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

The fair value of investment securities is based on valuations obtained from an independent pricing provider, ICE Data Pricing (formerly known as IDC). ICE is a well-recognized pricing company and an established leader in financial information. Such securities are classified as Level 1 or Level 2 depending on the basis for determining fair value. OFG holds one security categorized as other debt that is classified as Level 3. The estimated fair value of the other debt security is determined by using an adjusted third-party model to calculate the present value of projected future cash flows. The assumptions are highly uncertain and include primarily market discount rates and current spread. The assumptions used are drawn from similar securities that are actively traded in the market and have similar risk characteristics. The valuation is performed on a quarterly basis.

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 (or its fallback benchmark when applicable), and also applying yield curves that account for the industry sector and the credit rating of the counterparty and/or OFG. 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.

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.

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

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


	December 31, 2021
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
	(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale	$	10,825	$	498,358	$	1,530	$	510,713
Trading securities	—		20		—		20
Money market investments	8,952		—		—		8,952
Derivative assets	—		1		—		1
Servicing assets	—		—		48,973		48,973
Derivative liabilities	—		(804)		—		(804)
	$	19,777	$	497,575	$	50,503	$	567,855
Non-recurring fair value measurements:
Collateral dependent loans	—		—		10,233		10,233
Foreclosed real estate	—		—		15,039		15,039
Other repossessed assets	—		—		1,945		1,945
	$	—	$	—	$	27,217	$	27,217


	December 31, 2020
	Fair Value Measurements
	Level 1		Level 2		Level 3		Total
	(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale	$	10,983	$	435,455	$	—	$	446,438
Trading securities	—		22		—		22
Money market investments	11,908		—		—		11,908

Servicing assets	—		—		47,295		47,295
Derivative liabilities	—		(1,712)		—		(1,712)
	$	22,891	$	433,765	$	47,295	$	503,951
Non-recurring fair value measurements:
Collateral dependent loans	$	—	$	—	$	29,279	$	29,279
Foreclosed real estate	—		—		11,596		11,596
Other repossessed assets	—		—		1,816		1,816
	$	—	$	—	$	42,691	$	42,691

The fair value information included in the tables above for non-recurring fair value measurements is not as of period end, but as of the date that the fair value measurement was recorded during the years ended December 31, 2021 and 2020, and excludes nonrecurring fair value measurements of assets no longer outstanding as of the reporting date.


	Other debt securities available for sale		Servicing Assets		Total		Servicing Assets		Servicing Assets
	Year Ended December 31,
	2021						2020		2019
	(In thousands)
Balance at beginning year	$	—	$	47,295	$	47,295	$	50,779	$	10,716
New instruments acquired	—		6,089		6,089		2,394		41,637
Transfer from Level 2	1,500		—		1,500		—		—
Principal repayments and amortization	—		(6,738)		(6,738)		(4,067)		(906)
Gain (losses) included in earnings	—		2,327		2,327		(1,811)		(668)
Gains included in other comprehensive income	30		—		30		—		—
Balance at end of year	$	1,530	$	48,973	$	50,503	$	47,295	$	50,779

The transfer of other debt securities available for sale amounting to $1.5 million during the year ended December 31, 2021 from level 2 to level 3 corresponded to a convertible note purchased on June 25, 2021. The fair value used at June 30, 2021 was its initial value due to the proximity of its acquisition date, where the transaction price equaled the fair value at acquisition. During the quarter ended September 30, 2021, it was reclassified as level 3 due to the significant unobservable inputs used to determine its fair value at September 30, 2021. There were no transfers into or out of level 3 during the years ended December 31, 2020 and 2019.

Servicing assets gains (losses) included in earnings during the years ended December 31, 2021, 2020 and 2019 were included as mortgage servicing activities in the consolidated statement of operations. There were no changes in unrealized gains and losses from recurring level 3 fair value measurements held at December 2020 and 2019 during the years then ended included in other comprehensive income. For more information on the qualitative information about level 3 fair value measurements, see Note 10 – Servicing Assets.


	December 31, 2021
	Fair Value		Valuation Technique	Unobservable Input	Range		Weighted Average
	(In thousands)

Other debt securities available-for-sale	$	1,530	Cash flow valuation	Credit Rating	Baa1 - Baa3		Baa2
				Probability of Default Rate	0.16% - 2.28%		0.35	%
				Recovery Rate	33.08	%	33.08	%

Servicing assets	$	48,973	Cash flow valuation	Constant prepayment rate	3.90% - 24.48%		6.17	%
				Discount rate	10.00% - 15.50%		11.47	%

Collateral dependent loans	$	10,233	Fair value of property or collateral	Appraised value less disposition costs	10.20% - 30.20%		20.20	%

Foreclosed real estate	$	15,039	Fair value of property or collateral	Appraised value less disposition costs	10.20% - 30.20%		12.54	%

Other repossessed assets	$	1,945	Fair value of property or collateral	Estimated net realizable value less disposition costs	39.00% - 80.00%		60.54	%

Other debt security available for sale – The significant unobservable inputs used in the fair value measurement of one of OFG’s other debt securities is a discounted cash flow methodology (DCF). DCF is a valuation method that uses the concept of the time value of money. The methodology used the future cash flows discounted through a yield to obtain a net present value. Assumptions applied in the model are obtained from Moody’s Default Trends.

Servicing assets – The significant unobservable inputs used in the fair value measurement of OFG’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.

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.


	December 31,
	2021				2020
	Fair Value		Carrying Value		Fair Value		Carrying Value
	(In thousands)
Level 1
Financial Assets:
Cash and cash equivalents	$	2,023,475	$	2,023,475	$	2,154,202	$	2,154,202
Restricted cash	$	175	$	175	$	1,375	$	1,375
Investment securities available-for-sale	$	10,825	$	10,825	$	10,983	$	10,983
Level 2
Financial Assets:
Trading securities	$	20	$	20	$	22	$	22
Investment securities available-for-sale	$	498,358	$	498,358	$	435,455	$	435,455
Investment securities held-to-maturity	$	363,653	$	367,507	$	—	$	—
Federal Home Loan Bank (FHLB) stock	$	5,966	$	5,966	$	8,278	$	8,278
Equity securities	$	11,612	$	11,612	$	3,962	$	3,962
Derivative assets	$	1	$	1	$	—	$	—
Financial Liabilities:
Derivative liabilities	$	804	$	804	$	1,712	$	1,712
Level 3
Financial Assets:
Investment securities available for sale	$	1,530	$	1,530	$	—	$	—
Total loans (including loans held-for-sale)	$	6,197,347	$	6,329,311	$	6,323,689	$	6,501,259
Accrued interest receivable	$	56,560	$	56,560	$	65,547	$	65,547
Servicing assets	$	48,973	$	48,973	$	47,295	$	47,295
Accounts receivable and other assets	$	88,756	$	88,756	$	78,845	$	78,845
Financial Liabilities:
Deposits	$	8,614,073	$	8,603,118	$	8,422,599	$	8,415,640

Advances from FHLB	$	28,480	$	28,488	$	68,147	$	65,561
Other borrowings	$	—	$	—	$	707	$	707
Subordinated capital notes	$	36,084	$	36,083	$	33,325	$	36,083
Accrued expenses and other liabilities	$	96,240	$	96,240	$	154,418	$	154,418

•Cash and cash equivalents (including money market investments and time deposits with other banks), restricted cash, accrued interest receivable, accounts receivable and other assets, accrued expenses and other liabilities, and other borrowings 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.

•The fair value of investment securities, including trading securities, is based on quoted market prices, when available or prices provided from contracted pricing providers, or market prices provided by recognized broker-dealers. If listed prices or quotes are not available, fair value is based upon externally developed models that use both observable and unobservable inputs depending on the market activity of the instrument. Equity securities do not have readily available fair values and are measured at cost, less any impairment. The estimated fair value of the convertible note is determined by using an adjusted 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, 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 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 servicing asset is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions.

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

•The fair value of the loan portfolio (including loans held-for-sale and non-performing loans) is based on the exit market price, which 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. The fair value 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.

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

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