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FAIR VALUE OF FINANCIAL INSTRUMENTS
 6 Months Ended
Jun. 30, 2022
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS
OFG follows the fair value measurement framework under U.S. Generally Accepted Accounting Principles (“GAAP”).
Fair Value Measurement
The fair value measurement framework defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This framework also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Money market investments
The fair value of money market investments is based on the carrying amounts reflected in the consolidated statements of financial condition as these are reasonable estimates of fair value given the short-term nature of the instruments.
Investment securities
The fair value of investment securities is based on 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.
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 (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
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
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 opinion or an internal valuation. These foreclosed assets are classified as Level 3 given certain internal adjustments that may be made to external appraisals.
Other repossessed assets
Other repossessed assets include repossessed automobiles. The fair value of the repossessed automobiles may be determined using internal valuation and an external appraisal. These repossessed assets are classified as Level 3 given certain internal adjustments that may be made to external appraisals.
Assets and liabilities measured at fair value on a recurring and non-recurring basis are summarized below:
June 30, 2022
Fair Value Measurements
Level 1Level 2Level 3Total
(In thousands)
Recurring fair value measurements:
Investment securities available-for-sale$10,733 $1,147,256 $1,581 $1,159,570 
Trading securities— 13 — 13 
Money market investments4,913 — — 4,913 
Derivative assets— 187 — 187 
Servicing assets— — 49,280 49,280 
Derivative liabilities— (21)— (21)
$15,646 $1,147,435 $50,861 $1,213,942 
Non-recurring fair value measurements:
Collateral dependent loans— — 21,565 21,565 
Foreclosed real estate— — 15,061 15,061 
Other repossessed assets— — 2,533 2,533 
$— $— $39,159 $39,159 
December 31, 2021
Fair Value Measurements
Level 1Level 2Level 3Total
(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 investments8,952 — — 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 
The fair value information included in the tables above for non-recurring fair value measurements is not as of period end. Instead, it is as of the date that the fair value measurement was recorded during the periods ended June 30, 2022 and December 31, 2021, and excludes nonrecurring fair value measurements of assets no longer outstanding as of the reporting date.
The tables below present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarters and six-month periods ended June 30, 2022 and 2021:
Level 3 Instruments Only
Quarter Ended June 30,
20222021
Other debt securities available for saleServicing AssetsTotalServicing Assets
(In thousands)
Balance at beginning period$1,554 $49,446 $51,000 $47,911 
New instruments acquired— 1,150 1,150 2,023 
Principal repayments and amortization— (1,478)(1,478)(1,862)
Gains (losses) included in earnings— 162 162 (360)
Gains included in other comprehensive income27 — 27 — 
Balance at end of period$1,581 $49,280 $50,861 $47,712 
Other debt securities available for saleServicing AssetsTotalServicing Assets
Six-Month Period Ended June 30,
20222021
(In thousands)
Balance at beginning year$1,530 $48,973 $50,503 $47,295 
New instruments acquired— 2,269 2,269 3,443 
Principal repayments and amortization— (2,977)(2,977)(3,369)
Gains included in earnings— 1,015 1,015 343 
Gains included in other comprehensive income51 — 51 — 
Balance at end of year$1,581 $49,280 $50,861 $47,712 
There were no transfers into or out of Level 3 during the quarters and six-month periods ended June 30, 2022 and 2021.
Servicing assets gains (losses) included in earnings during the quarters and six-month periods ended June 30, 2022 and 2021 were included as mortgage servicing activities in the consolidated statements of operations. There were no changes in unrealized gains and losses from recurring Level 3 fair value measurements held at June 30, 2021 during the quarter and six-month period then ended included in other comprehensive income. For more information on the qualitative information about Level 3 fair value measurements, see Note 7 – Servicing Assets.
During the quarters and six-month periods ended June 30, 2022 and 2021, there were purchases and sales of assets and liabilities measured at fair value on a recurring basis.
The table below presents quantitative information for all assets and liabilities measured at fair value on a recurring and non-recurring basis using significant unobservable inputs (Level 3) at June 30, 2022:
June 30, 2022
Fair ValueValuation TechniqueUnobservable InputRangeWeighted Average
(In thousands)
Other debt securities available-for-sale$1,581 Cash flow valuationCredit Rating
Baa1 - Baa3
Baa2
Probability of Default Rate
0.15% - 2.12%
0.15 %
Recovery Rate33.08 %33.08 %
Servicing assets$49,280 Cash flow valuationConstant prepayment rate
3.60% - 22.71%
5.90 %
Discount rate
10.00% - 15.50%
11.45 %
Collateral dependent loans$21,565 Fair value of property
or collateral		Appraised value less disposition costs
10.20% - 33.20%
17.16 %
Foreclosed real estate$15,061 Fair value of property
or collateral		Appraised value less disposition costs
10.20% - 33.20%
11.69 %
Other repossessed assets$2,533 Fair value of property
or collateral		Estimated net realizable value less disposition costs
20.00% - 90.00%
61.76 %
Information about Sensitivity to Changes in Significant Unobservable Inputs
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.
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 OFG.
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.
The estimated fair value and carrying value of OFG’s financial instruments at June 30, 2022 and December 31, 2021 is as follows:
June 30,December 31,
20222021
Fair
Value		Carrying
Value		Fair
Value		Carrying
Value
(In thousands)
Level 1
Financial Assets:
Cash and cash equivalents$1,307,112 $1,307,112 $2,023,475 $2,023,475 
Restricted cash$169 $169 $175 $175 
Investment securities available-for-sale$10,733 $10,733 $10,825 $10,825 
Level 2
Financial Assets:
Trading securities$13 $13 $20 $20 
Investment securities available-for-sale$1,147,256 $1,147,256 $498,358 $498,358 
Investment securities held-to-maturity$501,747 $547,832 $363,653 $367,507 
Federal Home Loan Bank (FHLB) stock$6,047 $6,047 $5,966 $5,966 
Equity securities$13,801 $13,801 $11,612 $11,612 
Derivative assets$187 $187 $1 $1 
Financial Liabilities:
Derivative liabilities$21 $21 $804 $804 
Level 3
Financial Assets:
Investment securities available for sale$1,581 $1,581 $1,530 $1,530 
Total loans (including loans held-for-sale)$6,517,268 $6,585,210 $6,197,347 $6,329,311 
Accrued interest receivable$58,371 $58,371 $56,560 $56,560 
Servicing assets$49,280 $49,280 $48,973 $48,973 
Accounts receivable and other assets$86,225 $86,225 $88,756 $88,756 
Financial Liabilities:
Deposits$9,032,247 $9,029,570 $8,614,073 $8,603,118 
Advances from FHLB$27,557 $27,586 $28,480 $28,488 
Other borrowings$32 $32 $— $— 
Subordinated capital notes$— $— $36,084 $36,083 
Accrued expenses and other liabilities$119,065 $119,065 $96,240 $96,240 
The following methods and assumptions were used to estimate the fair values of significant financial instruments at June 30, 2022 and December 31, 2021:
•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.
•Investments in FHLB 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 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 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.