amount of Tier 1 Capital.

106

Pursuant to the Dodd-Frank Act, federal banking agencies have adopted new capital rules that became effective January 1, 2014 for advanced approaches banking organizations (i.e., those with consolidated assets greater than $250 billion or consolidated on-balance sheet foreign exposures of at least $10 billion) and January 1, 2015 for all other covered organizations (subject to certain phase-in periods through January 1, 2019) and that will replace their general risk-based capital rules, advanced approaches rule, market risk rule, and leverage rules.

The new capital rules provide certain changes to the prompt corrective action regulations adopted by the agencies under Section 38 of the FDIA, as amended by FDICIA. These regulations are designed to place restrictions on U.S. insured depository institutions if their capital levels begin to show signs of weakness. The five capital categories established by the agencies under their prompt corrective action framework are: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized”. As of March 31, 2014 and December 31, 2013, the Company is “well capitalized” for regulatory purposes.

The new capital rules expand such categories by introducing a common equity tier 1 capital requirement for all depository institutions, revising the minimum risk-based capital ratios and, beginning in 2018, the proposed supplementary leverage requirement for advanced approaches banking organizations. The common equity tier 1 capital ratio is a new minimum requirement designed to ensure that banking organizations hold sufficient high-quality regulatory capital that is available to absorb losses on a going-concern basis.

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, 2014, and December 31 2013:

| March 31 , |  | December 31, |  | Variance
| 2014 |  | 2013 |  | %
| (Dollars in thousands)
Oriental Bank Regulatory Capital Ratios: |  |  |  |  |  |  |
Total Tier 1 Capital to Total Assets |  | 9.18% |  |  | 8.57% |  | 7.1%
Actual tier 1 capital | $ | 715,591 |  | $ | 689,174 |  | 3.8%
Minimum capital requirement (4%) | $ | 311,659 |  | $ | 321,551 |  | -3.1%
Minimum to be well capitalized (5%) | $ | 389,574 |  | $ | 401,939 |  | -3.1%
Tier 1 Capital to Risk-Weighted Assets |  | 14.22% |  |  | 13.47% |  | 5.6%
Actual tier 1 risk-based capital | $ | 715,591 |  | $ | 689,174 |  | 3.8%
Minimum capital requirement (4%) | $ | 201,248 |  | $ | 204,627 |  | -1.7%
Minimum to be well capitalized (6%) | $ | 301,871 |  | $ | 306,940 |  | -1.7%
Total Capital to Risk-Weighted Assets |  | 16.02% |  |  | 15.26% |  | 5.0%
Actual total risk-based capital | $ | 805,900 |  | $ | 780,487 |  | 3.3%
Minimum capital requirement (8%) | $ | 402,495 |  | $ | 409,253 |  | -1.7%
Minimum to be well capitalized (10%) | $ | 503,119 |  | $ | 511,567 |  | -1.7%

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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, 2014 and December 31, 2013, the Company’s market capitalization for its outstanding common stock was $773.6 million ($17.19 per share) and $792.0 million ($17.34 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
2014 |  |  |  |  |  |  |  |
March 31,2014 | $ | 17.54 |  | $ | 14.30 |  | $ | 0.08
2013 |  |  |  |  |  |  |  |
December 31, 2013 | $ | 17.34 |  | $ | 14.74 |  | $ | 0.08
September 30,2013 | $ | 18.97 |  | $ | 16.13 |  | $ | 0.06
June 30, 2013 | $ | 18.11 |  | $ | 14.26 |  | $ | 0.06
March 31, 2013 | $ | 15.83 |  | $ | 13.85 |  | $ | 0.06
2012 |  |  |  |  |  |  |  |
December 31, 2012 | $ | 13.35 |  | $ | 9.98 |  | $ | 0.06
September 30, 2012 | $ | 11.49 |  | $ | 10.02 |  | $ | 0.06
June 30, 2012 | $ | 12.37 |  | $ | 9.87 |  | $ | 0.06
March 31, 2012 | $ | 12.69 |  | $ | 11.25 |  | $ | 0.06

Under the Company’s current stock repurchase program it is authorized to purchase in the open market up to $70 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 quarter ended March 31, 2014, the Company purchased 707,400 shares under this program for a total of $10.4 million, at an average price of $14.66 per share. There were no repurchases during 2013. The number of shares that may yet be purchased under the $70 million program is estimated at 1,341,002 and was calculated by dividing the remaining balance of $23.1 million by $17.19 (closing price of the Company common stock at March 31, 2014).

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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 discharging 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 monthly 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 one-year time horizon, assuming certain gradual upward and downward interest rate movements, achieved during a twelve-month period. 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, 2014 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 | $ | 4,527 |  | 1.26% |  | $ | 5,209 |  | 1.45%
+ 100 Basis points | $ | 2,176 |  | 0.61% |  | $ | 2,516 |  | 0.70%
- 50 Basis points | $ | (852) |  | -0.24% |  | $ | (851) |  | -0.24%

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, 2014.

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 unaudited 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 asset of $166 thousand (notional amount of $40.3 million) and a derivative liability of $10.7 million (notional amount of $225.0 million) were recognized at March 31, 2014, related to the valuation of these swaps. Refer to Note 7 of the unaudited consolidated financial statements for a description 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, 2014, interest rate swaps offered to clients not designated as hedging instruments represented a derivative asset of $2.8 million (notional amounts of $16.6 million), and the mirror-image interest rate swaps in which BBVAPR entered into represented a derivative liability of $2.8 million (notional amounts of $16.6 million). Refer to Note 7 of the unaudited consolidated financial statements for a description of these swaps.

S&P options — The Company has offered its customers certificates of deposit with an option tied to the performance of the S&P 500 Index. At the end of five years, the depositor receives a minimum return or a specified percentage of the average increase of the month-end value of the S&P 500 Index. The Company uses option agreements with major money center banks and major broker-dealer companies to manage its exposure to changes in that index. Under the terms of the option agreements, the Company receives the average increase in the month-end value of S&P 500 Index in exchange for a fixed premium. The changes in fair value of the options purchased and the options embedded in the certificates of deposit are recorded in earnings.

At March 31, 2014, the fair value of the purchased options used to manage the exposure to the S&P 500 Index on stock-indexed certificates of deposit represented an asset of $12.6 million (notional amounts of $23.8 million) and the options sold to customers embedded in the certificates of deposit represented a liability of $12.1 million (notional amount of $22.9 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, 2014, the Company had $265 million in interest rate swaps at an average rate of 2.6% designated as cash flow hedges for $265 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 eight years, due to a shrinking population, a protracted economic recession, a housing sector that remains under pressure, and the Puerto Rico government’s large indebtedness and structural budget deficit, and the recent rating downgrades of Puerto Rico general obligations and certain other government bonds to levels that are below investment grade.

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 Committee, composed of its Chief Executive Officer, Chief Credit 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.

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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 wholesale funding sources. Although the Company has selectively reduced its use of wholesale funding sources, such as repurchase agreements and brokered deposits, it is still dependent on wholesale funding sources. As of March 31, 2014, the Company had $1.010 billion in repurchase agreements and $712.9 million in brokered deposits.

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.

The Company participates in the Federal Reserve Bank’s Borrower-In Custody Program which allows it to pledge certain type of loans while keeping physical control of the collateral.

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, 2014, the Company had approximately $624.6 million in unrestricted cash and cash equivalents, $235.7 million in investment securities that are not pledged as collateral, $614 million in borrowing capacity at the FHLB-NY and $861 million in borrowing capacity at the Federal Reserve’s discount window available to cover liquidity needs.

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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 risk, 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 Risk Management 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 Compliance Director who reports to the Chief Risk Officer and is responsible for the oversight of regulatory compliance and implementation of a company-wide compliance program.

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 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, 2014, 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

Except as set forth below, 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, 2013. 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.

We rely on the services of third parties for our banking, information technology, telecommunications, and mortgage loan servicing infrastructure, and any failure, interruption or termination of such services or systems could have a material adverse affect on our financial condition and results of operations.

Our business relies on the secure, successful and uninterrupted functioning of our banking, information technology, telecommunications, and mortgage loan servicing infrastructure. We outsource some of our major systems, such as customer data and deposit processing, mortgage loan servicing, Internet and mobile banking, and electronic fund transfer systems. The failure or interruption of such systems, or the termination of a third-party software license or mortgage servicing, or any service agreement on which any of these systems or services is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such systems fail or experience interruptions.

We periodically sell or securitize our mortgage loans while retaining the obligation to perform the servicing of such loans. Although we are the master servicer of our mortgage loan portfolios, we outsource our servicing functions pursuant to a subservicing arrangement with a third party in Puerto Rico. The termination or interruption of such subservicing arrangement, without a feasible substitute or successor, could adversely affect our financial condition and results of operations. In addition, because the FDIC has the right to refuse or delay payment for loan and lease losses if the shared-loss agreements are not performed by us in accordance with their terms, any such termination or interruption of the subservicing of the covered loans that we acquired in the FDIC-assisted acquisition could adversely affect our ability to comply with such terms.

If sustained or repeated, a failure, denial or termination of such systems or services could result in a deterioration of our ability to process new loans, service existing loans, gather deposits and/or provide customer service. It could also compromise our ability to operate effectively, damage our reputation, result in a loss of customer business and/or subject us to additional regulatory scrutiny and possible financial liability. Any of the foregoing could have a material adverse effect on our financial condition and results of operations.

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A credit default or ratings downgrade on the Puerto Rico government’s debt obligations could adversely affect the value of our loans to the government of Puerto Rico and our investment portfolio of Puerto Rico government bonds.

Even though the economy of Puerto Rico is closely related to the economy of the rest of the United States, prevailing economic conditions and the fiscal situation of the government of Puerto Rico led Standard & Poor’s, Moody’s and Fitch to downgrade general obligations and certain other bonds of the Puerto Rico government to levels below investment grade.

Despite the Commonwealth’s progress in addressing its persistent budget deficits and underfunded government retirement plans, Puerto Rico continues to face significant economic and fiscal challenges, including a protracted economic recession, sizable debt-service obligations, high unemployment and a shrinking population. The recent Commonwealth credit downgrades by three leading rating agencies reflect only the views of such agencies, an explanation of which may be obtained from each such rating agency. Generally, below-investment-grade securities present greater risks and can be less liquid than investment-grade securities.

The reduction in the credit ratings of Puerto Rico government debt obligations could severely weaken the demand for such securities and the Commonwealth’s access to capital markets, which may affect its ability to obtain the financing that it needs. This may in turn increase the Commonwealth’s risk of default.

It is uncertain how capital markets may react to any future ratings downgrade in Puerto Rico government debt obligations. However, a further deterioration of economic or fiscal conditions in Puerto Rico, with possible negative ratings implications, could adversely affect the value of our loans to the government of Puerto Rico and the value of our investment portfolio of Puerto Rico government bonds.

At March 31, 2014, we had approximately $766.7 million of credit facilities granted to the Puerto Rico government, including its instrumentalities, public corporations and municipalities, of which $718.8 million was outstanding as of such date. A substantial portion of our credit exposure to the government of Puerto Rico consists of collateralized loans or obligations that have a specific source of income or revenues identified for its repayment. Some of these obligations consist of senior and subordinated loans to public corporations that obtain revenues from rates charged for services or products, such as water and electric power utilities. Public corporations have varying degrees of independence from the central government and many receive appropriations or other payments from it. We also have loans to various municipalities for which the good faith, credit and unlimited taxing power of the applicable municipality has been pledged to their repayment. These municipalities are required by law to levy special property taxes in such amounts as required for the payment of all of its general obligation bonds and notes. Another portion of these loans consists of special obligations of various municipalities that are payable from the basic real and personal property taxes collected within such municipalities. The good faith and credit obligations of the municipalities have a first lien on the basic property taxes.

Furthermore, as of March 31, 2014, we had approximately $42.4 million in obligations issued and guaranteed by the Puerto Rico government, including certain instrumentalities or public corporations, as part of our investment securities portfolio. We continue to closely monitor the economic and fiscal situation of Puerto Rico and evaluate the portfolio for any declines in value that management may consider being other-than-temporary.

Approximately 43% of our Puerto Rico government loans and obligations mature in the next 12 months or less. At March 31, 2014, we also had deposits of approximately $367.4 million from the government of Puerto Rico.

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

On June 29, 2011, the Company announced the approval by the Board of Directors of a stock repurchase program to purchase an additional $70 million of the Company’s common stock in the open market.

Any shares of common stock repurchased are held by the Company as treasury shares. The Company records treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. During the quarter ended March 31, 2014, the Company purchased approximately 707,400 additional shares under this program for a total of $10.4 million, at an average price of $14.66 per share.

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The following table presents the shares repurchased for each month in the quarter ended March 31, 2014, excluding the month ended March 31, 2014, during which no shares were purchased as part of the stock repurchase program:

|  |  |  |  |  | Total number of |  |  | Maximum approximate
|  |  |  |  |  | shares purchased |  |  | dollar value of shares
| Total number of |  | Average price paid |  | as part of publicly |  |  | that may yet be purchased
Period | shares purchased |  | per share |  | announced programs |  |  | under the programs
|  |  |  |  |  |  |  |  | (In thousands)
January 1-31, 2014 | 57,700 |  | $ | 14.73 |  | 57,700 |  | $ | 32,593
February 1-28, 2014 | 649,700 |  |  | 14.66 |  | 649,700 |  |  | 23,052
March 1-31, 2014 | - |  |  | - |  | - |  |  | 23,052
Quarter ended March 31, 2014 | 707,400 |  | $ | 14.66 |  | 707,400 |  | $ | 23,052

The number of shares that may yet be purchased under the current $70 million program is estimated at 1,341,002, and was calculated by dividing the remaining balance of $23.1 million by $17.19 (closing price of the Company’s common stock at March 31, 2014). The Company did not purchase any shares of its common stock other than through its publicly announced stock repurchase program during the quarter ended March 31, 2014.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit No. Description of Document:

10.1 Amendment to Technology Outsourcing Agreement between the Company and Metavante Corporation.(1)

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, 2014, 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.

(1) Incorporated herein by reference to Exhibit 10.16 of the Company’s annual report on Form 10-K filed with the SEC on March 3, 2014. Portions of this exhibit have been omitted pursuant to a request for confidential treatment

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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 9, 2014
| José Rafael Fernández |  |
| President and Chief Executive Officer |  |
By: | /s/ Ganesh Kumar |  | Date: May 9, 2014
| Ganesh Kumar |  |
| Executive Vice President and Chief Financial Officer |  |
By: | /s/ César A. Ortiz |  | Date: May 9, 2014
| César A. Ortiz |  |
| Senior Vice President and Chief Accounting Officer |  |

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