OFG Bancorp
Annual Report 2015

Plain-text annual report

T R O P E R L A U N N A 5 1 0 2 Online Banking. More than 53% of customers manage their accounts through our online banking platform. Mobile Banking. 70% of online banking users use our mobile app to perform transactions. My Status. 56% of customers who originated a mortgage with us used this mobile app to manage their loan application process. FOTOdepósito. 70% growth in registered customers using our mobile app to deposit checks remotely. People Pay. Oriental is the only bank in Puerto Rico offering mobile person-to-person (P2P) payments to accounts at any bank on the Island or in the US. Ahead of industry averages, more than 18% of our mobile users took advantage of this in 2015 on a regular basis. Fácil. Rápido. Hecho. Easy. Fast. Done. As a pioneer and leader in banking technology in Puerto Rico, OFG’s Oriental offers its clients agile, accessible and convenient new ways to bank, borrow, save and invest. 2015 Financial Highlights OFG Bancorp is one of Puerto Rico’s leading financial institutions, the result of organic growth and acquisitions. Despite the Island’s challenging fiscal environment, we were successful in 2015 in growing our core Oriental franchise and in proactively derisking our balance sheet. Retail Customer Growth Oriental differentiates itself with superior service delivery, true to our slogan, “Fácil. Rápido. Hecho.” Fast. Simple. Done. We furthered our innovative technological edge with the launch of My Status. The industry-first mobile app keeps home buyers updated on every step of their mortgage application. Net new retail customer accounts increased 4.4% along with asso- ciated deposits, loans and wealth manage- ment assets. 15,400 net new retail customers who contributed: • $67 million in deposits • $115 million in loans • $15 million in wealth management assets Total Loans (net) As part of derisking, we significantly re- duced our Puerto Rico government related loan exposure by $204 million or 33% and sold $247 million of Unpaid Principal Balance commercial non-performing loans and real estate from the Eurobank (2010) and BBVA Puerto Rico (2012) acquisitions. This was partially offset by originated loan balances, which increased 7% or approxi- mately $206 million. ($ in Billions) $5.16 $5.02 $4.83 $4.45 Credit Quality Credit quality remained strong due to proactive management. All our non-performing assets (NPAs), including all acquired and covered loans, totaled only 2.36% of assets at year-end. This is less than it was four years ago. All NPA as % of Assets (Excluding PREPA Credit) $1.67 2.42% 2.22% 1.90% 2.39% 2.36% 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 New Loan Originations As a result of our brand reputation and effective marketing strategies, new loan production grew more than 10%. We increased market share in commercial lend- ing (small, middle-market and institutional). We also expanded our market share in retail lending (new auto loans, residential mortgage loans, and consumer loans). Net Interest Margin NIM declined 81 basis points. This was primarily due to the above-mentioned reduction in high-yielding, tax free gov- ernment related loans and the placing on non-accrual of our participation in the syndicated PREPA fuel line of credit. Tangible Book Value Per Common Share (TBVPS) TBV held up well, declining only modestly. This reflected the provisioning of $54.1 million towards the PREPA credit, partially offset by the continued profitability of our core operations. We ended 2015 with capital ratios well in excess of require- ments for a well-capitalized institution. In light of the continued fiscal and economic challenges faced by Puerto Rico, our strat- egy is to preserve and build capital. ($ in Millions) $1,484 $396 $461 $919 $1,014 2.67% 2.19% 5.46% 5.84% 5.03% $15.19 $15.25 $14.73 $13.60 $13.10 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 Letter from the President To Our Shareholders: Our business success relies on three pillars: •Well served and satisfied customers •A loyal, knowledgeable and customer-focused staff, and •A strong capital structure Despite Puerto Rico’s difficult and challenging environment, it gives me great pleasure to report that last year we continued to make progress in all three. Our core business of attracting deposits, lending to retail and commercial customers, and gathering wealth management assets was solid. Credit trends were favorable, and our balance sheet remained liquid, with a strong tangible capital base. “While the environment was challenging, we completed the year with key capital ratios all well above regulatory requirements for a well-capitalized institution.” José Rafael Fernández President, CEO and Vice Chairman of the Board Although Puerto Rico’s economic outlook remains uncertain, recent developments provide hope. With some help from the U.S. Congress and the proper leadership at home, Puerto Rico will again regain its footing. Our principal subsidiary, Oriental Bank, remains viable and competitive. We are very confident that the actions we have taken and the initiatives that we are embarked upon will yield favorable results. Our Customers – The Oriental Franchise is Achieving Major Inroads Our network of 48 strategically located financial centers provides our customers with incomparable service and speed. In addition, we provide our customers with advanced banking technology for easy, comfortable use in the home or office. Indicative of our forward looking approach, this past year we introduced My Status, a new electronic tool for our residential mortgage loan business. My Status is the first industry mobile app enabling clients to remain updated on every step of their loan application, from origination through closing. Anyone who has sought a mortgage loan knows how difficult and seemingly interminable the process can be. My Status eliminates the uncertainty and increases the ease of obtaining a mortgage with Oriental. Additionally, we have significantly reduced the amount of time it takes to process a mortgage loan. “Our business success relies on three pillars: well served and satisfied customers; a loyal, knowledgeable and customer-focused staff; and a strong capital structure.” My Status is just one of a number of technological innovations we provide. Others include FOTOdepósito, People Pay and Cuenta Libre (Freedom Account). With Cuenta Libre, customers can access their accounts via mobile phone, tablet, web, debit/ credit card or ATMs, without paying fees. All of these developments have enabled Oriental to expand and grow its banking franchise and increase its market share in key business segments. As a result, in 2015 we added 15,400 net new retail customers, an increase of 4.4%. Those customers increased deposits by $67 million, accounted for $115 million in new loans, and contributed $15 million in wealth management assets. New loan production rose more than 10% for the year. Retail loans were up more than 17% despite a substantial slowdown in new auto sales. Nonetheless, there was a notable pickup in new auto financing in the fourth quarter as we refocused our marketing to provide greater assistance to auto dealers during their business slump. “Our approach, which is unique to the Puerto Rico market, is designed to instill in each of our employees a sense of community internally within our bank and a proactive interest externally in our customers and their communities.” 3 “In 2015 we added 15,400 net new retail customers, an increase of 4.4%. Those customers increased deposits by $67 million, accounted for $115 million in new loans, and contributed $15 million in wealth management assets.” Our approach, which is unique to the Puerto Rico market, is designed to instill in each of our employees a sense of community internally within our bank and a proactive interest externally in our customers and their communities. To achieve this, we have invested more than 40,000 hours companywide in training our people. The focus is on assuring that we work as an integrated team and in a collaborative manner to more capably and consciously service our customers. We not only want to keep existing clients and attract new ones. We believe it is our responsibility to give back to the Puerto Rico community. To illustrate, we are in the forefront of offering programs to foster the value of thrift among younger people, while also promoting seminars for adults, especially women, to encourage entrepreneurship. Our goal is to infuse in our people – and that means all of us, tellers, account executives, and senior executives – an understanding of, and loyalty to, Oriental’s service-oriented values. It is a program that is at the heart of what Oriental is all about and what makes us different. Our program to broaden commercial lending is another high priority that is enjoying good success. Our highly personal approach is based on a dedicated outreach effort and focused largely on medium to small businesses and professionals, the backbone of our economy. In doing so, we have maintained our standards for quality underwriting and fair returns in what can sometimes be an erratic market for pricing. We have been a leader in expanding the use of our full service banking network, as more customers rely on Oriental for their financial needs. Our wealth management business, encompassing pensions, trusts and brokerage activities, remains robust. Our People – Engaged and Service-Oriented One of our proudest achievements, and one that commands our everyday attention, is the growing recognition of the Oriental brand. It signifies service and commitment to high standards of banking that clients understand and appreciate. “Oriental expanded and grew its banking franchise and increased its market share in key business segments.” 4 Our Financial Strength – Continued to be Strong From a financial point of view, our principal and guiding goal in 2015 was to ensure the financial strength and integrity of our capital structure. While the environment was challenging, we completed the year with key capital ratios – tangible common equity to tangible assets, common equity Tier 1 leverage capital, and total risk-based capital – all well above regulatory requirements for a well-capitalized institution. This has enabled us to measurably de-risk our balance sheet without diminishing our financial strength. We remain supportive of the government of Puerto Rico. Given the fiscal realities it faces, however, we have reduced our exposure to government loans by almost half. Our largest single government-related loan, a participation in a fuel line of credit to PREPA, Puerto Rico’s electric power public utility, has been written down to manageable levels. As of this writing, promising efforts are underway to restructure PREPA’s indebtedness and improve the quality of our credit. “Indicative of our forward looking approach, we introduced My Status, an industry first mobile app that enables clients to remain updated on every step of the residential mortgage loan application process.” OFG – Confident and Optimistic Despite Challenges In sum, OFG Bancorp and the value of the Oriental banking franchise remains solid. It reflects adhering to our standards of quality in all businesses we undertake and prudence in how we acquire and manage business. Our staff’s loyalty, dedication and professionalism are greatly appreciated, as is your support and that of our Board of Directors. We look forward to the New Year with confidence and optimism. José Rafael Fernández President, CEO and Vice Chairman “Our goal is to instill in our people – and that means all of us, tellers, account executives, and senior executives – an understanding of, and loyalty to, Oriental’s service oriented values.” 5 Seated from left: Rafael Martínez Margarida, Carlos Souffront, Julián Inclán, Radamés Peña. Standing from left: Francisco Arriví, Pedro Morazanni, José Rafael Fernández, Juan Carlos Aguayo, Josen Rossi, Jorge Colón Gerena. Board of Directors Julian S. Inclán Chairperson Chairperson Board Credit Committee José Rafael Fernández President, CEO and Vice Chairman of the Board Jorge Colón Gerena Rafael Martínez Margarida Chairperson Risk and Compliance Committee Pedro Morazzani Chairperson Audit Committee Juan Carlos Aguayo Chairperson Corporate Governance and Nominating Committee Radamés Peña Josen Rossi Francisco Arriví Chairperson Compensation Committee Carlos O. Souffront Secretary 6 Left to Right Standing: Ganesh Kumar, Alexandra López-Soler, Milagros Pérez, César Ortiz, Félix Silva, Carlos O. Souffront, Rafael Cruz, Jennifer Zapata Nazario, Sean Miles, Maritza Arizmendi, Ramón Rosado, Ada García, José Rafael Fernández. Left to Right Seated: Tomás Torres, Patrick Haggarty, Elena Manrara. Executives & Officers EXECUTIVE TEAM: José Rafael Fernández President, CEO and Vice Chairman of the Board Ganesh Kumar Executive Vice President, Chief Financial Officer Carlos O. Souffront Executive Vice President, General Counsel LEADERSHIP TEAM: Maritza Arizmendi Senior Vice President, Corporate Finance and Chief Accounting Officer Rafael Cruz Senior Vice President, Bank Operations Ada García Senior Vice President, Retail Channel Business Development Patrick Haggarty Executive Vice President, Commercial Banking and Trust Alexandra López-Soler Senior Vice President, Marketing and Public Relations Elena Manrara Senior Vice President, Retail Product Development Sean Miles Senior Vice President, President of Oriental Financial Services Milagros Pérez Executive Vice President, Auto César Ortiz Senior Vice President, Chief Risk Officer Ramón Rosado Senior Vice President, Treasurer Félix Silva Senior Vice President, Retail Credit Operations and Collections Tomás Torres Senior Vice President, Chief Credit Officer Jennifer Zapata Nazario Senior Vice President, Human Resources 7 Form 10K 8 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2015 or  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to to . Commission File No. 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 Securities Registered Pursuant to Section 12(b) of the Act: Common Stock ($1.00 par value per share) 7.125% Noncumulative Monthly Income Preferred Stock, Series A ($25.00 liquidation preference per share) 7.0% Noncumulative Monthly Income Preferred Stock, Series B ($25.00 liquidation preference per share) 8.75% Noncumulative Convertible Perpetual Preferred Stock, Series C ($1,000.00 liquidation preference per share) 7.125% Noncumulative Perpetual Preferred Stock, Series D ($25.00 liquidation preference per share) Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  No  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  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  No  Indicate by check mark if disclosure of delinquent filings pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer  Accelerated filer  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  The aggregate market value of the common stock held by non-affiliates of OFG Bancorp (the “Company”) was approximately $473.4 million as of June 30, 2015 based upon 44,367,909 shares outstanding and the reported closing price of $10.67 on the New York Stock Exchange on that date. As of January 31, 2016, the Company had 43,867,909 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company’s definitive proxy statement relating to the 2016 annual meeting of shareholders are incorporated herein by reference in response to Items 10 through 14 of Part III, except for certain information set forth herein under Item 12. OFG Bancorp FORM 10-K For the Year Ended December 31, 2015 TABLE OF CONTENTS PART I Item 1. Business ..................................................................................................................................................................................4-17 Item 1A. Risk Factors ............................................................................................................................................................................18-27 Item 1B. Unresolved Staff Comments...................................................................................................................................................28 Item 2. Properties ................................................................................................................................................................................28 Item 3. Legal Proceedings...................................................................................................................................................................28 Item 4. Mine Safety Disclosures .........................................................................................................................................................28 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.....................................................................................................................................................................28-29 Item 6. Selected Financial Data ..........................................................................................................................................................30-32 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.................................................33-87 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ...............................................................................................88-92 Item 8. Financial Statements and Supplementary Data ......................................................................................................................93-210 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................................................211 Item 9A. Controls and Procedures .........................................................................................................................................................211 Item 9B. Other Information ...................................................................................................................................................................211 PART III Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ..............................212 Item 15. Exhibits and Financial Statement Schedules ......................................................................................................................... 213-215 PART IV FORWARD-LOOKING STATEMENTS The information included in this annual report on Form 10-K 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:  a credit default or potential restructuring by the Commonwealth of Puerto Rico or any of its agencies, municipalities or instrumentalities;  possible legislative, tax or regulatory changes;  the rate of growth in the economy and employment levels, as well as general business and economic conditions;  the relative strength or weakness of the consumer and commercial credit sectors and of the real estate market in Puerto Rico;  competition in the financial services industry;  the fiscal and monetary policies of the federal government and its agencies;  changes in interest rates, as well as the magnitude of such changes;  changes in federal bank regulatory and supervisory policies, including required levels of capital;  the impact of the industry regulations on the Company’s businesses, business practices and cost of operations;  the performance of the securities markets; and  additional Federal Deposit Insurance Corporation (“FDIC”) assessments. Other possible events or factors that could cause results or performance to differ materially from those expressed in these forward- looking statements include the following: negative economic conditions that adversely affect the general economy, housing prices, the job market, consumer confidence and spending habits which may affect, among other things, the level of non-performing assets, charge-offs and provision expense; changes in interest rates and market liquidity which may reduce interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets; adverse movements and volatility in debt and equity capital markets; changes in market rates and prices which may adversely impact the value of financial assets and liabilities; liabilities resulting from litigation and regulatory investigations; changes in accounting standards, rules and interpretations; increased competition; the Company’s ability to grow its core businesses; decisions to downsize, sell or close units or otherwise change the Company’s business mix; and management’s ability to identify and manage these and other risks. All forward-looking statements included in this annual report on Form 10-K 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. BUSINESS General The Company is a publicly-owned financial holding company incorporated on June 14, 1996 under the laws of the Commonwealth of Puerto Rico, providing a full range of banking and financial services through its subsidiaries. The Company is subject to the provisions of the U.S. Bank Holding Company Act of 1956, as amended, (the “BHC Act”) and accordingly, subject to the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Company provides comprehensive banking and financial services to its clients through a complete range of banking and financial solutions, including commercial, consumer, auto, and mortgage lending; checking and savings accounts; financial planning, insurance, financial services, and investment brokerage; and corporate and individual trust and retirement services. The Company operates through three major business segments: Banking, Wealth Management, and Treasury, differentiating the Oriental brand through customer segmentation and innovative solutions, primarily in Puerto Rico. The Company provides these services through various subsidiaries including, a commercial bank, Oriental Bank, a securities broker-dealer, Oriental Financial Services Corp. (“Oriental Financial Services”), an insurance agency, Oriental Insurance, LLC (“Oriental Insurance”), previously known as Oriental Insurance Inc., and a retirement plan administrator, Oriental Pension Consultants, Inc. (“OPC”), previously known as Caribbean Pension Consultants, Inc. All of our subsidiaries are based in San Juan, Puerto Rico, except for OPC which is based in Boca Raton, Florida. The Company has 48 branches in Puerto Rico. 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 strategy involves:     Strengthening its banking and financial services franchise by expanding its ability to attract deposits and build relationships with customers by refining the service delivery and providing innovative banking technologies for day- to-day customer transactions, and achieving sustainable levels of differentiation in the market; Focusing on greater growth in commercial, consumer and mortgage lending, trust and financial services and insurance products; Improving operating efficiencies, and continuing to maintain effective asset-liability management; Implementing a broad ranging effort to instill in employees and make customers aware of the Company’s determination to effectively serve and advise its customer base in a responsive and professional manner; and  Matching its portfolio of investment securities with the related funding to achieve favorable spreads, and primarily investing in U.S. government-sponsored agency obligations. Together with a highly experienced group of senior and mid-level executives and the benefits from the acquisitions of Eurobank Puerto Rico and the Puerto Rico operations of Banco Bilbao Vizcaya Argentaria, S.A. (“BBVA”), this strategy has resulted in sustained growth in the Company’s deposit-taking activities, commercial, consumer and mortgage lending and financial service activities, allowing the Company to distinguish itself in a highly competitive industry. The Company is not immune from general and local financial and economic conditions. Past experience is not necessarily indicative of future performance, but given market uncertainties and on a reasonable time horizon of three to five years, this strategy is expected to maintain its steady progress towards the Company’s long-term goal. On December 18, 2012, the Company purchased from BBVA, all of the outstanding common stock of each of (i) BBVAPR Holding Corporation (“BBVAPR Holding”), the sole shareholder of Banco Bilbao Vizcaya Argentaria Puerto Rico (“BBVAPR Bank”), a Puerto Rico chartered commercial bank, and BBVA Seguros, Inc. (“BBVA Seguros”), a subsidiary offering insurance services, and (ii) BBVA Securities of Puerto Rico, Inc. (“BBVA Securities”), a registered broker-dealer. This transaction is referred to as the “BBVAPR Acquisition” and BBVAPR Holding, BBVAPR Bank, BBVA Seguros and BBVA Securities are collectively referred to as the “BBVAPR Companies” or “BBVAPR.” 4 The Company’s principal funding sources are branch deposits, securities sold under agreements to repurchase, Federal Home Loan Bank (“FHLB”) advances, Federal Reserve Bank (“FRB”) advances, wholesale deposits, and subordinated capital notes. Through its branch network, Oriental Bank offers personal non-interest and interest-bearing checking accounts, savings accounts, certificates of deposit, individual retirement accounts (“IRAs”) and commercial non-interest bearing checking accounts. The FDIC insures Oriental Bank’s deposit accounts up to applicable limits. Management makes retail deposit pricing decisions periodically, adjusting the rates paid on retail deposits in response to general market conditions and local competition. Pricing decisions take into account the rates being offered by other local banks, the London Interbank Offered Rate (“LIBOR”), and mainland U.S. market interest rates. Segment Disclosure The Company has three reportable segments: Banking, Wealth Management, and Treasury. Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Company’s organizational structure, nature of 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 annual goals involving different financial parameters such as net income, interest rate spread, loan production, and fees generated. For detailed information regarding the performance of the Company’s operating segments, please refer to Note 26 in the Company’s accompanying consolidated financial statements. Banking Activities Oriental Bank (the “Bank”), the Company’s main subsidiary, is a full-service Puerto Rico commercial bank with its main office located in San Juan, Puerto Rico. The Bank has 48 branches throughout Puerto Rico and was incorporated in October 1964 as a federal mutual savings and loan association. It became a federal mutual savings bank in July 1983 and converted to a federal stock savings bank in April 1987. Its conversion from a federally-chartered savings bank to a commercial bank chartered under the banking law of the Commonwealth of Puerto Rico, on June 30, 1994, allowed the Bank to more effectively pursue opportunities in its market and obtain more flexibility in its businesses. As a Puerto Rico-chartered commercial bank, it is subject to examination by the FDIC and the Office of the Commissioner of Financial Institutions of Puerto Rico (the “OCFI”). The Bank offers banking services such as commercial, consumer, and mortgage lending, savings and time deposit products, financial planning, and corporate and individual trust services, and capitalizes on its retail banking network to provide commercial and mortgage lending products to its clients. The Bank operates two international banking entities (“IBE”) pursuant to the International Banking Center Regulatory Act of Puerto Rico, as amended (the “IBE Act”), one is a unit operating within the Bank, named Oriental Overseas (the “IBE Unit”), and the other is a wholly-owned subsidiary of the Bank, named Oriental International Bank, Inc. (the “IBE Subsidiary”). The IBE Unit and IBE Subsidiary offer the Bank certain Puerto Rico tax advantages, and their services are limited under Puerto Rico law to persons and assets/liabilities located outside of Puerto Rico. Banking activities include the Bank’s branches and mortgage banking activities with traditional retail banking products such as deposits, commercial loans, consumer loans and mortgage loans. The Bank’s significant lending activities are with consumers located in Puerto Rico. The Bank’s lending transactions include a diversified number of industries and activities, all of which are encompassed within four main categories: commercial, consumer, mortgage and auto. The Company’s mortgage banking activities are conducted through a division of the Bank. The mortgage banking activities include the origination of mortgage loans for the Bank’s own portfolio, and the sale of loans directly into the secondary market or the securitization of conforming loans into mortgage-backed securities. The Bank originates Federal Housing Administration (“FHA”) insured mortgages, Veterans Administration (“VA”) guaranteed mortgages, and Rural Housing Service (“RHS”) guaranteed loans that are primarily securitized for issuance of Government National Mortgage Association (“GNMA”) mortgage-backed securities which can be resold to individual or institutional investors in the secondary market. Conventional loans that meet the underwriting requirements for sale or exchange under standard Federal National Mortgage Association (the “FNMA”) or the Federal Home Loan Mortgage Corporation (the “FHLMC”) programs are referred to as conforming mortgage loans and are also securitized for issuance of FNMA or FHLMC mortgage-backed securities. The Bank is an approved seller of FNMA, as well as FHLMC, mortgage loans for issuance of FNMA and FHLMC mortgage-backed securities. The Bank is also an approved issuer of GNMA mortgage-backed securities. The Company outsources the servicing of the GNMA, FNMA and FHLMC pools that it issues, and its residential mortgage loan portfolio. 5 Loan Underwriting Auto loans: The Company provides financing for the purchase of new or used motor vehicles. These loans are granted mainly through dealers authorized and approved by the auto credit department committee of the Company. The auto credit department has the specialized structure and resources to provide the service required for this product according to market demands and trends. The auto loan credit policy establishes specific guidance and parameters for the underwriting and origination processes. Underwriting procedures, lending limits, interest rate approval, insurance coverage, and automobile brand restrictions are some parameters and internal controls implemented to ensure the quality and profitability of the auto loan portfolio. The credit scoring system is a fundamental part of the decision process. Consumer loans: Consumer loans include personal loans, credit cards, lines of credit and other loans made by banks to individual borrowers. All loan originations must be underwritten in accordance with the Company’s underwriting criteria, and include an assessment of each borrower’s personal financial condition, including verification of income, assets, FICO score, and credit reports. Residential mortgage loans: All loan originations, regardless of whether originated through the Company’s retail banking network or purchased from third parties, must be underwritten in accordance with the Company’s underwriting criteria, including loan-to-value ratios, borrower income qualifications, debt ratios and credit history, investor requirements, and title insurance and property appraisal requirements. The Company’s mortgage underwriting standards comply with the relevant guidelines set forth by the Department of Housing and Urban Development (“HUD”), VA, FNMA, FHLMC, federal and Puerto Rico banking regulatory authorities, as applicable. The Company’s underwriting personnel, while operating within the Company’s loan offices, make underwriting decisions independent of the Company’s mortgage loan origination personnel. Commercial loans: Commercial loans include lines of credit and term facilities to finance business operations and to provide working capital for specific purposes, such as to finance the purchase of assets, equipment or inventory. Since a borrower’s cash flow from operations is generally the primary source of repayment, the Company’s analysis of the credit risk focuses heavily on the borrower’s debt-repayment capacity. Commercial term loans generally have terms from one to five years, may be collateralized by the asset being acquired, real estate, or other available assets, and bear interest rates that float with the prime rate, LIBOR or another established index, or are fixed for the term of the loan. Lines of credit are extended to businesses based on an analysis of the financial strength and integrity of the borrowers and are generally secured primarily by real estate, accounts receivables or inventory, and have a maturity of one year or less. Such lines of credit bear an interest rate that floats with a base rate, the prime rate, LIBOR, or another established index. Sale of Loans and Securitization Activities The Company may engage in the sale or securitization of a portion of the residential mortgage loans that it originates and purchases and utilizes various channels to sell its mortgage products. The Company is an approved issuer of GNMA-guaranteed mortgage- backed securities which involves the packaging of FHA loans, RHS loans or VA loans into pools of mortgage-backed securities for sale primarily to securities broker-dealers and other institutional investors. The Company can also act as issuer in the case of conforming conventional loans in order to group them into pools of FNMA or FHLMC-issued mortgage-backed securities which the Company then sells to securities broker-dealers. The issuance of mortgage-backed securities provides the Company with flexibility in selling the mortgage loans that it originates or purchases and also provides income by increasing the value and marketability of such loans. In the case of conforming conventional loans, the Company also has the option to sell such loans through the FNMA and FHLMC cash-window programs. Wealth Management Activities Wealth management activities are generated by such businesses as securities brokerage, trust services, retirement planning, insurance, pension administration, and other financial services. Oriental Financial Services is a Puerto Rico corporation and the Company’s subsidiary engaged in securities brokerage activities in accordance with the Company’s strategy of providing fully integrated financial solutions to the Company’s clients. Oriental Financial Services, member of FINRA and the Securities Investor Protection Corporation, is a registered securities broker-dealer pursuant to Section 15(b) of the Securities Exchange Act of 1934. The broker-dealer does not carry customer accounts and is, accordingly, exempt from the Customer Protection Rule (SEC Rule 15c3-3) pursuant to subsection (k)(2)(ii) of such rule. It clears securities transactions through Pershing LLC, a clearing agent that carries the accounts of its customers on a “fully disclosed” basis. 6 Oriental Financial Services offers securities brokerage services covering various investment alternatives such as tax-advantaged fixed income securities, mutual funds, stocks, and bonds to retail and institutional clients. It also offers separately-managed accounts and mutual fund asset allocation programs sponsored by unaffiliated professional asset managers. These services are designed to meet each client’s specific needs and preferences, including transaction-based pricing and asset-based fee pricing. Oriental Financial Services has managed and participated in public offerings and private placements of debt and equity securities in Puerto Rico and has engaged in municipal securities business with the Commonwealth of Puerto Rico and its instrumentalities, municipalities, and public corporations. Investment banking revenue from such activities includes gains, losses, and fees, net of syndicate expenses, arising from securities offerings in which it acts as an underwriter or agent. Investment banking revenue also includes fees earned from providing merger-and-acquisition and financial restructuring advisory services. Oriental Insurance is a Puerto Rico limited liability company and the Company’s subsidiary engaged in insurance agency services. It was established by the Company to take advantage of the cross-marketing opportunities provided by financial modernization legislation. Oriental Insurance currently earns commissions by acting as a licensed insurance agent in connection with the issuance of insurance policies by unaffiliated insurance companies and continues to cross market its services to the Company’s existing customer base. OPC, a Florida corporation, is the Company’s subsidiary engaged in the administration of retirement plans in the U.S., Puerto Rico, and the Caribbean. Treasury Activities Treasury activities encompass all of the Company’s treasury-related functions. The Company’s investment portfolio consists of mortgage-backed securities, obligations of U.S. government-sponsored agencies, Puerto Rico government and agency obligations and money market instruments. Agency mortgage-backed securities, the largest component, consist principally of pools of residential mortgage loans that are made to consumers and then resold in the form of pass-through certificates in the secondary market, the payment of interest and principal of which is guaranteed by GNMA, FNMA or FHLMC. Market Area and Competition The main geographic business and service area of the Company is in Puerto Rico, where the banking market is highly competitive. Puerto Rico banks are subject to the same federal laws, regulations and supervision that apply to similar institutions in the United States of America. The Company also competes with brokerage firms with retail operations, credit unions, savings and loan cooperatives, small loan companies, insurance agencies, and mortgage banks in Puerto Rico. The Company encounters intense competition in attracting and retaining deposits and in its consumer and commercial lending activities. Management believes that the Company has been able to compete effectively for deposits and loans by offering a variety of transaction account products and loans with competitive terms, by emphasizing the quality of its service, by pricing its products at competitive interest rates, by offering convenient branch locations, and by offering financial planning and financial services at most of its branch locations. The phase-out consolidation of three failed Puerto Rico banks in 2010 and the failure of another Puerto Rico bank in 2015 has created an environment for more rational loan and deposit pricing. The Company’s ability to originate loans depends primarily on the services that it provides to its borrowers, in making prompt credit decisions, and on the rates and fees that it charges. Regulation and Supervision General The Company is a financial holding company subject to supervision and regulation by the Federal Reserve Board under the BHC Act, as amended by the Gramm-Leach-Bliley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “ Dodd- Frank Act”). The qualification requirements and the process for a bank holding company that elects to be treated as a financial holding company requires that a bank holding company and all of the subsidiary banks controlled by it at the time of election must be and remain at all times “well capitalized” and “well managed.” The Company elected to be treated as a financial holding company as permitted by the Gramm-Leach-Bliley Act. Under the Gramm- Leach-Bliley Act, if the Company fails to meet the requirements for being a financial holding company and is unable to correct such deficiencies within certain prescribed time periods, the Federal Reserve Board could require the Company to divest control of its depository institution subsidiary or alternatively cease conducting activities that are not permissible for bank holding companies that are not financial holding companies. 7 Financial holding companies may engage, directly or indirectly, in any activity that is determined to be (i) financial in nature or incidental to such financial activity, or (ii) complementary to a financial activity provided it does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Gramm-Leach-Bliley Act specifically provides that the following activities have been determined to be “financial in nature”: (a) lending, trust and other banking activities; (b) insurance activities; (c) financial, investment or economic advisory services; (d) securitization of assets; (e) securities underwriting and dealing; (f) existing bank holding company domestic activities; (g) existing bank holding company foreign activities; and (h) merchant banking activities. A financial holding company may generally commence any activity, or acquire any company, that is financial in nature without prior approval of the Federal Reserve Board. As provided by the Dodd-Frank Act, a financial holding company may not acquire a company, without prior Federal Reserve Board approval, in a transaction in which the total consolidated assets to be acquired by the financial holding company exceed $10 billion. In addition, the Gramm-Leach-Bliley Act specifically gives the Federal Reserve Board the authority, by regulation or order, to expand the list of financial or incidental activities, but requires consultation with the U.S. Treasury Department and gives the Federal Reserve Board authority to allow a financial holding company to engage in any activity that is complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system. The Company is required to file with the Federal Reserve Board and the SEC periodic reports and other information concerning its own business operations and those of its subsidiaries. In addition, Federal Reserve Board approval must also be obtained before a bank holding company acquires all or substantially all of the assets of another bank or merges or consolidates with another bank holding company. The Federal Reserve Board also has the authority to issue cease and desist orders against bank holding companies and their non-bank subsidiaries. The Bank is regulated by various agencies in the United States and the Commonwealth of Puerto Rico. Its main regulators are the OCFI and the FDIC. The Bank is subject to extensive regulation and examination by the OCFI and the FDIC, and is subject to the Federal Reserve Board’s regulation of transactions between the Bank and its affiliates. The federal and Puerto Rico laws and regulations which are applicable to the Bank regulate, among other things, the scope of its business, its investments, its reserves against deposits, the timing of the availability of deposited funds, and the nature and amount of and collateral for certain loans. In addition to the impact of such regulations, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to control inflation in the economy. The Company’s mortgage banking business is subject to the rules and regulations of FHA, VA, RHS, FNMA, FHLMC, HUD and GNMA with respect to the origination, processing and selling of mortgage loans and the sale of mortgage-backed securities. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines which include provisions for inspections and appraisal reports, require credit reports on prospective borrowers and fix maximum loan amounts, and, with respect to VA loans, fix maximum interest rates. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act, the Truth-in-Lending Act, the Real Estate Settlement Procedures Act and the regulations promulgated thereunder which, among other things, prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and settlement costs. The Company is also subject to regulation by the OCFI with respect to, among other things, licensing requirements and maximum origination fees on certain types of mortgage loan products. The Company and its subsidiaries are subject to the rules and regulations of certain other regulatory agencies. Oriental Financial Services, as a registered broker-dealer, is subject to the supervision, examination and regulation of FINRA, the SEC, and the OCFI in matters relating to the conduct of its securities business, including record keeping and reporting requirements, supervision and licensing of employees, and obligations to customers. Oriental Insurance is subject to the supervision, examination and regulation of the Office of the Commissioner of Insurance of Puerto Rico in matters relating to insurance sales, including but not limited to, licensing of employees, sales practices, charging of commissions and reporting requirements. Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank Act implements a variety of far-reaching changes and has been described as the most sweeping reform of the financial services industry since the 1930’s. It has a broad impact on the financial services industry, including significant regulatory and compliance changes, such as: (i) enhanced resolution authority of troubled and failing banks and their holding companies; (ii) enhanced lending limits strengthening the existing limits on a depository institution’s credit exposure to one borrower; (iii) increased capital and liquidity requirements; (iv) increased regulatory examination fees; (v) changes to assessments to be paid to the FDIC for federal deposit insurance; (vi) prohibiting bank holding companies, such as the Company, from including in regulatory Tier 1 capital future issuances of trust preferred securities or other hybrid debt and equity securities; and (vii) numerous other provisions designed to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. 8 Additionally, the Dodd-Frank Act establishes a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC. Further, the Dodd-Frank Act addresses many corporate governance and executive compensation matters that affect most U.S. publicly traded companies, including the Company. A few provisions of the Dodd-Frank Act became effective immediately, while various provisions have become effective in stages. Many of the requirements called for in the Dodd-Frank Act have been implemented over time and most are subject to implementing regulations. The Dodd-Frank Act also created a new consumer financial services regulator, the Bureau of Consumer Financial Protection (the “CFPB”), which assumed most of the consumer financial services regulatory responsibilities previously exercised by federal banking regulators and other agencies. The CFPB’s primary functions include the supervision of “covered persons” (broadly defined to include any person offering or providing a consumer financial product or service and any affiliated service provider) for compliance with federal consumer financial laws. It has primary authority to enforce the federal consumer financial laws, as well as exclusive authority to require reports and conduct examinations for compliance with such laws, in the case of any insured depository institution with total assets of more than $10 billion and any affiliate thereof. The CFPB also has broad powers to prescribe rules applicable to a covered person or service provider identifying as unlawful, unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. Holding Company Structure The Bank is subject to restrictions under federal laws that limit the transfer of funds to its affiliates (including the Company), whether in the form of loans, other extensions of credit, investments or asset purchases, among others. Such transfers are limited to 10% of the transferring institution’s capital stock and surplus with respect to any affiliate (including the Company), and, with respect to all affiliates, to an aggregate of 20% of the transferring institution’s capital stock and surplus. Furthermore, such loans and extensions of credit are required to be secured in specified amounts, carried out on an arm’s length basis, and consistent with safe and sound banking practices. Under the Dodd-Frank Act, a bank holding company, such as the Company, must serve as a source of financial strength for any subsidiary depository institution. The term “source of financial strength” is defined as the ability of a company to provide financial assistance to its insured depository institution subsidiaries in the event of financial distress at such subsidiaries. This support may be required at times when, absent such requirement, the bank holding company might not otherwise provide such support. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain capital of a subsidiary bank will be assumed by the bankruptcy trustee and be entitled to a priority of payment. In addition, any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. The Bank is currently the only depository institution subsidiary of the Company. Since the Company is a financial holding company, its right to participate in the assets of any subsidiary upon the latter’s liquidation or reorganization will be subject to the prior claims of the subsidiary’s creditors (including depositors in the case of the Bank) except to the extent that the Company is a creditor with recognized claims against the subsidiary. Dividend Restrictions The principal source of funds for the Company is the dividends from the Bank. The ability of the Bank to pay dividends on its common stock is restricted by the Puerto Rico Banking Act of 1933, as amended (the “Banking Act”), the Federal Deposit Insurance Act, as amended (the “FDIA”), and the FDIC regulations. In general terms, the Banking Act provides that when the expenditures of a bank are greater than its receipts, the excess of expenditures over receipts shall be charged against the undistributed profits of the bank and the balance, if any, shall be charged against the required reserve fund of the bank. If there is no sufficient reserve fund to cover such balance in whole or in part, the outstanding amount shall be charged against the bank’s capital account. The Banking Act provides that until said capital has been restored to its original amount and the reserve fund to 20% of the original capital, the bank may not declare any dividends. In general terms, the FDIA and the FDIC regulations restrict the payment of dividends when a bank is undercapitalized, when a bank has failed to pay insurance assessments, or when there are safety and soundness concerns regarding a bank. 9 The payment of dividends by the Bank may also be affected by other regulatory requirements and policies, such as maintenance of adequate capital. If, in the opinion of the regulatory authority, a depository institution under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (that, depending on the financial condition of the depository institution, could include the payment of dividends), such authority may require, after notice and hearing, that such depository institution cease and desist from such practice. The Federal Reserve Board has a policy statement that provides that an insured bank or bank holding company should not maintain its existing rate of cash dividends on common stock unless (i) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality, and overall financial condition. In addition, all insured depository institutions are subject to the capital-based limitations required by the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”). Federal Home Loan Bank System The FHLB system, of which the Bank is a member, consists of 12 regional FHLBs governed and regulated by the Federal Housing Finance Agency. The FHLB serves as a credit facility for member institutions within their assigned regions. They are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. They make loans (i.e., advances) to members in accordance with policies and procedures established by the FHLB and the boards of directors of each regional FHLB. As a system member, the Bank is entitled to borrow from the FHLB of New York (the “FHLB-NY”) and is required to invest in FHLB membership and activity-based stock. The Bank must purchase membership stock equal to the greater of $1,000 or 0.15% of certain mortgage-related assets held by the Bank. The Bank is also required to purchase activity-based stock equal to 4.50% of outstanding advances to the Bank by the FHLB. The Bank is in compliance with the membership and activity-based stock ownership requirements described above. All loans, advances and other extensions of credit made by the FHLB to the Bank are secured by a portion of the Bank’s mortgage loan portfolio, certain other investments, and the capital stock of the FHLB held by the Bank. The Bank is required to maintain a minimum amount of qualifying collateral with a fair value of at least 110% of the outstanding advances. Prompt Corrective Action Regulations Pursuant to the Dodd-Frank Act, federal banking agencies have adopted 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”. 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. Under the new rules, an insured depository institution is: (i) “well capitalized,” if it has a total risk-based capital ratio of 10% or more, a tier 1 risk-based capital ratio of 8% or more, a common equity tier 1 capital ratio of 6.5% or more, and a tier 1 leverage capital ratio of 5% or more, and is not subject to any written capital order or directive; (ii) “adequately capitalized,” if it has a total risk-based capital ratio of 8% or more, a tier 1 risk-based capital ratio of 6% or more, a common equity tier 1 capital ratio of 4.5% or more, and a tier 1 leverage capital ratio of 4% or more; (iii) “undercapitalized,” if it has a total risk-based capital ratio that is less than 8%, a tier 1 risk-based ratio that is less than 6%, a common equity tier 1 capital ratio that is less than 4.5%, or a tier 1 leverage capital ratio that is less than 4%; 10 (iv) “significantly undercapitalized,” if it has a total risk-based capital ratio that is less than 6%, a tier 1 risk-based capital ratio that is less than 4%, a common equity tier 1 capital ratio that is less than 3%, or a tier 1 leverage capital ratio that is less than 3%; and (v) “critically undercapitalized,” if it has a ratio of tangible equity (defined as tier 1 capital plus non-tier 1 perpetual preferred stock) to total assets that is equal to or less than 2%. The new capital rules also include a policy statement by the agencies that all banking organizations should maintain capital commensurate with their risk profiles, which may entail holding capital significantly above the minimum requirements. They also provide a reservation of authority permitting examiners to require that such organizations hold additional regulatory capital. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fees to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution’s holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution’s assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to the appointment of a receiver or conservator. FDIC Insurance Assessments The Bank is subject to FDIC deposit insurance assessments. The Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”) merged the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund (“SAIF”) into a single Deposit Insurance Fund, and increased the maximum amount of the insurance coverage for certain retirement accounts, and possible “inflation adjustments” in the maximum amount of coverage available with respect to other insured accounts. In addition, it granted a one-time initial assessment credit (of approximately $4.7 billion) to recognize institutions’ past contributions to the fund. As a result of the merger of the BIF and the SAIF, all insured institutions are subject to the same assessment rate schedule. The Dodd-Frank Act contains several important deposit insurance reforms, including the following: (i) the maximum deposit insurance amount was permanently increased to $250,000; (ii) the deposit insurance assessment is now based on the insured depository institution’s average consolidated assets minus its average tangible equity, rather than on its deposit base; (iii) the minimum reserve ratio for the Deposit Insurance Fund was raised from 1.15% to 1.35% of estimated insured deposits by September 30, 2020; (iv) the FDIC is required to “offset the effect” of increased assessments on insured depository institutions with total consolidated assets of less than $10 billion; (v) the FDIC is no longer required to pay dividends if the Deposit Insurance Fund’s reserve ratio is greater than the minimum ratio; and (vi) the FDIC temporarily insured the full amount of qualifying “noninterest- bearing transaction accounts” until December 31, 2012. As defined in the Dodd-Frank Act, a “noninterest-bearing transaction account” is a deposit or account maintained at a depository institution with respect to which interest is neither accrued nor paid, on which the depositor or account holder is permitted to make withdrawals by negotiable or transferrable instrument, payment orders of withdrawals, telephone or other electronic media transfers, or other similar items for the purpose of making payments or transfers to third parties or others, and on which the insured depository institution does not reserve the right to require advance notice of an intended withdrawal. The FDIC amended its regulations under the FDIA, as amended by the Dodd-Frank Act, to modify the definition of a depository institution’s insurance assessment base; to revise the deposit insurance assessment rate schedules in light of the new assessment base and altered adjustments; to implement the dividend provisions of the Dodd-Frank Act; and to revise the large insured depository institution assessment system to better differentiate for risk and better take into account losses from large institution failures that the FDIC may incur. Since the new assessment base under the Dodd-Frank Act is larger than the current assessment base, the new assessment rates adopted by the FDIC are lower than the former rates. 11 Brokered Deposits FDIC regulations adopted under the FDIA govern the receipt of brokered deposits by banks. Well capitalized institutions are not subject to limitations on brokered deposits, while adequately capitalized institutions are able to accept, renew or rollover brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the interest paid on such deposits. Undercapitalized institutions are not permitted to accept brokered deposits. As of December 31, 2015, the Bank is a well capitalized institution and is therefore not subject to these limitations on brokered deposits. Regulatory Capital Requirements Under the Dodd-Frank Act, federal banking regulators are required to establish minimum leverage and risk-based capital requirements, on a consolidated basis, for insured institutions, depository institution holding companies, and non-bank financial companies supervised by the Federal Reserve Board. The minimum leverage and risk-based capital requirements are to be determined based on the minimum ratios established for insured depository institutions under prompt corrective action regulations. In effect, such provision of the Dodd-Frank Act, which is commonly known as the Collins Amendment, applies to bank holding companies the same leverage and risk-based capital requirements that apply to insured depository institutions. Because the capital requirements must be the same for insured depository institutions and their holding companies, the Collins Amendment generally excludes certain debt or equity instruments, such as cumulative perpetual preferred stock and trust preferred securities, from Tier 1 Capital, subject to a three-year phase-out from Tier 1 qualification for such instruments issued before May 19, 2010, with the phase-out commencing on January 1, 2014 for advanced approaches banking organizations and January 1, 2015 for other bank holding companies with consolidated assets of $15 billion or more as of December 31, 2009. However, such instruments issued before May 19, 2010 by a bank holding company, such as the Company, with a total consolidated assets of less than $15 billion as of December 31, 2009, are not affected by the Collins Amendments, are “grandfathered” under the new capital rules, and may continue to be included in tier 1 Capital as a restricted core capital element. The new capital rules adopted by the federal banking agencies revise the agencies’ risk-based and leverage capital requirements for banking organizations, and consolidate three separate notices of proposed rulemaking that the OCC, Federal Reserve Board and FDIC published in the Federal Register on August 30, 2012, with selected changes. In particular, and consistent with the framework of the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems,” the new capital rules include a minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets that apply to all banking organizations. The rules also raise the minimum ratio of tier 1 capital to risk-weighted assets from 4% to 6% and include a minimum leverage ratio of 4% for all banking organizations. In addition, for the largest, most internationally active banking organizations, the rules include a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures. The rules incorporate these new requirements into the agencies’ prompt corrective action framework. In addition, the rules establish limits on a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a specified amount of common equity tier 1 capital in addition to the amount necessary to meet its minimum risk-based capital requirements. Further, the rules amend the methodologies for determining risk-weighted assets for all banking organizations; introduce disclosure requirements that would apply to top-tier banking organizations domiciled in the United States with $50 billion or more in total assets; and adopt changes to the agencies’ regulatory capital requirements that meet the requirements of Section 171 and Section 939A of the Dodd- Frank Act. These rules also codify the agencies’ current capital rules, which have previously resided in various appendices to their respective regulations, into a harmonized integrated regulatory framework. Failure to meet the capital guidelines could subject an institution to a variety of enforcement actions including the termination of deposit insurance by the FDIC and to certain restrictions on its business. At December 31, 2015, the Company was in compliance with all applicable capital requirements. For more information, please refer to the accompanying consolidated financial statements. Safety and Soundness Standards Section 39 of the FDIA, as amended by FDICIA, requires each federal banking agency to prescribe for all insured depository institutions standards relating to internal control, information systems, and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, and such other operational and managerial standards as the agency deems appropriate. In addition, each federal banking agency also is required to adopt for all insured depository institutions standards relating to asset quality, earnings and stock valuation that the agency determines to be appropriate. Finally, each federal banking agency is required to prescribe standards for the employment contracts and other compensation arrangements of executive officers, employees, directors and principal stockholders of insured depository institutions that would prohibit compensation, benefits and other arrangements that are excessive or that could lead to a material financial loss for the institution. If an institution fails to meet any of the standards described above, it will be required to submit to the appropriate federal banking agency a 12 plan specifying the steps that will be taken to cure the deficiency. If the institution fails to submit an acceptable plan or fails to implement the plan, the appropriate federal banking agency will require the institution to correct the deficiency and, until it is corrected, may impose other restrictions on the institution, including any of the restrictions applicable under the prompt corrective action provisions of FDICIA. The FDIC and the other federal banking agencies have adopted Interagency Guidelines Establishing Standards for Safety and Soundness that, among other things, set forth standards relating to internal controls, information systems and internal audit systems, loan documentation, credit, underwriting, interest rate exposure, asset growth and employee compensation. Activities and Investments of Insured State-Chartered Banks Section 24 of the FDIA, as amended by FDICIA, generally limits the activities and equity investments of FDIC-insured, state- chartered banks to those that are permissible for national banks. Under FDIC regulations of equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank, such as the Bank, is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary engaged in permissible activities, (ii) investing as a limited partner in a partnership, or as a non- controlling interest holder of a limited liability company, the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such investments may not exceed 2% of the bank’s total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting stock of an insured depository institution if certain requirements are met, including that it is owned exclusively by other banks. Under the FDIC regulations governing the activities and investments of insured state banks which further implemented Section 24 of the FDIA, as amended by FDICIA, an insured state-chartered bank may not, directly, or indirectly through a subsidiary, engage as “principal” in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the Deposit Insurance Fund and the bank is in compliance with applicable regulatory capital requirements. Transactions with Affiliates and Related Parties Transactions between the Bank and any of its affiliates are governed by sections 23A and 23B of the Federal Reserve Act. These sections are important statutory provisions designed to protect a depository institution from transferring to its affiliates the subsidy arising from the institution’s access to the Federal safety net. An affiliate of a bank is any company or entity that controls, is controlled by, or is under common control with the bank, including investment funds for which the bank or any of its affiliates is an investment advisor. Generally, sections 23A and 23B (i) limit the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of the bank’s capital stock and surplus, and limit such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and (ii) require that all such transactions be on terms that are consistent with safe and sound banking practices. The term “covered transactions” includes the making of loans, purchase of or investment in securities issued by the affiliate, purchase of assets, acceptance of securities issued by the affiliate as collateral for a loan or extension of credit, issuance of guarantees and other similar types of transactions. The Dodd-Frank Act expanded the scope of transactions treated as “covered transactions” to include credit exposure to an affiliate on derivatives transactions, credit exposure resulting from a securities borrowing or lending transaction, or derivative transaction, and acceptances of affiliate-issued debt obligations as collateral for a loan or extension of credit. Most loans by a bank to any of its affiliates must be secured by collateral in amounts ranging from 100% to 130% of the loan amount, depending on the nature of the collateral. In addition, any covered transaction by a bank with an affiliate and any sale of assets or provision of services to an affiliate must be on terms that are substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with nonaffiliated companies. Regulation W of the Federal Reserve Board comprehensively implements sections 23A and 23B. The regulation unified and updated staff interpretations issued over the years prior to its adoption, incorporated several interpretative proposals (such as to clarify when transactions with an unrelated third party will be attributed to an affiliate), and addressed issues arising as a result of the expanded scope of non-banking activities engaged in by banks and bank holding companies and authorized for financial holding companies under the Gramm-Leach- Bliley Act. Sections 22(g) and 22(h) of the Federal Reserve Act place restrictions on loans by a bank to executive officers, directors, and principal shareholders. Regulation O of the Federal Reserve Board implements these provisions. Under Section 22(h) and Regulation O, loans to a director, an executive officer and to greater-than-10% shareholders of a bank and certain of their related interests (“insiders”), and insiders of its affiliates, may not exceed, together with all other outstanding loans to such person and its related interests, the bank’s single borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus). Section 22(h) and Regulation O also require that loans to insiders and to insiders of affiliates be made on terms substantially the same as offered in comparable transactions to other persons, unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of 13 the bank and (ii) does not give preference to insiders over other employees of the bank. Section 22(h) and Regulation O also require prior board of directors’ approval for certain loans, and the aggregate amount of extensions of credit by a bank to all insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) and Regulation O place additional restrictions on loans to executive officers. Community Reinvestment Act Under the Community Reinvestment Act (“CRA”), a financial institution has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires federal examiners, in connection with the examination of a financial institution, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Company has a Compliance Department that oversees the planning of products and services offered to the community, especially those aimed to serve low and moderate income communities. USA Patriot Act Under Title III of the USA Patriot Act, also known as the International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all financial institutions, including the Company, Oriental Financial Services, and the Bank, are required in general to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions. The U.S. Treasury Department (the “US Treasury”) has issued a number of regulations implementing the USA Patriot Act that apply certain of its requirements to financial institutions. The regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. Failure of a financial institution to comply with the USA Patriot Act’s requirements could have serious legal consequences for the institution. The Company and its subsidiaries, including the Bank, have adopted policies, procedures and controls to address compliance with the USA Patriot Act under existing regulations, and will continue to revise and update their policies, procedures and controls to reflect changes required by the USA Patriot Act and the US Treasury’s regulations. Privacy Policies Under the Gramm-Leach-Bliley Act, all financial institutions are required to adopt privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties at the customer’s request, and establish procedures and practices to protect customer data from unauthorized access. The Company and its subsidiaries have established policies and procedures to assure the Company’s compliance with all privacy provisions of the Gramm-Leach-Bliley Act. Sarbanes-Oxley Act The Sarbanes-Oxley Act of 2002 (“SOX”) implemented a range of corporate governance and accounting measures to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of disclosures under federal securities laws. In addition, SOX established membership requirements and responsibilities for the audit committee, imposed restrictions on the relationship between the Company and external auditors, imposed additional responsibilities for the external financial statements on the chief executive officer and the chief financial officer, expanded the disclosure requirements for corporate insiders, required management to evaluate its disclosure controls and procedures and its internal control over financial reporting, and required the auditors to issue a report on the internal control over financial reporting. The Company has included in this annual report on Form 10-K management’s assessment regarding the effectiveness of the Company’s internal control over financial reporting. The internal control report includes a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting for the Company; management’s assessment as to the effectiveness of the Company’s internal control over financial reporting based on management’s evaluation as of year-end; and the framework used by management as criteria for evaluating the effectiveness of the Company’s internal control over financial reporting. As of December 31, 2015, the Company’s management concluded that its internal control over financial reporting was effective. 14 Puerto Rico Banking Act As a Puerto Rico-chartered commercial bank, the Bank is subject to regulation and supervision by the OCFI under the Banking Act, which contains provisions governing the incorporation and organization of the Bank, rights and responsibilities of directors, officers and stockholders, as well as the corporate powers, savings, lending, capital and investment requirements and other aspects of the Bank and its affairs. In addition, the OCFI is given extensive rulemaking power and administrative discretion under the Banking Act. The OCFI generally examines the Bank at least once every year. The Banking Act requires that a minimum of 10% of the Bank’s net income for the year be transferred to a reserve fund until such fund (legal surplus) equals the total paid-in capital on common and preferred stock. At December 31, 2015 and 2014, legal surplus amounted to $70.4 million. The amount transferred to the legal surplus account is not available for the payment of dividends to shareholders. The Banking Act also provides that when the expenditures of a bank are greater than the receipts, the excess of the former over the latter must be charged against the undistributed profits of the bank, and the balance, if any, must be charged against the reserve fund. If there is no reserve fund sufficient to cover such balance in whole or in part, the outstanding amount must be charged against the capital account and no dividend may be declared until said capital has been restored to its original amount and the reserve fund to 20% of the original capital. The Banking Act further requires every bank to maintain a legal reserve which cannot be less than 20% of its demand liabilities, except government deposits (federal, commonwealth and municipal), which are secured by actual collateral. The Banking Act also requires change of control filings. When any person or entity will own, directly or indirectly, upon consummation of a transfer, 5% or more of the outstanding voting capital stock of a bank, the acquiring parties must inform the OCFI of the details not less than 60 days prior to the date said transfer is to be consummated. The transfer will require the approval of the OCFI if it results in a change of control of the bank. Under the Banking Act, a change of control is presumed if an acquirer who did not own more than 5% of the voting capital stock before the transfer exceeds such percentage after the transfer. The Banking Act permits Puerto Rico commercial banks to make loans to any one person, firm, partnership or corporation, up to an aggregate amount of 15% of the sum of: (i) the bank’s paid-in capital; (ii) the bank’s reserve fund; (iii) 50% of the bank’s retained earnings, subject to certain limitations; and (iv) any other components that the OCFI may determine from time to time. If such loans are secured by collateral worth at least 25% more than the amount of the loan, the aggregate maximum amount will include 33.33% of 50% of the bank’s retained earnings. Such restrictions under the Banking Act on the amount of loans to a single borrower do not apply to loans: (i) to the government of the United States or the government of the Commonwealth of Puerto Rico, or any of their respective agencies, instrumentalities or municipalities, or (ii) that are wholly secured by bonds, securities and other evidence of indebtedness of the government of the United States or of the Commonwealth of Puerto Rico or by bonds, not in default, of municipalities or instrumentalities of the Commonwealth of Puerto Rico. The Puerto Rico Finance Board is composed of the Commissioner of Financial Institutions of Puerto Rico; the Presidents of the Government Development Bank for Puerto Rico, the Economic Development Bank for Puerto Rico and the Planning Board; the Puerto Rico Secretaries of Commerce and Economic Development, Treasury and Consumer Affairs; the Commissioner of Insurance; and the President of the Public Corporation for Insurance and Supervision of Puerto Rico Credit Unions. It has the authority to regulate the maximum interest rates and finance charges that may be charged on loans to individuals and unincorporated businesses in the Commonwealth. The current regulations of the Puerto Rico Finance Board provide that the applicable interest rate on loans to individuals and unincorporated businesses is to be determined by free competition. The Puerto Rico Finance Board also has the authority to regulate maximum finance charges on retail installment sales contracts and for credit card purchases. There is presently no maximum rate for retail installment sales contracts and for credit card purchases. Puerto Rico Internal Revenue Code On July 2014, the Governor signed into law Act No. 77-2014, known as “Ley de Ajustes al Sistema Contributivo” (Act of Adjustments to the Tax System). The main purpose of this legislation is to increase government collections in order to alleviate the structural budget deficit. Its most relevant provisions, as applicable to the Company, and effective for transactions held after June 30, 2014, are as follows: (1) the capital tax rate was increased from 15% to 20% and (2) for an asset to be considered long term capital asset, the holding period must be over a year, which before was defined with a holding period of over six months. 15 On May 29, 2015 the Governor signed Act No. 72 of 2015. The most relevant provisions of the Act No. 72, as applicable to the Company, for taxable years beginning after December 31, 2014, are as follows: (1) establishes a new definition of “large taxpayers,” which require them to file their tax return following a special procedure established by the Secretary of the Treasury, (2) net operating losses carried forward may be deducted up to 70% of the alternative minimum net income for purposes of computing the alternative minimum tax, and (3) net operating losses carried forward may be deducted up to 80% of the net income for purposes of computing the regular corporate income tax. Other Code amendments applicable during 2015 are the increase of the Sales and Use Tax (SUT) from 7% to 11.5% beginning July 1st, 2015 and a special SUT to business to business transactions of 4%, beginning October 1st, 2015. These were implemented as a transitional phase to the enacted Value Added Tax (VAT) of 10.5%, which will be in place on April 1st, 2016, along with a Municipal SUT of 1% on certain taxable items. International Banking Center Regulatory Act of Puerto Rico The business and operations of the Bank’s IBE Unit and IBE Subsidiary are subject to supervision and regulation by the OCFI. Under the IBE Act, no sale, encumbrance, assignment, merger, exchange or transfer of shares, interest or participation in the capital of an IBE may be initiated without the prior approval of the OCFI if by such transaction a person would acquire, directly or indirectly, control of 10% or more of any class of stock, interest or participation in the capital of the IBE. The IBE Act and the regulations issued thereunder by the OCFI (the “IBE Regulations”) limit the business activities that may be carried out by an IBE. Such activities are limited in part to persons and assets/liabilities located outside of Puerto Rico. The IBE Act provides further that every IBE must have not less than $300 thousand of unencumbered assets or acceptable financial guarantees. Pursuant to the IBE Act and the IBE Regulations, the Bank’s IBE Unit and IBE Subsidiary have to maintain books and records of all their transactions in the ordinary course of business. They are also required to submit quarterly and annual reports of their financial condition and results of operations to the OCFI, including annual audited financial statements. The IBE Act empowers the OCFI to revoke or suspend, after notice and hearing, a license issued thereunder if, among other things, the IBE fails to comply with the IBE Act, the IBE Regulations or the terms of its license, or if the OCFI finds that the business or affairs of the IBE are conducted in a manner that is not consistent with the public interest. In 2012, the IBE Act was superseded by a new law that, among other things, prohibits new license applications to organize and operate an IBE. Any such newly organized entity (now called an “international financial entity”) must be licensed under the new law, and such entity (as opposed to existing IBEs organized under the IBE Act, including the Bank’s IBE Unit and IBE Subsidiary, which are “grandfathered”) will generally be subject to a 4% Puerto Rico income tax rate. Volcker Rule The so-called “Volcker Rule” adopted by the federal banking regulatory agencies under Section 619 of the Dodd-Frank Act generally prohibits insured depository institutions and their affiliates from (i) engaging in short-term proprietary trading of securities, derivatives, commodities futures and options on these instruments for their own account; and (ii) owning, sponsoring or having certain relationships with hedge funds or private equity funds. However, it exempts certain activities, including market making, underwriting, hedging, trading in government and municipal obligations, and organizing and offering a hedge fund or private equity fund, among others. A banking entity that engages in any such covered activity (i.e., proprietary trading or investment activities in hedge funds or private equity funds) is generally required to establish an internal compliance program reasonably designed to ensure and monitor compliance with the Volcker Rule. Employees At December 31, 2015, the Company had 1,466 employees. None of its employees is represented by a collective bargaining group. The Company considers its employee relations to be good. Internet Access to Reports The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any and all amendments to such reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge on or through the “Investor Relations” link of the Company’s internet website at www.orientalbank.com, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. 16 The Company’s corporate governance principles and guidelines, code of business conduct and ethics, and the charters of its audit committee, compensation committee, risk and compliance committee, and corporate governance and nominating committee are available free of charge on the Company’s website at www.orientalbank.com in the investor relations section under the corporate governance link. The Company’s code of business conduct and ethics applies to its directors, officers, employees and agents, including its principal executive, financial and accounting officers. 17 ITEM 1A. RISK FACTORS In addition to other information set forth in this report, you should carefully consider the following risk factors, as updated by other filings the Company makes with the SEC under the Securities Exchange Act of 1934. Additional risks and uncertainties not presently known to us at this time or that the Company currently deems immaterial may also adversely affect the Company’s business, financial condition or results of operations. Most of our business is conducted in Puerto Rico, which in recent years has been experiencing a deep economic recession, a downturn in the real estate market, and a government fiscal and liquidity crisis. Our loan and deposit activities are directly affected by economic conditions within Puerto Rico. Because a significant portion of our credit risk exposure on our loan portfolio, which is the largest component of our interest-earning assets, is concentrated in Puerto Rico, our profitability and financial condition may be adversely affected by an extended economic recession, adverse political, fiscal or economic developments in Puerto Rico, or the effects of a natural disaster, all of which could result in a reduction in loan originations, an increase in non-performing assets, an increase in foreclosure losses on mortgage loans, and a reduction in the value of our loans and loan servicing portfolio. The Puerto Rico economy has been in a recession since 2006 and the Commonwealth government currently faces a severe fiscal and liquidity crisis as a result of many years of significant budget deficits, among other factors, which have adversely affected its ability to obtain financing at reasonable interest rates, if at all. Puerto Rico also faces high unemployment, unprecedented population decline, and high levels of government debt and pension obligations. A further deterioration in local economic conditions or in the financial condition of an industry on which the local market depends could adversely affect factors such as unemployment rates and real estate vacancy and values. This could result in, among other things, a reduction of creditworthy borrowers seeking loans, an increase in loan delinquencies, defaults and foreclosures, an increase in classified and non-accrual loans, a decrease in the value of collateral for or loans, and a decrease in core deposits. Any of these factors could materially impact our business. For a discussion of the impact of the economy on our loan portfolios, see “—A prolonged economic downturn or recession or a continuing decline in the real estate market would likely result in an increase in delinquencies, defaults and foreclosures and in a reduction in loan origination activity, which would adversely affect our financial results.” We are exposed to credit and concentration risk in connection with our loans to certain public corporations, instrumentalities and municipalities of Puerto Rico, and a credit default on their debt obligations could adversely affect the value of such loans and our financial condition. Although the economy of Puerto Rico is closely related to the economy of the rest of the United States, the Commonwealth and its instrumentalities face a number of severe economic and fiscal challenges that, either individually or in the aggregate, could adversely affect the Commonwealth’s ability to pay debt-service on its obligations when due. The three main credit rating agencies have downgraded all debt obligations of the Puerto Rico government to categories that are well below investment grade and a credit or payment default by at least two of the Commonwealth’s public instrumentalities has occurred and additional defaults are generally expected. The downgrades are based mostly on concerns about Puerto Rico’s economic recession, liquidity availability, sizable debt- obligations, high unemployment, shrinking population, unreliable forecasts for financial information, and the Puerto Rico government’s lack of financial flexibility and limited capacity to borrow in the capital markets, which increase the Commonwealth’s risk of default. Securities that are below investment grade present greater risks and are less liquid than investment-grade securities. The Commonwealth government has unveiled a fiscal restructuring plan that, among other findings, provides that paying debt service on Puerto Rico’s government obligations in the face of significant financing gaps could severely impair its ability to provide essential services to the residents of Puerto Rico. In this regard, it has proposed to seek a consensual restructuring of its outstanding debt and other tax-supported obligations. If the government is unable to restructure its debts and/or negotiate upcoming maturities and liquidity sources continue scarce, the government may have to declare a debt-service moratorium, default on its debt obligations, eliminate government agencies, cut essential programs or services, and take other emergency or extraordinary actions. Any further deterioration of economic or fiscal conditions in Puerto Rico 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 December 31, 2015, we had approximately $415 million of credit facilities granted to the Puerto Rico government, including its instrumentalities, public corporations and municipalities, all of which was outstanding as of such date. A substantial portion of our 18 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 their 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 the Puerto Rico Electric Power Authority (“PREPA”). Public corporations have varying degrees of independence from the central government and many have received appropriations or are due other payments from it. Oriental Bank is part of a four bank syndicate providing a $550 million revolving line of credit to finance the purchase of fuel for PREPA’s day-to-day power generation activities. Our participation in the line of credit has an unpaid principal balance of $190.3 million as of December 31, 2015. As part of the bank syndicate, the Bank entered into a forbearance agreement with PREPA, which was extended several times until the execution of a Restructuring Support Agreement on November 5, 2015 with PREPA and certain other creditors. The Restructuring Support Agreement provides for the restructuring of the fuel line of credit subject to the accomplishment of several milestones, including some milestones that depend on the actions of third parties to the agreement, such as the negotiation of agreements with other creditors and legislative action. The Company has classified the credit facility to PREPA as substandard and on non-accrual status. The Company conducted an impairment analysis considering the probability of collection of principal and interest, which included a financial model to project the future liquidity status of PREPA under various scenarios and its capacity to service its financial obligations, and concluded that PREPA had sufficient cash flows for the repayment of the line of credit. Despite the Company’s analysis showing PREPA’s capacity to repay the line of credit, the Company placed its participation in non-accrual during the first quarter of 2015 and recorded a $53.3 million provision for loan and lease losses during 2015. Since April 1, 2015, interest payments have been applied to principal. In June 2014, Puerto Rico enacted the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the “Recovery Act”), which established procedures for the adjustment of debts of certain public corporations owned by the Commonwealth, which, as Puerto Rico governmental instrumentalities, are not currently eligible for federal bankruptcy relief under any chapter of the U.S. Bankruptcy Code. The Recovery Act states in its preamble that it further promotes the government’s public policy of no longer providing financial support to such public corporations, such as, for example, the PREPA, and promoting their economic independence. In February 2015, the United States District Court for the District of Puerto Rico held that the Recovery Act is preempted by the U.S Bankruptcy Code and is therefore void pursuant to the Supremacy Clause of the United States Constitution. It also permanently enjoined the Commonwealth from enforcing the Recovery Act. The District Court’s decision was upheld on appeal by the United States Circuit Court of Appeals for the First Circuit. However, on December 4, 2015, the United States Supreme Court granted the Commonwealth’s petition for writ of certiorari to review the District Court’s decision. Oral arguments before the United States Supreme Court are scheduled for March 22, 2016. In addition, there are ongoing initiatives in Congress to make Chapter 9 of the U.S. Bankruptcy Code applicable to Puerto Rico and/or otherwise provide an orderly debt restructuring regime for the Commonwealth. In summary, the Commonwealth’s current ability to restructure the debts of some of its public corporations, such as PREPA, remains uncertain, and a broad disorderly restructuring with multiple creditor lawsuits and other legal actions is possible. PREPA’s enabling act provides for local receivership upon request to any Puerto Rico court of competent jurisdiction in the event of a default in debt-service payments or other obligations in connection with PREPA’s bonds. The receiver so appointed would be empowered, directly or through its agents and attorneys, to take possession of the undertakings, income and revenues pledged to the payment of the bonds in default; to have, hold, use, operate, manage and control the same; and to exercise all of PREPA’s rights and powers with respect to such undertakings. However, any such receiver would not have the power to sell, assign, mortgage or otherwise dispose of PREPA’s assets, and its powers would be limited to the operation and maintenance of such undertakings and the collection and application of the income and revenues therefrom. These provisions have not been tested in the courts, and it is not clear if and how they would apply in connection with other debts and obligations of PREPA upon an event of default. The PREPA Revitalization Act was recently signed into law by the Governor of Puerto Rico. It provides for a major debt restructuring of PREPA’s outstanding debt and sets forth a legal framework for PREPA to execute on the agreements reached with its creditors. Among other things, it (i) enhances PREPA’s governance processes; (ii) adjusts PREPA’s practices for hiring and managing personnel; (iii) changes PREPA’s processes for collecting outstanding bills from public and private entities; (iv) improves transparency of PREPA’s billing practices; (v) implements a competitive bidding process for soliciting third party investment in PREPA’s infrastructure; (vi) allows for the refinancing of existing PREPA bonds through a securitization that would reduce PREPA’s indebtedness and cost of borrowing; and (vii) sets forth a process for the Energy Commission to address PREPA’s proposal for a new rate structure that consistent with its recovery plan. 19 If our Commonwealth public debtors are unable to pay their obligations to us as they become due, or under certain other circumstances, we may be required to adversely classify such loans and provision for losses in connection therewith. Such provision may significantly impact our financial condition and our regulatory capital ratios. Our decisions regarding credit risk and the allowance for loan and lease losses may materially and adversely affect our business and results of operations. Making loans is an essential element of our business, and there is a risk that the loans will not be repaid. This default risk is affected by a number of factors, including:     the duration of the loan; credit risks of a particular borrower; changes in economic or industry conditions; and in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral. Our customers might not repay their loans according to the original terms, and the collateral securing the payment of those loans might be insufficient to pay any remaining loan balance. Hence, we may experience significant loan losses, which could have a materially adverse effect on our operating results. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In determining the amount of the allowance for loan losses, we rely on loan quality reviews, past loss experience, and an evaluation of economic conditions, among other factors. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to the allowance. Material additions to the allowance would materially decrease our net income. Our emphasis on the origination of commercial real estate and business loans is one of the more significant factors in evaluating our allowance for loan losses. As we continue to increase the amount of these loans, additional or increased provisions for credit losses may be necessary and as a result would decrease our earnings. We strive to maintain an appropriate allowance for loan and lease losses to provide for probable losses inherent in the loan portfolio. We periodically determine the amount of the allowance based on consideration of several factors such as default frequency, internal risk ratings, expected future cash collections, loss recovery rates and general economic factors, among others. Our methodology for measuring the adequacy of the allowance relies on several key elements, which include a specific allowance for identified problem loans and a general systematic allowance. We believe our allowance for loan and lease losses is currently sufficient given the constant monitoring of the risk inherent in the loan portfolio. However, there is no precise method of predicting loan losses and therefore we always face the risk that charge-offs in future periods will exceed the allowance for loan and lease losses and that additional increases in the allowance for loan and lease losses will be required. In addition, the FDIC as well as the OCFI may require us to establish additional reserves. Additions to the allowance for loan and lease losses would result in a decrease of net earnings and capital, and could hinder our ability to pay dividends. Given the severe economic conditions in Puerto Rico, we may continue to experience increased credit costs or need to take greater than anticipated markdowns and make greater than anticipated provisions to increase the allowances for loan losses on the loans acquired that could adversely affect our financial condition and results of operations in the future. Bank regulators periodically review our allowance for loan losses and may require us to increase our provision for credit losses or loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities could have a materially adverse effect on our results of operations and/or financial condition. Non-Compliance with USA Patriot Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions. Financial Institutions are required under the USA Patriot Act and Bank Secrecy Acts to develop programs to prevent financial institutions from being used for money-laundering and terrorist activities. Financial institutions are obligated to file suspicious activity reports with the U.S. Treasury Department’s Office of Financial Crimes Enforcement Network if such activities are detected. These rules also require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure or the inability to comply with these regulations could result in enforcement actions, fines or 20 penalties, curtailment of expansion opportunities, intervention or sanctions by regulators or costly litigation or expensive additional controls and systems. We have developed policies and continue to augment procedures, staff and systems designed to assist in compliance with such laws and regulations. We are subject to default and other risks in connection with mortgage loan originations. From the time that we fund the mortgage loans originated to the time that they are sold, we are generally at risk for any mortgage loan defaults. Once we sell the mortgage loans, the risk of loss from mortgage loan defaults and foreclosures passes to the purchaser or insurer of the mortgage loans. However, in the ordinary course of business, we make representations and warranties to the purchasers and insurers of mortgage loans relating to the validity of such loans. If there is a breach of any of these representations or warranties, we may be required to repurchase the mortgage loan and bear any subsequent loss on the mortgage loan. We also may be required to repurchase mortgage loans in the event that there was improper underwriting or fraud or in the event that the loans become delinquent shortly after they are originated. For the year ended December 31, 2015, we repurchased $26.6 million of loans from GNMA and FNMA. Any such repurchases in the future may negatively impact our liquidity and operating results. Termination of our ability to sell mortgage products to the U.S government-sponsored entities would have a material adverse effect on our results of operations and financial condition. In addition, we may be required to indemnify certain purchasers and others against losses they incur in the event of breaches of representations and warranties and in various other circumstances, including securities fraud claims, and the amount of such losses could exceed the purchase amount of the related loans. Consequently, we may be exposed to credit risk associated with sold loans. In addition, we incur higher liquidity risk with respect to mortgage loans not eligible to be purchased or insured by FNMA, GNMA or FHLMC, due to a lack of secondary market in which to sell these loans. We have established reserves in our consolidated financial statements for potential losses that are considered to be both probable and reasonably estimable related to the mortgage loans sold by us. The adequacy of the reserve and the ultimate amount of losses incurred will depend on, among other things, the actual future mortgage loan performance, the actual level of future repurchase and indemnification requests, the actual success rate of claimants, developments in litigation related to us and the industry, actual recoveries on the collateral and macroeconomic conditions (including unemployment levels and housing prices). Due to uncertainties relating to these factors, there can be no assurance that our reserves will be adequate or that the total amount of losses incurred will not have a material adverse effect upon our financial condition or results of operations. For additional information related to our allowance for loan and lease losses, see “Note 6—Allowance for Loan and Lease Losses” to our audited consolidated financial statements included in this annual report on Form 10-K. A prolonged economic downturn or recession or a continuing decline in the real estate market would likely result in an increase in delinquencies, defaults and foreclosures and in a reduction in loan origination activity, which would adversely affect our financial results. The residential mortgage loan origination business has historically been cyclical, enjoying periods of strong growth and profitability followed by periods of lower volumes and industry-wide losses. The market for residential mortgage loan originations in Puerto Rico is currently in decline, and this trend could also reduce the level of mortgage loans that we may originate in the future and may adversely impact our business. During periods of rising interest rates, refinancing originations for many mortgage products tend to decrease as the economic incentives for borrowers to refinance their existing mortgage loans are reduced. In addition, the residential mortgage loan origination business is impacted by home values. A significant trend of decreasing values in several housing segments in Puerto Rico has also been noted. There is a risk that a reduction in housing values could negatively impact our loss levels on the mortgage loan portfolio because the value of the homes underlying the loans is a primary source of repayment in the event of foreclosure. The decline in Puerto Rico’s economy has had an adverse effect in the credit quality of our loan portfolios. Among other things, during the ongoing recession, we have experienced an increase in the level of non-performing assets and loan loss provision, which adversely affected our profitability. Although the delinquency rates have decreased recently, they may increase if the recession continues or worsen. If there is another decline in economic activity, additional increases in the allowance for loan and lease losses could be necessary with further adverse effects on our profitability. Any sustained period of increased delinquencies, foreclosures or losses could harm our ability to sell loans, the price received on the sale of such loans, and the value of the mortgage loan portfolio, all of which could have a negative impact on our results of operations 21 and financial condition. In addition, any material decline in real estate values would weaken our collateral loan-to-value ratios and increase the possibility of loss if a borrower defaults. For a discussion of the impact of the Puerto Rico economy on our business operations, see “Most of our business is conducted in Puerto Rico, which is experiencing a deep economic recession, downturn in the real estate market, and a government fiscal and liquidity crisis.” We are subject to security and operational risk related to our use of technology, including the risk of cyber-attack or cyber theft Our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks regarding our customers and their accounts. To provide these products and services, we use information systems and infrastructure that we and third party service providers operate. As a financial institution, we also are subject to and examined for compliance with an array of data protection laws, regulations and guidance, as well as to our own internal privacy and information security policies and programs. Such incidents may include unauthorized access to our digital systems for purposes of misappropriation of assets, gaining access to sensitive information, corrupting data, or causing operational disruption. Although our information technology structure continue to be subject to cyber attacks, we have not experience a breach of cyber-security. Such an event could compromise our confidential information as well as that of our customers and third parties with whom we interact with and may result in negative consequences, including remediation costs, loss of revenues, additional regulatory scrutiny, litigation and reputational damage. Though we have insurance against some cyber-risks and attacks, it may not be sufficient to offset the impact of a material loss event. While we have policies and procedures designated to prevent or limit the effect of the possible security breach of our information systems, if unauthorized persons were somehow to get access to confidential or proprietary information in our possession or to our proprietary information, it could result in significant legal and financial exposure, damage to our reputation or a loss of confidence in the security of our systems that could adversely affect our business. Though we have insurance against some cyber-risks and attacks, it may not be sufficient to offset the impact of a material loss event. 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. Our financial results are constantly exposed to market risk, in particular to changes in interest rates. Market risk refers to the probability of variations in the net interest income or the fair value of assets and liabilities due to changes in interest rates, currency exchange rates or equity prices. 22 Changes in interest rates are one of the principal market risks affecting us. Our income and cash flows depend to a great extent on the difference between the interest rates earned on interest-earning assets, such as loans and investment securities, and the interest rates paid on interest-bearing liabilities, such as deposits and borrowings. Net interest income is the difference between the revenue generated on interest-earning assets and the interest cost of funding those assets. Depending on the duration and repricing characteristics of the assets, liabilities and off-balance sheet items, changes in interest rates could either increase or decrease the level of net interest income. For any given period, the pricing structure of the assets and liabilities is matched when an equal amount of such assets and liabilities mature or reprice in that period. We use an asset-liability management software program to project future movements in the 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. These simulations are highly complex and use many simplifying assumptions. In addition, the interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and the policies of various governmental and regulatory agencies, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the prepayment speed of loans, the value of loans and investment securities, the purchase of investments, the generation of deposits and the rates received on loans and investment securities and paid on deposits or other sources of funding. We are subject to interest rate risk because of the following factors:      Assets and liabilities may mature or reprice at different times. For example, if assets reprice slower than liabilities and interest rates are generally rising, earnings may initially decline. Assets and liabilities may reprice at the same time but by different amounts. For example, when the general level of interest rates is rising, we may increase rates charged on loans by an amount that is less than the general increase in market interest rates because of intense pricing competition. Also, basis risk occurs when assets and liabilities have similar repricing frequencies but are tied to different market interest rate indices that may not move in tandem. Short-term and long-term market interest rates may change by different amounts, i.e., the shape of the yield curve may affect new loan yields and funding costs differently. The remaining maturity of various assets and liabilities may shorten or lengthen as interest rates change. For example, if long-term mortgage interest rates decline sharply, our mortgage-backed securities portfolios may prepay significantly earlier than anticipated, which could reduce portfolio income. If prepayment rates increase, we would be required to amortize net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has a significant impact on mortgage-backed securities and collateralized mortgage obligations since prepayments could shorten the weighted average life of these portfolios. Interest rates may have an indirect impact on loan demand, credit losses, loan origination volume, the value of financial assets and financial liabilities, gains and losses on sales of securities and loans, the value of mortgage servicing rights and other sources of earnings. In limiting interest rate risk to an acceptable level, management may alter the mix of floating and fixed rate assets and liabilities, change pricing schedules, adjust maturities through sales and purchases of investment securities, and enter into derivative contracts, among other alternatives. We may suffer losses or experience lower spreads than anticipated in initial projections as management implements strategies to reduce future interest rate exposure. The hedging transactions that we enter into may not be effective in managing our exposure to market risk, including interest rate risk. We use over-the-counter (“OTC”) derivatives, such as interest rate swaps and options on interest rate swaps, to manage part of our exposure to market risk caused by changes in interest rates. We have offered certificates of deposit with an option tied to the performance of the Standard & Poor 500 stock market index and use derivatives, such as option agreements with major broker-dealer companies, to manage our exposure to changes in the value of the index. The OTC derivative instruments that we may utilize also have their own risks, which include: (i) basis risk, which is the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost; (ii) credit or default risk, which is the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder; and (iii) legal risk, which is the risk that we are unable to enforce certain terms of such instruments. All or any of such risks could expose us to losses. Further, as a result of the new regulatory regime 23 for OTC derivatives enacted under the Dodd-Frank Act, and the regulations issued thereunder by the SEC and the Commodity Futures Trading Commission, we are subject to additional reporting, recordkeeping and other requirements in connection with our use of OTC derivatives. If the counterparty to an OTC derivative contract fails to perform, our credit risk is equal to the net fair value of the contract. We deal with counterparties that have high quality credit ratings at the time we enter into the counterparty relationships. However, there can be no assurances that the counterparties will have the ability to perform under their contracts. If the counterparty fails to perform, including as a result of the bankruptcy or insolvency of such counterparty, we would incur losses as a result. Our business could be adversely affected if we cannot maintain access to stable funding sources. Our business requires continuous access to various funding sources. We are able to fund our operations through deposits as well as through advances from the FHLB-NY and FRB-NY; however, our business is significantly dependent upon other wholesale funding sources, such as repurchase agreements and brokered deposits, which consisted of approximately 23% of our total interest-bearing liabilities as of December 31, 2015. Brokered deposits are typically sold through an intermediary to small retail investors. Our 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, our credit rating and the relative interest rates that we are 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. We expect to have continued access to credit from the foregoing sources of funds. However, 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 us, the availability and cost of funding sources could be adversely affected. In that event, our cost of funds may increase, thereby reducing the net interest income, or we may need to dispose of a portion of the investment portfolio, which, depending upon market conditions, could result in realizing a loss or experiencing other adverse accounting consequences upon the dispositions. The interest rates that we pay on our securities are also influenced by, among other things, applicable credit ratings from recognized rating agencies. A downgrade to any of these credit ratings could affect our ability to access the capital markets, increase our borrowing costs and have a negative impact on our results of operations. Our 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 us or market related events. In the event that such sources of funds are reduced or eliminated and we are not able to replace them on a cost-effective basis, we may be forced to curtail or cease our loan origination business and treasury activities, which would have a material adverse effect on our operations and financial condition. Our risk management policies, procedures and systems may be inadequate to mitigate all risks inherent in our various businesses. A comprehensive risk management function is essential to the financial and operational success of our business. The types of risk we monitor and seek to manage include, but are not limited to, operational risk, technological and organizational risk, market risk, fiduciary risk, legal and compliance risk, liquidity risk and credit risk. We have adopted various policies, procedures and systems to monitor and manage these risks. There can be no assurance that those policies, procedures and systems are adequate to identify and mitigate all risks inherent in our various businesses. Our businesses and the markets in which we operate are also continuously evolving. If we fail to fully understand the implications of changes in our business or the financial markets and to adequately or timely enhance the risk framework to address those changes, we could incur losses. In addition, in a difficult or less liquid market environment, our risk management strategies may not be effective because other market participants may be attempting to use the same or similar strategies to deal with the challenging market conditions. In such circumstances, it may be difficult for us to reduce our risk positions due to the activity of such other market participants. Competition with other financial institutions could adversely affect our profitability. We face substantial competition in originating loans and in attracting deposits and assets to manage. The competition in originating loans and attracting assets comes principally from other U.S., Puerto Rico and foreign banks, investment advisors, securities broker- dealers, mortgage banking companies, consumer finance companies, credit unions, insurance companies, and other institutional lenders and purchasers of loans. We will encounter greater competition as we expand our operations. Increased competition may require us to increase the rates paid on deposits or lower the rates charged on loans which could adversely affect our profitability. 24 We operate in a highly regulated environment and may be adversely affected by changes in federal and local laws and regulations. Our operations are subject to extensive regulation by federal and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. Because our business is highly regulated, the laws, rules and regulations applicable to us are subject to regular modification and change. For example, the Dodd-Frank Act has a broad impact on the financial services industry, including significant regulatory and compliance changes, as discussed under the subheading “Dodd-Frank Wall Street Reform and Consumer Protection Act” in Item 1of this annual report. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. In particular, the potential impact of the Dodd-Frank Act on our operations and activities, both currently and prospectively, include, among others:     a reduction in our ability to generate or originate revenue-producing assets as a result of compliance with heightened capital standards; increased cost of operations due to greater regulatory oversight, supervision and examination of banks and bank holding companies, and higher deposit insurance premiums; the limitation on our ability to raise capital through the use of trust preferred securities as these securities will no longer be included as tier 1 capital going forward; and the limitation on our ability to expand consumer product and service offerings due to stricter consumer protection laws and regulations. Further, we may be required to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements. Failure to comply with the new requirements may negatively impact our results of operations and financial condition. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to our investors. Legislative and other measures that may be taken by Puerto Rico governmental authorities could materially increase our tax burden or otherwise adversely affect our financial condition, results of operations or cash flows. In an effort to address the Commonwealth’s ongoing fiscal problems, the Government has enacted tax reform in the past and is expected to do so in the future. In 2014, the Government of Puerto Rico approved an amendment to the Internal Revenue Code, which, among other things, changed the income tax rate for capital gains from 15% to 20%. In addition, in May 2015, the Government approved an increase in the state sales and use tax rate, effective July 1, 2015, from 6% to 10.5% (the municipal sales and use tax remained at a 1% rate), expanded the sales and use tax to certain business-to-business services that were previously exempt, and provided for a transition to a value-added tax was expected to become effective on April 1, 2016. Now, the value added tax is expected to become effective on June 1, 2016. Legislative changes, particularly changes in tax laws, could adversely impact our results of operations. We operate the IBE Unit and IBE Subsidiary pursuant to the IBE Act that provide us with significant tax advantages. An IBE has the benefits of exemptions from Puerto Rico income taxes on interest earned on, or gain realized from the sale of, non-Puerto Rico assets, including U.S. government obligations and certain mortgage-backed securities. This exemption has allowed us to have effective tax rates significantly below the maximum statutory tax rates. In the past, the Legislature of Puerto Rico has considered proposals to curb the tax benefits afforded to IBEs. In 2012, a new Puerto Rico law was enacted in this area. Although it did not repeal the IBE Act, the new law does not allow new license applications under the IBE Act to organize and operate an IBE. Any newly organized entity (now called an “international financial entity”) must be licensed under the new law and such entity (as opposed to existing IBEs organized under the IBE Act, including the Bank’s IBE Unit and IBE Subsidiary, which are “grandfathered”) will generally be subject to a 4% Puerto Rico income tax rate. In the event other legislation is passed in Puerto Rico to eliminate or modify the tax exemption enjoyed by IBEs, the consequences could have a materially adverse impact on us, including increasing the tax burden or otherwise adversely affecting our financial condition, results of operations or cash flows. Our goodwill and other intangible assets could be determined to be impaired in the future and could decrease the Company’s earnings. 25 We are required to test our goodwill, core deposit and customer relationship intangible assets for impairment on a periodic basis. The impairment testing process considers a variety of factors, including the current market price of our common shares, the estimated net present value of our assets and liabilities, and information concerning the terminal valuation of similarly situated insured depository institutions. If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible assets will be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on the tangible book value of our common shares or our regulatory capital levels, but such an impairment loss could significantly restrict the Company’s ability to make dividend payments without prior regulatory approval. Based on our annual goodwill impairment test, we determined that no impairment charges were necessary. As of December 31, 2015, we had on our consolidated balance sheet $86.1 million of goodwill in connection with the BBVAPR Acquisition and the FDIC- assisted Eurobank acquisition, $5.3 million of core deposit intangible in connection with the FDIC-assisted Eurobank acquisition and the BBVAPR Acquisition, and $2.5 million of customer relationship intangible in connection with the BBVAPR Acquisition. There can be no assurance that future evaluations of such goodwill or intangibles will not result in any impairment charges. Among other factors, further declines in our common stock as a result of macroeconomic conditions and the general weakness of the Puerto Rico economy, could lead to an impairment of such assets. If such assets become impaired, it could have a negative impact on our results of operations. Our ability to receive dividends from our subsidiaries could affect our liquidity and ability to pay dividends. We are a separate and distinct legal entity from our subsidiaries. Dividends to us from our subsidiaries have represented a major source of funds for us to pay dividends on our common and preferred stock, make payments on corporate debt securities and meet other obligations. There are various U.S. federal and Puerto Rico law limitations on the extent to which Oriental Bank, our main subsidiary, can finance or otherwise supply funds to us through dividends and loans. These limitations include minimum regulatory capital requirements, U.S. federal and Puerto Rico banking law requirements concerning the payment of dividends out of net profits or surplus, Sections 23A and 23B of the Federal Reserve Act of 1913 and Regulation W of the Federal Reserve Board governing transactions between an insured depository institution and its affiliates, as well as general federal regulatory oversight to prevent unsafe or unsound practices. Further, under the new capital rules adopted by the federal banking regulatory agencies, a banking organization will need to hold a capital conservation buffer (composed of common equity tier 1 capital) greater than 2.5% of total risk- weighted assets to avoid limitations on capital distributions and discretionary bonus payments. Compliance with the capital conservation buffer is determined as of the end of the calendar quarter prior to any such capital distribution or discretionary bonus payment, and is subject to a three-year transition period beginning in 2016. If our subsidiaries’ earnings are not sufficient to make dividend payments while maintaining adequate capital levels, our liquidity may be affected, and we may not be able to make dividend payments to our holders of common and preferred stock or payments on outstanding corporate debt securities or meet other obligations, each of which could have a material adverse impact on our results of operations, financial position or perception of financial health. In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. Changes in accounting standards issued by the Financial Accounting Standards Board (“FASB”) or other standard-setting bodies may adversely affect our financial statements. Our financial statements are subject to the application of GAAP, which are periodically revised and/or expanded. Accordingly, from time to time we are required to adopt new or revised accounting standards issued by FASB. Market conditions have prompted accounting standard setters to promulgate new guidance which further interprets or seeks to revise accounting pronouncements related to financial instruments, structures or transactions as well as to issue new standards expanding disclosures. See “Note 1—Summary of Significant Accounting Policies” to our consolidated financial statements included herein for a discussion of any accounting developments that have been issued but not yet implemented. An assessment of proposed standards is not provided as such proposals are subject to change through the exposure process and, therefore, the effects on our consolidated financial statements cannot be meaningfully assessed. It is possible that future accounting standards that we are required to adopt could change the current accounting treatment that applies to the consolidated financial statements and that such changes could have a material effect on our financial condition and results of operations. Competition in attracting talented people could adversely affect our operations. 26 We depend on our ability to attract and retain key personnel and we rely heavily on our management team. The inability to recruit and retain key personnel or the unexpected loss of key managers may adversely affect our operations. Our success to date has been influenced strongly by the ability to attract and retain senior management experienced in banking and financial services. Retention of senior managers and appropriate succession planning will continue to be critical to the successful implementation of our strategies. Reputational risk and social factors may impact our results. Our ability to originate loans and to attract deposits and assets is highly dependent upon the perceptions of consumer, commercial and funding markets of our business practices and our financial health. Negative public opinion could result from actual or alleged conduct in any number of activities or circumstances, including lending practices, regulatory compliance, inadequate protection of customer information, or sales and marketing, and from actions taken by regulators in response to such conduct. Adverse perceptions regarding us could lead to difficulties in originating loans and generating and maintaining accounts as well as in financing them. In addition, a variety of social factors may cause changes in borrowing activity, including credit card use, payment patterns and the rate of defaults by account holders and borrowers. If consumers develop or maintain negative attitudes about incurring debt, or if consumption trends decline, our business and financial results will be negatively affected. 27 ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES The Company owns a fifteen-story office building located at 254 Muñoz Rivera Avenue, San Juan Puerto Rico, known as Oriental Center. The Company operates a full service branch at the plaza level and our centralized units and subsidiaries occupy approximately 66% of the office floor space. Approximately 34% of the office space is leased to outside tenants. The Company also leases offices at 997 San Roberto Street, Professional Offices Park, San Juan, Puerto Rico, known as Oriental Tower. In addition, the Company also leases an office space in Boca Raton, Florida for the operations of OPC, its retirement plan administrator. The Bank owns ten branch premises and leases thirty eight branch commercial offices throughout Puerto Rico. The Bank’s management believes that each of its facilities is well maintained and suitable for its purpose and can readily obtain appropriate additional space as may be required at competitive rates by extending expiring leases or finding alternative space. At December 31, 2015, the aggregate future rental commitments under the terms of the leases, exclusive of taxes, insurance and maintenance expenses payable by the Company, was $45.3 million. The Company’s investment in premises and equipment, exclusive of leasehold improvements at December 31, 2015, was $106.9 million, gross of accumulated depreciation. ITEM 3. 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 4. MINE SAFETY DISCLOSURE Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG”. Information concerning the range of high and low sales prices for the Company’s common stock for each quarter in the years ended December 31, 2015 and 2014, as well as cash dividends declared for such periods is set forth under the sub-heading “Stockholders’ Equity” in the “Analysis of Financial Condition” caption in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). Information concerning legal or regulatory restrictions on the payment of dividends by the Company and the Bank is contained under the sub-heading “Dividend Restrictions” in Item 1 of this report. As of December 31, 2015, the Company had approximately 2,999 holders of record of its common stock, including all directors and officers of the Company, and beneficial owners whose shares are held in “street” name by securities broker-dealers or other nominees. 28 Stock Performance Graph The graph below compares the percentage change in the Company’s cumulative total stockholder return during the measurement period with the cumulative total return, assuming reinvestment of dividends, of the Russell 2000 Index and the SNL Bank Index. The cumulative total stockholder return was obtained by dividing the sum of (i) the cumulative amount of dividends per share, assuming dividend reinvestment, for the measurement period beginning December 31, 2010, and (ii) the difference between the share price at the beginning and the end of the measurement period, by the share price at the beginning of the measurement period. Comparison of 5 Year Cumulative Total Return Assumes Initial Investment of $100 Index OFG Bancorp Russell 2000 SNL Bank 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 12/31/2015 100.00 100.00 100.00 98.78 95.82 77.44 111.17 111.49 104.51 146.65 154.78 143.49 143.69 162.35 160.40 65.22 155.18 163.14 29 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 and “Financial Statements and Supplementary Data” under Item 8 of this report. OFG Bancorp SELECTED FINANCIAL DATA YEARS ENDED DECEMBER 31, 2015, 2014, 2013, 2012, AND 2011 Year Ended December 31, 2013 2012 2014 (In thousands, except per share data) 2011 $ 2015 406,568 69,196 337,372 161,501 175,871 52,472 248,401 (20,058) (17,554) (2,504) 485,257 76,782 408,475 60,640 347,835 17,323 242,725 122,433 37,252 85,181 (13,862) (16,366) $ (13,862) 71,319 (0.37) $ (0.37) $ $ 51,455 44,231 16.67 14.53 7.32 0.36 15,932 -0.03% -2.47% -2.16% 12.64% 60.00% 4.95% 5.03% 1.58 1.50 45,024 52,326 17.40 15.25 16.65 0.34 15,286 1.10% 10.91% 9.50% 12.65% 49.90% 5.79% 5.84% $ $ $ $ $ $ $ $ $ $ 493,632 83,960 409,672 72,894 336,778 17,095 264,136 89,737 (8,709) 98,446 (13,862) 84,584 1.85 1.73 45,706 53,033 15.74 13.60 17.34 0.26 11,875 1.15% 14.01% 12.03% 10.85% 53.45% 5.46% 5.46% $ $ $ $ $ $ $ $ $ 260,808 103,518 157,290 23,681 133,609 26,057 131,810 27,856 3,301 24,555 (9,939) 14,616 0.35 0.35 41,626 45,304 15.31 13.10 13.35 0.24 10,067 0.37% 2.32% 2.29% 9.38% 64.05% 2.59% 2.67% 297,295 156,362 140,933 13,813 127,120 32,241 124,045 35,316 866 34,450 (4,802) 29,648 0.67 0.67 44,433 44,524 15.28 15.19 12.11 0.21 9,153 0.48% 4.54% 4.50% 10.38% 66.26% 2.15% 2.19% EARNINGS DATA: Interest income Interest expense Net interest income Provision for loan and lease losses Net interest income after provision for loan and leases losess Non-interest income Non-interest expenses (Loss) income before taxes Income tax (benefit) expense Net (loss) income Less: dividends on preferred stock (Loss) income available to common shareholders PER SHARE DATA: Basic Diluted Average common shares outstanding Average common shares outstanding and equivalents Book value per common share Tangible book value per common share Market price at end of period Cash dividends declared per common share Cash dividends declared on common shares PERFORMANCE RATIOS: Return on average assets (ROA) Return on average tangible common stockholders' equity Return on average common equity (ROE) Equity-to-assets ratio Efficiency ratio Interest rate spread Interest rate margin $ $ $ $ $ $ $ $ $ 30 PERIOD END BALANCES AND CAPITAL RATIOS: Investments and loans Investment securities Originated loans, net Acquired loans, net Total investments and loans Deposits and borrowings Deposits Securities sold under agreements to repurchase Other borrowings Total deposits and borrowings Stockholders’ equity Preferred stock Common stock Additional paid-in capital Legal surplus Retained earnings Treasury stock, at cost Accumulated other comprehensive income Total stockholders' equity Capital ratios Leverage capital Tier 1 common equity to risk-weighted assets Common equity Tier 1 capital ratio Tier 1 risk-based capital Total risk-based capital Financial assets managed Trust assets managed Broker-dealer assets gathered Total assets managed $ $ $ $ $ 2015 1,615,872 3,016,781 1,417,432 6,050,085 4,716,859 934,691 436,843 6,088,393 176,000 52,626 540,512 70,435 148,886 (105,379) 13,997 897,077 $ 11.18% N/A 12.14% 15.99% 17.29% December 31, 2014 2012 2013 (In thousands, except per share data) $ $ $ $ $ $ 1,402,056 2,811,207 2,015,439 6,228,702 4,924,406 980,087 439,919 6,344,412 176,000 52,626 539,311 70,435 181,184 (97,070) 19,711 942,197 10.61% 11.88% N/A 16.02% 17.57% $ $ $ $ $ $ 1,614,809 2,400,023 2,619,396 6,634,228 5,383,265 1,267,618 439,816 7,090,699 176,000 52,707 538,071 61,957 133,629 (80,642) 3,191 884,913 9.06% 10.46% N/A 14.38% 16.16% $ $ $ $ $ $ 2,233,265 1,278,750 3,878,887 7,390,902 5,690,579 1,695,247 791,417 8,177,243 176,000 52,671 537,453 52,143 70,734 (81,275) 55,880 863,606 6.55% 8.76% N/A 13.18% 15.40% 2011 3,867,970 1,169,916 496,276 5,534,162 2,437,796 3,056,238 427,063 5,921,097 68,000 47,809 499,096 50,178 68,149 (74,808) 37,131 695,555 9.65% 27.01% N/A 31.84% 33.12% 2,691,423 2,374,709 5,066,132 $ $ 2,841,111 2,622,001 5,463,112 $ $ 2,796,923 2,493,324 5,290,247 $ $ 2,514,401 2,722,197 5,236,598 $ $ 2,216,088 1,926,148 4,142,236 $ $ $ $ $ $ $ $ 31 The ratios shown below demonstrate the Company’s ability to generate sufficient earnings to pay the fixed charges or expenses of its debt and preferred stock dividends. The Company’s consolidated ratios of earnings to combined fixed charges and preferred stock dividends were computed by dividing earnings by combined fixed charges and preferred stock dividends, as specified below, using two different assumptions, one excluding interest on deposits and the second including interest on deposits: Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends Excluding Interests on Deposits Including Interests on Deposits (A) (A) 2.81x 2.16x 2.26x 1.75x 1.21x 1.15x 1.26x 1.19x 2015 Year Ended December 31, 2013 2012 2014 2011 (A) In 2015, earnings were not sufficient to cover preferred stock dividends, and the ratio was less than 1:1. The Company would have had to generate additional earnings of $34 million to achieve a ratio of 1:1 in 2015. For purposes of computing these consolidated ratios, earnings represent income before income taxes plus fixed charges and amortization of capitalized interest, less interest capitalized. Fixed charges consist of interest expensed and capitalized, amortization of debt issuance costs, and the Company’s estimate of the interest component of rental expense. The term “preferred stock dividends” is the amount of pre-tax earnings that is required to pay dividends on the Company’s outstanding preferred stock. As of the dates presented above, except for 2011, the Company had noncumulative perpetual preferred stock issued and outstanding amounting to $176.0 million, as follows: (i) Series A amounting to $33.5 million or 1,340,000 shares at a $25 liquidation value; (ii) Series B amounting to $34.5 million or 1,380,000 shares at a $25 liquidation value; (iii) Series C amounting to $84.0 million or 84,000 shares at a $1,000 liquidation value; and (iv) Series D amounting to $24.0 million or 960,000 shares at a $25 liquidation value. At December 31, 2011, the Company had noncumulative perpetual preferred stock issued and outstanding amounting to $68.0 million, as follows: (i) Series A amounting to $33.5 million or 1,3400,000 shares at a $25 liquidation value; (ii) Series B amounting to $34.5 million or 1,380,000 shares at a $25 liquidation value. 32 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2015 CRITICAL ACCOUNTING POLICIES AND ESTIMATES The accounting and reporting policies followed by the Company conform with GAAP and general practices within the financial services industry. The Company’s significant accounting policies are described in detail in Note 1 to the consolidated financial statements and should be read in conjunction with this section. Critical accounting policies require management to make estimates and assumptions, which involve significant judgment about the effect of matters that are inherently uncertain and that involve a high degree of subjectivity. These estimates are made under facts and circumstances at a point in time and changes in those facts and circumstances could produce actual results that differ from those estimates. The following MD&A section is a summary of what management considers the Company’s critical accounting policies. Loans and Leases Originated and Other Loans and Leases Held in Portfolio Loans the Company originates and intends to hold in portfolio are stated at the principal amount outstanding, adjusted for unamortized deferred fees and costs which are amortized to interest income over the expected life of the loan using the interest method. The Company discontinues accrual of interest on originated loans after payments become more than 90 days past due or earlier if the Company does not expect the full collection of principal or interest. The delinquency status is based upon the contractual terms of the loans. Loans for which the recognition of interest income has been discontinued are designated as non-accruing. Collections are accounted for on the cash method thereafter, until qualifying to return to accrual status. Such loans are not reinstated to accrual status until interest is received on a current basis and other factors indicative of doubtful collection cease to exist generally for a period of six- months. The determination as to the ultimate collectability of the loan’s balance may involve management’s judgment in the evaluation of the borrower’s financial condition and prospects for repayment. The Company follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan and lease losses to provide for inherent losses in the loan portfolio. This methodology includes the consideration of factors such as economic conditions, portfolio risk characteristics, prior loss experience, and results of periodic credit reviews of individual loans. The provision for loan and lease losses charged to current operations is based on such methodology. Loan and lease losses are charged and recoveries are credited to the allowance for loan and lease losses on originated and other loans. Larger commercial loans that exhibit potential or observed credit weaknesses are subject to individual review and grading. Where appropriate, allowances are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow, and legal options available to the Company. Included in the review of individual loans are those that are impaired. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the collateral, if the loan is collateral dependent. Loans are individually evaluated for impairment, except large groups of small balance homogeneous loans that are collectively evaluated for impairment and loans that are recorded at fair value or at the lower of cost or fair value. The Company measures for impairment all commercial loans over $250 thousand (i) that are either 33 over 90 days past due or adversely classified, or (ii) when deemed necessary by management and TDR’s. The portfolios of mortgage loans, auto and leasing, and consumer loans are considered homogeneous and are evaluated collectively for impairment. The Company uses a rating system to apply an overall allowance percentage to each originated and other loan portfolio segment based on historical credit losses adjusted for current conditions and trends. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over a determined look back period for each segment. The actual loss factor is adjusted by the appropriate loss emergence period as calculated for each portfolio. Then, the adjusted loss experience is supplemented with other qualitative factors based on the risks present for each portfolio segment. These qualitative factors include consideration of the following: the credit grading assigned to commercial loans; levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff, including the bank’s loan review system as graded by regulatory agencies in their last examination; local economic trends and conditions; industry conditions; effects of external factors such as competition and regulatory requirements on the level of estimated credit losses in the current portfolio; and effects of changes in credit concentrations and collateral value. Additional impact from the historical loss experience is applied based on levels of delinquency and loan classification, and for the auto loan portfolio by FICO score. At origination, a determination is made whether a loan will be held in our portfolio or is intended for sale in the secondary market. Loans that will be held in the Company’s portfolio are carried at amortized cost. Residential mortgage loans held for sale are recorded at the lower of the aggregate cost or market value (“LOCOM”). Acquired Loans and Leases Loans that the Company acquire in acquisitions are recorded at fair value with no carryover of the related allowance for loan losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. The Company has acquired loans in two separate acquisitions, the BBVAPR Acquisition in December 2012 and the FDIC-assisted Eurobank acquisition in April 2010. For each acquisition, the Company considered the following factors as indicators that an acquired loan had evidence of deterioration in credit quality and was therefore in the scope of ASC 310-30:     Loans that were 90 days or more past due, Loans that had an internal risk rating of substandard or worse. Substandard is consistent with regulatory definitions and is defined as having a well-defined weakness that jeopardizes liquidation of the loan, Loans that were classified as nonaccrual by the acquired bank at the time of acquisition, and Loans that had been previously modified in a troubled debt restructuring. Any acquired loans that were not individually in the scope of ASC 310-30 because they did not meet the criteria above were either (i) pooled into groups of similar loans based on the borrower type, loan purpose, and collateral type and accounted for under ASC 310-30 by analogy or (ii) accounted for under ASC 310-20 (Non-refundable fees and other costs). Acquired Loans Accounted for under ASC 310-20 (loans with revolving feature and/or acquired at a premium) Revolving credit facilities such as credit cards, retail and commercial lines of credit and floor plans which are specifically scoped out of ASC 310-30 are accounted for under the provisions of ASC 310-20. Also, performing auto loans with FICO scores over 660 acquired at a premium in the BBVAPR Acquisition are accounted for under this guidance. Auto loans with FICO scores below 660 were acquired at a discount and are accounted for under the provisions of ASC 310-30. The provisions of ASC 310-20 require that any differences between the contractually required loan payments 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 acquired in the BBVAPR Acquisition that were accounted for under the provisions of ASC 310-20 which had fully amortized their premium or discount, recorded at the date of acquisition, are removed from the acquired loan category. Loans accounted for under ASC 310-20 are placed on non-accrual status when past due in accordance with the Company’s non-accruing policy and any accretion of discount is discontinued. These assets were recorded at estimated fair value on their acquisition date, incorporating an estimate of future expected cash flows. Such fair value includes a credit discount which accounts for expected loan losses over the estimated life of these loans. Management takes into consideration this credit discount when determining the necessary allowance for acquired loans that are accounted for under the provisions of ASC 310-20. 34 The allowance for loan and lease losses model for acquired loans accounted for under ASC 310-20 is the same as for the originated and other loan portfolio. Acquired Loans Accounted under ASC 310-30 (including those accounted for under ASC 310-30 by analogy) The Company performed a fair market valuation of each of the loan pools, and each pool was recorded at a discount. The Company determined that at least part of the discount on the acquired individual or pools of loans was attributable to credit quality by reference to the valuation model used to estimate the fair value of these pools of loans. The valuation model incorporated lifetime expected credit losses into the loans’ fair valuation in consideration of factors such as evidence of credit deterioration since origination and the amounts of contractually required principal and interest that the Company did not expect to collect as of the acquisition date. Based on the guidance included in the December 18, 2009 letter from the AICPA Depository Institutions Panel to the Office of the Chief Accountant of the SEC, the Company has made an accounting policy election to apply ASC 310-30 by analogy to all of these acquired pools of loans as they all (i) were acquired in a business combination or asset purchase, (ii) resulted in recognition of a discount attributable, at least in part, to credit quality; and (iii) were not subsequently accounted for at fair value. The excess of expected cash flows from acquired loans over the estimated fair value of acquired loans at acquisition is referred to as the accretable discount and is recognized into interest income over the remaining life of the acquired loans using the interest method. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the life of the acquired loans. Subsequent decreases to the expected cash flows require the Company to evaluate the need for an addition to the allowance for loan losses. Subsequent improvements in expected cash flows result in the reversal of the associated allowance for loan losses, if any and the reversal of a corresponding amount of the nonaccretable discount which the Company then reclassifies as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method. The Company’s evaluation of the amount of future cash flows that it expects to collect takes into account actual credit performance of the acquired loans to date and the Company’s best estimates for the expected lifetime credit performance of the loans using currently available information. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable discount portion of the fair value adjustment. To the extent that the Company experiences deterioration in credit quality in its expected cash flows subsequent to the acquisition of the loans; an allowance for loan losses would be established based on the estimate of future credit losses over the remaining life of the loans. In accordance with ASC 310-30, recognition of income is dependent on having a reasonable expectation about the timing and amount of cash flows expected to be collected. The Company performs such an evaluation on a quarterly basis on both its acquired loans individually accounted for under ASC 310-30 and those in pools accounted for under ASC 310-30 by analogy. Cash flows for acquired loans individually accounted for under ASC 310-30 are estimated on a quarterly basis. Based on this evaluation, a determination is made as to whether or not the Company has a reasonable expectation about the timing and amount of cash flows. Such an expectation includes cash flows from normal customer repayment, collateral value, foreclosure or other collection efforts. Cash flows for acquired loans accounted for on a pooled basis under ASC 310-30 by analogy are also estimated on a quarterly basis. For residential real estate, home equity and other consumer loans, cash flow loss estimates are calculated based on a model that incorporates a projected probability of default and loss. For commercial loans, lifetime loss rates are assigned to each pool with consideration given for pool make-up, including risk rating profile. Lifetime loss rates are developed from internally generated historical loss data and are applied to each pool. To the extent that the Company cannot reasonably estimate cash flows, interest income recognition is discontinued. The unit of account for loans in pools accounted for under ASC 310-30 by analogy is the pool of loans. Accordingly, as long as the Company can reasonably estimate cash flows for the pool as a whole, accretable yield on the pool is recognized and all individual loans within the pool - even those more than 90 days past due - would be considered to be accruing interest in the Company’s financial statement disclosures, regardless of whether or not the Company expects any principal or interest cash flows on an individual loan 90 days or more past due. Because of the loss protection provided by the FDIC, the risk of the loans acquired in the FDIC-assisted Eurobank acquisition that are covered under the FDIC shared-loss agreements are significantly different from loans not covered under the FDIC shared-loss agreement. These loans are referred to as "covered loans". The FDIC shared-loss agreement related to the commercial and other non- single family acquired Eurobank loans expired on June 30, 2015. The coverage for single-family residential loans will expire on June 30, 2020. Covered loans are no longer a material amount. Therefore, the Company changed its current and prior year loan disclosures. 35 Covered loans are accounted for under ASC 310-30. To the extent credit deterioration occurs after the date of acquisition, the Company will record an allowance for loan and lease losses and an increase in the FDIC shared-loss indemnification asset for the expected reimbursement from the FDIC under the shared-loss agreement. Allowance for Loan and Lease Losses for Originated and Acquired BBVAPR Loans and Leases The Company follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan and lease losses to provide for inherent losses in its loan portfolio. This methodology includes the consideration of factors such as economic conditions, portfolio risk characteristics, prior loss experience, and results of periodic credit reviews of individual loans. The loss factor used for the general reserve of these loans is established considering the Bank's historical loss experience adjusted for an estimated loss emergence period and the consideration of environmental factors. Environmental factors considered are: changes in non-performing loans; migration in classification; trends in charge offs; trends in volume of loans; changes in collateral values; changes in risk selections and underwriting standards, and other changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staff, including the Company’s loan review system; national and local economic trends and industry conditions; and effect of external factors such as competition and regulatory requirements on the level of estimated credit losses. The sum of the adjusted loss experience factors and the environmental factors will be the general valuation reserve (“GVA”) factor to be used for the determination of the allowance for loan and lease losses in each category. As part of the Company’s continuous enhancement to the allowance for loan and lease losses methodology, during the year 2015 the following assumptions were reviewed: - - - An assessment of the look-back period and historical loss factor was performed for all portfolio segments. The analysis was based on the trends observed and their relation with the economic cycle as of the period of the analysis. As a result, for the commercial portfolio, the look-back period was changed to 36 months from the previously determined 12 months. For auto, leasing and consumer, a look-back period of 24 months was maintained. The residential mortgages portfolio was evaluated during the fourth quarter of 2015. For this portfolio, a 12-month look-back period was maintained as management concluded that, given the charge offs evolution, a shorter period of losses is more representative of the recent trends and more accurate in predicting future losses During the second quarter of 2015, an assessment of environmental factors was performed for commercial, auto, and consumer portfolios. As a result, the environmental factors continue to reflect our assessment of the impact to our portfolio, taking into consideration the current evolution of the portfolios and expected impact, due to recent economic developments, changes in values of collateral and delinquencies, among others. During the fourth quarter of 2015 the loss realization period was revised to 1.60 years for commercial real estate, other portfolios remained at one year. These changes in the allowance for loan and lease losses’ look-back period and loss emergence period for the commercial portfolios are considered a change in accounting estimate as per ASC 250-10 provisions, where adjustments are made prospectively. Originated and Other Loans and Leases Held for Investment and Acquired Loans Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium) The Company determines the allowance for loan and lease losses by portfolio segments, which consist of mortgage loans, commercial loans, consumer loans, and auto and leasing, as follows: Mortgage loans: These loans are divided into four classes: traditional mortgages, non-traditional mortgages, loans in loan modification programs and home equity secured personal loans. Traditional mortgage loans include loans secured by a dwelling, fixed coupons and regular amortization schedules. Non-traditional mortgages include loans with interest-first amortization schedules and loans with balloon considerations as part of their terms. Mortgages in loan modification programs are loans that are being serviced under such programs. Home equity loans are mainly equity lines of credit. The allowance factor on these loans is impacted by the adjusted historical loss factors on the sub-segments and the environmental risk factors described above and by delinquency buckets. The traditional mortgage loan portfolio is further segregated by vintages and then by delinquency buckets. 36 Commercial loans: The commercial portfolio is segmented by business line (corporate, institutional, middle market, corporate retail, floor plan, and real estate) and by collateral type (secured by real estate and other commercial and industrial assets). The loss factor used for the GVA of these loans is established considering the Bank's past thirty-six month historical loss experience of each segment adjusted for the loss realization period and the consideration of environmental factors. The sum of the adjusted loss experience and the environmental factors is the GVA factor used for the determination of the allowance for loan and lease losses on each category. Consumer loans: The consumer portfolio consists of smaller retail loans such as retail credit cards, overdrafts, unsecured personal lines of credit, and personal unsecured loans. The allowance factor, consisting of the adjusted historical loss factor and the environmental risk factors, will be calculated for each sub-class of loans by delinquency bucket. Auto and Leasing: The auto and leasing portfolio consists of financing for the purchase of new or used motor vehicles for private or public use. These loans are granted mainly through dealers authorized and approved by the auto department credit committee of the Bank. In addition, this segment includes personal loans guaranteed by vehicles in the form of lease financing. The allowance factor on the auto and leasing portfolio is impacted by the adjusted historical loss factor and the environmental risk factors. For the determination of the allowance factor, the portfolio is segmented by FICO score, which is updated on a quarterly basis and then by delinquency bucket. The Company establishes its allowance for loan losses through a provision for credit losses based on our evaluation of the credit quality of the loan portfolio. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, and other factors that warrant recognition in determining our allowance for loan losses. The Company continues to monitor and modify the level of the allowance for loan losses to ensure it is adequate to cover losses inherent in our loan portfolio. Our allowance for loan losses consists of the following elements: (i) specific valuation allowances based on probable losses on specifically identified impaired loans; and (ii) valuation allowances based on net historical loan loss experience for similar loans with similar inherent risk characteristics and performance trends, adjusted, as appropriate, for qualitative risk factors specific to respective loan types. When current information and events indicate that it is probable that we will be unable to collect all amounts of principal and interest due under the original terms of a business or commercial real estate loan greater than $250 thousand, such loan will be classified as impaired. Additionally, all loans modified in a troubled debt restructuring ("TDR") are considered impaired. The need for specific valuation allowances are determined for impaired loans and recorded as necessary. For impaired loans, we consider the fair value of the underlying collateral, less estimated costs to sell, if the loan is collateral dependent, or we use the present value of estimated future cash flows in determining the estimates of impairment and any related allowance for loan losses for these loans. Confirmed losses are charged off immediately. Prior to a loan becoming impaired, we typically would obtain an appraisal through our internal loan grading process to use as the basis for the fair value of the underlying collateral. Loan loss ratios and credit risk categories are updated at least quarterly and are applied in the context of GAAP as prescribed by ASC and the importance of depository institutions having prudent, conservative, but not excessive loan allowances that fall within an acceptable range of estimated losses. While management uses current available information in estimating possible loan and lease losses, factors beyond the Company’s control, such as those affecting general economic conditions, may require future changes to the allowance. Acquired Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy) For our acquired loans accounted for under ASC Subtopic 310-30, our allowance for loan losses is estimated based upon our expected cash flows for these loans. To the extent that we experience a deterioration in borrower credit quality resulting in a decrease in the net present value of our expected cash flows (which are used as a proxy to identify probable incurred losses) subsequent to the acquisition of the loans, an allowance for loan losses is established based on our estimate of future credit losses over the remaining life of the loans. Acquired loans accounted for under ASC 310-30 are not considered non-performing and continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. Also, loans charged-off against the non-accretable difference established in purchase accounting are not reported as charge-offs. Charge-offs on loans 37 accounted under ASC Subtopic 310-30 are recorded only to the extent that losses exceed the non-accretable difference established with purchase accounting. Covered loans are accounted for under ASC 310-30 and our policy is consistent with our policy for non-covered acquired loans. For covered loans, the portion of the loss reimbursable from the FDIC is recorded as an offset to the provision for credit losses and increases the FDIC shared-loss indemnification asset. Financial Instruments Certain financial instruments, including derivatives, trading securities and investment securities available-for-sale, are recorded at fair value and unrealized gains and losses are recorded in other comprehensive income or as part of non-interest income, as appropriate. Fair values are based on listed market prices, if available. If listed market prices are not available, fair value is determined based on other relevant factors, including price quotations for similar instruments. The fair values of certain derivative contracts are derived from pricing models that consider current market and contractual prices for the underlying financial instruments as well as time value and yield curve or volatility factors underlying the positions. The Company determines the fair value of its financial instruments based on the fair value measurement framework, which establishes a fair value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below: Level 1 — Level 1 assets and liabilities include equity securities that are traded in an active exchange market, as well as certain U.S. Treasury and other U.S. government agency securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include (i) mortgage-backed securities for which the fair value is estimated based on valuations obtained from third-party pricing services for identical or comparable assets, (ii) debt securities with quoted prices that are traded less frequently than exchange-traded instruments and (iii) derivative contracts and financial liabilities whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models for which the determination of fair value requires significant management judgment or estimation. 38 2015 FINANCIAL HIGHLIGHTS For 2015, the Company reported a loss to common shareholders of $16.4 million, or ($0.37) per share, compared to income of $71.3 million, or $1.50 per diluted share, in 2014. These results reflect the significant de-risking steps taken by the Company, including the following: o Reduction in interest income as the balance of our loans to the Puerto Rico central government and its public corporations fell 47.8% to $211.9 million at December 31, 2015, from $406.1 million a year ago. Our loans to Puerto Rico municipalities declined 4.4% to $203.5 million, and the balance of our Puerto Rico government securities decreased by 15.0% to $17.8 million. o An increase in share-loss amortization of $10.2 million in the second quarter of 2015 upon successful negotiation and termination of the FDIC commercial shared loss coverage. However, this also resulted in a reduction of approximately $10 million a quarter going forward, starting in the third quarter, for a total reduction of $22.2 million in the year 2015. o A successful bulk sale of $235.2 million in unpaid principal balances of acquired non-performing assets ("NPAs"). This resulted in a charge of $20.2 million pre-tax in 2015. o The de-risking of the loan portfolio resulted in normalization of net interest margin to 5.03% from 5.84%, primarily reflecting contraction from the steep reduction in tax exempt, high-yield, government-related loans. o A $53.3 million provision for loan and lease losses on the $200 million participation in a syndicated fuel line of credit to the PREPA, reflecting continued hurdles in restructuring the credit. Currently in non-accrual status, interest payments are being credited to the payment of principal, which now stands at $137.0 million, net of allowances, or 68.5% of the outstanding principal balance. Growth of the Oriental retail franchise through new customers, products and services. o Oriental Bank furthered its innovative edge in the third quarter of 2015 with the launch of MyStatus. The industry-first mobile app updates home buyers on every step of their mortgage application from origination through closing. o MyStatus followed the introduction of FOTOdepósito, People Pay, and Cuenta Libre (Freedom Account). With Cuenta Libre, customers who access their accounts via mobile phone, tablet, web, debit/credit card, or ATMs, do not have to pay ATM fees. o Such products and services, among others, helped the Bank add 15,400 net new retail customers, increasing its total customer base by 4.40%. New customers added approximately $67 million in deposits, $115 million in loans, and $15 million in wealth management assets. o In total, new loan production of $1.0 billion increased 10.3% year over year, with commercial loans up 38.9%, residential mortgage loans up 14.8%, and consumer loans up 17.3%, more than offsetting a decline in auto loans. All components of our business continued strong, given Puerto Rico’s deep economic recession and severe fiscal crisis. Interest Income Total interest income for 2015 decreased 16.2% to $406.6 million when compared to $485.3 million for 2014, reflecting the transition in our loan portfolio as originated loans with normal yields grow and higher-yielding acquired loans decrease, due to repayments and maturities. The yield on interest-earning assets decreased to 6.06% from 6.94%. Interest Expense Total interest expense for 2015 decreased 9.9% to $69.2 million as compared to $76.8 million for 2014. Such decrease reflects the lower cost of deposits (0.66% vs. 0.84%, before amortization adjustments). Such lower cost reflects continuing progress in the repricing of the Company’s core retail deposits and other reductions in its cost of funds. 39 Net Interest Income Net interest income for 2015 decreased to $337.4 million when compared with $408.5 million for 2014, mostly due to lower balances in our acquired loan portfolios and lower yields in our originated loan portfolio. The decrease also reflects a $9.7 million decrease in interest income from loans to PREPA, which was placed in non-accrual at the end of the first quarter of 2015, and Puerto Rico Aqueducts and Sewer Authority ("PRASA"), which was paid off during the second quarter of 2015. Such decrease also reflects a decrease in net interest margin of 81 basis points to 5.03%. Provision for Loan and Lease Losses Provision for loan and lease losses increased $100.9 million to $161.5 million, reflecting $32.9 million and $5.2 million provision for loan and lease losses on non-performing acquired Eurobank and BBVAPR loans, respectively, as a result of the bulk sale of commercial NPAs during 2015. In addition, the Company recorded a $53.3 million provision for loan and lease losses related to the PREPA line of credit, which was changed to non-accrual status during the first quarter of 2015. Non-Interest Income Core banking and wealth management revenues decreased 1.7% to $76.6 million from $77.9 million as compared to 2014, primarily reflecting a decrease of $1.3 million and $815 thousand in mortgage banking activities and wealth management revenue, respectively, and an increase of $754 thousand in banking service revenue. During 2015, the Company recognized an other-than-temporary impairment charge of $1.5 million on its portfolio of investment securities available-for-sale classified as obligations from the Puerto Rico government and its political subdivisions. The Company determined that $1.5 million of the unrealized loss carried by these securities was attributed to estimated credit losses. The decrease in the FDIC shared-loss expense to $42.8 million, compared to $65.8 million in 2014, was principally driven by the expiration of the FDIC loss share coverage for commercial loans and other non-single family loans on June 30, 2015. A $20.0 million reimbursement from the FDIC was recognized in the statement of operations during 2015 related to the sale of a portion of covered non-performing commercial loans on September 28, 2015, as the FDIC agreed to cover $20.0 million of losses as part of its loss-share agreement with the Company. Non-Interest Expense Non-interest expense of $248.4 million, increased $5.7 million or 2.3 % compared to 2014, primarily reflecting a $9.3 million loss related to the bulk sale of non-performing acquired commercial loans, which included the sale of real estate owned with a carrying amount of $11.0 million from the BBVAPR acquisition. Such increase also reflects an increase of $2.8 million in electronic banking charges and $1.5 million in legal fees related to PREPA’s restructuring. The Company’s efficiency ratio for 2015 was 60.00%, compared to 49.90% for 2014. Income Tax Expense Income tax benefit of $17.6 million, primarily resulting from the 2015 loss, compared to an income tax expense of $37.3 million in 2014. Income Available to Common Shareholders The Company’s net loss to common shareholders amounted to $16.4 million, compared to net income available to common shareholders of $71.3 million for 2014. The loss per basic common share and fully diluted common share was $0.37 for 2015, compared to income per basic common share of $1.58 and fully diluted common share of $1.50 for 2014. 40 Interest Earning Assets The loan portfolio declined to $4.434 billion at December 31, 2015, compared to $4.827 billion at December 31, 2014, primarily due to the bulk sale of covered non-performing commercial loans with an unpaid principal balance amounting to $197.1 million and the sale of non-performing commercial loans from the BBVAPR Acquisition with an unpaid principal balance amounting to $38.1 million, as part of the same transaction, in addition to loan repayments and maturities as the Company continues to execute on its strategy to reduce its exposure to the Puerto Rico government. The investment portfolio of $1.616 billion at December 31, 2015 increased 15.3% compared to $1.402 billion at December 31, 2014. Interest Bearing Liabilities Total deposits amounted to $4.717 billion at December 31, 2015, a decrease of 4.2% compared to $4.924 billion at December 31, 2014. Interest bearing deposits decreased 5.3% to $3.956 billion. Cost of deposits, which averaged 0.66% at December 31, 2014, decreased to 0.57% at December 31, 2015. Stockholders’ Equity Stockholders’ equity at December 31, 2015 was $897.1 million compared to $942.2 million at December 31, 2014, a decrease of 4.8%. This reflects a decrease of $32.3 million in retained earnings and an increase of $8.3 million in treasury stock. Book value per share was $16.67 at December 31, 2015 compared to $17.40 at December 31, 2014. The Company maintains capital ratios in excess of regulatory requirements. At December 31, 2015, tier 1 leverage capital ratio was 11.18% (December 31, 2014 – 10.61%), tier 1 risk-based capital ratio was 15.99% (December 31, 2014 – 16.02%), and total risk- based capital ratio was 17.29% (December 31, 2014 – 17.57%). common equity tier 1 capital ratio under the new capital rules was 12.14% at December 31, 2015. Return on Average Assets and Common Equity Return on average common equity (“ROE”) was (2.16%) compared to 9.50% for 2014. Return on average assets (“ROA”) was (0.03%) compared to 1.10% for 2014. Both decreases reflect the net loss in 2015. Assets under Management At December 31, 2015, total assets managed by the Company’s trust division and OPC decreased to $2.691 billion compared to $2.841 billion at December 31, 2014. At December 31, 2015, total assets gathered by the securities broker-dealer subsidiary from its customer investment accounts decreased to $2.375 billion, compared to $2.622 billion at December 31, 2014. Changes in trust and broker-dealer related assets primarily reflect a decrease in portfolio balances and fluctuations in market values. Lending Total loan production of $1.014 billion increased by 10.3% compared to 2014. Total commercial loan production of $365.2 million increased by 38.9% from $262.9 million for 2014, mostly from corporate and institutional loans. Mortgage loan production of $247.2 million increased by 14.8% from $215.4 million. In the aggregate, consumer loan and auto and leasing production totaled $401.5 million, an increase of 9.0% from 2014. Credit Quality on Non-Acquired Loans Net credit losses, excluding acquired loans, increased $9.1 million to $38.1 million, representing 1.30% of average non-acquired loans outstanding versus 1.11% in 2014. The allowance for loan and lease losses, excluding acquired loans, at December 31, 2015, increased to $112.6 million (3.62% of total non-acquired loans) compared to $51.4 million (1.81% of total non- acquired loans) at December 31, 2014, mostly from the PREPA allowance of $53.3 million in 2015. Non-GAAP Measures The Company uses certain non-GAAP measures of financial performance to supplement the consolidated financial statements presented in accordance with GAAP. The Company presents non-GAAP measures that management believes are useful and 41 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 in 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 year ended December 31, 2015, the Company’s pre-tax pre-provision operating income decreased 32.0% to $165.6 million as compared to $243.7 million for 2014. Pre-tax pre-provision operating income is calculated as follows: PRE-TAX PRE-PROVISION OPERATING INCOME Net interest income Core non-interest income: Banking service revenue Wealth management revenue Mortgage banking activities Total core non-interest income Non-interest expenses Less merger and restructuring charges 2015 Year Ended December 31, 2014 (In thousands) 2013 $ 337,372 $ 408,475 $ 409,672 41,466 29,040 6,128 76,634 248,401 - 40,712 29,855 7,381 77,948 242,725 - 44,239 30,924 10,994 86,157 264,136 (17,660) 249,353 Total pre-tax pre-provision operating income $ 165,605 $ 243,698 $ Tangible common equity consists of common equity less goodwill, core deposit intangibles and customer relationship intangible. 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, tier 1 common equity to risk-weighted assets, and tangible book value per common share are non-GAAP measures and are not codified in the federal banking regulations. At December 31, 2015, tangible common equity to total assets decreased to 8.98% from 9.14% and tangible common equity to risk- weighted assets decreased to 13.02% from 14.04% at December 31, 2014. Total equity to risk-weighted assets decreased to 18.32% from 19.44% at December 31, 2014. 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. Tangible common equity or related measures should not be considered in isolation or as a substitute for stockholders’ equity, total assets or any other measure calculated in accordance with GAAP. 42 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 years ended 2015 and 2014: TABLE 1 - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 A - TAX EQUIVALENT SPREAD Interest-earning assets Tax equivalent adjustment Interest-earning assets - tax equivalent Interest-bearing liabilities Tax equivalent net interest income / spread Tax equivalent interest rate margin B - NORMAL SPREAD Interest-earning assets: Investments: Investment securities Trading securities Interest bearing cash and money market investments Total investments Non-acquired loans Mortgage Commercial Consumer Auto and leasing Total non-acquired loans Acquired loans: Acquired BBVAPR Mortgage Commercial Consumer Auto Total acquired BBVAPR loans Acquired Eurobank Total loans Total interest earning assets Interest Average rate Average balance December 2015 December 2014 December 2015 December 2014 (Dollars in thousands) December 2015 December 2014 $ $ 406,568 6,891 413,459 69,196 344,263 485,257 50,793 536,050 76,782 459,268 37,596 70 1,280 38,946 39,778 60,931 21,003 62,108 183,820 34,842 48,730 13,187 34,633 131,392 52,410 367,622 406,568 48,242 151 1,311 49,704 40,978 64,328 15,367 51,971 172,644 37,612 73,403 15,412 47,513 173,940 88,969 435,553 485,257 6.06% 0.10% 6.16% 1.11% 5.05% 5.13% 2.49% 8.25% 0.26% 1.95% 5.16% 4.56% 10.35% 9.86% 6.25% 5.55% 10.65% 16.35% 9.03% 8.47% 24.58% 7.81% 6.06% 6.94% $ 0.73% 7.67% 1.15% 6.52% 6.57% $ 6,704,995 - 6,704,995 6,226,372 478,623 6,992,631 - 6,992,631 6,663,591 329,040 3.33% 8.67% 0.23% 2.45% 5.21% 5.41% 10.04% 10.38% 6.56% 5.46% 11.29% 13.70% 8.62% 8.68% 26.70% 8.77% 6.94% 1,508,819 848 491,051 2,000,718 771,322 1,336,510 202,971 629,910 2,940,713 628,340 457,767 80,666 383,583 1,550,356 213,208 4,704,277 6,704,995 1,450,778 1,741 573,403 2,025,922 786,607 1,190,038 153,067 500,720 2,630,432 689,408 649,936 112,477 551,186 2,003,007 333,270 4,966,709 6,992,631 43 Interest-bearing liabilities: Deposits: NOW Accounts Savings and money market Individual retirement accounts Retail certificates of deposits Total core deposits Institutional deposits Brokered deposits Total wholesale deposits Non-interest bearing deposits Deposits fair value premium amortization Core deposit intangible amortization Total deposits Borrowings: Securities sold under agreements to repurchase Advances from FHLB and other borrowings Subordinated capital notes Total borrowings Total interest bearing liabilities Net interest income / spread Interest rate margin Excess of average interest-earning assets over average interest-bearing liabilities Average interest-earning assets to average interest-bearing liabilities ratio Interest Average rate Average balance December December December December December December 2015 2014 2015 2014 2015 2014 (Dollars in thousands) 4,451 6,504 2,482 5,397 18,834 2,790 4,900 7,690 26,524 - (660) 1,170 27,034 29,567 9,072 3,523 42,162 69,196 337,372 $ $ 8,001 8,097 3,760 6,852 26,710 4,961 5,715 10,676 37,386 - (4,773) 1,341 33,954 29,654 9,185 3,989 42,828 76,782 408,475 0.38% 0.52% 0.88% 1.32% 0.61% 1.04% 0.78% 0.86% 0.66% 0.00% 0.00% 0.00% 0.57% 2.92% 2.68% 3.45% 2.90% 1.11% 4.95% 5.03% 0.56% 0.69% 1.15% 1.39% 0.78% 1.42% 0.82% 1.02% 0.84% 0.00% 0.00% 0.00% 0.66% 2.85% 2.58% 3.96% 2.86% 1.15% 5.79% 5.84% 1,163,424 1,256,909 281,197 409,038 3,110,568 268,678 624,210 892,888 4,003,456 769,790 - - 4,773,246 1,012,756 338,299 102,071 1,453,126 6,226,372 1,417,272 1,169,482 325,678 491,485 3,403,917 348,742 697,756 1,046,498 4,450,415 715,729 - - 5,166,144 1,041,378 355,322 100,747 1,497,447 6,663,591 $ 478,623 $ 329,040 107.69% 104.94% C - CHANGES IN NET INTEREST INCOME DUE TO: Interest Income: Investments Loans Total interest income Interest Expense: Deposits Repurchase agreements Other borrowings Total interest expense Net Interest Income Volume Rate Total (In thousands) $ $ (729) (42,700) (43,429) $ (10,029) (25,231) (35,260) (2,582) (815) (453) (3,850) (4,338) 728 (126) (3,736) (10,758) (67,931) (78,689) (6,920) (87) (579) (7,586) $ (39,579) $ (31,524) $ (71,103) 44 TABLE 1A - YEAR-TO-DATE ANALYSIS OF NET INTEREST INCOME AND CHANGES DUE TO VOLUME/RATE FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013 A - TAX EQUIVALENT SPREAD Interest-earning assets Tax equivalent adjustment Interest-earning assets - tax equivalent Interest-bearing liabilities Tax equivalent net interest income / spread Tax equivalent interest rate margin B - NORMAL SPREAD Interest-earning assets: Investments: Investment securities Trading securities Interest bearing cash and money market investments Total investments Non-acquired loans Mortgage Commercial Consumer Auto and leasing Total non-acquired loans Acquired loans: Acquired BBVAPR Mortgage Commercial Consumer Auto Total acquired BBVAPR loans Acquired Eurobank Total loans Total interest earning assets Interest December 2014 December 2013 Average rate December 2014 (Dollars in thousands) December 2013 Average balance December 2014 December 2013 $ $ 485,257 50,793 536,050 76,782 459,268 48,242 151 1,311 49,704 40,978 64,328 15,367 51,971 172,644 37,612 73,403 15,412 47,513 173,940 88,969 435,553 485,257 493,632 41,106 534,738 83,960 450,778 48,456 117 1,157 49,730 43,531 32,891 8,058 21,181 105,661 42,740 114,492 21,147 68,093 246,472 91,769 443,902 493,632 6.94% 0.73% 7.67% 1.15% 6.52% 6.57% 3.33% 8.67% 0.23% 2.45% 5.21% 5.41% 10.04% 10.38% 6.56% 5.46% 11.29% 13.70% 8.62% 8.68% 26.70% 8.77% 6.94% 6.58% $ 0.55% 7.13% 1.12% 6.01% 6.01% $ 6,992,631 - 6,992,631 6,663,591 329,040 7,499,993 - 7,499,993 7,482,019 17,974 2.60% 6.56% 0.21% 2.07% 5.71% 4.95% 9.34% 9.94% 6.12% 5.60% 9.38% 13.13% 7.99% 8.22% 24.64% 8.71% 6.58% 1,450,778 1,741 573,403 2,025,922 786,607 1,190,038 153,067 500,720 2,630,432 689,408 649,936 112,477 551,186 2,003,007 333,270 4,966,709 6,992,631 1,862,274 1,784 540,724 2,404,782 762,403 663,968 86,250 213,127 1,725,748 763,195 1,220,471 161,120 852,165 2,996,951 372,512 5,095,211 7,499,993 45 Interest-bearing liabilities: Deposits: NOW Accounts Savings and money market Individual retirement accounts Retail certificates of deposits Total core deposits Institutional deposits Brokered deposits Total wholesale deposits Non-interest bearing deposits Deposits fair value premium amortization Core deposit intangible amortization Total deposits Borrowings: Securities sold under agreements to repurchase Advances from FHLB and other borrowings Subordinated capital notes Total borrowings Total interest bearing liabilities Net interest income / spread Interest rate margin Excess of average interest-earning assets over average interest-bearing liabilities Average interest-earning assets to average interest-bearing liabilities ratio C - CHANGES IN NET INTEREST INCOME DUE TO: Interest Income: Investments Loans Total interest income Interest Expense: Deposits Repurchase agreements Other borrowings Total interest expense Net Interest Income Interest Average rate Average balance December December December December December December 2014 2013 2014 2013 2014 2013 (Dollars in thousands) $ $ 8,001 8,097 3,760 6,852 26,710 4,961 5,715 10,676 37,386 - (4,773) 1,341 33,954 29,654 9,185 3,989 42,828 76,782 11,151 9,481 4,832 11,203 36,667 9,983 7,068 17,051 53,718 - (14,400) 1,659 40,977 29,249 8,620 5,114 42,983 83,960 $ 408,475 $ 409,672 0.56% 0.69% 1.15% 1.39% 0.78% 1.42% 0.82% 1.02% 0.84% 0.00% 0.00% 0.00% 0.66% 2.85% 2.58% 3.96% 2.86% 1.15% 5.79% 5.84% 0.77% $ 1,417,272 $ 1,452,030 1.01% 1.35% 1.66% 1.07% 1.66% 0.86% 1.20% 1.11% 0.00% 0.00% 0.00% 0.73% 2.16% 2.05% 4.64% 2.28% 1.12% 5.46% 5.46% 1,169,482 325,678 491,485 3,403,917 348,742 697,756 1,046,498 4,450,415 715,729 $ - - 938,450 358,605 674,241 3,423,326 602,769 821,112 1,423,881 4,847,207 751,757 - - 5,166,144 5,598,964 1,041,378 355,322 100,747 1,497,447 6,663,591 1,353,011 419,880 110,164 1,883,055 7,482,019 $ 329,040 $ 17,974 104.94% 100.24% Volume Rate Total (In thousands) $ $ (7,835) (16,322) (24,157) (3,168) (6,737) (1,917) (11,822) (12,335) $ $ 7,809 7,973 15,782 (3,855) 7,142 1,357 4,644 11,138 $ $ (26) (8,349) (8,375) (7,023) 405 (560) (7,178) (1,197) 46 Net Interest Income Comparison for the years ended December 31, 2015 and 2014 Net interest income is a function of the difference between rates earned on the Company’s interest-earning assets and rates paid on its interest-bearing liabilities (interest rate spread) and the relative amounts of its interest earning assets and interest-bearing liabilities (interest rate margin). The Company constantly monitors the composition and re-pricing of its assets and liabilities to maintain its net interest income at adequate levels. Table 1 above shows the major categories of interest-earning assets and interest-bearing liabilities, their respective interest income, expenses, yields and costs, and their impact on net interest income due to changes in volume and rates for 2015 and 2014. Net interest income of $337.4 million decreased 17.4% compared with $408.5 million reported in 2014, reflecting a decrease of 15.6% in interest income from loans and a decrease of 21.6% in interest income from investments. Interest rate spread decreased 84 basis points from 5.79% to 4.95%. This decrease is mainly due to the net effect of a 88 basis points decrease in the average yield of interest-earning assets from 6.94% to 6.06%, reflecting reduction in high yielding loan portfolios including Puerto Rico government credit and acquired loan portfolio. Interest income decreased to $406.6 million from $485.3 million in 2014. Such decrease reflects decreases of $43.4 million and $35.3 million in the volume and interest rate, respectively, of interest-earning assets. Interest income from loans decreased 15.6% to $367.6 million, reflecting a decrease in both, volume and interest rate of $42.7 million and $25.2 million, respectively. Such decrease reflects lower acquired loan balances and yield mainly related to the bulk sale at the end of the third quarter of 2015 and also normal repayments and maturities. In addition, the decrease reflects a $9.7 million decrease in interest income from loans to PREPA, which was placed in non-accrual status at the end of the first quarter of 2015, and Puerto Rico Aqueducts and Sewer Authority ("PRASA"), which was paid off during the second quarter of 2015. Non-acquired loans interest income increased 6.5% to $183.8 million as average balances grew 11.8% and yield contracted 31 basis points to 6.25%. Acquired BBVAPR loans interest income fell 24.5% to $131.4 million as average balances declined 22.6% and yield decreased 21 basis points to 8.47%. Acquired Eurobank loans interest income fell 41.1% to $52.4 million as average balances declined 36.0% and yield decreased 212 basis points to 24.58%. Interest income from investments decreased 21.6% to $38.9 million, reflecting a decrease in interest rate and volume of $10.0 million and $729 thousand, respectively. Such decrease in interest income from investments reflects a decrease in investment securities from redemptions, maturities and sales, and higher premium amortization on existing securities. Interest expense decreased 9.9% to $69.2 million, primarily because of a $3.9 million decrease in the volume of interest-bearing liabilities and a decrease of $3.7 million in interest rate. The decrease in interest-bearing liabilities is mostly due to the decrease of $2.6 million in deposits volume and $4.3 million in interest rate, a decrease of $815 thousand in repurchase agreements volume which was partially offset by an increase of $728 thousand in interest rate, and a decrease in other borrowings volume of $453 thousand and $126 thousand in interest rate. The cost of interest bearing deposits before fair value amortization and core deposit intangible amortization decreased 18 basis points to 0.66%, compared to 0.84% for 2014. The decrease in the cost of deposits was partially offset by an increase in the cost of borrowings, which increased 4 basis points to 2.90% from 2.86%. The average balance of total interest-earning assets was $6.704 billion, a decrease of 4.1% from 2014. The decrease in average balance of interest-earning assets was mainly attributable to a decrease of 1.2% in average investments and a decrease of 5.3% in average loans. Comparison of years ended December 31, 2014 and 2013 Net interest income amounted to $408.5 million, a slight decrease of 0.3% from $409.7 million for 2013. This change reflects a decrease of 1.8% in interest income from loans and a 17.1% decrease in interest expense from deposits, when comparing the years 2014 and 2013. Interest rate spread for 2014 increased 33 basis points to 5.79% from 5.46% in 2013. This increase is mainly due to the net effect of a 36 basis point increase in the average yield of interest-earning assets from 6.58% to 6.94%, and a 3 basis point increase in the average cost of funds from 1.12% to 1.15%. 47 Interest income for 2014 decreased to $485.3 million from $493.6 million in 2013. Such decrease reflects $24.2 million reduction in the volume of interest-earning assets, partially offset by an increase in rate of $15.8 million. Interest income from loans decreased 1.9% to $435.6 million, primarily reflecting a decrease in volume of $16.3 million, partially offset by an $8.0 million increase in interest rate. Interest income from investments remained leveled at $49.7 million compared to 2013, reflecting a decrease in volume of $7.8 million, offset by a $7.8 million increase in interest rate. Interest expense for 2014 decreased 8.5% to $76.8 million from $84.0 million in 2013. The decrease was primarily the net result of an $11.8 million decrease in the volume of interest-bearing liabilities and an increase of $4.6 million in interest rate. The decrease in interest-bearing liabilities was mostly due to the decrease in repurchase agreements volume of $6.7 million, and a decrease in deposits volume of $3.2 million and deposits interest rate of $3.9 million, partially offset by a $7.1 million increase in repurchase agreements interest rate. The cost of interest bearing deposits before fair value amortization and core deposit intangible amortization decreased 27 basis points to 0.84% for 2014, compared to 1.11% for 2013. The decrease in the cost of deposits was partially offset by an increase in the cost of borrowings, which increased 58 basis points to 2.86% from 2.28%. For 2014, the average balance of total interest-earning assets was $6.993 billion, a decrease of $507.4 million, or 6.8%, from 2013. Such decrease was mainly attributable to a decline of $378.9 million, or 22.1%, in average investment securities, resulting from sales, redemptions and maturities during 2014. The average yield on interest-earning assets was 6.94% compared to 6.58% for 2013. The yield of the investment portfolio increased to 2.45% from 2.07%. Increase in investment yield is related to lower premium amortization in the mortgage-backed securities portfolio from the extension of the duration of the portfolio as a result of the level of market rates. TABLE 2 - NON-INTEREST INCOME SUMMARY Banking service revenue Wealth management revenue Mortgage banking activities Total banking and financial service revenue Total other-than-temporary impairment losses on investment securities Portion of loss recognized in other comprehensive income, before taxes Net impairment losses recognized in earnings FDIC shared-loss expense, net: FDIC indemnification asset expense Change in true-up payment obligation 2015 $ 41,466 $ Year Ended December 31, Variance 2014 (Dollars in thousands) 40,712 29,855 7,381 77,948 - - - (62,285) (3,471) (65,756) 1.9% $ -2.7% -17.0% -1.7% -100.0% 100.0% -100.0% 35.6% 22.9% 34.9% 2013 44,239 30,924 10,994 86,157 - - - (66,253) (3,014) (69,267) 29,040 6,128 76,634 (4,662) 3,172 (1,490) (40,131) (2,677) (42,808) Reimbursement from FDIC shared-loss coverage in sale of loans Net gain (loss) on: Sale of securities available for sale Derivatives Early extinguishment of debt Other non-interest (loss) income Total non-interest income, net 20,000 - 100.0% - 2,572 (190) - (2,246) (24,162) 52,472 $ $ 4,366 (608) - 1,373 (60,625) 17,323 -41.1% 68.8% 0.0% -263.6% 60.1% 202.9% $ - (1,526) 1,061 670 (69,062) 17,095 48 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, trading and other transactions. Comparison of years ended December 31, 2015 and 2014 As shown in Table 2 above, the Company recorded non-interest income in the amount of $52.5 million, compared to $17.3 million for 2014, an increase of 202.9%, or $35.2 million, mostly from a $20.0 million reimbursement from the FDIC upon successful negotiation and termination of the commercial shared-loss coverage. The net FDIC shared-loss expense decreased to $42.8 million as compared to $65.8 million for 2014, primarily from the decrease of the FDIC commercial loss share amortization related to the expiration of the non-single family loss share coverage by the FDIC. The decrease is also related to the ongoing evaluation of expected cash flows of the covered loan portfolio and from changes in the fair value of the true-up payment obligation (also known as a clawback liability). The FDIC indemnification asset expense decreased to $40.1 million from $62.3 million compared with 2014. The true-up payment obligation decreased to $2.7 million as compared to $3.5 million for 2014. The true-up payment obligation may increase if actual and expected losses decline. The Company measures the true- up payment obligation at fair value. Notwithstanding the expiration of loss share coverage for non-single family loans, on July 2, 2015, the Company entered into an agreement with the FDIC pursuant to which the FDIC concurred with a sale of loss-share assets covered under the non-single family loss share agreement. As a result to such agreement, the FDIC agreed and paid $20 million in loss share coverage with respect to the aggregate loss resulting from the recent bulk sale of covered non-performing commercial loans, as reflected in Table 2, and such reimbursement was received in December 2015. Banking service revenue, which consists primarily of fees generated by deposit accounts, electronic banking services, and customer services, increased to $41.5 million, from $40.7 million for 2014. The increase is mainly driven by higher electronic banking fees of $2.4 million, partially offset by lower checking account fees by $1.4 million. Wealth management revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and insurance activities, decreased to $29.0 million from $29.9 million in 2014, mainly due to a decrease in mutual fund and over-the- counter trading of $680 thousand and lower bond sales by $294 thousand. Income generated from mortgage banking activities decreased 17.0% to $6.1 million, compared to $7.4 million 2014. The decrease in mortgage banking activities was mostly due to foregone gains on sales as a result of retaining securitized GNMA pools. The Company retained securitized GNMA pools totaling $54.5 million at a yield of 3.09% from its own originations during the second half of 2015. During 2015, the Company recognized an other-than-temporary impairment charge on its portfolio of investment securities available- for-sale classified as obligations from the Puerto Rico government and its political subdivisions. The Corporation determined that $1.5 million of the unrealized loss carried by these securities was attributed to estimated credit losses. Gains from the sale of securities were $2.6 million compared to $4.4 million for the same period in 2014. Losses from derivative activities were $190 thousand, compared to $608 thousand for 2014. Other non-interest income declined $3.6 million, mainly related to the sale during the second quarter of 2015 of GNMA mortgage loan servicing rights for approximately $7.0 million. The Company recognized a loss of $2.7 million related to this transaction. 49 Comparison of the years ended December 31, 2014 and 2013 The Company recorded non-interest income in the amount of $17.3 million, compared to $17.1 million for 2013, an increase of $228 thousand. The FDIC shared-loss expense, net, decreased to $65.8 million for 2014, as compared to $69.3 million for 2013. This amortization is decreasing as 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. The true-up payment obligation increased to $3.5 million for 2014, as compared to $3.0 million in 2013. The true-up payment obligation may increase if actual and expected losses decline. The Company measures the true-up payment obligation at fair value. Banking service revenue, which consists primarily of fees generated by deposit accounts, electronic banking services, and customer services, decreased 8.0% to $40.7 million for 2014, from $44.2 million in 2013. The decrease in banking services revenues is mostly due to a $1.5 million decrease in retail checking account fees, as customers have shifted to lower fee account products, a $733 thousand decrease in credit card interchange income, and a $1.1 million decrease in other loan fees due to a non-recurrent prepayment penalty from a commercial loan cancellation during 2013. Wealth management revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and insurance activities, decreased 3.5% to $29.9 million for 2014, compared to $30.9 million in 2013. This decrease is mainly due to a decrease in Oriental Financial Services revenues subject to commissions which is attributable to lower trading activity in Puerto Rico bonds and mutual funds as a result of current local economic conditions. Income generated from mortgage banking activities decreased 32.9% to $7.4 million for 2014, compared to $11.0 million for 2013. The decrease in mortgage banking activities is mainly due to higher losses in repurchased loans and a decrease in sales when compared to 2013. TABLE 3 - NON-INTEREST EXPENSES SUMMARY Compensation and employee benefits Professional and service fees Occupancy and equipment Insurance Electronic banking charges Information technology expenses Advertising, business promotion, and strategic initiatives Merger and restructuring charges Foreclosure, repossession and other real estate expenses Loan servicing and clearing expenses Taxes, other than payroll and income taxes Communication Printing, postage, stationery and supplies Director and investor relations Other operating expenses Total non-interest expenses Relevant ratios and data: Efficiency ratio Compensation and benefits to non-interest expense Compensation to average total assets owned Average number of employees Average compensation per employee Average loans per average employee Year Ended December 31, 2015 2014 Variance % 2013 (Dollars in thousands) 85,283 15,996 34,710 8,830 19,081 6,019 7,014 - 25,125 7,567 14,409 3,430 2,533 1,106 11,622 242,725 49.90% 35.14% 1.10% 1,567 54.4 3,170 $ $ $ $ $ $ $ $ 79,172 16,217 34,186 9,567 21,893 5,648 6,452 - 37,522 9,075 9,460 3,086 2,575 1,091 12,457 248,401 60.00% 31.87% 1.08% 1,496 52.9 3,145 50 -7.2% $ 1.4% -1.5% 8.3% 14.7% -6.2% -8.0% 0.0% 49.3% 19.9% -34.3% -10.0% 1.7% -1.4% 7.2% 2.3% $ $ $ 91,957 21,321 34,408 8,795 16,702 10,546 7,025 17,660 16,484 7,588 15,539 3,377 3,459 1,098 8,177 264,136 53.27% 34.81% 1.08% 1,564 58.8 3,258 Non-Interest Expenses Comparison of years ended December 30, 2015 and 2014 Non-interest expense for 2015 was $248.4 million, representing an increase of 2.3% compared to $242.7 million in the previous year. Foreclosure, repossession and other real estate expenses increased 49.3% to $37.5 million, as compared to $25.1 million for the previous year, primarily reflecting an $8.5 million loss related to foreclosed estate sold as part of the bulk sale completed during the third quarter of 2015. In addition, there was a $5.1 million increase in commercial properties markdowns, as part of our ongoing and proactive de-risking efforts. Electronic banking charges increased 14.7% to $21.9 million, mostly due to the increase in expenses related to merchant business and card interchange transactions resulting from the continued growth of our banking business. Loan servicing and clearing expenses increased 19.9% to $9.1 million, mainly due to an increase of $764 thousand in servicing expenses and $807 thousand in the preparation for mortgage servicing migration to the Bank. The increases in the foregoing non-interest expenses were partially offset by decreases in compensation and employee benefits and in taxes other than payroll and income taxes. Compensation and employee benefits decreased 7.2% to $79.2 million from $85.3 million for 2014. The decrease is due mainly to lower salaries and lower benefits as a result of a headcount reduction from 1,567 to 1,496 mainly from the voluntary early retirement programs offered by the Company in December 2014 and during 2015 for qualified employees as a cost savings initiative. Taxes, other than payroll and income taxes decreased by $4.9 million or 34.3%, mostly due to a decrease of $6.6 million in the local gross receipts tax that was repealed for taxable years commencing after December 31, 2014. Efficiency ratio was 60.00% compared to 49.90% for 2014. The efficiency ratio measures how much of the Company’s revenues is used to pay operating expenses. The Company computes its efficiency ratio by dividing non-interest expenses by the sum of its net interest income and non-interest income, but excluding gains on the sale of investment securities, derivatives gains or losses, credit- related other-than-temporary impairment losses, FDIC shared-loss expense, FDIC reimbursement, other gains and losses, and other income that may be considered volatile in nature. Management believes that the exclusion of those items permits consistent comparability. Amounts presented as part of non-interest losses that are excluded from the efficiency ratio computation amounted to losses of $24.2 million, compared to $53.7 million in 2014. Comparison of years December 31, 2014 and 2013 Non-interest expense for 2014 was $242.7 million, representing a decrease of 8.1% compared to $264.1 million in the previous year. The decrease is due mainly to the non-recurring merger and restructuring charges of $17.7 million incurred during 2013 for the BBVAPR Acquisition and to the decrease of $6.7 million in compensation and employee benefits. Compensation and employee benefits decreased 7.3% to $85.3 million from $92.0 million in 2013. The decrease is due mainly to the impact of the assessment of employee bonuses required pursuant to the BBVAPR Acquisition of $4.3 million for 2013, a $929 thousand decrease in fixed compensation mainly due to consolidation of employee positions, a decrease in loan incentives of $844 thousand related to lower new loan production during 2014, a decrease in stock option expense of $788 thousand mainly from stock option forfeitures, and a decrease of $1.3 million in commissions paid by the securities broker-dealer due to lower business activity. This decrease was partially offset by a non-recurring accrual of $3.8 million for a voluntary early retirement program offered by the Company for qualified employees as a cost savings initiative for 2015. The increase in total employee headcount is mainly related to the conversion from temporary to regular employees, mainly concentrated in branches. Professional and service fees decreased 25.0% to $16.0 million, as compared to $21.3 million in 2013. Professional and service fees primarily comprise legal expenses and consulting and outsourcing expenses. For 2014, legal expenses amounted to $5.1 million compared to $5.6 million in 2013. The decrease in professional and service fees is mainly related to consulting and outsourcing expenses which amounted to $3.9 million, compared to $5.5 million in 2013, and a decrease in audit fees which amounted to $1.8 51 million compared to $2.3 million in 2013. The decrease in consulting and outsourcing expenses is mainly related to loan servicing fees amounting to $3.0 million for a third-party loan servicer whose contract was terminated during the second quarter of 2013. Information technology expenses decreased 42.9% to $6.0 million, as compared to $10.5 million, mostly due to systems integration during the end of the year 2013, as part of BBVAPR systems conversion. The decreases in the foregoing non-interest expenses were partially offset by increases in foreclosure, repossession and other real estate expenses and in electronic banking charges. Foreclosure, repossession and other real estate expenses increased 49.8% to $25.1 million, as compared to $16.5 million for the previous year, principally due to an increase in foreclosures and a decrease in the fair value of real estate as a result of current local economic conditions. Electronic banking charges increased 14.2% to $19.1 million, mostly due to the increase in expenses related to merchant business and card interchange transactions resulting from the continued growth of our banking business. The decrease in non-interest expenses resulted in an improved efficiency ratio of 49.9% from 53.3% for 2013. The efficiency ratio measures how much of the Company’s revenues is used to pay operating expenses. The Company computes its efficiency ratio by dividing non-interest expenses by the sum of its net interest income and non-interest income, but excluding gains on the sale of investment securities, derivatives gains or losses, 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 consistent comparability. Amounts presented as part of non-interest income that are excluded from the efficiency ratio computation amounted to losses of $60.6 million, compared to $69.0 million in 2013. Provision for Loan and Lease Losses Comparison of years ended December 30, 2015 and 2014 Provision for loan and lease losses increased 166.3% or $100.9 million, to $161.5 million, reflecting a $38.1 million provision for loan and lease losses resulting from the bulk sale completed during the third quarter of 2015 and a $53.3 million provision related to the PREPA line of credit. Based on an analysis of the credit quality and the composition of the Company’s loan portfolio, management determined that the provision for 2015 was adequate in order to maintain the allowance for loan and lease losses at an adequate level to provide for probable losses based upon an evaluation of known and inherent risks. Provision for loan and lease losses, excluding acquired loans, increased 216.1%, or $67.9 million, to $99.3 million from $31.4 million when compared with 2014. Such increase was primarily due to the classification of a $200 million participation in the PREPA line of credit on non-accrual status and the recognition of a $53.3 million provision for loan and lease losses on such credit facility during 2015. Total charge-offs, excluding acquired loans, increased 35.0% to $53.0 million, as compared to $39.3 million for 2014. Commercial charge-offs increased $3.1 million to $5.5 million. Auto and leasing charge-offs increased $7.3 million to $33.4 million. Consumer charge-offs increased $2.9 million to $8.7 million. Total recoveries, excluding acquired loans, increased from $10.2 million to $14.9 million. As a result, the recoveries to charge-offs ratio increased from 25.95% to 28.03%. Net credit losses increased $9.1 million to $38.1 million, representing 1.30% of average originated and other loans outstanding versus 1.11% for 2014. Provision for acquired loan and lease losses increased 113.0%, or $33.0 million, to $62.2 million from $29.2 million when compared with 2014. Provision for acquired BBVAPR loan and lease losses increased 2.5% to $24.1 million, compared to $23.5 million for 2014. An additional provision of $5.2 million was recorded as a result of the sale of certain non-performing commercial loans from the BBVAPR Acquisition, during the third quarter of 2015. Provision for acquired Eurobank loan and lease losses increased $32.4 million from $5.7 million to $38.0 million. Such increase reflects an additional provision of $32.9 million recorded as a result of the 52 sale of a portfolio of non-performing commercial loans acquired in the Eurobank transaction with an unpaid principal balance of $197.1 million ($100.0 million carrying amount) during the third quarter of 2015. The provision for loan and lease losses for loans accounted for under ASC 310-30 reflects 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. Comparison of years December 31, 2014 and 2013 Provision for non-covered loan and lease losses decreased $12.6 million to $55.0 million when compared to $67.6 million in 2013, which included the impact of a $21.0 million additional provision due to the reclassification to held-for-sale of non-performing residential mortgage loans. Provision for covered loan and lease losses increased 6.5% to $5.7 million from $5.3 million in 2013. Based on an analysis of the credit quality and the composition of the Company’s loan portfolio, management determined that the provision for 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. Provision for non-covered loans, excluding acquired loans, decreased $24.2 million to $31.4 million, when compared to $55.6 million in 2013. This was the result of a decrease in the provision for mortgage loans of 87.8% to $4.3 million and a recapture for commercial loans of $4.4 million compared to a provision of $3.3 million in 2013, which was partially offset by an increase in the provision for auto and leasing of 127.4% to $23.6 million and an increase in the provision for consumer loans of 33.1% to $8.3 million. Total charge-offs on non-covered loans, excluding acquired loans, decreased 19.1% to $39.3 million, as compared to $48.5 million in 2013. This was the result of a 86.3% decrease in mortgage charge-offs to $5.0 million and a 58.8% decrease in commercial charge- offs to $2.4 million, partially offset by a 466.0% increase in auto and leasing charge-offs to $26.0 million and a 289.4% increase in consumer charge-offs to $5.8 million. Total recoveries increased from $2.1 million to $10.2 million. As a result, the recoveries to charge-offs ratio increased from 4.37% to 25.95%. Net credit losses, excluding acquired loans, decreased $17.4 million to $29.1 million, representing 4.42% of average non- covered loans outstanding versus 2.69% for 2013. The non-covered acquired loans accounted for under ASC 310-20 required a provision for loan and lease losses of $12.9 million, as compared to $9.1 million in 2013. Non-covered acquired loans accounted for under ASC 310-30 required a provision for loan and lease losses of $10.6 million compared to $2.9 million in 2013. The provision for 2014 reflects 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. Provision for covered loan and lease losses was $5.7 million, compared to $5.3 million in 2013, 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. Income Taxes Comparison of years December 31, 2015 and 2014 Income tax expense decreased $54.8 million to a benefit of $17.6 million, compared to $37.3 million for 2014. The decrease in income tax expense reflects the decrease in the net income before income taxes of $142.5 million to a loss of $20.1 million in 2015, compared to net income before income taxes of $122.4 million a year ago. Comparison of years December 31, 2014 and 2013 The income tax expense for 2014 amounted $37.3 million, compared to an income tax benefit of $8.7 million for 2013. Notwithstanding, the effective income tax rate for 2014 was 30.43% compared with the maximum income tax statutory rate of 39%. During 2013, the Company recognized a $38.1 million income tax benefit from the increase in the Company’s deferred tax asset as a result of the increase in corporate income taxes to 39% from 30%. 53 Business Segments The Company segregates its businesses into the following major reportable segments: Banking, Wealth Management, and Treasury. Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Company’s organization, nature of its products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. The Company measures the performance of these reportable segments based on pre-established goals of different financial parameters such as net income, net interest income, loan production, and fees generated. The Company’s methodology for allocating non-interest expenses among segments is based on several factors such as revenue, employee headcount, occupied space, dedicated services or time, among others. Following are the results of operations and the selected financial information by operating segment for 2015, 2014 and 2013. Banking Wealth Management Year Ended December 31, 2015 Total Major Segments Treasury (In thousands) Eliminations Consolidated Total Interest income Interest expense Net interest income Provision for loan and lease losses Non-interest income (loss) Non-interest expenses Intersegment revenue Intersegment expenses (Loss) income before income taxes Total assets Interest income Interest expense Net interest income Provision for loan and lease losses Non-interest income (loss) Non-interest expenses Intersegment revenue Intersegment expenses $ $ $ $ 367,620 $ (28,425) 339,195 (161,501) 23,900 (219,415) 1,427 (948) (17,342) $ 95 $ - 95 - 28,288 (22,564) - (1,027) 4,792 38,853 $ 406,568 $ - $ (40,771) (1,918) - 284 (6,422) 948 (400) (69,196) 337,372 (161,501) 52,472 (248,401) 2,375 (2,375) - - - - - (2,375) 2,375 406,568 (69,196) 337,372 (161,501) 52,472 (248,401) - - (7,508) $ (20,058) $ - $ (20,058) 5,867,874 $ 22,349 $ 2,126,921 $ 8,017,144 $ (917,995) $ 7,099,149 Banking Management Treasury Wealth Total Major Segments Eliminations Total Consolidated Year Ended December 31, 2014 435,580 $ (34,721) 400,859 (60,640) (13,389) (213,935) 1,410 (327) 174 $ - 174 - 28,525 (21,748) - (1,089) (In thousands) 49,503 $ (42,061) 485,257 $ (76,782) 7,442 - 2,187 (7,042) 327 (321) 408,475 (60,640) 17,323 (242,725) 1,737 (1,737) - $ - - - - - (1,737) 1,737 485,257 (76,782) 408,475 (60,640) 17,323 (242,725) - - 122,433 7,449,109 Income before income taxes $ 113,978 $ 5,862 $ 2,593 $ 122,433 $ - $ Total assets $ 6,454,015 $ 21,644 $ 1,940,504 $ 8,416,163 (967,054) $ 54 Interest income Interest expense Net interest income Provision for loan and lease losses Non-interest income (loss) Non-interest expenses Intersegment revenue Intersegment expenses Income (loss) before income taxes Total assets Banking Wealth Management Treasury Total Major Segments Eliminations Consolidated Total Year Ended December 31, 2013 $ 445,363 $ (42,044) 403,319 (72,894) (17,438) (222,408) 618 - 91,197 5,820,726 $ $ $ $ 354 - 354 - 30,614 (26,603) - (1,813) 2,552 23,280 $ $ $ (In thousands) $ 47,915 493,632 $ (41,916) 5,999 - 3,919 (15,125) 1,195 - (4,012) $ $ 3,084,409 (83,960) 409,672 (72,894) 17,095 (264,136) 1,813 (1,813) 89,737 8,928,415 $ $ $ - - - - - - (1,813) 1,813 - $ (770,400) $ 493,632 (83,960) 409,672 (72,894) 17,095 (264,136) - - 89,737 8,158,015 Comparison of year ended December 31, 2015 and 2014 Banking Net interest income of the Company’s Banking segment decreased $61.7 million for 2015, or 15.4%, reflecting a decrease of 15.6% in interest income from loans. Interest income from loans decreased 15.6% to $367.6 million, reflecting a decrease in both, volume and interest rate of $42.7 million and $25.2 million, respectively. Such decrease reflects lower acquired loan balances and yields mainly related to the bulk sale of non-performing acquired commercial loans and foreclosed real estate at the end of the third quarter of 2015 and also normal repayments and maturities. In addition, the decrease reflects a $9.7 million decrease in interest income from a loan to PREPA, which was placed in non-accrual status during the first quarter of 2015, and a loan to PRASA, which was paid off during the second quarter of 2015. Provision for loan and lease losses increased 166.3%, or $100.9 million, to $161.5 million, reflecting a $38.1 million provision for loan and lease losses resulting from the bulk sale of non-performing acquired commercial loans and foreclosed real estate completed during 2015. In addition, during 2015, the Company recorded an additional provision for loan and lease losses of $53.3 million related to its participation in the line of credit to PREPA. The net FDIC shared-loss expense decreased to $42.8 million as compared to $65.8 million for 2014, primarily from the decrease of the FDIC commercial loss share amortization related to the expiration of the non-single family loss share coverage by the FDIC at the end of the second quarter of 2015. Notwithstanding the expiration of loss share coverage for non-single family loans, on July 2, 2015, the Company entered into an agreement with the FDIC pursuant to which the FDIC concurred with a potential sale of a pool of loss share assets covered under the non-single family loss share agreement. Pursuant to such agreement, the FDIC agreed and paid $20 million in loss share coverage with respect to the aggregate loss resulting from the sale of covered non-performing commercial loans, and such reimbursement was received in December 2015. Banking service revenue, which consists primarily of fees generated by deposit accounts, electronic banking services, and customer services, increased to $41.5 million, from $40.7 million for 2014. The increase is mainly driven by higher electronic banking fees of $2.4 million, partially offset by lower checking account fees of $1.4 million. Income generated from mortgage banking activities decreased 17.0% to $6.1 million, compared to $7.4 million in 2014. The decrease in mortgage banking activities was mostly due to foregone gains on sales as a result of retaining securitized GNMA pools, as the Company retained securitized GNMA pools totaling $54.5 million at a yield of 3.09% from its own loan originations during the second half of 2015. Non-interest expense of $219.4 million increased 2.6% when compared to 2014. The increase in non-interest expense primarily reflects an $8.5 million loss related to the sale of foreclosed real estate, mostly from Eurobank Acquisition, as part of the bulk sale during 2015. In addition, there was a $5.1 million increase in commercial properties markdowns, as part of our ongoing de-risking efforts. Also, electronic banking charges increased 14.7%, mainly from merchant business and credit/debit card interchange transactions as our banking business continues to grow. 55 Wealth Management Wealth management revenue, which consists of commissions and fees from fiduciary activities, and securities brokerage and insurance activities decreased slightly to $28.3 million, compared to $28.5 million in 2014. Non-interest expenses increased by 3.8% to $22.6 million from $21.7 million, mainly due to a $2.1 million payment in 2015 consisting of restitution to certain clients of our broker-dealer subsidiary as required by FINRA. Treasury The investment portfolio of $1.616 billion at December 31, 2015 increased 15.3% compared to $1.402 billion at December 31, 2014. This was mainly the result of $617.6 million purchases, $101.3 million sales, and $277.3 million principal paydowns of available-for- sale and held-to-maturity investment securities during 2015. Interest income from investments decreased 21.6% to $38.9 million, reflecting a decrease in interest rate of $10.0 million. Such decrease in interest income from investments reflects higher premium amortization on existing securities. Comparison of years ended December 31, 2014 and 2013 Banking Net interest income of the Banking segment slightly decreased $2.5 million for 2014, or 1.0%, reflecting a decrease of 2.0% in interest income from loans, partially offset by a decrease of 17.4% in interest expense. The decrease in interest income mainly reflects a decrease in loan volume, as acquired loans continue to mature at higher level at higher level than the increase in the originated loans. Provision for non-covered loans losses decreased $12.6 million to $55.0 million when compared to $67.6 million for 2013, which included the impact of a $21.0 million additional provision due to the reclassification to held-for-sale of non-performing residential mortgage loans. Provision for covered loans losses increased $345 thousand when compared to 2013. Non-interest loss decreased $4.0 million to $13.4 million when compared to $17.4 million in 2013, mainly as a result of a decrease of $3.5 million in net FDIC shared-loss expense from $69.3 million. In addition, for 2013, the Company recognized a realized loss of $1.5 million from the sale of performing and non-performing residential mortgage loans, which was not the case in 2014. Banking service revenues decreased, mostly due to a $1.5 million decrease in retail checking account fees, as customers have shifted to lower fee account products, a $733 thousand decrease in credit card interchange income, and a $1.1 million decrease in other loan fees due to a non-recurrent prepayment penalty from a commercial loan cancellation during 2013. Non-interest expense of $214.0 million decreased 3.8% when compared to 2013, mainly due to $17.7 million in non-recurring merger and restructuring charges during 2013 compared to none in 2014. This decrease was partially offset by an increase in foreclosure, repossession and other real estate expenses of $8.6 million to $25.1 million, principally caused by an increase in foreclosures and a decrease in the fair value of real estate as a result of current local economic conditions. Also, there was an increase in electronic banking charges of $2.4 million to $19.1 million, mostly due to the increase in expenses related to merchant business and card interchange transactions resulting from the continued growth of our banking business. Wealth Management Wealth management income before income taxes increased $3.3 million, mostly due to a decrease of $4.9 million in non-interest expense, partially offset by a decrease of $2.1 million in non-interest income. Wealth management revenues, which consist of commissions and fees from fiduciary activities, and securities brokerage and insurance activities, decreased to $28.5 million mostly as a result of current local economic conditions. Non-interest expenses decreased to $21.7 million, mainly as commissions paid by the securities broker-dealer decreased when compared to 2013. In addition, other operating expenses decreased as a result of cost reduction strategies. 56 Treasury Average investments decreased 15.8% resulting from sales, redemptions and maturities in 2014. Interest income from investments increased 3.3% and the yield increased to 2.45% from 2.07% in 2013. Increase in yield is related to lower premium amortization in the mortgage-backed securities portfolio from the extension of the duration of the portfolio as a result of the level of market rates. Interest expenses remained leveled at $42 million for 2014 and 2013. Non-interest expenses of the treasury segment, mainly composed of indirect expenses allocated from support departments decreased 53.44% to $7.0 million as part of the Company’s general expenses reduction. During 2014, the classification of certain cash accounts was revised to more accurately depict the nature of the underlying segments. This reclassification resulted in a reduction in banking segment total assets of approximately $1.190 billion, with a corresponding increase in treasury segment total assets of $830.9 million and a decrease in total assets eliminations of $358.8 million in 2013. The Company evaluated the impact of this reclassification on the total assets allocated to these segments and determined that the effect of this adjustment was not material to any previously reported results. 57 ANALYSIS OF FINANCIAL CONDITION Assets Owned At December 31, 2015, the Company’s total assets amounted to $7.099 billion representing a decrease of 4.7% when compared to $7.449 billion at December 31, 2014. This reduction is mainly due to a decrease in the loan portfolio, partially offset by an increase in the investment portfolio. The loan portfolio decreased $392.4 million from $4.827 billion at December 31, 2014 to $4.434 billion, which included the sale of a portion of acquired non-performing commercial loans amounting to $109.9 million, carrying amount, during the third quarter of 2015, the full repayment of the $75 million loan to PRASA during the second quarter of 2015, and the full payment of the $78 million loan to Puerto Rico State Insurance Fund Corporation. Investment securities increased $213.8 million from $1.402 billion at December 31, 2014 to $1.616 billion. This was mainly the result of $617.6 million purchases, $101.3 million sales, and $277.3 million principal paydowns of available-for-sale and held-to-maturity investment securities in 2015. At December 31, 2015, loans represented 73% of total interest-earning assets while investments represented 27%, compared to 77% and 23%, respectively, at December 31, 2014. The Company’s loan portfolio is comprised of residential mortgage loans, commercial loans collateralized by mortgages on real estate located in Puerto Rico, other commercial and industrial loans, consumer loans, and auto loans. At December 31, 2015, the Company’s loan portfolio decreased by 8.1% to $4.434 billion compared to $4.827 billion at December 31, 2014, primarily due to lower acquired loan balances. Our loan portfolio is transitioning as originated loans grow at a slower pace than acquired loans decrease, due to portfolio sales, repayments and maturities, and the Company continues to reduce its exposure to the Puerto Rico government. At December 31, 2015, the originated loan portfolio increased $206.5 million, or 7.4%, the acquired BBVAPR loan portfolio decreased $445.9 million, or 26.0%, and the acquired Eurobank loan portfolio decreased $152.1 million, or 50.9% from December 31, 2014. Investments principally consist of U.S. government and agency bonds, mortgage-backed securities, and Puerto Rico government and agency bonds. At December 31, 2015, the investment portfolio increased 15.3% to $1.616 billion from $1.402 billion at December 31, 2014. During 2015, the Company sold $101.3 million of mortgage-backed securities available for sale and reduced some interest rate sensitivity. Recent purchases of investment securities, mostly FNMA and FHLM certificates, were categorized as held-to-maturity. The Company’s management will determine the category of upcoming investment securities purchases based on the Company’s expectations at such time. During 2015, the Company recognized an other-than-temporary impairment charge on its portfolio of investment securities available-for-sale classified as obligations from the Puerto Rico government and its political subdivisions. The Company determined that $1.5 million of the unrealized loss carried by these securities was attributed to estimated credit losses. The FDIC indemnification asset amounted to $22.6 million at December 31, 2015 and $97.4 million at December 31, 2014, representing a 76.8% reduction. The decrease in the FDIC indemnification asset is mainly related to collections and reimbursement receivables from the FDIC of $38.4 million and amortization of $36.4 million for 2015, as the FDIC loss-share coverage for commercial loans expired on June 30, 2015. Financial Assets Managed The Company’s financial assets managed include those managed by the Company’s trust division, retirement plan administration subsidiary, and assets gathered by its securities 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, OPC, manages private retirement plans. At December 31, 2015, total assets managed by the Company’s trust division and OPC amounted to $2.691 billion, compared to $2.841 billion at December 31, 2014. 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 December 31, 2015, total assets gathered by Oriental Financial Services from its customer investment accounts decreased 9.4% to $2.375 billion, compared to $2.622 billion at December 31, 2014. Changes in trust and broker- dealer related assets primarily reflect a decrease in portfolio and differences in market values due principally to economic conditions in Puerto Rico. 58 Goodwill Goodwill recorded in connection with the BBVAPR Acquisition and the FDIC-assisted Eurobank acquisition is not amortized to expense, but is tested at least annually for impairment. A quantitative annual impairment test is not required if, based on a qualitative analysis, the Company determines that the existence of events and circumstances indicate that it is more likely than not that goodwill is not impaired. The Company completes its annual goodwill impairment test as of October 31 of each year. The Company tests for impairment by first allocating its goodwill and other assets and liabilities, as necessary, to defined reporting units. A fair value is then determined for each reporting unit. If the fair values of the reporting units exceed their book values, no write-down of the recorded goodwill is necessary. If the fair values are less than the book values, an additional valuation procedure is necessary to assess the proper carrying value of the goodwill. Reporting unit valuation is inherently subjective, with a number of factors based on assumptions and management judgments or estimates. Actual values may differ significantly from such estimates. Among these are future growth rates for the reporting units, selection of comparable market transactions, discount rates and earnings capitalization rates. Changes in assumptions and results due to economic conditions, industry factors, and reporting unit performance and cash flow projections could result in different assessments of the fair values of reporting units and could result in impairment charges. If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, an interim impairment test is required. Relevant events and circumstances for evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount may include macroeconomic conditions (such as a further deterioration of the Puerto Rico economy or the liquidity for Puerto Rico securities or loans secured by assets in Puerto Rico), adverse changes in legal factors or in the business climate, adverse actions by a regulator, unanticipated competition, the loss of key employees, or similar events. The Company’s loan portfolio, which is the largest component of its interest-earning assets, is concentrated in Puerto Rico and is directly affected by adverse local economic and fiscal conditions. Such conditions have generally affected the market demand for non-conforming loans secured by assets in Puerto Rico and, therefore, affect the valuation of the Company’s assets. As of December 31, 2015, the Company had $86.1 million of goodwill allocated as follows: $84.1 million to the Banking unit and $2.0 to the Wealth Management unit. Based on its annual goodwill impairment test, the Company determined that the Banking unit failed step one of the two-step impairment test and that Wealth Management unit passed such step. As a result of step one, the Banking unit’s adjusted net book value exceed its fair value by approximately $263.1 million, or 29.6%. Accordingly, the Company proceeded to perform step two of the analysis. Based on the results of step two, the Company determined that the carrying value of the goodwill allocated to the Banking unit was not impaired as of the valuation date. For additional details related to such goodwill impairment test, please refer to “Goodwill and Intangible Assets” under Note 1 of the accompanying consolidated financial statements. 59 TABLE 4 - ASSETS SUMMARY AND COMPOSITION Investments: FNMA and FHLMC certificates Obligations of US government-sponsored agencies US Treasury securities CMOs issued by US government-sponsored agencies GNMA certificates Puerto Rico government and public instrumentalities FHLB stock Other debt securities Other investments Total investments Loans Total securities and loans Other assets: Cash and due from banks (including restricted cash) Money market investments FDIC indemnification asset Foreclosed real estate Accrued interest receivable Deferred tax asset, net Premises and equipment, net Servicing assets Derivative assets Goodwill Other assets and customers' liability on acceptances Total other assets Total assets Investments portfolio composition: FNMA and FHLMC certificates Obligations of US government-sponsored agencies US Treasury securities CMOs issued by US government-sponsored agencies GNMA certificates Puerto Rico government and public instrumentalities FHLB stock Other debt securities and other investments December 31, 2015 2014 (Dollars in thousands) Variance % $ 1,354,802 $ 1,172,262 5,093 25,032 135,073 58,495 13,731 20,783 2,572 291 1,615,872 4,434,213 6,050,085 535,359 4,699 22,599 58,176 20,637 145,901 74,590 7,455 3,025 86,069 7,182 - 176,129 4,752 15,671 21,169 3,294 1,597 1,402,056 4,826,646 6,228,702 577,159 4,675 97,378 95,661 21,345 108,708 80,599 13,992 8,107 86,069 90,554 1,049,064 126,714 1,220,407 15.6% -29.1% 100.0% -23.3% 1131.0% -12.4% -1.8% -21.9% -81.8% 15.3% -8.1% -2.9% -7.2% 0.5% -76.8% -39.2% -3.3% 34.2% -7.5% -46.7% -62.7% 0.0% -28.5% -14.0% $ 7,099,149 $ 7,449,109 -4.7% 83.9% 0.3% 1.5% 8.4% 3.6% 0.8% 1.3% 0.2% 100.0% 83.7% 0.5% 0.0% 12.6% 0.3% 1.1% 1.5% 0.3% 100.0% 60 TABLE 5 — LOANS RECEIVABLE COMPOSITION Originated and other loans and leases held for investment: Mortgage Commercial Consumer Auto and leasing Allowance for loan and lease losses on originated and other loans and leases Deferred loan costs, net Total originated and other loans loans held for investment, net Acquired loans: Acquired BBVAPR loans: Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium) Commercial Consumer Auto Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-20 Accounted for under ASC 310-30 (Loans acquired with deteriorated credit quality, including those by analogy) Mortgage Commercial Construction Consumer Auto Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-30 Total acquired BBVAPR loans, net Acquired Eurobank loans: Loans secured by 1-4 family residential properties Commercial and construction Consumer Allowance for loan and lease losses on Eurobank loans Total acquired Eurobank loans, net Total acquired loans, net Total held for investment, net Mortgage loans held for sale Total loans, net December 31, 2015 2014 (In thousands) Variance % $ $ $ 757,828 1,441,649 242,950 669,163 3,111,590 (112,626) 2,998,964 4,203 3,003,167 7,457 38,385 106,911 152,753 (5,542) 147,211 608,294 287,311 88,180 11,843 153,592 1,149,220 (25,785) 1,123,435 1,270,646 92,273 142,377 2,314 236,964 (90,178) 146,786 1,417,432 4,420,599 13,614 4,434,213 $ 791,751 1,289,732 186,760 575,582 2,843,825 (51,439) 2,792,386 4,282 2,796,668 12,675 45,344 184,782 242,801 (4,597) 238,204 656,122 452,201 106,361 29,888 247,233 1,491,805 (13,481) 1,478,324 1,716,528 102,162 256,488 4,506 363,156 (64,245) 298,911 2,015,439 4,812,107 14,539 4,826,646 -4.3% 11.8% 30.1% 16.3% 9.4% -119.0% 7.4% -1.8% 7.4% -41.2% -15.3% -42.1% -37.1% -20.6% -38.2% -7.3% -36.5% -17.1% -60.4% -37.9% -23.0% -91.3% -24.0% -26.0% -9.7% -44.5% -48.6% -34.7% -40.4% -50.9% -29.7% -8.1% -6.4% -8.1% 61 The Company’s loan portfolio is composed of two segments, loans initially accounted for under the amortized cost method (referred as "originated and other" loans) and loans acquired (referred as "acquired" loans). Acquired loans are further segregated between acquired BBVAPR loans and acquired Eurobank loans. Acquired Eurobank loans were purchased subject to loss-sharing agreements with the FDIC. The FDIC loss sharing coverage, related to commercial acquired Eurobank loans expired on June 30, 2015. Notwithstanding the expiration of loss-share coverage of commercial loans, on July 2, 2015, the Company entered into an agreement with the FDIC pursuant to which the FDIC concurred with a potential sale of a pool of loss-share assets covered under the commercial loss-share agreement. Pursuant to such agreement, the FDIC agreed to pay up to $20 million in loss share coverage with respect to the aggregate loss resulting from any portfolio sale within 120 days of the agreement. This sale was completed on September 28, 2015. The coverage for the single-family residential loans will expire on June 30, 2020. At December 31, 2015, the remaining covered loans amounting to $59.6 million, net carrying amount, are included as part of acquired Eurobank loans under the name "loans secured by 1- 4 family residential properties". At December 31, 2014, covered loans amounted to $298.9 million, net carrying amount. Covered loans are no longer a material amount. Therefore, the Company changed its current and prior year loan disclosures during 2015. As shown in Table 5 above, total loans, net, amounted to $4.434 billion at December 31, 2015 and $4.827 billion at December 31, 2014. On September 28, 2015, the Company sold covered non-performing commercial loans with an unpaid principal balance amounting to $197.1 million ($100.0 million carrying amount). The sales price was 18.44% of UPB, or $36.3 million. The FDIC agreed to cover and paid $20.0 million of losses as part of its loss-share agreement with the Company. As a result, a $20.0 million reimbursement was recorded in the statement of operations. The Company also recorded a $32.9 million provision for loan and lease losses for acquired Eurobank loans, which was partially offset by $4.6 million in cost recoveries. Also, as part of this transaction, the Company sold certain non-performing commercial loans that were part of the BBVAPR Acquisition with an unpaid principal balance amounting to $38.1 million ($9.9 million carrying amount). The sales price was $5.2 million. As a result, a $5.2 million provision for loan and lease losses was recorded for BBVAPR acquired loans, which was partially offset by $2.4 million in cost recoveries. In addition, certain foreclosed real estate with a carrying amount of $11.0 million was sold for $1.7 million. As part of this transaction, the Company made customary representations and warranties to the purchaser regarding certain characteristics of the assets that were sold. Such representations and warranties survive for a limited period of time. To the extent that the assets sold do not meet the specified characteristics, and subject to certain notice, cure period and other conditions, the purchaser would be entitled to require the Company to repurchase such assets. The Company’s originated and other loans held-for-investment portfolio composition and trends were as follows:  Mortgage loan portfolio amounted to $757.8 million (24.4% of the gross originated loan portfolio) compared to $791.8 million (27.8% of the gross originated loan portfolio) at December 31, 2014. Mortgage loan production totaled $247.2 million for 2015, which represents an increase of 14.8% from $215.4 million in the previous year. Mortgage loans included delinquent loans in the GNMA buy-back option program amounting to $7.9 million and $42.2 million at December 31, 2015 and 2014, 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 $1.442 billion (46.3% of the gross originated loan portfolio) compared to $1.290 billion (45.4% of the gross originated loan portfolio) at December 31, 2014. Commercial loan production increased 38.9% to $365.2 million for 2015 from $262.9 million for 2014. Consumer loan portfolio amounted to $243.0 million (7.8% of the gross originated loan portfolio) compared to $186.8 million (6.6% of the gross originated loan portfolio) at December 31, 2014. Consumer loan production increased 17.3% to $140.7 million for 2015 from $119.9 million for 2014.  Auto and leasing portfolio amounted to $669.2 million (21.5% of the gross originated loan portfolio) compared to $575.6 million (20.2% of the gross originated loan portfolio) at December 31, 2014. Auto and leasing production decreased by 18.8% to $260.8 million for 2015, compared to $321.2 million for 2014. 62 The following table summarizes the remaining contractual maturities of the Company’s total gross non-covered loans, excluding loans accounted for under ASC 310-30, segmented to reflect cash flows as of December 31, 2015. Contractual maturities do not necessarily reflect the period of resolution of a loan, considering prepayments. Maturities From One to Five Years After Five Years Balance Outstanding at December 31, 2015 One Year or Less Fixed Interest Rates Variable Interest Rates Fixed Interest Rates Variable Interest Rates (Dollars in thousands) Originated and other loans: Mortgage Commercial Consumer Auto and leasing Total Acquired loans accounted under ASC 310-20 Commercial Commercial secured by real estate Consumer Auto Total $ 757,828 $ 2,414 $ 13,473 $ 1,441,649 242,950 669,163 $ 3,111,590 4,340 3,117 38,385 106,911 893,429 30,305 3,014 929,162 4,340 2,929 38,385 8,115 398,578 141,450 302,453 855,954 - 188 - 98,796 $ 152,753 $ 53,769 $ 98,984 $ - - - - - - - - - - $ 741,941 $ 149,642 71,195 363,696 1,326,474 - - - - - $ - - - - - - - - - - 63 TABLE 6 — HIGHER RISK RESIDENTIAL MORTGAGE LOANS December 31, 2015 Higher-Risk Residential Mortgage Loans* Junior Lien Mortgages Interest Only Loans Carrying Carrying Value Allowance Coverage Value High Loan-to-Value Ratio Mortgages LTV 90% and over Carrying Allowance (In thousands) Coverage Value Allowance Coverage Delinquency: 0 - 89 days 90 - 119 days 120 - 179 days 180 - 364 days 365+ days Total $ $ 11,849 26 96 246 323 12,540 $ $ 259 3 - 5 57 324 2.19% $ 11.54% 0.00% 2.03% 17.65% 2.58% $ 14,849 522 1,319 641 712 18,043 $ $ 627 26 84 41 185 963 4.22% $ 4.98% 6.37% 6.40% 25.98% 5.34% $ 71,687 761 1,306 1,066 2,319 77,139 $ $ 1,227 41 78 15 72 1,433 1.71% 5.39% 5.97% 1.41% 3.10% 1.86% Percentage of total loans excluding acquired loans accounted for under ASC 310-30 0.38% 0.55% 2.36% Refinanced or Modified Loans: Amount Percentage of Higher-Risk Loan Category Loan-to-Value Ratio: Under 70% 70% - 79% 80% - 89% 90% and over $ 2,079 $ 222 10.68% $ 195 $ 19 9.74% $ 11,449 $ 820 7.16% 16.58% 1.08% $ $ 7,940 2,300 179 2,121 12,540 $ $ 220 68 14 22 324 2.77% $ 2.96% 7.82% 1.04% 2.58% $ 2,603 2,543 4,915 7,982 18,043 $ $ 227 108 251 377 963 8.72% $ 4.25% 5.11% 4.72% 5.34% $ 14.84% - - - 77,139 77,139 $ $ - - - 1,433 1,433 - - - 1.86% 1.86% * Loans may be included in more than one higher-risk loan category and excludes acquired residential mortgage loans. 64 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 December 31, 2015 Maturity Loans and Securities: Carrying Value Less than 1 Year 1 to 3 Years More than 3 Years Comments (In thousands) Central government $ 20,957 $ - $ - $ 20,957 Public corporations 190,935 190,290 645 - Municipalities 203,520 187 48,165 155,168 Investment securities 17,801 - 8,733 9,068 Total $ 433,213 $ 190,477 $ 57,543 $ 185,193 Some highlights follow regarding the data included above: Repayment sources include all available revenues of the Commonwealth Includes $190.3 million PREPA loan, which has $53.3 million allowance for loan and lease losses Repayment from property taxes Includes $11 million in PRIDCO bonds that had a $1.2 million other-than- temporary impairment    Loans to municipalities are backed by their unlimited taxing power or real and personal property taxes. 44% of loans and securities balances mature in 12-months or less. Deposits from municipalities, central government and other government entities totaled $99.0 million at December 31, 2015. However, this amount could decline as a result of local legislation intended 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.  Oriental Bank, is part of a four bank syndicate providing a $550 million dollar revolving line of credit to finance the purchase of fuel for the day to day power generation activities of PREPA. The Bank’s participation in the line of credit has an unpaid principal balance of $190.3 million as of December 31, 2015. During the first quarter of 2015, the Bank placed its participation in such line of credit on non-accrual status. After the first quarter of 2015, interest payments received were applied to principal. As of December 31, 2015, the specific reserve was at $53.3 million. 65 Credit Risk Management Allowance for Loan and Lease Losses 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. At December 31, 2015, the Company’s allowance for loan and lease losses amounted to $234.1 million, an increase from $133.8 million at December 31, 2014. Tables 8 through 12 set forth an analysis of activity in the allowance for loan and lease losses and present selected loan loss statistics. In addition, Table 5 sets forth the composition of the loan portfolio. At December 31, 2015, $112.6 million of the allowance corresponded to originated and other loans held for investment, or 3.62% of total originated and other loans held for investment, compared to $51.4 million or 1.81% of total originated and other loans held for investment at December 31, 2014. The allowance increased as a result of a $99.3 million provision for loan and lease losses and $14.9 million of recoveries, which were partially offset by charge-offs of $53.0 million during 2015. During the last year, the Company recorded a $53.3 million provision for loan and lease losses for the PREPA line of credit. The allowance for commercial loans increased 668.4% (or $56.4 million), when compared with the balances recorded at December 31, 2014. The allowance for residential mortgage loans decreased by 6.7% (or $1.3 million), when compared with the balances recorded at December 31, 2014. The allowance for consumer loans and auto and leases increased by 23.4% (or $2.1 million) and 28.1% (or $4.0 million), respectively, when compared with the balances recorded at December 31, 2014. Allowance for loan and lease losses recorded for acquired BBVAPR loans accounted for under the provisions of ASC 310-20 at December 31, 2015 was $5.5 million compared to $4.6 million at December 31, 2014, a 20.6% increase. The allowance increased as a result of a $7.5 million provision for loan and lease losses and $2.8 million of recoveries, which were partially offset by $9.3 million in charge-offs during 2015. The allowance for commercial loans decreased by 60.0% (or $39 thousand), when compared with the balance recorded at December 31, 2014. The allowance for consumer loans increased by 183.2% (or $2.2 million) and auto loans decreased by 37.2% (or $1.2 million), respectively, when compared with the balances recorded at December 31, 2014, due to the normal amortization of credit discount of these acquired loans. Allowance for loan and lease losses recorded for acquired BBVAPR loans accounted for under ASC-310-30 at December 31, 2015 was $25.8 million as compared to $13.5 million at December 31, 2014. The allowance increased as a result of a $16.7 million provision for loan and lease losses, partially offset by $4.4 million in charge-offs during 2015. During the third quarter of 2015, the Company recorded $5.2 million of provision for loan and lease losses for acquired BBVAPR loans related to the most recent sale of certain non-performing commercial loans on September 28, 2015. The allowance for commercial loans increased by 57.0% (or $7.7 million), when compared with the balance recorded at December 31, 2014. The allowance for residential mortgage loans increased $1.7 million, when compared with the balances recorded at December 31, 2014. The allowance for consumer loans and auto loans increased by $84 thousand and $2.9 million, respectively, when compared with the balances recorded at December 31, 2014. Allowance for loan and lease losses recorded for acquired Eurobank loans at December 31, 2015 was $90.2 million as compared to $64.2 million at December 31, 2014. The allowance increased as a result of a $38.0 million provision for loan and lease losses and a provision of $2.5 million of FDIC shared-loss portion for covered loan and lease losses, partially offset by $14.6 million in loan pools fully charged-off. During the third quarter of 2015, the Company recorded $32.9 million of provision for loan and losses for acquired Eurobank loans related to the sale of a portfolio of non-performing commercial loans on September 28, 2015. The allowance for loan and lease losses on covered loans is accounted for 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 indemnification asset. 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. 66 Non-performing Assets The Company’s non-performing assets include non-performing loans and foreclosed real estate (see Tables 11 and 12). At December 31, 2015 and 2014, the Company had $300.1 million and $101.5 million, respectively, of non-accrual loans, including acquired BBVAPR loans accounted for under ASC 310-20 (loans with revolving feature and/or acquired at a premium). During the first quarter of 2015, the Company placed its $200.0 million participation in the PREPA line of credit, which was previously classified as troubled- debt restructuring, on non-accrual status. At December 31, 2015 and 2014, loans whose terms have been extended and which are classified as troubled-debt restructuring that are not included in non-performing assets amounted to $93.6 million and $274.4 million, respectively. Oriental Bank is part of a four bank syndicate providing a $550 million revolving line of credit to finance the purchase of fuel for PREPA’s day-to-day power generation activities. Our participation in the line of credit has an unpaid principal balance of $190.3 million as of December 31, 2015. As part of the bank syndicate, the Bank entered into a forbearance agreement with PREPA, which was extended several times until the execution of a Restructuring Support Agreement on November 5, 2015 with PREPA and certain other creditors. The Restructuring Support Agreement provides for the restructuring of the fuel line of credit subject to the accomplishment of several milestones, including some milestones that depend on the actions of third parties to the agreement, such as the negotiation of agreements with other creditors and legislative action. The Company has classified the credit facility to PREPA as substandard and on non-accrual status. The Company conducted an impairment analysis considering the probability of collection of principal and interest, which included a financial model to project the future liquidity status of PREPA under various scenarios and its capacity to service its financial obligations, and concluded that PREPA had sufficient cash flows for the repayment of the line of credit. Despite the Company’s analysis showing PREPA’s capacity to repay the line of credit, the Company placed its participation in non-accrual during the first quarter of 2015 and recorded a $54.1 million provision for loan and lease losses during 2015. Since April 1, 2015, interest payments have been applied to principal. Delinquent residential mortgage loans insured or guaranteed under applicable FHA and VA programs are classified as non-performing loans when they become 90 days or more past due, but are not placed in non-accrual status until they become 18 months or more past due, since they are insured loans. Therefore, these loans are included as non-performing loans but excluded from non-accrual loans. Acquired loans with credit deterioration are considered to be performing due to the application of the accretion method under ASC 310-30, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses. Credit related decreases in expected cash flows, compared to those previously forecasted are recognized by recording a provision for credit losses on these loans when it is probable that all cash flows expected at acquisition will not be collected. At December 31, 2015, the Company’s non-performing assets increased by 106.5% to $367.8 million (6.31% of total assets, excluding covered assets and acquired loans with deteriorated credit quality) from $178.1 million (4.30% of total assets, excluding covered assets and acquired loans with deteriorated credit quality) at December 31, 2014. The increase is mostly due to the classification of PREPA to non-performing status during the first quarter of 2015. 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 December 31, 2015, the allowance for originated loan and lease losses to non-performing loans coverage ratio was 37.15% (49.11% at December 31, 2014). 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. 67 The following items comprise non-performing assets:  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 December 31, 2015, the Company’s originated non-performing mortgage loans totaled $77.9 million (25.5% of the Company’s non-performing loans), a 6.9% increase from $72.8 million (66.8% of the Company’s non-performing loans) at December 31, 2014. 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 December 31, 2015, the Company’s originated non-performing commercial loans amounted to $215.3 million (70.5% of the Company’s non-performing loans), a 893.0% increase from $21.7 million at December 31, 2014 (19.9% of the Company’s non-performing loans). Most of this portfolio is collateralized by commercial real estate properties. During the first quarter of 2015, the Company placed its $200.0 million participation in the PREPA line of credit, which was previously classified as troubled-debt-restructuring, on non-accrual status. At December 31, 2015, the PREPA line of credit had an outstanding principal balance of $190.3 million. 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 December 31, 2015, the Company’s originated non-performing consumer loans totaled $1.6 million (0.5% of the Company’s non-performing loans), compared to $1.6 million (1.5% of the Company’s non-performing loans) at December 31, 2014. Auto loans and leases — are placed on non-accrual status when they become 90 days past due, partially written-off to collateral value when payments are delinquent 120 days, and fully written-off when payments are delinquent 180 days. At December 31, 2015, the Company’s originated non-performing auto loans and leases amounted to $8.4 million (2.8% of the Company’s total non-performing loans), a decrease of 2.9% from $8.7 million at December 31, 2014 (8.0% of the Company’s total non-performing loans).  Acquired BBVAPR loans accounted for under ASC 310-20 (loans with revolving features and/or acquired at premium): Commercial revolving lines of credit and credit cards — are placed on non-accrual status when they become 90 days or more past due and are written-down, if necessary, based on the specific evaluation of the underlying collateral, if any. At December 31, 2015, the Company’s acquired non-performing commercial lines of credit accounted for under ASC 310-20 amounted to $880 thousand (0.3% of the Company’s non-performing loans), a 25.9% decrease from $1.2 million at December 31, 2014 (1.1% 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 December 31, 2015, the Company’s acquired non-performing consumer lines of credit and credit cards accounted for under ASC 310-20 totaled $535 thousand (0.2% of the Company’s non-performing loans), a 63.8% decrease from $1.5 million at December 31, 2014 (1.4% of the Company’s non-performing loans). Auto loans acquired at premium - are placed on non-accrual status when they become 90 days past due, partially written-off to collateral value when payments are delinquent 120 days, and fully written-off when payments are delinquent 180 days. At December 31, 2015, the Company’s acquired non-performing auto loans accounted for under ASC 310-20 totaled $831 thousand (0.3% of the Company’s non-performing loans), a 45.0% decrease from $1.5 million at December 31, 2014 (1.4% of the Company’s non-performing loans). 68 The Company has two mortgage loan modification programs. These are the Loss Mitigation Program and the Non-traditional Mortgage Loan Program. Both programs are intended to help responsible homeowners to remain in their homes and avoid foreclosure, while also reducing the Company’s losses on non-performing mortgage loans. The Loss Mitigation Program helps mortgage borrowers who are or will become financially unable to meet the current or scheduled mortgage payments. Loans that qualify under this program are those guaranteed by FHA, VA, PRHFA, (“Puerto Rico Housing Finance Authority”), conventional loans guaranteed by Mortgage Guaranty Insurance Corporation (MGIC), conventional loans sold to FNMA and FHLMC, and conventional loans retained by the Company. The program offers diversified alternatives such as regular or reduced payment plans, payment moratorium, mortgage loan modification, partial claims (only FHA), short sale, and payment in lieu of foreclosure. The Non-traditional Mortgage Loan Program is for non-traditional mortgages, including balloon payment, interest only/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 under the credit underwriting guidelines of FHA/VA/FNMA/ FHLMC, and performing loans not meeting secondary market guidelines processed by the Company’s current credit and underwriting guidelines. The Company achieved an affordable and sustainable monthly payment by taking specific, sequential, and necessary steps such as reducing the interest rate, extending the loan term, capitalizing arrearages, deferring the payment of principal or, if the borrower qualifies, refinancing the loan. In order to apply for any of the loan modification programs, if the borrower is active in Chapter 13 bankruptcy, they must request an authorization from the bankruptcy trustee to allow for the loan modification. Borrowers with discharged Chapter 7 bankruptcies may also apply. Loans in these programs are evaluated by designated underwriters for troubled-debt restructuring classification if the Company grants a concession for legal or economic reasons due to the debtor’s financial difficulties. 69 TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN December 31, 2015 2014 Variance % (Dollars in thousands) Originated and other loans held for investment Allowance balance: Mortgage Commercial Consumer Auto and leasing Unallocated allowance Total allowance balance Allowance composition: Mortgage Commercial Consumer Auto and leasing Unallocated allowance Allowance coverage ratio at end of period applicable to: Mortgage Commercial Consumer Auto and leasing Total allowance to total originated loans Allowance coverage ratio to non-performing loans: Mortgage Commercial Consumer Auto and leasing Total Acquired BBVAPR loans accounted for under ASC 310-20 Allowance balance: Commercial Consumer Auto Total allowance balance Allowance composition: Commercial Consumer Auto Allowance coverage ratio at end of period applicable to: Commercial Consumer Auto Total allowance to total acquired loans Allowance coverage ratio to non-performing loans: Commercial Consumer Auto Total $ 18,352 $ 64,791 11,197 18,261 25 112,626 16.30% 57.53% 9.94% 16.21% 0.02% 100.00% 2.42% 4.49% 4.61% 2.73% 3.62% 23.57% 30.10% 686.51% 216.93% 37.15% 26 3,429 2,087 5,542 $ $ 0.47% 61.87% 37.66% 100.00% 0.35% 8.93% 1.95% 3.63% 2.95% 640.93% 251.14% 246.75% 19,679 8,432 9,072 14,255 1 51,439 38.26% 16.39% 17.64% 27.71% 0.00% 100.00% 2.49% 0.65% 4.86% 2.48% 1.81% 27.03% 38.89% 570.57% 164.46% 49.11% 65 1,211 3,321 4,597 1.41% 26.34% 72.25% 100.00% 0.51% 2.67% 1.80% 1.89% 5.48% 82.05% 219.64% 110.11% -6.7% 668.4% 23.4% 28.1% 2400.0% 119.0% -57.4% 251.0% -43.7% -41.5% 100.0% -2.8% 590.8% -5.1% 10.1% 100.0% -12.8% -22.6% 20.3% 31.9% -24.4% -60.0% 183.2% -37.2% 20.6% -66.7% 134.9% -47.9% -31.4% 234.5% 8.3% 92.1% -46.2% 681.1% 14.3% 124.1% $ $ $ $ 70 TABLE 8 — ALLOWANCE FOR LOAN AND LEASE LOSSES BREAKDOWN (CONTINUED) Acquired BBVAPR loans accounted for under ASC 310-30 Allowance balance: Mortgage Commercial Consumer Auto Total allowance balance Allowance composition: Mortgage Commercial Consumer Auto Acquired Eurobank loans accounted for under ASC 310-30 Allowance balance: Mortgage Commercial Consumer Total allowance balance Allowance composition: Mortgage Commercial Consumer $ $ $ $ December 31, 2015 2014 Variance % (Dollars in thousands) 1,678 21,161 84 2,862 25,785 $ $ 6.51% 82.06% 0.33% 11.10% 100.00% 32,624 57,187 367 90,178 $ $ 36.18% 63.41% 0.41% 100.0% - 13,476 5 - 13,481 0.00% 99.96% 0.04% 0.00% 100.00% 15,522 48,334 389 64,245 24.16% 75.23% 0.61% 100.0% 100.0% 57.0% 1580.0% 100.0% 91.3% 100.0% -17.9% 725.0% 100.0% 110.2% 18.3% -5.7% 40.4% 49.8% -15.7% -32.8% 71 TABLE 9 — ALLOWANCE FOR LOAN AND LEASE LOSSES SUMMARY Year Ended December 31, 2015 2014 (Dollars in thousands) Variance % 2013 (Dollars in thousands) Originated and other loans: Balance at beginning of year Provision for loan and lease losses Charge-offs Recoveries Balance at end of year Acquired loans: BBVAPR loans Acquired loans accounted for under ASC 310-20: Balance at beginning of year Provision for loan and lease losses Charge-offs Recoveries Balance at end of year Acquired loans accounted for under ASC 310-30: Balance at beginning of year Provision for loan and lease losses Loan pools fully charged off Balance at end of year Eurobank loans Balance at beginning of year Provision for loan and lease losses Loan pools fully charged off FDIC shared-loss portion on (provision for) recapture of loan and lease losses Balance at end of year $ $ $ $ $ $ $ $ 39,921 55,579 (48,541) 2,122 49,081 - 9,117 (11,205) 4,442 2,354 - 2,863 - 2,863 51,439 $ 99,336 (53,001) 14,852 112,626 $ 49,081 31,427 (39,258) 10,189 51,439 4.8% $ 216.1% 35.0% 45.8% 119.0% $ 95.3% $ -42.2% -30.5% 1.7% 20.6% $ 370.9% $ 56.9% -100.0% 91.3% $ 4,597 $ 7,469 (9,345) 2,821 5,542 $ 13,481 $ 16,656 (4,352) 25,785 $ 64,245 $ 38,040 (14,610) 2,354 12,915 (13,445) 2,773 4,597 2,863 10,618 - 13,481 52,729 5,680 - 21.8% $ 569.7% -100.0% 54,124 5,335 (6,730) 2,503 90,178 $ 5,836 64,245 -57.1% 40.4% $ - 52,729 Allowance for loans and lease losses on originated and other loans to: Total originated loans Non-performing originated loans 3.62% 37.15% 1.81% 49.11% 100.0% -24.4% 2.04% 61.52% 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 Non-performing acquired loans accounted for under ASC 310-20 3.63% 246.75% 1.89% 92.1% 110.11% 124.1% 0.54% 36.95% 72 TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING LOANS ACCOUNTED FOR UNDER ASC 310-30 Originated and other loans and leases: Mortgage Charge-offs Recoveries Total Commercial Charge-offs Recoveries Total Consumer Charge-offs Recoveries Total Auto Charge-offs Recoveries Total Net credit losses Total charge-offs Total recoveries Total Net credit losses to average loans outstanding: Mortgage Commercial Consumer Auto Total Recoveries to charge-offs Average originated loans: Mortgage Commercial Consumer Auto Total 2015 Year Ended December 31, Variance % (Dollar in thousands) 2014 2013 $ (5,397) $ 391 (5,006) (5,546) 432 (5,114) (8,683) 871 (7,812) (33,375) 13,158 (20,217) (53,001) 14,852 $ (38,149) $ 0.65% 0.38% 3.85% 3.21% 1.30% (5,011) 428 (4,583) (2,424) 333 (2,091) (5,782) 570 (5,212) (26,041) 8,858 (17,183) (39,258) 10,189 (29,069) 0.58% 0.18% 3.41% 3.43% 1.11% 28.02% 25.95% 7.7% $ -8.6% 9.2% (36,566) 6 (36,560) 128.8% 29.7% 144.6% 50.2% 52.8% 49.9% 28.2% 48.5% 17.7% 35.0% 45.8% (5,889) 383 (5,506) (1,485) 165 (1,320) (4,601) 1,568 (3,033) (48,541) 2,122 31.2% $ (46,419) 12.1% 111.1% 12.9% -6.4% 17.1% 8.0% 4.80% 0.83% 1.53% 1.42% 2.69% 4.37% $ $ 771,322 $ 1,336,510 202,971 629,910 786,607 1,190,038 153,067 500,720 -1.9% $ 12.3% 32.6% 25.8% 762,403 663,968 86,250 213,127 2,940,713 $ 2,630,432 11.8% $ $1,725,748 73 TABLE 10 — NET CREDIT LOSSES STATISTICS ON LOAN AND LEASES, EXCLUDING LOANS ACCOUNTED FOR UNDER ASC 310-30 (CONTINUED) Acquired loans accounted for under ASC 310-20: Commercial Charge-offs Recoveries Total Consumer Charge-offs Recoveries Total Auto Charge-offs Recoveries Total Net credit losses Total charge-offs Total recoveries Total Net credit losses to average loans outstanding: Commercial Consumer Auto Total Recoveries to charge-offs Average loans accounted for under ASC 310-20: Commercial Consumer Auto Total Year Ended December 31, Variance % 2014 (Dollars in thousands) 2013 2015 $ (42) $ 31 (11) (4,755) 680 (4,075) (4,548) 2,110 (2,438) (9,345) 2,821 (532) 73 (459) (6,902) 532 (6,370) (6,011) 2,169 (3,842) (13,445) 2,774 -92.1% $ -57.5% -97.6% -31.1% 27.8% -36.0% -24.3% -2.7% -36.5% -30.5% 1.7% $ (6,524) $ (10,671) -38.9% $ 1.31% 6.59% 1.27% 2.56% 1.61% 9.53% 1.61% 3.20% 30.19% 20.63% -18.6% -30.9% -21.0% -19.6% 46.3% $ $ 840 $ 61,842 192,058 254,740 $ 28,509 66,812 238,653 333,974 -97.1% $ -7.4% -19.5% -23.7% $ (25) 9 (16) (5,530) 1,035 (4,495) (5,650) 3,398 (2,252) (11,205) 4,442 (6,763) 0.01% 7.03% 0.59% 0.89% 39.64% 311,546 63,983 382,770 758,299 74 TABLE 11 — NON-PERFORMING ASSETS December 31, 2015 2014 (Dollars in thousands) Variance (%) Non-performing assets: Non-accruing loans Troubled-Debt Restructuring loans $ 217,691 $ Other loans Accruing loans Troubled-Debt Restructuring loans Other loans Total non-performing loans Foreclosed real estate not covered under the shared-loss agreements with the FDIC Other repossessed assets 82,429 4,240 1,091 27,707 73,835 3,862 3,523 $ $ 305,451 $ 108,927 56,304 6,034 367,789 $ 48,147 21,043 178,117 685.7% 11.6% 9.8% -69.0% 180.4% 16.9% -71.3% 106.5% Non-performing assets to total assets, excluding covered assets and acquired loans with deteriorated credit quality (including those by analogy) Non-performing assets to total capital 6.31% 41.00% 4.30% 18.90% 46.7% 116.9% Interest that would have been recorded in the period if the loans had not been classified as non-accruing loans $ 3,118 $ 2,204 $ 1,468 2015 Year Ended December 31, 2014 (In thousands) 2013 75 TABLE 12 — NON-PERFORMING LOANS Non-performing loans: Originated and other loans held for investment Mortgage Commercial Consumer Auto and leasing Acquired loans accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium) Commercial Consumer Auto Total Non-performing loans composition percentages: Originated loans Mortgage Commercial Consumer Auto and leasing Acquired loans accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium) Commercial Consumer Auto Total Non-performing loans to: Total loans, excluding loans accounted for under ASC 310-30 (including those by analogy) Total assets, excluding loans accounted for under ASC 310-30 (including those by analogy) Total capital Non-performing loans with partial charge-offs to: Total loans, excluding loans accounted for under ASC 310-30 (including those by analogy) Non-performing loans Other non-performing loans ratios: Charge-off rate on non-performing loans to non-performing loans on which charge-offs have been taken Allowance for loan and lease losses to non-performing loans on which no charge-offs have been taken December 31, 2015 2014 (Dollars in thousands) Variance % 6.9% 893.0% 2.6% -2.9% 189.5% -25.9% -63.8% -45.0% -46.2% 180.4% $ 77,875 $ 215,281 1,631 8,418 303,205 880 535 831 2,246 305,451 $ $ 25.5% 70.5% 0.5% 2.8% 0.3% 0.2% 0.2% 72,815 21,679 1,590 8,668 104,752 1,187 1,476 1,512 4,175 108,927 66.8% 19.9% 1.5% 8.0% 1.1% 1.4% 1.3% 100.0% 100.0% 9.36% 5.24% 3.53% 2.63% 165.2% 99.2% 34.05% 11.56% 194.6% 1.15% 12.25% 1.04% 29.42% 10.58% -58.4% 61.15% 53.42% 14.5% 44.09% 72.88% -39.5% 76 FDIC Indemnification Asset The Company recorded the FDIC indemnification asset, measured separately from the covered loans, as part of the Eurobank FDIC- assisted transaction. Based on the accounting guidance in ASC Topic 805, at each reporting date subsequent to the initial recording of the indemnification asset, the Company measures the indemnification asset on the same basis as the covered loans and assesses its collectability. The amount to be ultimately collected for the indemnification asset is dependent upon the performance of the underlying covered assets, the passage of time, claims submitted to the FDIC and the Corporation’s compliance with the terms of the loss sharing agreements. Refer to Notes 6 and 7 to the consolidated financial statements for additional information on the FDIC loss share agreements. The FDIC loss-share coverage for the commercial loans and other non-single family loans was in effect until June 30, 2015. The coverage for the single family residential loans will expire on June 30, 2020. Accordingly, the Company amortized the remaining portion of the FDIC indemnification asset attributable to non-single family loans at the close of the second quarter of 2015. At December 31, 2015, the FDIC indemnification asset only reflects the balance for single family residential mortgage loans. On July 2, 2015, the Bank entered into an agreement with the FDIC pursuant to which the FDIC concurred with a proposed sale of a pool of shared-loss assets under the commercial shared loss agreement. Pursuant to such agreement, the FDIC agreed and paid the Bank $20 million in loss-share coverage with respect to the aggregate loss resulting from the sale on September 28, 2015 of a portion of covered non-performing commercial loans amounting to $197.1 million in unpaid principal balance ($100.0 million carrying amount). The sales price was 18.4% of UPB, or $36.3 million. As a result, a $20.0 million reimbursement from the FDIC was recorded in the statement of operations. TABLE 13 - ACTIVITY OF FDIC INDEMNIFICATION ASSET 2015 Year Ended December 31, 2014 (In thousands) 2013 FDIC indemnification asset: Balance at beginning of year Shared-loss agreements reimbursements from the FDIC Increase (decrease) in expected credit losses to be covered under shared-loss agreements, net FDIC indemnification asset expense Final settlement with the FDIC on commercial loans Incurred expenses to be reimbursed under shared-loss agreements Balance at end of year $ $ 97,378 $ (55,723) 189,240 $ (47,666) 302,295 (47,100) 2,503 (36,398) (1,589) 16,428 22,599 $ 5,836 (62,285) - 12,253 97,378 $ (6,730) (66,253) - 7,028 189,240 TABLE 14 - ACTIVITY IN THE REMAINING FDIC INDEMNIFICATION ASSET DISCOUNT 2015 Year Ended December 31, 2014 (In thousands) 71,451 (62,285) 12,516 21,682 21,682 $ (36,417) 19,549 4,814 $ $ $ Balance at beginning of year Amortization of negative discount Impact of lower projected losses Balance at end of year $ $ 77 2013 105,903 (66,253) 31,801 71,451 TABLE 15 - LIABILITIES SUMMARY AND COMPOSITION December 31, 2015 2014 Variance % (Dollars in thousands) Deposits: Non-interest bearing deposits NOW accounts Savings and money market accounts Certificates of deposit Total deposits Accrued interest payable Total deposits and accrued interest payable Borrowings: Securities sold under agreements to repurchase Advances from FHLB Subordinated capital notes Other term notes Total borrowings Total deposits and borrowings Other Liabilities: Derivative liabilities Acceptances outstanding Other liabilities Total liabilities Deposits portfolio composition percentages: Non-interest bearing deposits NOW accounts Savings and money market accounts Certificates of deposit Borrowings portfolio composition percentages: Securities sold under agreements to repurchase Advances from FHLB Other term notes Subordinated capital notes 2.1% -12.1% -14.9% 8.8% -4.2% -11.7% -4.2% -4.6% -0.6% 1.0% -56.7% -3.4% -4.0% -45.1% -18.9% -30.3% -4.7% $ 761,117 $ 1,100,541 1,179,229 1,674,431 4,715,318 1,541 4,716,859 934,691 332,476 102,633 1,734 1,371,534 6,088,393 6,162 14,582 92,935 745,570 1,251,943 1,385,823 1,539,324 4,922,660 1,746 4,924,406 980,087 334,331 101,584 4,004 1,420,006 6,344,412 11,221 17,989 133,290 $ 6,202,072 $ 6,506,912 16.2% 23.3% 25.0% 35.5% 100.0% 68.2% 24.2% 0.1% 7.5% 100.0% 15.1% 25.4% 28.2% 31.3% 100.0% 69.0% 23.5% 0.3% 7.2% 100.0% Securities sold under agreements to repurchase (excluding accrued interest) Amount outstanding at period-end Daily average outstanding balance Maximum outstanding balance at any month-end $ $ $ 932,500 1,012,756 1,158,945 $ $ $ 977,816 1,041,378 1,149,167 78 Liabilities and Funding Sources As shown in Table 15 above, at December 31, 2015, the Company’s total liabilities were $6.202 billion, 4.7% less than the $6.507 billion at December 31, 2014. Deposits and borrowings, the Company’s funding sources, amounted to $6.088 billion at December 31, 2015 versus $6.344 billion at December 31, 2014, a 4.0% decrease. At December 31, 2015, deposits represented 77% and borrowings represented 23% of interest-bearing liabilities. At December 31, 2015, deposits (including accrued interest payable), the largest category of the Company’s interest-bearing liabilities, were $4.717 billion, a decrease of 4.2% from $4.924 billion at December 31, 2014. Demand and savings deposits decreased 9.7% to $2.969 billion, brokered deposits increased 26.4% to $783.0 million and time deposits declined 5.0% to $964.6 million as part of our efforts to reduce the cost of deposits, which averaged 0.57% at December 31, 2015 compared to 0.66% at December 31, 2014. Borrowings consist mainly of repurchase agreements, FHLB-NY advances and subordinated capital notes. At December 31, 2015, borrowings amounted to $1.372 billion, representing a decrease of 3.4% when compared with the $1.420 billion reported at December 31, 2014. Repurchase agreements at December 31, 2015 decreased $45.4 million to $934.7 billion from $980.1 million at December 31, 2014, as a $255.0 million repurchase agreement matured and $22.5 million was repaid and the remaining $232.5 million was renewed. In addition, there were $52.8 million one-month short-term repurchase agreements outstanding at December 31, 2014 compared to $30.0 million outstanding at December 31, 2015. 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 the FHLB-NY amounted to $332.5 million at December 31, 2015 and $334.3 million at December 31, 2014. These advances mature from January 2016 through July 2020. Stockholders’ Equity At December 31, 2015, the Company’s total stockholders’ equity was $897.1 million, a 4.8% decrease when compared to $942.2 million at December 31, 2014. This decline in stockholders’ equity reflects decreases in retained earnings of $31.9 million and in treasury stock of $8.3 million, which in turn reflects the net loss, dividends declared during the year, and common stock repurchases. Book value per share was $16.67 at December 31, 2015 compared to $17.40 at December 31, 2014. From December 31, 2014 to 2015, tangible common equity to total assets decreased to 8.98% from 9.14%, Tier 1 Leverage Capital Ratio increased to 11.18% from 10.61%, Tier 1 Risk-Based Capital Ratio decreased to 15.99% from 16.02%, and Total Risk-Based Capital Ratio decreased to 17.29% from 17.57%. Common Equity Tier 1 Capital Ratio under the new capital rules was 12.14% as of December 31, 2015. New Capital Rules to Implement Basel III Capital Requirements In July 2013, the Board of Governors of the Federal Reserve System (the “Board”), the Office of the Comptroller of the Currency (the “OCC”) and the FDIC (together with the Board and the OCC, the “Agencies”) approved new rules (“New Capital Rules”) to establish a revised comprehensive regulatory capital framework for all U.S. banking organizations. The New Capital Rules generally implement the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. The New Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries, including the Company and the Bank, as compared to the prior U.S. general risk-based capital rules. The New Capital Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The New Capital Rules also address asset risk weights and other matters affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing general risk-weighting approach, which was derived from the Basel Committee’s 1988 “Basel I” capital accords, with a more risk-sensitive approach based, in part, on the “standardized approach” in the Basel Committee’s 2004 “Basel II” capital accords. In addition, the New Capital Rules implement certain provisions of Dodd-Frank Act, including the requirements of Section 939A to remove references to credit ratings from the Agencies’ rules. The New Capital Rules became effective for the Company and the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions. Among other matters, the New Capital Rules: (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to 79 existing regulations. Under the New Capital Rules, for most banking organizations, including the Company, the most common form of Additional Tier 1 capital is noncumulative perpetual preferred stock and the most common form of Tier 2 capital is subordinated notes and a portion of the allocation for loan and lease losses, in each case, subject to the New Capital Rules’ specific requirements. Pursuant to the New Capital Rules, the minimum capital ratios as of January 1, 2015 are as follows: • • • • 4.5% CET1 to risk-weighted assets; 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; 8.0% total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and 4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”). The New Capital Rules also introduce a new 2.5% “capital conservation buffer”, composed entirely of CET1, on top of the three minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. Thus, when fully phased-in on January 1, 2019, the Company and the Bank will be required to maintain an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) total capital to risk- weighted assets of at least 10.5%. The New Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. In addition (as noted above), under the current general risk-based capital rules, the effects of AOCI items included in shareholders’ equity (for example, mark-to-market adjustments to the value of securities held in the available for sale portfolio) under U.S. GAAP are reversed for the purposes of determining regulatory capital ratios. Pursuant to the New Capital Rules, the effects of certain AOCI items are not excluded; however, non-advanced approach banking organizations may make a one-time permanent election to continue to exclude these items. The Company and the Bank made the election to continue to exclude these items in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of their securities portfolio, concurrently with the first filing of the Company’s and the Bank’s periodic regulatory reports in 2015. The New Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion in bank holding companies’ Tier 1 capital, subject to phase-out, in the case of bank holding companies that had $15 billion or more in total consolidated assets as of December 31, 2009. Therefore, the Company is permitted to continue to include its existing trust preferred securities as Tier 1 capital. Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019. With respect to the Bank, the New Capital Rules revise the “prompt corrective action” (“PCA”) regulations adopted pursuant to Section 38 of the Federal Deposit Insurance Act by: (i) introducing a CET1 ratio requirement at each PCA category (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii) eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3% leverage ratio and still be adequately capitalized. The New Capital Rules do not change the total risk-based capital requirement for any PCA category. The New Capital Rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, and resulting in higher risk weights for a variety of asset classes. 80 The following are the consolidated capital ratios of the Company under the New Capital Rules at December 31, 2015 and under the previous capital rules at December 31, 2014: TABLE 16 — CAPITAL, DIVIDENDS AND STOCK DATA Capital data: Stockholders’ equity Regulatory Capital Ratios data: Common equity tier 1 capital ratio Minimum common equity tier 1 capital ratio required Actual common equity tier 1 capital Minimum common equity tier 1 capital required Excess over regulatory requirement Risk-weighted assets Tier 1 risk-based capital ratio Minimum tier 1 risk-based capital ratio required Actual tier 1 risk-based capital Minimum tier 1 risk-based capital required Excess over regulatory requirement Risk-weighted assets Total risk-based capital ratio Minimum total risk-based capital ratio required Actual total risk-based capital Minimum total risk-based capital required Excess over regulatory requirement Risk-weighted assets Leverage capital ratio Minimum leverage capital ratio required Actual tier 1 capital Minimum tier 1 capital required Excess over regulatory requirement Tangible common equity to total assets Tangible common equity to risk-weighted assets Total equity to total assets Total equity to risk-weighted assets Stock data: Outstanding common shares Book value per common share Tangible book value per common share Market price at end of period Market capitalization at end of period Common dividend data: Cash dividends declared Cash dividends declared per share Payout ratio Dividend yield $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ December 31, 2015 2014 (Dollars in thousands, except per share data) Variance % 897,077 $ 942,197 -4.8% 12.14% 4.50% 594,482 220,344 374,138 4,896,539 15.99% 6.00% 782,912 293,792 489,120 4,896,539 17.29% 8.00% 846,748 391,723 455,025 4,896,539 11.18% 4.00% 782,912 280,009 502,903 8.98% 13.02% 12.64% 18.32% 43,867,909 16.67 14.53 7.32 321,113 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 16.02% 4.00% 776,525 193,886 582,639 4,847,150 17.57% 8.00% 851,437 387,772 463,665 4,847,150 10.61% 4.00% 776,525 292,738 483,787 9.14% 14.04% 12.65% 19.44% 44,613,615 17.40 15.25 16.65 742,817 -0.2% 0.8% 51.5% -16.1% 1.0% -1.6% -0.6% 1.0% -1.9% 1.0% 5.4% 0.8% -4.3% 4.0% -1.8% -7.3% -0.1% -5.8% -1.7% -4.2% -4.7% -56.0% -56.8% Year Ended December 31, 2015 2014 Variance % 2013 15,286 0.34 22.67% 2.04% 4.2% $ 5.9% $ -529.2% 141.2% 11,875 0.26 15.03% 1.50% 15,932 0.36 $ $ -97.30% 4.92% 81 The following table presents a reconciliation of the Company’s total stockholders’ equity to tangible common equity and total assets to tangible assets at December 31, 2015, 2014 and 2013: Total stockholders' equity Preferred stock Preferred stock issuance costs Goodwill Core deposit intangible Customer relationship intangible Total tangible common equity Total assets Goodwill Core deposit intangible Customer relationship intangible Total tangible assets Tangible common equity to tangible assets Common shares outstanding at end of period Tangible book value per common share $ $ $ $ 2015 December 31, 2014 (In thousands, except share or per share information) 942,197 $ $ 897,077 (176,000) 10,130 (86,069) (5,294) (2,544) 637,300 7,099,149 (86,069) (5,294) (2,544) $ (176,000) 10,130 (86,069) (6,463) (3,280) 680,515 7,449,109 (86,069) (6,463) (3,280) $ 2013 884,913 (176,000) 10,130 (86,069) (7,804) (4,108) 621,062 8,158,015 (86,069) (7,804) (4,108) 7,005,242 $ 7,353,297 $ 8,060,034 9.10% 9.25% 7.71% 43,867,909 44,613,615 14.53 $ 15.25 $ 45,676,922 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. 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. 82 The following table presents the Company’s capital adequacy information under the New Capital Rules: Risk-based capital: Common equity tier 1 capital Additional tier 1 capital Tier 1 capital Additional Tier 2 capital Total risk-based capital Risk-weighted assets: Balance sheet items Off-balance sheet items Total risk-weighted assets Ratios: Common equity tier 1 capital (minimum required - 4.5%) Tier 1 capital (minimum required - 6%) Total capital (minimum required - 8%) Leverage ratio Equity to assets Tangible common equity to assets $ $ $ $ December 31 2015 (Dollars in thousands) 594,482 188,430 782,912 63,836 846,748 4,742,113 154,426 4,896,539 12.14% 15.99% 17.29% 11.18% 12.64% 8.98% 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 December 31, 2015 and 2014: Oriental Bank Regulatory Capital Ratios: Common Equity Tier 1 Capital to Risk-Weighted Assets Actual common equity tier 1 capital Minimum capital requirement (4.5%) Minimum to be well capitalized (6.5%) Tier 1 Capital to Risk-Weighted Assets Actual tier 1 risk-based capital Minimum capital requirement (6%) Minimum to be well capitalized (8%) Total Capital to Risk-Weighted Assets Actual total risk-based capital Minimum capital requirement (8%) Minimum to be well capitalized (10%) Total Tier 1 Capital to Average Total Assets Actual tier 1 capital Minimum capital requirement (4%) Minimum to be well capitalized (5%) December 31, 2015 2014 (Dollars in thousands) 15.40% 751,886 219,762 317,434 15.40% 751,886 293,016 390,688 16.70% 815,458 390,688 488,360 10.80% 751,886 278,399 347,999 $ $ $ $ $ $ $ $ $ N/A N/A N/A N/A 15.45% 746,524 193,222 289,833 16.99% 820,884 386,444 483,055 10.26% 746,177 290,879 363,599 Variance % N/A N/A N/A N/A -0.3% 0.7% 51.6% 34.8% -1.7% -0.7% 1.1% 1.1% 5.3% 0.8% -4.3% -4.3% $ $ $ $ $ $ $ $ $ $ $ $ 83 The Company’s common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “OFG.” At December 31, 2015 and 2014, the Company’s market capitalization for its outstanding common stock was $321.1 million ($7.32 per share) and $742.8 million ($16.65 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: 2015 December 31, 2015 September 30, 2015 June 30, 2015 March 31, 2015 2014 December 31, 2014 September 30, 2014 June 30, 2014 March 31, 2014 Price High Low Cash Dividend Per share $ $ $ $ $ $ $ $ 10.52 10.20 17.04 17.70 16.76 18.89 18.88 17.54 $ $ $ $ $ $ $ $ 6.39 6.63 10.67 14.88 14.35 14.92 16.38 14.30 $ $ $ $ $ $ $ $ 0.06 0.10 0.10 0.10 0.10 0.08 0.08 0.08 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 $7.7 million of authority remains. The shares of common stock repurchased are to be held by the Company as treasury shares. During 2015 the Company purchased 803,985 shares under this program for a total of $8.9 million, at an average price of $11.10 per share. There were no repurchases during 2014. The number of shares that may yet be purchased under the $70 million program is estimated at 1,056,128 and was calculated by dividing the remaining balance of $7.7 million by $7.32 (closing price of the Company common stock at December 31, 2015). The Company did not purchase any shares of its common stock other than through its publicly announced stock repurchase program during 2015 and 2014. 84 Contractual Obligations and Commercial Commitments As disclosed in the notes to the Company’s consolidated financial statements, the Company has certain obligations and commitments to make future payments under contracts. At December 31, 2015, the aggregate contractual obligations and commercial commitments, excluding accrued interests and unamortized premiums (discounts), are as follows: CONTRACTUAL OBLIGATIONS: Securities sold under agreements to repurchase Advances from FHLB Subordinated capital notes Other term notes Annual rental commitments under noncancelable operating leases Certificates of deposits Total $ $ Payments Due by Period Total Less than 1 year 1 - 3 years (In thousands) 3 - 5 years After 5 years $ 932,500 332,114 102,000 1,734 45,350 $ 432,500 262,982 67,000 - 7,755 $ 500,000 59,267 - - 19,743 $ - 9,865 - - 5,455 1,673,025 3,086,723 $ 975,602 1,745,839 $ 631,312 1,210,322 $ 66,111 81,431 $ - - 35,000 1,734 12,397 - 49,131 85 Loan commitments, which represent unused lines of credit and letters of credit provided to customers, increased to $607.1 million and $1.5 million, respectively, for 2015, as compared to $493.2 million and $885 thousand, respectively, at December 31, 2014. Commitments to extend credit are agreements to lend to customers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates, bear variable interest rate and may require payment of a fee. Since the commitments may expire unexercised, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Impact of Inflation and Changing Prices The financial statements and related data presented herein (except for certain non-GAAP measures as previously indicated) have been prepared in accordance with GAAP which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services since such prices are affected by inflation. 86 QUARTERLY FINANCIAL DATA The following is a summary of the quarterly results of operations: TABLE 17 — SELECTED QUARTERLY FINANCIAL DATA: March 31, 2015 EARNINGS DATA: Interest income Interest expense Net interest income Provision for loan and lease losses Net interest income after provision for loan and lease losses Non-interest income Non-interest expenses Income before taxes Income tax expense (benefit) Net (loss) income Less: dividends on preferred stock 17,366 89,635 42,193 47,442 6,881 56,332 (2,009) 979 (2,988) (3,465) 17,121 82,292 15,539 66,753 (4,656) 64,437 (2,340) 769 (3,109) (3,466) (Loss) income available to common shareholders PER SHARE DATA: Basic Diluted $ $ $ (6,453) $ (6,575) $ (0.14) $ (0.14) $ (0.15) $ (0.15) $ June 30, 2015 September 30, 2015 December 31, 2015 (In thousands, except per share data) $ 107,001 $ 99,413 $ 107,247 $ 92,907 $ Total 2015 406,568 69,196 337,372 161,501 175,871 52,472 248,401 (20,058) (17,554) (2,504) (13,862) (16,366) (0.37) (0.37) 17,424 89,823 51,579 38,244 35,977 69,090 5,131 562 4,569 (3,465) 1,104 0.03 0.03 17,285 75,622 52,190 23,432 14,270 58,542 (20,840) (19,864) (976) (3,466) $ $ $ (4,442) $ (0.10) $ (0.10) $ EARNINGS DATA: Interest income Interest expense Net interest income Provision for loan and lease losses Total provision for loan and lease losses, net Net interest income after provision for loan and lease losses Non-interest income Non-interest expenses Income before taxes Income tax expense Net income Less: dividends on preferred stock Income available to common shareholders PER SHARE DATA: Basic Diluted March 31, 2014 June 30, 2014 September 30, 2014 December 31, 2014 Total 2014 (In thousands, except per share data) $ 123,074 $ 125,900 $ 120,301 $ 115,982 $ 19,676 103,398 11,691 11,691 91,707 5,229 61,404 35,532 11,785 23,747 (3,465) 20,282 0.45 0.42 $ $ $ 19,822 106,078 14,815 14,815 91,263 507 59,848 31,922 10,613 21,309 (3,466) 17,843 0.40 0.38 $ $ $ $ $ $ 18,430 101,871 17,257 17,257 84,614 2,491 59,575 27,530 7,998 19,532 (3,465) 16,067 0.36 0.34 $ $ $ 18,854 97,128 16,877 16,877 80,251 9,096 61,898 27,449 6,856 20,593 (3,466) 17,127 0.38 0.36 $ $ $ 485,257 76,782 408,475 60,640 60,640 347,835 17,323 242,725 122,433 37,252 85,181 (13,862) 71,319 1.58 1.50 87 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Background The Company’s risk management policies are established by its Board of Directors (the “Board”) and implemented by management through the adoption of a risk management program, which is overseen and monitored by the Chief Risk Officer and the Risk Management and Compliance Committee. The Company has continued to refine and enhance its risk management program by strengthening policies, processes and procedures necessary to maintain effective risk management. All aspects of the Company’s business activities are susceptible to risk. Consequently, risk identification and monitoring are essential to risk management. As more fully discussed below, the Company’s primary risk exposures include, market, interest rate, credit, liquidity, operational and concentration risks. Market Risk Market risk is the risk to earnings or capital arising from adverse movements in market rates or prices, such as interest rates or prices. The Company evaluates market risk together with interest rate risk. The Company’s financial results and capital levels are constantly exposed to market risk. The Board and management are primarily responsible for ensuring that the market risk assumed by the Company complies with the guidelines established by policies approved by the Board. The Board has delegated the management of this risk to the Asset/Liability Management Committee (“ALCO”) which is composed of certain executive officers from the business, treasury and finance areas. One of ALCO’s primary goals is to ensure that the market risk assumed by the Company is within the parameters established in such policies. Interest Rate Risk Interest rate risk is the exposure of the Company’s earnings or capital to adverse movements in interest rates. It is a predominant market risk in terms of its potential impact on earnings. The Company manages its asset/liability position in order to limit the effects of changes in interest rates on net interest income. ALCO oversees interest rate risk, liquidity management and other related matters. In executing its responsibilities, ALCO examines current and expected conditions in global financial markets, competition and prevailing rates in the local deposit market, liquidity, unrealized gains and losses in securities, recent or proposed changes to the investment portfolio, alternative funding sources and their costs, hedging and the possible purchase of derivatives such as swaps, and any tax or regulatory issues which may be pertinent to these areas. On a quarterly basis, the Company performs a net interest income simulation analysis on a consolidated basis to estimate the potential change in future earnings from projected changes in interest rates. These simulations are carried out over a five-year time horizon, assuming certain gradual upward and downward interest rate movements, achieved during a twelve-month period. Instantaneous interest rate movements are also modeled. Simulations are carried out in two ways: (i) using a static balance sheet as the Company had on the simulation date, and (ii) using a dynamic balance sheet based on recent growth patterns and business strategies. The balance sheet is divided into groups of assets and liabilities detailed by maturity or re-pricing and their corresponding interest yields and costs. As interest rates rise or fall, these simulations incorporate expected future lending rates, current and expected future funding sources and costs, the possible exercise of options, changes in prepayment rates, deposits decay and other factors which may be important in projecting the future growth of net interest income. The Company uses a software application to project future movements in the Company’s balance sheet and income statement. The starting point of the projections generally corresponds to the actual values of the balance sheet on the date of the simulations. 88 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 December 31, 2015 for the most likely scenario, assuming a one-year time horizon: Change in interest rate + 200 Basis points + 100 Basis points - 50 Basis points Net Interest Income Risk (one year projection) Static Balance Sheet Growing Simulation Amount Change Percent Change (Dollars in thousands) Amount Change Percent Change $ $ $ 5,479 3,042 (1,582) 2.13% $ 1.18% $ -0.61% $ 4,174 2,393 (1,130) 1.66% 0.95% -0.45% 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 December 31, 2015. 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 10 to the accompanying consolidated financial statements for further information concerning the Company’s derivative activities. 89 Following is a summary of certain strategies, including derivative activities, currently used by the Company to manage interest rate risk: Interest rate swaps — The Company entered into hedge-designated swaps to hedge the variability of future interest cash flows of forecasted wholesale borrowings attributable to changes in the one-month LIBOR rate. Once the forecasted wholesale borrowings transactions occurred, the interest rate swap effectively fixes the Company’s interest payments on an amount of forecasted interest expense attributable to the one-month LIBOR rate corresponding to the swap notional stated rate. A derivative liability of $6.4 million (notional amount of $263.3 million) was recognized at December 31, 2015 related to the valuation of these swaps. In addition, the Company has certain derivative contracts, including interest rate swaps not designated as hedging instruments, which are utilized to convert certain variable rate loans to fixed-rate loans, and the mirror-images of these interest rate swaps in which the Company enters into to minimize its interest rate risk exposure that results from offering the derivatives to clients. These interest rate swaps are marked to market through earnings. At December 31, 2015, interest rate swaps offered to clients not designated as hedging instruments represented a derivative asset of $2.1 million (notional amounts of $16.3 million), and the mirror-image interest rate swaps in which the Company entered into represented a derivative liability of $2.1 million (notional amounts of $16.3 million). 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 the 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 December 31, 2015, 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 $1.1 million (notional amounts of $3.4 million) and the options sold to customers embedded in the certificates of deposit represented a liability of $1.0 million (notional amount of $3.2 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 December 31, 2015, the Company had $263.3 million in interest rate swaps at an average rate of 2.6% designated as cash flow hedges for $263.3 million in advances from the FHLB-NY that reprice or are being rolled over on a monthly basis. Credit Risk Credit risk is the possibility of loss arising from a borrower or counterparty in a credit-related contract failing to perform in accordance with its terms. The principal source of credit risk for the Company is its lending activities. In Puerto Rico, the Company’s principal market, economic conditions are challenging, as they have been for the last ten years, due to a shrinking population, a protracted economic recession, a housing sector that remains under pressure, the Puerto Rico government’s fiscal and liquidity crisis, and the recent credit or payment default on certain Puerto Rico government bonds, with additional defaults expected if the Puerto Rico government is unable to restructure its debts and/or access the capital markets to place new debt or refinance its upcoming maturities. Also, the Company’s banking subsidiary has an outstanding $190.3 million credit facility to PREPA that is classified as substandard and on non-accrual status, which now stands at $137.0 million, net of allowances. The Company recorded a $53.3 million loss provision for such credit facility in 2015. 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. 90 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. Liquidity Risk Liquidity risk is the risk of the Company not being able to generate sufficient cash from either assets or liabilities to meet obligations as they become due without incurring substantial losses. The Board has established a policy to manage this risk. The Company’s cash requirements principally consist of deposit withdrawals, contractual loan funding, repayment of borrowings as these mature, and funding of new and existing investments as required. The Company’s business requires continuous access to various funding sources. While the Company is able to fund its operations through deposits as well as through advances from the FHLB-NY and other alternative sources, the Company’s business is dependent upon other external wholesale funding sources. As part of its efforts to reduce its cost of deposits, the Company increased its brokered deposits by 26.4% in 2015. As of December 31, 2015, the Company had $932.5 million in repurchase agreements, excluding accrued interest, and $783.0 million in brokered deposits, including $71.6 million in money market accounts. Brokered deposits are typically offered through an intermediary to small retail investors. The Company’s ability to continue to attract brokered deposits is subject to variability based upon a number of factors, including volume and volatility in the global securities markets, the Company’s credit rating, and the relative interest rates that it is prepared to pay for these liabilities. Brokered deposits are generally considered a less stable source of funding than core deposits obtained through retail bank branches. Investors in brokered deposits are generally more sensitive to interest rates and will generally move funds from one depository institution to another based on small differences in interest rates offered on deposits. Although the Company expects to have continued access to credit from the foregoing sources of funds, there can be no assurance that such financing sources will continue to be available or will be available on favorable terms. In a period of financial disruption or if negative developments occur with respect to the Company, the availability and cost of the Company’s funding sources could be adversely affected. In that event, the Company’s cost of funds may increase, thereby reducing its net interest income, or the Company may need to dispose of a portion of its investment portfolio, which depending upon market conditions, could result in realizing a loss or experiencing other adverse accounting consequences upon any such dispositions. The Company’s efforts to monitor and manage liquidity risk may not be successful to deal with dramatic or unanticipated changes in the global securities markets or other reductions in liquidity driven by the Company or market-related events. In the event that such sources of funds are reduced or eliminated and the Company is not able to replace these on a cost-effective basis, the Company may be forced to curtail or cease its loan origination business and treasury activities, which would have a material adverse effect on its operations and financial condition. As of December 31, 2015, the Company had approximately $526.2 million in unrestricted cash and cash equivalents, $477.9 million in investment securities that are not pledged as collateral, $770.6 million in borrowing capacity at the FHLB-NY. Operational Risk Operational risk is the risk of loss from inadequate or failed internal processes, personnel and systems or from external events. All functions, products and services of the Company are susceptible to operational risk. The Company faces ongoing and emerging risk and regulatory pressure related to the activities that surround the delivery of banking and financial products and services. Coupled with external influences such as market conditions, security risks, and legal risks, the potential for operational and reputational loss has increased. In order to mitigate and control operational risk, the Company has developed, and continues to enhance, specific internal controls, policies and procedures that are designed to identify and manage operational risk at appropriate levels throughout the organization. The purpose of these policies and procedures is to provide reasonable assurance that the Company’s business operations are functioning within established limits. 91 The Company classifies operational risk into two major categories: business specific and corporate-wide affecting all business lines. For business specific risks, a risk assessment group works with the various business units to ensure consistency in policies, processes and assessments. With respect to corporate-wide risks, such as information security, business recovery, legal and compliance, the Company has specialized groups, such as Information Security, Enterprise Risk Management, Corporate Compliance, Information Technology, Legal and Operations. These groups assist the lines of business in the development and implementation of risk management practices specific to the needs of the business groups. All these matters are reviewed and discussed in the Information Technology Steering Committee and the Executive Risk and Compliance Committee. The Company is subject to extensive United States federal and Puerto Rico regulations, and this regulatory scrutiny has been significantly increasing over the last several years. The Company has established and continues to enhance procedures based on legal and regulatory requirements that are reasonably designed to ensure compliance with all applicable statutory and regulatory requirements. The Company has a corporate compliance function headed by a Regulatory Compliance Director who reports to the Deputy General Counsel and the BSA Officer who reports to the Chief Risk Officer. The Regulatory Compliance Director is responsible for the oversight of regulatory compliance and implementation of a company-wide compliance program, except for the Bank Secrecy Act/Anti-Money Laundering compliance program, which is overseen and implemented by the BSA Officer. Concentration Risk Substantially all of the Company’s business activities and a significant portion of its credit exposure are concentrated in Puerto Rico. As a consequence, the Company’s profitability and financial condition may be adversely affected by an extended economic slowdown, adverse political, fiscal or economic developments in Puerto Rico or the effects of a natural disaster, all of which could result in a reduction in loan originations, an increase in non-performing assets, an increase in foreclosure losses on mortgage loans, and a reduction in the value of its loans and loan servicing portfolio and its Puerto Rico government securities. 92 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA OFG Bancorp FORM 10-K FINANCIAL DATA INDEX Management’s Annual Report on Internal Controls Over Financial Reporting Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting Consolidated Statements of Financial Condition at December 31, 2015 and 2014 Consolidated Statements of Operations for the years ended December 31, 2015, 2014, and 2013 Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2015, 2014, and 2013 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2015, 2014, and 2013 Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014, and 2013 Notes to the Consolidated Financial Statements Note 1– Summary of Significant Accounting Policies Note 2 – Restricted Cash Note 3 – Investment Securities Note 4 – Pledged Assets Note 5 – Loans Note 6 – Allowance for Loan and Lease Losses Note 7 – FDIC Indemnification Asset and True-up Payment Obligation and FDIC Shared- loss Expense Note 8 – Premises and Equipment Note 9 – Servicing Assets Note 10 – Derivatives Note 11 – Accrued Interest Receivable and Other Assets Note 12 – Deposits Note 13 – Borrowings and Related Interest Note 14 – Offsetting of Financial Assets and Liabilities Note 15 – Employee Benefit Plan Note 16 – Related Party Transactions Note 17 – Income Taxes Note 18 – Regulatory Capital Requirements Note 19 – Equity- Based Compensation Plan Note 20 – Stockholders’ Equity Note 21 – Accumulated Other Comprehensive Income Note 22 – (Loss) Earnings per Common Share Note 23 – Guarantees Note 24 – Commitments and Contingencies Note 25 – Fair Value of Financial Instruments Note 26 – Business Segments Note 27 – OFG Bancorp (Holding Company Only) Financial Information Page 94 95 96 97 98 99 100 101-102 103-122 123 123-130 131 132-156 157-165 166-168 168 169-171 171-173 174 175-176 177-180 181-182 183 183 184-187 187-188 189-190 191-192 192-194 194-195 195-196 196-198 198-205 206-207 208-210 93 OFG Bancorp MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING To the Board of Directors and stockholders of OFG Bancorp: The management of OFG Bancorp (the “Company”) is responsible for establishing and maintaining effective internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, and for the assessment of internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As called for by Section 404 of the Sarbanes-Oxley Act of 2002, management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. Management made its assessment using the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Criteria”). Based on its assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2015 based on the COSO Criteria. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2015, has been audited by KPMG LLP, the Company’s independent registered public accounting firm, as stated in their report dated March 14, 2016. By: /s/ José Rafael Fernández By: /s/ Ganesh Kumar José Rafael Fernández Ganesh Kumar President and Chief Executive Officer Executive Vice President and Chief Financial Officer Date: March 14, 2016 Date: March 14, 2016 94 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders OFG Bancorp: We have audited the accompanying consolidated statements of financial condition of OFG Bancorp and subsidiaries (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive (loss) income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of OFG Bancorp and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), OFG Bancorp and its subsidiaries’ internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. /s/ KPMG LLP San Juan, Puerto Rico March 14, 2016 Stamp No. E196956 of the Puerto Rico Society of Certified Public Accountants was affixed to the record copy of this report. 95 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders OFG Bancorp: We have audited OFG Bancorp and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, OFG Bancorp and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of OFG Bancorp and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2015, and our report dated March 14, 2016, expressed an unqualified opinion on those consolidated financial statements. /s/ KPMG LLP San Juan, Puerto Rico March 14, 2016 Stamp No. E196955 of the Puerto Rico Society of Certified Public Accountants was affixed to the record copy of this report. 96 OFG BANCORP CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AS OF DECEMBER 31, 2015 AND 2014 Cash and cash equivalents: Cash and due from banks Money market investments Total cash and cash equivalents Restricted cash ASSETS Investments: Trading securities, at fair value, with amortized cost of $667 (December 31, 2014 - $2,419) Investment securities available-for-sale, at fair value, with amortized cost of $955,646 (December 31, 2014 - $1,187,679) Investment securities held-to-maturity, at amortized cost, with fair value of $614,679 (December 31, 2014 - $164,154) Federal Home Loan Bank (FHLB) stock, at cost Other investments Total investments Loans: Mortgage loans held-for-sale, at lower of cost or fair value Loans held for investment, net of allowance for loan and lease losses of $234,131 (December 31, 2014 - $133,762) Total loans Other assets: FDIC indemnification asset Foreclosed real estate Accrued interest receivable Deferred tax asset, net Premises and equipment, net Customers' liability on acceptances Servicing assets Derivative assets Goodwill Other assets Total assets Deposits: Demand deposits Savings accounts Time deposits LIABILITIES AND STOCKHOLDERS’ EQUITY Total deposits Borrowings: Securities sold under agreements to repurchase Advances from FHLB Subordinated capital notes Other borrowings Total borrowings Other liabilities: Derivative liabilities Acceptances executed and outstanding Accrued expenses and other liabilities Total liabilities Commitments and contingencies (See Note 24) 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, 2014 - 1,340,000 shares; 1,380,000 shares; and 960,000 shares) $25 liquidation value 84,000 shares of Series C issued and outstanding (December 31, 2014 - 84,000 shares); $1,000 liquidation value Common stock, $1 par value; 100,000,000 shares authorized; 52,625,869 shares issued: 43,867,909 shares outstanding (December 31, 2014 - 52,625,869; 44,613,615) Additional paid-in capital Legal surplus Retained earnings Treasury stock, at cost, 8,757,960 shares (December 31, 2014 - 8,012,254 shares) Accumulated other comprehensive income, net of tax of $1,182 (December 31, 2014 $447) Total stockholders’ equity December 31, 2015 2014 (In thousands) $ 532,010 $ 4,699 536,709 3,349 288 974,609 620,189 20,783 3 568,752 4,675 573,427 8,407 1,594 1,216,538 162,752 21,169 3 1,615,872 1,402,056 13,614 4,420,599 4,434,213 22,599 58,176 20,637 145,901 74,590 14,582 7,455 3,025 86,069 75,972 14,539 4,812,107 4,826,646 97,378 95,661 21,345 108,708 80,599 17,989 13,992 8,107 86,069 108,725 $ $ 7,099,149 $ 7,449,109 1,861,680 1,179,229 1,675,950 4,716,859 934,691 332,476 102,633 1,734 1,997,536 1,385,824 1,541,046 4,924,406 980,087 334,331 101,584 4,004 1,371,534 1,420,006 6,162 14,582 92,935 11,221 17,989 133,290 6,202,072 6,506,912 92,000 84,000 52,626 540,512 70,435 148,886 (105,379) 13,997 897,077 92,000 84,000 52,626 539,311 70,467 181,152 (97,070) 19,711 942,197 Total liabilities and stockholders’ equity $ 7,099,149 $ 7,449,109 The accompanying notes are an integral part of these consolidated financial statements 97 OFG BANCORP CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013 Year Ended December 31, 2015 2014 (In thousands, except per share data) 2013 Interest income: Loans Mortgage-backed securities Investment securities and other Total interest income Interest expense: Deposits Securities sold under agreements to repurchase Advances from FHLB and other borrowings Subordinated capital notes Total interest expense Net interest income Provision for loan and lease losses, net Net interest income after provision for loan and lease losses Non-interest income: Banking service revenue Wealth management revenue Mortgage banking activities Total banking and financial service revenues Other-than-temporary impairment losses on investment securities Portion of losses recognized in other comprehensive (loss) income, before taxes Net impairment losses recognized FDIC shared-loss expense, net Reimbursement from FDIC shared-loss coverage in sale of loans and foreclosed real estate Net gain (loss) on: Sale of securities Derivatives Early extinguishment of debt Other non-interest (loss) income Total non-interest income, net Non-interest expense: Compensation and employee benefits Professional and service fees Occupancy and equipment Insurance Electronic banking charges Information technology expenses Advertising, business promotion, and strategic initiatives Merger and restructuring charges Foreclosure, repossession and other real estate expenses Loan servicing and clearing expenses Taxes, other than payroll and income taxes Communication Printing, postage, stationary and supplies Director and investor relations Other Total non-interest expense (Loss) income before income taxes Income tax (benefit) expense Net (loss) income Less: dividends on preferred stock Net (loss) income available to common shareholders (Loss) earnings per common share: Basic Diluted Average common shares outstanding and equivalents Cash dividends per share of common stock $ 367,622 $ 435,553 $ 35,338 3,608 406,568 27,034 29,567 9,072 3,523 69,196 337,372 161,501 175,871 41,466 29,040 6,128 76,634 (4,662) 3,172 (1,490) (42,808) 20,000 2,572 (190) - (2,246) 52,472 79,172 16,217 34,186 9,567 21,893 5,648 6,452 - 37,522 9,075 9,460 3,086 2,575 1,091 12,457 248,401 (20,058) (17,554) (2,504) (13,862) $ $ $ $ (16,366) $ (0.37) $ (0.37) $ 51,455 0.36 $ 44,836 4,868 485,257 33,954 29,654 9,185 3,989 76,782 408,475 60,640 347,835 40,712 29,855 7,381 77,948 - - - (65,756) - 4,366 (608) - 1,373 17,323 85,283 15,996 34,710 8,830 19,081 6,019 7,014 - 25,125 7,567 14,409 3,430 2,533 1,106 11,622 242,725 122,433 37,252 85,181 (13,862) 71,319 1.58 1.50 52,326 0.34 $ $ $ $ 443,902 40,927 8,803 493,632 40,977 29,249 8,620 5,114 83,960 409,672 72,894 336,778 44,239 30,924 10,994 86,157 - - - (69,267) - - (1,526) 1,061 670 17,095 91,957 21,321 34,408 8,795 16,702 10,546 7,025 17,660 16,484 7,588 15,539 3,377 3,459 1,098 8,177 264,136 89,737 (8,709) 98,446 (13,862) 84,584 1.85 1.73 53,033 0.26 The accompanying notes are an integral part of these consolidated financial statements 98 OFG BANCORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013 Net (loss) income Other comprehensive (loss) income before tax: Unrealized gain (loss) on securities available-for-sale Realized gain on investment securities included in net (loss) income Other-than-temporary impairment on investment securities included in net income Unrealized gain on cash flow hedges Other comprehensive (loss) income before taxes Income tax effect Other comprehensive (loss) income after taxes Comprehensive (loss) income Year Ended December 31, 2015 2014 2013 (In thousands) $ (2,504) $ 85,181 $ 98,446 (8,814) (2,572) 1,490 4,278 (5,618) (96) (5,714) (8,218) $ 19,843 (4,366) - 2,322 17,799 (1,279) 16,520 101,701 $ (62,080) - - 6,758 (55,322) 2,633 (52,689) 45,757 $ The accompanying notes are an integral part of these consolidated financial statements 99 OFG BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013 Preferred stock: Balance at beginning of year Balance at end of year Common stock: Balance at beginning of year Exercised stock options Reclassification to treasury stock Balance at end of year Additional paid-in capital: Balance at beginning of year Stock-based compensation expense Exercised stock options Lapsed restricted stock units Preferred stock issuance cost Common stock issuance cost Balance at end of year Legal surplus: Balance at beginning of year Transfer from retained earnings Balance at end of year Retained earnings: Balance at beginning of year Net (loss) income Cash dividends declared on common stock Cash dividends declared on preferred stock Transfer to legal surplus Balance at end of year Treasury stock: Balance at beginning of year Stock repurchased Lapsed restricted stock units Reclassification from common stock Stock used to match defined contribution plan Balance at end of year Accumulated other comprehensive income, net of tax: Balance at beginning of year Other comprehensive (loss) income, net of tax Balance at end of year Total stockholders’ equity 2015 Year Ended December 31, 2014 2013 (In thousands) $ 176,000 $ 176,000 176,000 $ 176,000 52,626 - - 52,626 539,311 1,637 - (436) - - 540,512 70,467 (32) 70,435 181,152 (2,504) (15,932) (13,862) 32 148,886 (97,070) (8,950) 641 - - (105,379) 19,711 (5,714) 13,997 897,077 $ 52,707 55 (136) 52,626 538,071 1,036 591 (387) - - 539,311 61,957 8,510 70,467 133,629 85,181 (15,286) (13,862) (8,510) 181,152 (80,642) (16,948) 384 136 - (97,070) 3,191 16,520 19,711 942,197 $ $ 176,000 176,000 52,671 36 - 52,707 537,453 1,823 399 (1,563) (16) (25) 538,071 52,143 9,814 61,957 70,734 98,446 (11,875) (13,862) (9,814) 133,629 (81,275) - 556 - 77 (80,642) 55,880 (52,689) 3,191 884,913 The accompanying notes are an integral part of these consolidated financial statements 100 OFG BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013 Cash flows from operating activities: Net (loss) income Adjustments to reconcile net (loss) income to net cash provided by operating activities: Amortization of deferred loan origination fees, net of costs Amortization of fair value premiums, net of discounts, on acquired loans Amortization of investment securities premiums, net of accretion of discounts Amortization of core deposit and customer relationship intangibles Amortization of fair value premiums on acquired deposits FDIC shared-loss expense, net Other-than-temporary impairment on securities Other Depreciation and amortization of premises and equipment Deferred income tax expense (benefit), net Provision for loan and lease losses, net Stock-based compensation (Gain) loss on: Sale of securities Sale of mortgage loans held-for-sale Derivatives Early extinguishment of debt Foreclosed real estate Sale of other repossessed assets Sale of premises and equipment Originations of loans held-for-sale Proceeds from sale of loans held-for-sale Net (increase) decrease in: Trading securities Accrued interest receivable Servicing assets Other assets Net increase (decrease) in: Accrued interest on deposits and borrowings Accrued expenses and other liabilities Net cash provided by operating activities Cash flows from investing activities: Purchases of: Investment securities available-for-sale Investment securities held-to-maturity FHLB stock Maturities and redemptions of: Investment securities available-for-sale Investment securities held-to-maturity FHLB stock Proceeds from sales of: Investment securities available-for-sale Foreclosed real estate and other repossessed assets, including write-offs Proceeds from sale of loans held-for-investment Premises and equipment Mortgage servicing rights Origination and purchase of loans, excluding loans held-for-sale Principal repayment of loans, including covered loans Reimbursements from the FDIC on shared-loss agreements Additions to premises and equipment Net change in securities purchased under agreements to resell Net change in restricted cash Net cash provided by investing activities 2015 Year Ended December 31, 2014 (In thousands) 2013 $ (2,504) $ 85,181 $ 98,446 3,396 3,106 12,109 1,906 660 42,808 1,490 - 11,100 (37,329) 161,501 1,637 (2,572) (3,135) (81) - 33,998 4,828 192 (211,352) 102,383 1,306 708 610 (14,849) (250) (14,584) 97,082 (1,939) (499,317) - 238,003 39,310 386 103,831 74,940 42,110 - 5,927 (802,572) 861,891 90,697 (5,283) - 5,058 153,042 2,883 12,310 3,124 2,169 4,772 65,756 - 62 10,199 24,155 60,640 1,036 (4,366) (5,123) 752 - 9,195 6,770 (11) (176,199) 96,804 275 (2,611) (191) 11,738 (1,292) (33,028) 175,000 (219,853) (166,562) (86,175) 490,048 3,612 89,456 214,518 54,639 9,378 25 - (739,017) 751,215 32,692 (7,909) 60,000 73,792 559,859 1,258 12,224 19,014 2,577 14,400 69,267 - 8 10,318 (11,066) 72,894 1,823 - (2,980) 220 (1,061) 6,255 3,089 5 (307,339) 147,531 (1,374) (4,080) (3,006) 29,123 (2,155) 18,425 173,816 (33,294) - (104,337) 554,801 - 118,298 141,202 57,449 - 891 - (1,176,875) 1,171,150 47,100 (9,120) 20,000 (68,739) 718,526 101 OFG BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 – (CONTINUED) Cash flows from financing activities: Net increase (decrease) in: Deposits Short term borrowings Securities sold under agreements to repurchase FHLB advances, federal funds purchased, and other borrowings Subordinated capital notes Exercise of stock options and restricted units lapsed, net Issuance of common stock, net Issuance of preferred stock, net Purchase of treasury stock Termination of derivative instruments Dividends paid on preferred stock Dividends paid on common stock Net cash used in financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental Cash Flow Disclosure and Schedule of Non-cash Activities: Interest paid Income taxes paid Mortgage loans securitized into mortgage-backed securities Transfer from loans to foreclosed real estate and other repossessed assets Reclassification of loans held-for-investment portfolio to held-for-sale portfolio Reclassification of loans held-for-sale portfolio to held-for-investment portfolio 2015 Year Ended December 31, 2014 (In thousands) 2013 (198,052) - (45,315) (4,155) 1,049 204 - - (8,950) - (13,862) (17,761) (450,976) - (287,184) (1,469) 1,574 643 - - (16,948) - (13,862) (14,479) (323,899) (92,210) (427,931) (213,144) (44,968) (572) (16) (25) - 1,108 (13,862) (10,789) $ $ $ $ $ $ $ $ (286,842) $ (782,701) $ (1,126,308) (36,718) 573,427 536,709 67,766 13,966 116,319 67,345 3,445 156 $ $ $ $ $ $ $ (47,842) 621,269 573,427 81,506 7,114 95,909 85,459 5,202 25,801 $ $ $ $ $ $ $ (233,966) 855,235 621,269 98,856 378 137,943 89,142 41,780 - The accompanying notes are an integral part of these consolidated financial statements 102 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies of OFG Bancorp (the “Company”) conform with U.S. generally accepted accounting principles (“GAAP”) and to banking industry practices. The following is a description of the Company’s most significant accounting policies: Nature of Operations 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, LLC. (“Oriental Insurance”), previously known as Oriental Insurance, Inc., and a retirement plan administrator, Oriental Pension Consultants, Inc. (“OPC”). In December 2015 Oriental Insurance, Inc was converted to a limited liability company under the name Oriental Insurance LLC. 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. The main offices of the Company and its subsidiaries are located in San Juan, Puerto Rico, except for OPC, which is located in Boca Raton, Florida. The Company is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) under the U.S. Bank Holding Company Act of 1956, as amended, and the Dodd-Frank Act. The Bank is subject to the supervision, examination and regulation of the Office of the Commissioner of Financial Institutions of Puerto Rico (the “OCFI”) and the Federal Deposit Insurance Corporation (the “FDIC”). The Bank offers banking services such as commercial, and consumer lending, leasing, auto loans, savings and time deposit products, financial planning, and corporate and individual trust services, and capitalizes on its commercial banking network to provide mortgage lending products to its clients. Oriental International Bank Inc. (“OIB”), a wholly-owned subsidiary of the Bank, and Oriental Overseas, a division of the Bank, are international banking entities licensed pursuant to International Banking Center Regulatory Act of Puerto Rico, as amended. OIB and Oriental Overseas offer the Bank certain Puerto Rico tax advantages. Their activities are limited under Puerto Rico law to persons located in Puerto Rico with assets/liabilities located outside of Puerto Rico. Oriental Financial Services is a securities broker-dealer and is subject to the supervision, examination and regulation of the Financial Industry Regulatory Authority (the “FINRA”), the SEC, and the OCFI. Oriental Financial Services is also a member of the Securities Investor Protection Corporation. Oriental Insurance is an insurance agency and is subject to the supervision, examination and regulation of the Office of the Commissioner of Insurance of Puerto Rico. The Company’s mortgage banking activities are conducted through a division of the Bank. The mortgage banking activities include the origination of mortgage loans for the Bank’s own portfolio, and the sale of loans directly in the secondary market or the securitization of conforming loans into mortgage-backed securities. The Bank originates Federal Housing Administration (“FHA”) insured and Veterans Administration (“VA”) guaranteed mortgages that are primarily securitized for issuance of Government National Mortgage Association (“GNMA”) mortgage-backed securities which can be resold to individual or institutional investors in the secondary market. Conventional loans that meet the underwriting requirements for sale or exchange under certain Federal National Mortgage Association (“FNMA”) or Federal Home Loan Mortgage Corporation (“FHLMC”) programs are referred to as conforming mortgage loans and are also securitized for issuance of FNMA or FHLMC mortgage-backed securities. The Bank is an approved seller of FNMA, as well as FHLMC, mortgage loans for issuance of FNMA and FHLMC mortgage-backed securities. The Bank is also an approved issuer of GNMA mortgage-backed securities. The Bank is the master servicer of the GNMA, FNMA and FHLMC pools that it issues and of its mortgage loan portfolio, and has a subservicing arrangement with a third party. On December 18, 2012, the Company purchased from Banco Bilbao Vizcaya Argentaria, S. A. (“BBVA”), all of the outstanding common stock of each of (i) BBVAPR Holding Corporation (“BBVAPR Holding”), the sole shareholder of Banco Bilbao Vizcaya Argentaria Puerto Rico (“BBVAPR Bank”), a Puerto Rico chartered commercial bank, and BBVA Seguros, Inc. (“BBVA Seguros”), a subsidiary offering insurance services, and (ii) BBVA Securities of Puerto Rico, Inc. (“BBVA Securities”), a registered broker-dealer. This transaction is referred to as the “BBVAPR Acquisition” and BBVAPR Holding, BBVAPR Bank, BBVA Seguros and BBVA Securities are collectively referred to as the “BBVAPR Companies” or “BBVAPR.” 103 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Statutory Trust II is exempt from the consolidation requirements of Generally Accepted Accounting Principles ("GAAP"). Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amount of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate mainly to the determination of the allowance for loan and lease losses, the valuation of securities and derivative instruments, revisions to expected cash flows in acquired loans, accounting for the indemnification asset, the valuation of the true up payment obligation, the determination of income taxes and other-than-temporary impairment of securities, and goodwill valuation and impairment assessment. Business Combinations Business combinations are accounted for under the acquisition method. Under this method, assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date are measured at their fair values as of the acquisition date. The acquisition date is the date the acquirer obtains control. Also, assets or liabilities arising from noncontractual contingencies are measured at their acquisition date at fair value only if it is more likely than not that they meet the definition of an asset or liability. Adjustments subsequently made to the provisional amounts recorded on the acquisition date as a result of new information obtained about facts and circumstances that existed as of the acquisition date but were known to the Corporation after acquisition will be made retroactively during a measurement period not to exceed one year. Furthermore, acquisition-related restructuring costs that do not meet certain criteria of exit or disposal activities are expensed as incurred. Transaction costs are expensed as incurred. Changes in income tax valuation allowances for acquired deferred tax assets are recognized in earnings subsequent to the measurement period as an adjustment to income tax expense. Contingent consideration classified as an asset or a liability is remeasured to fair value at each reporting date until the contingency is resolved. The changes in fair value of the contingent consideration are recognized in earnings unless the arrangement is a hedging instrument for which changes are initially recognized in other comprehensive income. There were no significant business combinations during 2015, 2014 or 2013. Cash Equivalents 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. (Loss) Earnings per Common Share Basic (loss) earnings per share is calculated by dividing (loss) income available to common shareholders (net (loss) income (increased) reduced by dividends on preferred stock) by the weighted average of outstanding common shares. Diluted (loss) earnings per share is similar to the computation of basic (loss) earnings per share except that the weighted average of common shares is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares underlying stock options and restricted units had been issued, assuming that proceeds from exercise are used to repurchase shares in the market (treasury stock method). Any stock splits and dividends are retroactively recognized in all periods presented in the consolidated financial statements. Securities Purchased/Sold Under Agreements to Resell/Repurchase The Company purchases securities under agreements to resell the same or similar securities. Amounts advanced under these agreements represent short-term loans and are reflected as assets in the consolidated statements of financial condition. It is the Company’s policy to take possession of securities purchased under resale agreements while the counterparty retains effective control over the securities. The Company monitors the fair value of the underlying securities as compared to the related receivable, including accrued interest, and requests additional collateral when deemed appropriate. 104 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The Company also sells securities under agreements to repurchase the same or similar securities. The Company retains effective control over the securities sold under these agreements. Accordingly, such agreements are treated as financing arrangements, and the obligations to repurchase the securities sold are reflected as liabilities. The securities underlying the financing agreements remain included in the asset accounts. The counterparty to repurchase agreements generally has the right to repledge the securities received as collateral. Investment Securities Securities are classified as held-to-maturity, available-for-sale or trading. Securities for which the Company has the intent and ability to hold until maturity are classified as held-to-maturity and are carried at amortized cost. Securities that might be sold prior to maturity because of interest rate changes to meet liquidity needs or to better match the repricing characteristics of funding sources are classified as available-for-sale. These securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of tax in other comprehensive (loss) income. The Company classifies as trading those securities that are acquired and held principally for the purpose of selling them in the near future. These securities are carried at fair value with realized and unrealized changes in fair value included in earnings in the period in which the changes occur. The Company’s investment in the Federal Home Loan Bank (“FHLB”) of New York stock, a restricted security, has no readily determinable fair value and can only be sold back to the FHLB-NY at cost. Therefore, these stock shares are deemed to be nonmarketable equity securities and are carried at cost. Premiums and discounts are amortized to interest income over the life of the related securities using the interest method. Net realized gains or losses on sales of investment securities and unrealized gains and losses valuation adjustments considered other than temporary, if any, on securities classified as either available-for-sale or held-to-maturity are reported separately in the statements of operations. The cost of securities sold is determined by the specific identification method. Financial Instruments Certain financial instruments, including derivatives, trading securities and investment securities available-for-sale, are recorded at fair value and unrealized gains and losses are recorded in other comprehensive (loss) income or as part of non-interest income, as appropriate. Fair values are based on listed market prices, if available. If listed market prices are not available, fair value is determined based on other relevant factors, including price quotations for similar instruments. The fair values of certain derivative contracts are derived from pricing models that consider current market and contractual prices for the underlying financial instruments as the well as time value and yield curve or volatility factors underlying the positions. The Company determines the fair value of its financial instruments based on the fair value measurement framework, which establishes a fair value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below: Level 1 — Level 1 assets and liabilities include equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include (i) mortgage-backed securities for which the fair value is estimated based on valuations obtained from third-party pricing services for identical or comparable assets, (ii) debt securities with quoted prices that are traded less frequently than exchange-traded instruments and (iii) derivative contracts and financial liabilities whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models for which the determination of fair value requires significant management judgment or estimation. 105 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Impairment of Investment Securities The Company conducts periodic reviews to identify and evaluate each investment in an unrealized loss position for other-than- temporary impairment. The Company separates the amount of total impairment into credit and noncredit-related amounts. The term “other-than-temporary impairment” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near- term recovery of value is not favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Any portion of a decline in value associated with a credit loss is recognized in income, while the remaining noncredit-related component is recognized in other comprehensive (loss) income. A credit loss is determined by assessing whether the amortized cost basis of the security will be recovered by comparing it to 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.” The Company’s review for impairment generally entails, but is not limited to: • the identification and evaluation of investments that have indications of possible other-than-temporary impairment; • the analysis of individual investments that have fair values less than amortized cost, including consideration of the length of time the investment has been in an unrealized loss position, and the expected recovery period; • the financial condition of the issuer or issuers; • the creditworthiness of the obligor of the security; • actual collateral attributes; • any rating changes by a rating agency; • current analysts’ evaluations; • the payment structure of the debt security and the likelihood of the issuer being able to make payments; • current market conditions; • adverse conditions specifically related to the security, industry, or a geographic area; • the Company’s intent to sell the debt security; • whether it is more-likely-than-not that the Company will be required to sell the debt security before its anticipated recovery; and • other qualitative factors that could support or not an other-than-temporary impairment. Derivative Instruments and Hedging Activities The Company’s overall interest rate risk-management strategy 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 rate risk-management strategy include interest rate swaps, caps, 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 exchange-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. 106 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The Company has offered its customers certificates of deposit with an option tied to the performance of the Standard & Poor’s 500 stock market index (“S&P 500 Index”). The Company has purchased options from major financial entities to manage its exposure to changes in this index. Under the terms of the option agreements, the Company receives a certain percentage of the increase, if any, in the initial month-end value of the S&P 500 Index over the average of the monthly index observations in a five-year period 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. The embedded option in the certificates of deposit is bifurcated, and the changes in the value of that option are also recorded in earnings. When using derivative instruments, the Company exposes itself to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract due to insolvency or any other event of default, the Company’s credit risk will equal the fair value gain in a derivative plus any cash or securities that may have been delivered to the counterparty as part of the transaction terms. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes the Company, thus creating a repayment risk for the Company. This risk is generally mitigated by requesting cash or securities from the counterparty to cover the positive fair value. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, assumes no credit risk other than to the extent that the cash or value of the collateral delivered as part of the transactions exceeds the fair value of the derivative. The Company minimizes the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties. The Company uses forward-settlement swaps to hedge the variability of future interest cash flows of forecasted wholesale borrowings attributable to changes in LIBOR. Once the forecasted wholesale borrowing transactions occur, the interest rate swap will effectively lock-in the Company’s interest rate payments on an amount of forecasted interest expense attributable to the one-month LIBOR corresponding to the swap notional amount. By employing this strategy, the Company minimizes its exposure to volatility in LIBOR. As part of this hedging strategy, the Company formally documents all relationships between hedging instruments and hedged items, as the well as its risk-management objective and strategy for undertaking various hedging transactions. This process includes linking all derivatives that are designated as cash flow hedges to (i) specific assets and liabilities on the balance sheet or (ii) specific firm commitments or forecasted transactions. The Company also formally assesses (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. The changes in fair value of the forward-settlement swaps are recorded in accumulated other comprehensive income to the extent there is no significant ineffectiveness. The Company discontinues hedge accounting prospectively when (i) it determines that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item (including hedged items such as firm commitments or forecasted transactions); (ii) the derivative expires or is sold, terminated, or exercised; (iii) it is no longer probable that the forecasted transaction will occur; (iv) a hedged firm commitment no longer meets the definition of a firm commitment; or (v) management determines that designating the derivative as a hedging instrument is no longer appropriate or desired. The Company’s derivative activities are monitored by its Asset/Liability Management Committee which is also responsible for approving hedging strategies that are developed through its analysis of data derived from financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into the Company’s overall interest rate risk- management. Off-Balance Sheet Instruments In the ordinary course of business, the Company enters into off-balance sheet instruments consisting of commitments to extend credit, further discussed in Note 24 hereto. Such financial instruments are recorded in the financial statements when these are funded or related fees are incurred or received. The Company periodically evaluates the credit risks inherent in these commitments and establishes accruals for such risks if and when these are deemed necessary. 107 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Mortgage Banking Activities and Loans Held-For-Sale The residential mortgage loans reported as held-for-sale are stated at the lower of cost or fair value, cost being determined on the outstanding loan balance less unearned income, and fair value determined in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. Realized gains or losses on these loans are determined using the specific identification method. Loans held-for-sale include all conforming mortgage loans originated and purchased, which from time to time the Company sells to other financial institutions or securitizes conforming mortgage loans into GNMA, FNMA and FHLMC pass- through certificates. Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities The Company recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. The Company is not engaged in sales of mortgage loans and mortgage-backed securities subject to recourse provisions except for those provisions that allow for the repurchase of loans as a result of a breach of certain representations and warranties other than those related to the credit quality of the loans included in the sale transactions. The transfer of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset in which the Company surrenders control over the assets is accounted for as a sale if all of the following conditions set forth in Accounting Standards Codification ("ASC") Topic 860 are met: (i) the assets must be isolated from creditors of the transferor, (ii) the transferee must obtain the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the transferor cannot maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. When the Company transfers financial assets and the transfer fails any one of these criteria, the Company is prevented from derecognizing the transferred financial assets and the transaction is accounted for as a secured borrowing. For federal and Puerto Rico income tax purposes, the Company treats the transfers of loans which do not qualify as “true sales” under the applicable accounting guidance, as sales, recognizing a deferred tax asset or liability on the transaction. For transfers of financial assets that satisfy the conditions to be accounted for as sales, the Company derecognizes all assets sold; recognizes all assets obtained and liabilities incurred in consideration as proceeds of the sale, including servicing assets and servicing liabilities, if applicable; initially measures at fair value assets obtained and liabilities incurred in a sale; and recognizes in earnings any gain or loss on the sale. The guidance on transfer of financial assets requires a true sale analysis of the treatment of the transfer under state law as if the Company was a debtor under the bankruptcy code. A true sale legal analysis includes several legally relevant factors, such as the intent of the parties, the nature and level of recourse to the transferor, and the nature of retained interests in the loans sold. The analytical conclusion as to a true sale is never absolute and unconditional, but contains qualifications based on the inherent equitable powers of a bankruptcy court, as well as the unsettled state of the common law. Once the legal isolation test has been met, other factors concerning the nature and extent of the transferor’s control over the transferred assets are taken into account in order to determine whether derecognition of assets is warranted. When the Company sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. Conforming conventional mortgage loans are combined into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or sold directly to FNMA or other private investors for cash. To the extent the loans do not meet the specified characteristics, investors are generally entitled to require the Company to repurchase such loans or indemnify the investor against losses if the assets do not meet certain guidelines. GNMA programs allow financial institutions to buy back individual delinquent mortgage loans that meet certain criteria from the securitized loan pool for which the Company provides servicing. At the Company’s option and without GNMA prior authorization, the Company may repurchase such delinquent loans for an amount equal to 100% of the loan’s remaining principal balance. This buy-back option is considered a conditional option until the delinquency criteria is met, at which time the option becomes unconditional. When the loans backing a GNMA security are initially securitized, the Company treats the transaction as a sale for accounting purposes because the conditional nature of the buy-back option means that the Company does not maintain effective control over the loans, and therefore these are derecognized from the statement of financial condition. When individual loans later meet GNMA’s specified delinquency criteria and are eligible for repurchase, the Company is deemed to have regained effective control over these loans, and these must be brought back onto the Company’s books as assets, regardless of whether the Company intends to exercise the buy-back option. Quality review procedures are performed by the Company as required under the government agency programs to ensure that asset guideline qualifications are met. The Company has not recorded any specific contingent liability in the consolidated financial statements for these customary representation and warranties related to loans sold by the Company, and management believes that, based on historical data, the probability of payments and expected losses under these representation and warranty arrangements is not significant. 108 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) As part of the BBVAPR Acquisition, on December 18, 2012, the Company assumed a liability for residential mortgage loans sold by BBVAPR subject to credit recourse, principally loans associated with FNMA residential mortgage loan sales and securitization programs. 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. 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. The Company has established a liability to cover the estimated credit loss exposure related to loans sold with credit recourse. 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 as part of acquired servicing rights, and are updated by accruing or reversing expense (categorized in the line item "mortgage banking activities" in the consolidated statements of operations) throughout the life of the loan, as necessary, when additional relevant information becomes available. The methodology used to estimate the recourse liability is a function of the recourse arrangements given and considers a variety of factors, which include actual defaults and historical loss experience, foreclosure rate, estimated future defaults and the probability that a loan would be delinquent. Statistical methods are used to estimate the recourse liability. 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 90 days delinquent within the following twelve-month period. Servicing Assets The Company periodically sells or securitizes mortgage loans while retaining the obligation to perform the servicing of such loans. In addition, the Company may purchase or assume the right to service mortgage loans originated by others. Whenever the Company undertakes an obligation to service a loan, management assesses whether a servicing asset and/or liability should be recognized. A servicing asset is recognized whenever the compensation for servicing is expected to more than adequately compensate the Company for servicing the loans. Likewise, a servicing liability would be recognized in the event that servicing fees to be received are not expected to adequately compensate the Company for its expected cost. All separately recognized servicing assets are recognized at fair value using the fair value measurement method. Under the fair value measurement method, the Company measures servicing rights at fair value at each reporting date and reports changes in fair value of servicing asset in the statement of operations in the period in which the changes occur, and includes these changes, if any, with mortgage banking activities in the consolidated statement of operations. The fair value of servicing rights is subject to fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. The fair value of servicing rights 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. Loans and Leases Originated and Other Loans and Leases Held in Portfolio Loans the Company originates and intends to hold in portfolio are stated at the principal amount outstanding, adjusted for unamortized deferred fees and costs which are amortized to interest income over the expected life of the loan using the interest method. The Company discontinues accrual of interest on originated loans after payments become more than 90 days past due or earlier if the Company does not expect the full collection of principal or interest. The delinquency status is based upon the contractual terms of the loans. Loans for which the recognition of interest income has been discontinued are designated as non-accruing. Collections are accounted for on the cash method thereafter, until qualifying to return to accrual status. Such loans are not reinstated to accrual status until interest is received on a current basis and other factors indicative of doubtful collection cease to exist. The determination as to the ultimate collectability of the loan’s balance may involve management’s judgment in the evaluation of the borrower’s financial condition and prospects for repayment. 109 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The Company follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan and lease losses to provide for inherent losses in the loan portfolio. This methodology includes the consideration of factors such as economic conditions, portfolio risk characteristics, prior loss experience, and results of periodic credit reviews of individual loans. The provision for loan and lease losses charged to current operations is based on such methodology. Loan and lease losses are charged and recoveries are credited to the allowance for loan and lease losses on originated and other loans. Larger commercial loans that exhibit potential or observed credit weaknesses are subject to individual review and grading. Where appropriate, allowances are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow, and legal options available to the Company. Included in the review of individual loans are those that are impaired. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or as a practical expedient, at the observable market price of the loan or the fair value of the collateral, if the loan is collateral dependent. Loans are individually evaluated for impairment, except large groups of small balance homogeneous loans that are collectively evaluated for impairment and loans that are recorded at fair value or at the lower of cost or fair value. The Company measures for impairment all commercial loans over $250 thousand (i) that are either over 90 days past due or adversely classified, or (ii) when deemed necessary by management or because the loan is a troubled debt restructuring ("TDR"). The portfolios of mortgage loans, auto and leasing, and consumer loans are considered homogeneous and are evaluated collectively for impairment. The Company uses a rating system to apply an overall allowance percentage to each originated and other loan portfolio segment based on historical credit losses adjusted for current conditions and trends. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over a determined look back period for each segment. The actual loss factor is adjusted by the appropriate loss emergence period as calculated for each portfolio. Then, the adjusted loss experience is supplemented with other qualitative factors based on the risks present for each portfolio segment. These qualitative factors include consideration of the following: the credit grading assigned to commercial loans; levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff, including the bank’s loan review system as graded by regulatory agencies in their last examination; local economic trends and conditions; industry conditions; effects of external factors such as competition and regulatory requirements on the level of estimated credit losses in the current portfolio; and effects of changes in credit concentrations and collateral value. Additional impact from the historical loss experience is applied based on levels of delinquency and loan classification, and for the auto loan portfolio by FICO score, and origination date for the mortgage loan portfolio. At origination, a determination is made whether a loan will be held in our portfolio or is intended for sale in the secondary market. Loans that will be held in the Company’s portfolio are carried at amortized cost. Residential mortgage loans held for sale are recorded at the lower of the aggregate cost or market value (“LOCOM”). Acquired Loans and Leases Loans that the Company acquires in acquisitions are recorded at fair value with no carryover of the related allowance for loan losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. The Company has acquired loans in two separate acquisitions, the BBVAPR Acquisition in December 2012 and the FDIC-assisted Eurobank acquisition in April 2010. For each acquisition, the Company considered the following factors as indicators that an acquired loan had evidence of deterioration in credit quality and was therefore in the scope of ASC 310-30:     Loans that were 90 days or more past due, Loans that had an internal risk rating of substandard or worse. Substandard is consistent with regulatory definitions and is defined as having a well-defined weakness that jeopardizes liquidation of the loan, Loans that were classified as nonaccrual by the acquired bank at the time of acquisition, and Loans that had been previously modified in a troubled debt restructuring. 110 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Any acquired loans that were not individually in the scope of ASC 310-30 because they did not meet the criteria above were either (i) pooled into groups of similar loans based on the borrower type, loan purpose, and collateral type and accounted for under ASC 310-30 by analogy or (ii) accounted for under ASC 310-20 (non-refundable fees and other costs). Acquired Loans Accounted for under ASC 310-20 (loans with revolving feature and/or acquired at a premium) Revolving credit facilities such as credit cards, retail and commercial lines of credit and floor plans which are specifically scoped out of ASC 310-30 are accounted for under the provisions of ASC 310-20. Also, performing auto loans with FICO scores over 660 acquired at a premium in the BBVAPR Acquisition are accounted for under this guidance. Auto loans with FICO scores below 660 were acquired at a discount and are accounted for under the provisions of ASC 310-30. The provisions of ASC 310-20 require that any differences between the contractually required loan payments 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 acquired in the BBVAPR Acquisition that were accounted for under the provisions of ASC 310-20 which had fully amortized their premium or discount, recorded at the date of acquisition, are removed from the acquired loan category. Loans accounted for under ASC 310-20 are placed on non-accrual status when past due in accordance with the Company’s non-accruing policy and any accretion of discount is discontinued. These assets were recorded at estimated fair value on their acquisition date, incorporating an estimate of future expected cash flows. Such fair value includes a credit discount which accounts for expected loan losses over the estimated life of these loans. Management takes into consideration this credit discount when determining the necessary allowance for acquired loans that are accounted for under the provisions of ASC 310-20. The allowance for loan and lease losses model for acquired loans accounted for under ASC 310-20 is the same as for the originated and other loan portfolio. Acquired Loans Accounted under ASC 310-30 (including those accounted for under ASC 310-30 by analogy) The Company performed a fair market valuation of each of the loan pools, and each pool was recorded at a discount. The Company determined that at least part of the discount on the acquired individual or pools of loans was attributable to credit quality by reference to the valuation model used to estimate the fair value of these pools of loans. The valuation model incorporated lifetime expected credit losses into the loans’ fair valuation in consideration of factors such as evidence of credit deterioration since origination and the amounts of contractually required principal and interest that the Company did not expect to collect as of the acquisition date. Based on the guidance included in the December 18, 2009 letter from the AICPA Depository Institutions Panel to the Office of the Chief Accountant of the SEC, the Company has made an accounting policy election to apply ASC 310-30 by analogy to all of these acquired pools of loans as they all (i) were acquired in a business combination or asset purchase, (ii) resulted in recognition of a discount attributable, at least in part, to credit quality; and (iii) were not subsequently accounted for at fair value. The excess of expected cash flows from acquired loans over the estimated fair value of acquired loans at acquisition is referred to as the accretable discount and is recognized into interest income over the remaining life of the acquired loans using the interest method. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the life of the acquired loans. Subsequent decreases to the expected cash flows require the Company to evaluate the need for an addition to the allowance for loan losses. Subsequent improvements in expected cash flows result in the reversal of the associated allowance for loan losses, if any and the reversal of a corresponding amount of the nonaccretable discount which the Company then reclassifies as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method. The Company’s evaluation of the amount of future cash flows that it expects to collect takes into account actual credit performance of the acquired loans to date and the Company’s best estimates for the expected lifetime credit performance of the loans using currently available information. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable discount portion of the fair value adjustment. To the extent that the Company experiences deterioration in credit quality in its expected cash flows subsequent to the acquisition of the loans; an allowance for loan losses is established based on the estimate of future credit losses over the remaining life of the loans. In accordance with ASC 310-30, recognition of income is dependent on having a reasonable expectation about the timing and amount of cash flows expected to be collected. The Company performs such an evaluation on a quarterly basis on both its acquired loans individually accounted for under ASC 310-30 and those in pools accounted for under ASC 310-30 by analogy. 111 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Cash flows for acquired loans individually accounted for under ASC 310-30 are estimated on a quarterly basis. Based on this evaluation, a determination is made as to whether or not the Company has a reasonable expectation about the timing and amount of cash flows. Such an expectation includes cash flows from normal customer repayment, collateral value, foreclosure or other collection efforts. Cash flows for acquired loans accounted for on a pooled basis under ASC 310-30 by analogy are also estimated on a quarterly basis. For residential real estate, home equity and other consumer loans, cash flow loss estimates are calculated based on a model that incorporates a projected probability of default and loss. For commercial loans, lifetime loss rates are assigned to each pool with consideration given for pool make-up, including risk rating profile. Lifetime loss rates are developed from internally generated historical loss data and are applied to each pool. To the extent that the Company cannot reasonably estimate cash flows, interest income recognition is discontinued. The unit of account for loans in pools accounted for under ASC 310-30 by analogy is the pool of loans. Accordingly, as long as the Company can reasonably estimate cash flows for the pool as a whole, accretable yield on the pool is recognized and all individual loans within the pool - even those more than 90 days past due - would be considered to be accruing interest in the Company’s financial statement disclosures, regardless of whether or not the Company expects any principal or interest cash flows on an individual loan 90 days or more past due. Because of the loss protection provided by the FDIC, the risk of the loans acquired in the FDIC-assisted Eurobank acquisition that are covered under the FDIC shared-loss agreements are significantly different from loans not covered under the FDIC shared-loss agreement. These loans are referred to as "covered loans". The FDIC shared-loss agreement related to the commercial and other non- single family acquired Eurobank loans expired on June 30, 2015. The coverage for single-family residential loans will expire on June 30, 2020. Covered loans are no longer a material amount. Therefore, the Company changed its current and prior year loan disclosures. Covered loans are accounted for under ASC 310-30. To the extent credit deterioration occurs after the date of acquisition, the Company will record an allowance for loan and lease losses and an increase in the FDIC shared-loss indemnification asset for the expected reimbursement from the FDIC under the shared-loss agreement. Allowance for Loan and Lease Losses for Originated and Acquired BBVAPR Loans and Leases The Company follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan and lease losses to provide for inherent losses in loan portfolio. This methodology includes the consideration of factors such as economic conditions, portfolio risk characteristics, prior loss experience, and results of periodic credit reviews of individual loans. The loss factor used for the general reserve of these loans is established considering the Bank's historical loss experience adjusted for an estimated loss emergence period and the consideration of environmental factors. Environmental factors considered are: change in non-performing loans; migration in classification; trends in charge offs; trends in volume of loans; changes in collateral values; changes in risk selections and underwriting standards, and other changes in lending policies, procedures and practices; experience, ability and depth of lending management and other relevant staff, including the Company’s loan review system; national and local economic trends and industry conditions; and effect of external factors such as competition and regulatory requirements on the level of estimated credit losses. The sum of the adjusted loss experience factors and the environmental factors will be the general valuation reserve (“GVA”) factor to be used for the determination of the allowance for loan and lease losses in each category. As part of the Company’s continuous enhancement to the allowance for loan and lease losses methodology, during the year 2015 the following assumptions were reviewed: - - An assessment of the look-back period and historical loss factor was performed for all portfolio segments. The analysis was based on the trends observed and their relation with the economic cycle as of the period of the analysis. As a result, for the commercial portfolio, the look-back period was changed to 36 months from the previously determined 12 months. For auto, leasing and consumer, a look back period of 24 months was maintained. The Residential Mortgages Portfolio, was evaluated during the fourth quarter of 2015. For this portfolio, a 12 month look back period was maintained as management concluded that given the charge off evolution, a shorter period of losses is more representative of the recent trends and more accurate in predicting future losses. During the quarter ended June 30, 2015, an assessment of environmental factors was performed for commercial, auto, and consumer portfolios. As a result, the environmental factors continue to reflect our assessment of the impact to our portfolio, taking into consideration the current evolution of the portfolio and expected impact, due to recent economic developments, changes in values of collateral and delinquencies, among others. 112 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) - During fourth quarter the loss realization period was revised to 1.60 years for commercial real estate, other portfolios remained at 1 year. These changes in the allowance for loan and lease losses’ look back period and loss emergence period for the commercial portfolios are considered a change in accounting estimate as per ASC 250-10 provisions, where adjustments are made prospectively. Originated and Other Loans and Leases Held for Investment and Acquired Loans Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium) The Company determines the allowance for loan and lease losses by portfolio segment, which consist of mortgage loans, commercial loans, consumer loans, and auto and leasing, as follows: Mortgage loans: These loans are divided into four classes: traditional mortgages, non-traditional mortgages, loans in loan modification programs and home equity secured personal loans. Traditional mortgage loans include loans secured by a dwelling, fixed coupons and regular amortization schedules. Non-traditional mortgages include loans with interest-first amortization schedules and loans with balloon considerations as part of their terms. Mortgages in loan modification programs are loans that are being serviced under such programs. Home equity loans are mainly equity lines of credit. The allowance factor on these loans is impacted by the adjusted historical loss factors on the sub-segments and the environmental risk factors described above and by delinquency buckets. The traditional mortgage loan portfolio is further segregated by vintages and then by delinquency buckets. Commercial loans: The commercial portfolio is segmented by business line (corporate, institutional, middle market, corporate retail, floor plan, and real estate) and by collateral type (secured by real estate and other commercial and industrial assets). The loss factor used for the GVA of these loans is established considering the Bank's past thirty six month historical loss experience of each segment adjusted for the loss realization period and the consideration of environmental factors. The sum of the adjusted loss experience and the environmental factors is the GVA factor used for the determination of the allowance for loan and lease losses on each category. Consumer loans: The consumer portfolio consists of smaller retail loans such as retail credit cards, overdrafts, unsecured personal lines of credit, and personal unsecured loans. The allowance factor, consisting of the adjusted historical loss factor and the environmental risk factors, will be calculated for each sub-class of loans by delinquency bucket. Auto and Leasing: The auto and leasing portfolio consists of financing for the purchase of new or used motor vehicles for private or public use. These loans are granted mainly through dealers authorized and approved by the auto department credit committee of the Bank. In addition, this segment includes personal loans guaranteed by vehicles in the form of lease financing. The allowance factor on the auto and leasing portfolio is impacted by the adjusted historical loss factor and the environmental risk factors. For the determination of the allowance factor, the portfolio is segmented by FICO score, which is updated on a quarterly basis and then by delinquency bucket. The Company establishes its allowance for loan losses through a provision for credit losses based on our evaluation of the credit quality of the loan portfolio. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, and other factors that warrant recognition in determining our allowance for loan losses. The Company continues to monitor and modify the level of the allowance for loan losses to ensure it is adequate to cover losses inherent in our loan portfolio. Our allowance for loan losses consists of the following elements: (i) specific valuation allowances based on probable losses on specifically identified impaired loans; and (ii) valuation allowances based on net historical loan loss experience for similar loans with similar inherent risk characteristics and performance trends, adjusted, as appropriate, for qualitative risk factors specific to respective loan types. 113 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) When current information and events indicate that it is probable that we will be unable to collect all amounts of principal and interest due under the original terms of a business or commercial real estate loan greater than $250 thousand, such loan will be classified as impaired. Additionally, all loans modified in a TDR are considered impaired. The need for specific valuation allowances are determined for impaired loans and recorded as necessary. For impaired loans, we consider the fair value of the underlying collateral, less estimated costs to sell, if the loan is collateral dependent, or we use the present value of estimated future cash flows in determining the estimates of impairment and any related allowance for loan losses for these loans. Confirmed losses are charged off immediately. Prior to a loan becoming impaired, we typically would obtain an appraisal through our internal loan grading process to use as the basis for the fair value of the underlying collateral. Loan loss ratios and credit risk categories, for commercial loans, are updated at least quarterly and are applied in the context of GAAP Management uses current available information in estimating possible loan and lease losses, factors beyond the Company’s control, such as those affecting general economic conditions, may require future changes to the allowance. Acquired Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy) For our acquired loans accounted for under ASC 310-30, our allowance for loan losses is estimated based upon our expected cash flows for these loans. To the extent that we experience a deterioration in borrower credit quality resulting in a decrease in the net present value of our expected cash flows (which are used as a proxy to identify probable incurred losses) subsequent to the acquisition of the loans, an allowance for loan losses is established based on our estimate of future credit losses over the remaining life of the loans. Acquired loans accounted for under ASC Subtopic 310-30 are not considered non-performing and continue to have an accretable yield as long as there is a reasonable expectation about the timing and amount of cash flows expected to be collected. Also, loans charged- off against the non-accretable difference established in purchase accounting are not reported as charge-offs. Charge-offs on loans accounted under ASC Subtopic 310-30 are recorded only to the extent that losses exceed the non-accretable difference established with purchase accounting. Covered loans are accounted for under ASC 310-30 and our policy is consistent with our policy for non-covered acquired loans. For covered loans, the portion of the loss reimbursable from the FDIC is recorded as an offset to the provision for credit losses and increases the FDIC shared-loss indemnification asset. Lease Financing The Company leases vehicles for personal and commercial use to individual and corporate customers. The direct finance lease method of accounting is used to recognize revenue on leasing contracts that meet the criteria specified in the guidance for leases in ASC Topic 840. Aggregate rentals due over the term of the leases, less unearned income, are included in lease financing contracts receivable. Unearned income is amortized using a method over the average life of the leases as an adjustment to the interest yield. Troubled Debt Restructuring A TDR is the restructuring of a receivable in which the Company, as creditor, grants a concession for legal or economic reasons due to the debtor’s financial difficulties. A concession is granted when, as a result of the restructuring, the Company does not expect to collect all amounts due, including interest accrued at the original contract rate. These concessions may include a reduction of the interest rate, principal or accrued interest, extension of the maturity date or other actions intended to minimize potential losses. To assess whether the debtor is having financial difficulties, the Company evaluates whether it is probable that the debtor will default on any of its debt in the foreseeable future. Receivables that are restructured in a TDR are presumed to be impaired and are subject to a specific impairment-measurement method. If the payment of principal at original maturity is primarily dependent on the value of collateral, the Company considers the current value of that collateral in determining whether the principal will be paid. For non-collateral dependent loans, the specific reserve is calculated based on the present value of expected cash flows discounted at the loan’s effective interest rate. An accruing loan that is modified in a TDR can remain in accrual status if, based on a current, well-documented credit analysis, collection of principal and interest in accordance with the modified terms is reasonably assured, and the borrower has demonstrated sustained historical repayment performance for a reasonable period before the modification. 114 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Reserve for Unfunded Commitments The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities and is included in other liabilities in the consolidated statements of financial condition. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded credit facilities. Net adjustments to the reserve for unfunded commitments are included in other operating expenses in the consolidated statements of operations. FDIC Indemnification Asset and True-up Payment Obligation The FDIC indemnification asset is accounted for and measured separately from the covered loans acquired in the FDIC-assisted acquisition as it is not contractually embedded in any of the covered loans. The indemnification asset related to estimated future loan and lease losses is not transferable should the Company sell a loan prior to foreclosure or maturity. The indemnification asset was recorded at fair value at the acquisition date and represents the present value of the estimated cash payments expected to be received from the FDIC for future losses on covered assets based on the credit adjustment estimated for each covered asset and the shared-loss percentages. This balance also includes incurred expenses under the shared-loss agreements. These cash flows are then discounted at a market-based rate to reflect the uncertainty of the timing and receipt of the shared-loss reimbursements from the FDIC. The amount ultimately collected for this asset is dependent upon the performance of the underlying covered assets, the passage of time, the proper submission of claims to the FDIC and compliance with the obligations set forth in the FDIC shared-loss agreements. The time value of money incorporated into the present value computation is accreted into earnings over the shorter of the life of the shared-loss agreements or the holding period of the covered assets. The FDIC indemnification asset is reduced as losses are recognized on covered loans and foreclosed real estate and shared-loss payments are received from the FDIC. Realized credit losses in excess of acquisition-date estimates result in an increase in the FDIC indemnification asset. Conversely, if realized credit losses are less than acquisition-date estimates, the FDIC indemnification asset is amortized through the term of the shared-loss agreements. Depending on the timing of claims and covered asset resolution, the Company could also have owed payments to the FDIC for the recovery of prior claims. The liability for these payments is recorded in other liabilities in the consolidated statements of financial condition until cash is paid to the FDIC. The true-up payment obligation associated with the loss share agreements is accounted for at fair value in accordance with ASC Section 805-30-25-6 as it is considered contingent consideration. The true-up payment obligation is included as part of other liabilities in the consolidated statements of financial condition. Any changes in the carrying value of the obligation are included in the category of FDIC loss share income (expense) in the consolidated statements of operations. Goodwill and Intangible Assets The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired less the fair value of liabilities assumed as goodwill. The Company amortizes the acquired identifiable intangible assets with definite useful economic lives over their useful economic life utilizing an accelerated amortization method. On a periodic basis, the Company assesses whether events or changes in circumstances indicate that the carrying amounts of the Company’s core deposit and other intangible assets may be impaired. The Company does not amortize goodwill or any acquired identifiable intangible assets with an indefinite useful economic life, but reviews them for impairment at the reporting unit level on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired. The Company defines a reporting unit as a distinct, separately identifiable component of one of its operating segments for which complete, discrete financial information is available and reviewed regularly by that segment’s management. The Company has the option to first assess qualitative factors to determine whether there are events or circumstances that exist that make it more likely than not that the fair value of the reporting unit is less than its carrying amount. If it is more likely than not that the fair value of the reporting unit is less than its carrying amount, or if the Company chooses to bypass the qualitative assessment, the Company compares each reporting unit's fair value to its carrying value to identify potential impairment. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. However, if the carrying amount of the reporting unit were to exceed its estimated fair value, a second step would be performed that would compare the implied fair value of the reporting unit's goodwill with the carrying amount. The implied fair value of goodwill is determined in the same manner as goodwill that is recognized in a business combination. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of the reporting units. The Company performs annual goodwill impairment test as of October 31 and monitors for interim triggering events on an ongoing basis. Goodwill is reviewed for impairment utilizing a qualitative 115 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) assessment or a two-step process. The Company has an option to make a qualitative assessment of a reporting unit's goodwill for impairment. If the Company chooses to perform a qualitative assessment and determines the fair value more likely than not exceeds the carrying value, no further evaluation is necessary. For reporting units where the Company performs the two-step process, the first step requires the Company to compare the fair value of each reporting unit, which the Company primarily determines using an income approach based on the present value of discounted cash flows, to the respective carrying value, which includes goodwill. If the fair value of the reporting unit exceeds its carrying value, the goodwill is not considered impaired. If the carrying value is higher than the fair value, there is an indication that an impairment may exist and the second step is required. In step two, the implied fair value of goodwill is calculated as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit's goodwill, the difference is recognized as an impairment loss. The Company performed its annual impairment review of goodwill during the fourth quarter of 2015 and 2014 using October 31, 2015 and 2014 as the annual evaluation date, respectively. There was no impairment at December 31, 2015 and 2014. Foreclosed Real Estate and Other Repossessed Property Foreclosed Real Estate and Other Repossessed Property Foreclosed real estate and other repossessed property are initially recorded at the fair value of the real estate or repossessed property less the cost of selling it at the date of foreclosure or repossession. At the time properties are acquired in full or partial satisfaction of loans, any excess of the loan balance over the estimated fair value of the property is charged against the allowance for loan and lease losses on non-covered loans. After foreclosure or repossession, these properties are carried at the lower of cost or fair value less estimated cost to sell, based on recent appraised values or options to purchase the foreclosed or repossessed property. Any excess of the carrying value over the estimated fair value, less estimated costs to sell, is charged to non-interest expense. The costs and expenses associated to holding these properties in portfolio are expensed as incurred. Foreclosed Real Estate covered by the FDIC Covered foreclosed real estate is initially recorded at its estimated fair value on the acquisition date, based on appraisal value less estimated selling costs. Any subsequent write-downs due to declines in fair value and costs and expenses associated with holding these properties in portfolio are charged as incurred to non-interest expense with a partially offsetting non-interest income for the loss reimbursement under the FDIC shared-loss agreement. Any recoveries of previous write-downs are credited to non-interest expense with a corresponding charge to non-interest income for the portion of the recovery that is due to the FDIC. At December 31, 2015 and 2015 foreclosed real estate covered by the FDIC amounted to $1.9 million and $47.5 million, respectively. Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful life of each type of asset. Amortization of leasehold improvements is computed using the straight-line method over the terms of the leases or estimated useful lives of the improvements, whichever is shorter. Impairment of Long-Lived Assets The Company periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, an estimate of the future cash flows expected to result from the use of the asset and its eventual disposition is made. If the sum of the future cash flows (undiscounted and without interest charges) is less than the carrying amount of the assets, an impairment loss is recognized. The amount of the impairment is the excess of the carrying amount over the fair value of the asset. As of December 31, 2015, there was no indication of impairment as a result of such review. Income Taxes In preparing the consolidated financial statements, the Company is required to estimate income taxes. This involves an estimate of current income tax expense together with an assessment of temporary differences resulting from differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The determination of current income tax expense involves estimates and assumptions that require the Company to assume certain positions based on its interpretation of current tax laws and regulations. Changes in assumptions affecting estimates may be required in the future, and estimated tax assets or liabilities may need to be increased or decreased accordingly. The accrual for tax contingencies is adjusted in 116 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. When particular matters arise, a number of years may elapse before such matters are audited and finally resolved. Favorable resolution of such matters could be recognized as a reduction to the Company’s effective tax rate in the year of resolution. Unfavorable settlement of any particular issue could increase the effective tax rate and may require the use of cash in such year. The determination of deferred tax expense or benefit is based on changes in the carrying amounts of assets and liabilities that generate temporary differences. The carrying value of the Company’s net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to record valuation allowances against its deferred tax assets resulting in additional income tax expense in the consolidated statements of operations. Management evaluates on a regular basis whether the deferred tax assets can be realized and assesses the need for a valuation allowance. A valuation allowance is established when management believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in valuation allowance from period to period are included in the Company’s tax provision in the period of change. In addition to valuation allowances, the Company establishes accruals for uncertain tax positions when, despite the belief that the Company’s tax return positions are fully supported, the Company believes that certain positions are likely to be challenged. The accruals for uncertain tax positions are adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law, and emerging legislation. The accruals for the Company’s uncertain tax positions are reflected as income tax payable as a component of accrued expenses and other liabilities. These accruals are reduced upon expiration of the applicable statute of limitations. The Company follows a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company’s policy is to include interest and penalties related to unrecognized income tax benefits within the provision for income taxes on the consolidated statements of operations. On May 29, 2015 the Governor signed Act No. 72 of 2015. The most relevant provisions of the Act, as applicable to the Company, for taxable years beginning after December 31, 2014, are as follows: (1) establishes a new definition of “large taxpayers,” which requires them to file their tax return following a special procedure established by the Secretary of the Treasury, (2) net operating losses carried forward may be deducted up to 70% of the alternative minimum net income for purposes of computing the alternative minimum tax, and (3) net operating losses carried forward may be deducted up to 80% of the net income for purposes of computing the regular corporate income tax. The Government has enacted tax reform in the past and is expected to do so in the future. In 2014, the Government of Puerto Rico approved an amendment to the Internal Revenue Code, which, among other things, changed the income tax rate for capital gains from 15% to 20%. In addition, in May 2015, the Government approved an increase in the state sales and use tax rate, effective July 1, 2015, from 6% to 10.5% (the municipal sales and use tax remained at a 1% rate), expanded the sales and use tax to certain business-to- business services that were previously exempt, and provided for a transition to a value-added tax was expected to become effective on April 1, 2016. Now, the value added tax is expected to become effective on June 1, 2016. Equity-Based Compensation Plan The Company’s 2007 Omnibus Performance Incentive Plan, as amended and restated (the “Omnibus Plan”), provides for equity-based compensation incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted units and dividend equivalents, as well as equity-based performance awards. The Omnibus Plan was adopted in 2007, amended and restated in 2008, and further amended in 2010. The purpose of the Omnibus Plan is to provide flexibility to the Company to attract, retain and motivate directors, officers, and key employees through the grant of awards based on performance and to adjust its compensation practices to the best compensation practice and corporate governance trends as they develop from time to time. The Omnibus Plan is further intended to motivate high levels of individual performance coupled with increased shareholder returns. Therefore, awards under the Omnibus Plan (each, an 117 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) “Award”) are intended to be based upon the recipient’s individual performance, level of responsibility and potential to make significant contributions to the Company. Generally, the Omnibus Plan will terminate as of (a) the date when no more of the Company’s shares of common stock are available for issuance under the Omnibus Plan or, (b) if earlier, the date the Omnibus Plan is terminated by the Company’s Board of Directors. The Board’s Compensation Committee (the “Committee”), or such other committee as the Board may designate, has full authority to interpret and administer the Omnibus Plan in order to carry out its provisions and purposes. The Committee has the authority to determine those persons eligible to receive an Award and to establish the terms and conditions of any Award. The Committee may delegate, subject to such terms or conditions or guidelines as it shall determine, to any employee or group of employees any portion of its authority and powers under the Omnibus Plan with respect to participants who are not directors or executive officers subject to the reporting requirements under Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Only the Committee may exercise authority in respect to Awards granted to such participants. The Omnibus Plan replaced and superseded the Company’s 1996, 1998 and 2000 Incentive Stock Option Plans (the “Stock Option Plans”). All outstanding stock options under the Stock Option Plans continue in full force and effect, subject to their original terms and conditions. The expected term of stock options granted represents the period of time that such options are expected to be outstanding. Expected volatilities are based on historical volatility of the Company’s shares of common stock over the most recent period equal to the expected term of the stock options. For stock options issued during 2015, the expected volatilities are based on both historical and implied volatility of the Company’s shares of common stock. The Company follows the fair value method of recording stock-based compensation. The Company used the modified prospective transition method, which requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award with the cost to be recognized over the service period. It applies to all awards unvested and granted after the effective date and awards modified, repurchased, or cancelled after that date. Comprehensive Income (Loss) Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, except for those resulting from investments by owners and distributions to owners. GAAP requires that recognized revenue, expenses, gains and losses be included in net income (loss). Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities and on derivative activities that qualify and are designated for cash flows hedge accounting, net of taxes, are reported as a separate component of the stockholders’ equity section of the consolidated statements of financial condition, such items, along with net income (loss), are components of comprehensive income (loss). Commitments and Contingencies Liabilities for loss contingencies, arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. Subsequent Events The Company has evaluated other events subsequent to the balance sheet date and prior to the filing of this annual report on Form 10- K for the year ended December 31, 2015, and has adjusted and disclosed those events that have occurred that would require adjustment or disclosure in the consolidated financial statements. Recent Accounting Developments Reclassification of Defaulted Consumer Mortgage Loans upon Foreclosure - In January 2014, the 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 becomes effective for annual and interim periods beginning after December 15, 2014. The ASU can 118 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) 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 did not have a material effect on our consolidated financial statements, since the Company already followed this approach. Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures - In June 2014, FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in the ASU require repurchase-to-maturity transactions to be recorded and accounted for as secured borrowings. Amendments to Topic 860 also require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (i.e., a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement, as well as additional required disclosures. The accounting amendments and disclosures are effective for interim and annual periods beginning after December 15, 2014. The disclosures for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings are required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The adoption of this guidance did not have a material effect on our consolidated financial statements. Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure- In August 2014, FASB issued ASU No. 2014-14, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government- Guaranteed Mortgage Loans upon Foreclosure. The amendments require a mortgage loan to be derecognized and a separate receivable to be recognized upon foreclosure if the loan has a government guarantee that is non-separable from the loan before foreclosure, the creditor has the ability and intent to convey the real estate property to the guarantor, and any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Additionally, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor upon foreclosure. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. The adoption of this guidance did not have a material effect on our consolidated financial statements. 119 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Future Application of Accounting Standards Revenue from Contracts with Customers - In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in ASU 2014-09 supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The general principle of the amendments require an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance sets forth a five step approach to be utilized for revenue recognition. The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Management is currently assessing the impact to the Company’s consolidated financial statements. Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period - In June 2014, FASB issued ASU No. 2014-12, Compensation- Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The amendments require that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. Specifically, if the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should b recognized prospectively over the remaining requisite service period. The amendments are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Management does not expect the requirements of this update to have a material impact on the Company’s financial position, results of operations or cash flows. Going Concern - In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, a new going concern standard, which requires management to assess at each interim and annual reporting period whether substantial doubt exists about the company’s ability to continue as a going concern. Substantial doubt exists if it is probable (the same threshold that is used for contingencies) that the company will be unable to meet its obligations as they become due within one year after the date the financial statements are issued or available to be issued (assessment date). Management needs to consider known (and reasonably knowable) events and conditions at the assessment date. For all entities, this standard is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, with earlier adoption permitted. The adoption of this standard will have no material impact on our financial position or results of operations. Hybrid Financial Instruments - In December 2014, the FASB issued ASU No. 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force), a standard that will require a company that issues or invests in a hybrid financial instrument (e.g., a preferred share with a redemption feature, a conversion feature, or both) to determine the nature of the host contract by considering the economic characteristics of the entire instrument, including the embedded derivative feature that is being evaluated for separate accounting. Concluding the host contract is debt-like (versus equity-like) may result in substantially different answers about whether certain features must be accounted for separately. The guidance provides a modified retrospective transition for all existing hybrid financial instruments in the form of a share, with the option for full retrospective application. The new standard is effective for public business entities in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption, including adoption in an interim period, is permitted. The adoption of this standard will have no material impact on our financial position or results of operations. 120 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Amendment to the Consolidation Analysis - In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendment to the Consolidation Analysis (“ASU 2015-02”), which changes the analysis that a reporting entity must perform to determine whether it should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: 1) 2) 3) 4) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities Eliminate the presumption that a general partner should consolidate a limited partnership Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships Provide a scope exception from consolidation guidance for reporting entities with interest in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2015. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustment should be reflected as of the beginning of the fiscal year of that includes that interim period. The amendments may be applied using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A reporting entity may also apply the amendments of this ASU retrospectively. The adoption of this standard will have no material impact on our financial position or results of operations. Extraordinary and Unusual Items - In January 2015, the FASB issued ASU 2015-01, Income Statement – (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”), which eliminates from GAAP the concept of extraordinary items. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports the classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity is also required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. Eliminating the concept of extraordinary items will save time and reduce costs for preparers because they will not have to assess whether a particular event or transaction event is extraordinary. This will alleviate uncertainty for preparers, auditors, and regulators because auditors and regulators no longer will need to evaluate whether a preparer treated an unusual and/or infrequent item appropriately. The presentation and disclosure guidance for items that are unusual in nature and occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The amendments of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2015. The amendments may be applied prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided is applied from the beginning of the fiscal year of adoption. The adoption of this standard will have no material impact on our financial position or results of operations. Simplifying the Presentation of Debt Issuance Costs - In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability rather than as an asset. The standard does not affect the recognition and measurement of debt issuance costs; therefore, the amortization of such costs shall continue to be reported as interest expense. ASU 2015-03 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permissible for financial statements that have not been previously issued. The new guidance is to be applied on a retrospective basis to all prior periods. The Company does not expect the adoption of ASU 2015-03 to have a material impact on its consolidated financial statements. 121 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Recognition and Measurement of Financial Assets and Liabilities - In January 2016 the FASB released ASU No. 2016-01, Recognition and Measurement of Financial Assets and Liabilities. The main provisions of the update are to eliminate the available for sale classification of accounting for equity securities and to adjust the fair value disclosures for financial instruments carried at amortized costs such that the disclosed fair values represent an exit price as opposed to an entry price. The provisions of this update will require that equity securities be carried at fair market value on the balance sheet and any periodic changes in value will be adjustments to the income statement. A practical expedient is provided for equity securities without a readily determinable fair value, such that these securities can be carried at cost less any impairment. The provisions of this update become effective for interim and annual periods beginning after December 15, 2017. Management does not expect the requirements of this update to have a material impact on the Company’s financial position, results of operations or cash flows. Leases - In February 2016 the FASB released ASU 2016-02, Leases (Topic 842), which supersedes ASC Topic 840 and sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessors and lessees. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The amendments of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The ASU is expected to impact the Company’s consolidated financial statements since the Company has certain operating lease arrangements for which it is the lessee. The Company is currently evaluating the impact that the adoption of this accounting pronouncement will have on its consolidated financial statements. Other Potential Amendments to Current Accounting Standards - FASB and the International Accounting Standards Board, either jointly or separately, are currently working on several major projects, including amendments to existing accounting standards governing financial instruments, leases, and consolidation and investment companies. As part of the joint financial instruments project, FASB has issued a proposed ASU that would result in significant changes to the guidance for recognition and measurement of financial instruments, in addition to the proposed ASU that would change the accounting for credit losses on financial instruments discussed above. FASB is also working on a joint project that would require substantially all leases to be capitalized on the balance sheet. Upon completion of the standards, the Company will need to re-evaluate its accounting and disclosures. However, due to ongoing deliberations of the standard setters, the Company is currently unable to determine the effect of future amendments or proposals. 122 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) NOTE 2 – RESTRICTED CASH The following table includes the composition of the Company’s restricted cash: Cash pledged as collateral to other financial institutions to secure: Derivatives Obligations under agreement of loans sold with recourse December 31, 2015 2014 (In thousands) $ $ 1,980 1,369 3,349 $ $ 2,980 5,427 8,407 At December 31, 2015 and 2014, the Bank’s international banking entities, Oriental International Bank Inc. (“OIB”) and Oriental Overseas, a division of the Bank, each held unencumbered certificates of deposit in the amount of $300 thousand as the legal reserve required for international banking entities under Puerto Rico law. Each certificate of deposit cannot be withdrawn by OIB or Oriental Overseas without prior written approval of the OCFI. As part of its derivative activities, the Company has entered into collateral agreements with certain financial counterparties. At December 31, 2015 and 2014, the Company had delivered $2.0 million and $3.0 million, respectively, of cash as collateral for such derivatives activities. As part of the BBVA Acquisition, the Company assumed a contract with FNMA which required collateral to guarantee the repurchase, if necessary, of loans sold with recourse. At December 31, 2015 and 2014, the Company delivered as collateral cash amounting to $1.4 million and $5.4 million, respectively. The Bank is required by Puerto Rico law to maintain average weekly reserve balances to cover demand deposits. The amount of those minimum average reserve balances for the week that covered December 31, 2015 was $148.3 million (December 31, 2014 - $141.5 million). At December 31, 2015 and 2014, the Bank complied with the requirement. Cash and due from bank as well as other short- term, highly liquid securities are used to cover the required average reserve balances. NOTE 3 – INVESTMENT SECURITIES Money Market Investments The Company considers as cash equivalents all money market instruments that are not pledged and that have maturities of three months or less at the date of acquisition. At December 31, 2015 and 2014, money market instruments included as part of cash and cash equivalents amounted to $4.7 million in both periods. 123 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Investment Securities The amortized cost, gross unrealized gains and losses, fair value, and weighted average yield of the securities owned by the Company at December 31, 2015 and 2014 were as follows: Available-for-sale Mortgage-backed securities FNMA and FHLMC certificates GNMA certificates CMOs issued by US government-sponsored agencies Total mortgage-backed securities Investment securities Obligations of US government-sponsored agencies Obligations of Puerto Rico government and political subdivisions Other debt securities Total investment securities Total securities available for sale Held-to-maturity Mortgage-backed securities FNMA and FHLMC certificates Investment securities US Treasury securities Total securities held to maturity Total Available-for-sale Mortgage-backed securities FNMA and FHLMC certificates GNMA certificates CMOs issued by US government-sponsored agencies Total mortgage-backed securities Investment securities Obligations of US government-sponsored agencies Obligations of Puerto Rico government and public instrumentalities Other debt securities Total investment securities Total securities available-for-sale Held-to-maturity Mortgage-backed securities FNMA and FHLMC certificates Total Amortized Cost Gross Unrealized Gains December 31, 2015 Gross Unrealized Losses (In thousands) Fair Value Weighted Average Yield $ $ $ $ 735,363 57,129 137,787 930,279 5,122 17,801 2,444 25,367 955,646 595,157 25,032 620,189 1,575,835 $ $ $ 25,791 1,366 27 27,184 - - 128 128 27,312 426 - 426 27,738 $ $ $ 1,509 - 2,741 4,250 29 4,070 - 4,099 8,349 5,865 71 5,936 14,285 $ $ $ 759,645 58,495 135,073 953,213 5,093 13,731 2,572 21,396 974,609 589,718 24,961 614,679 1,589,288 2.97% 3.19% 1.85% 2.82% 1.36% 6.24% 2.98% 4.94% 2.87% 2.24% 0.49% 2.17% 2.60% Amortized Cost December 31, 2014 Gross Unrealized Gains Gross Unrealized Losses (In thousands) Fair Value Weighted Average Yield $ 972,836 $ 37,876 $ 4,473 179,146 1,156,455 7,148 20,939 288 136 38,300 33 - 3,137 31,224 1,187,679 $ 157 190 38,490 $ 1,203 8 3,153 4,364 - 5,267 - 5,267 9,631 $ 1,009,509 4,753 176,129 1,190,391 7,181 15,672 3,294 26,147 1,216,538 $ 162,752 1,402 - 164,154 1,350,431 $ 39,892 $ 9,631 $ 1,380,692 124 $ $ 3.12% 4.94% 1.81% 2.92% 1.34% 5.41% 2.95% 4.23% 2.96% 2.48% 2.90% OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The amortized cost and fair value of the Company’s investment securities at December 31, 2015, 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. Mortgage-backed securities Due after 5 to 10 years FNMA and FHLMC certificates Total due after 5 to 10 years Due after 10 years FNMA and FHLMC certificates GNMA certificates CMOs issued by US government-sponsored agencies Total due after 10 years Total mortgage-backed securities Investment securities Due from 1 to 5 years US Treasury securities Obligations of Puerto Rico government and political subdivisions Total due from 1 to 5 years Due after 5 to 10 years Obligations of US government and sponsored agencies Total due after 5 to 10 years Due after 10 years Obligations of Puerto Rico government and political subdivisions Other debt securities Total due after 10 years Total investment securities Total securities available-for-sale December 31, 2015 Available-for-sale Held-to-maturity Amortized Cost Fair Value Amortized Cost Fair Value (In thousands) (In thousands) $ 15,098 $ 15,098 15,228 $ 15,228 $ - - 720,265 57,129 137,787 915,181 930,279 - 8,733 8,733 5,122 5,122 9,068 2,444 11,512 25,367 744,417 58,495 135,073 937,985 953,213 - 7,438 7,438 5,093 5,093 6,293 2,572 8,865 21,396 595,157 - - 595,157 595,157 25,032 - 25,032 - - - - - 25,032 $ 955,646 $ 974,609 $ 620,189 $ - - 589,718 - - 589,718 589,718 24,961 - 24,961 - - - - - 24,961 614,679 125 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The Company, as part of its asset/liability management, may purchase U.S. Treasury securities and U.S. government-sponsored agency discount notes close to their maturities as alternatives to cash deposits at correspondent banks or as a short term vehicle to reinvest the proceeds of sale transactions until investment securities with attractive yields can be purchased. During the years ended 2015, 2014 and 2013, the Company sold $63.5 million, $99.4 million and $141.2 million, respectively, of available-for-sale Government National Mortgage Association (“GNMA”) certificates as part of its recurring mortgage loan origination and securitization activities. These sales did not realize any gains or losses during such periods. During the year ended December 31, 2015, the Company retained securitized GNMA pools totaling $54.5 million amortized cost, at a yield of 3.09% from its own originations. Previously, the Company was selling all securitized GNMA pools. For the years ended December 31, 2015 and 2014, the Company recorded a net gain on sale of securities of $2.6 million and $4.4 million, respectively and a net loss of $35 thousand for the year ended December 31, 2013. The table below presents the gross realized gains and losses by category for such periods: Description Sale Price Year Ended December 31, 2015 Book Value at Sale Gross Gains (In thousands) Gross Losses Sale of securities available-for-sale Mortgage-backed securities FNMA and FHLMC certificates GNMA certificates Total $ $ 40,307 63,524 103,831 $ $ 37,736 63,523 101,259 $ $ 2,571 1 2,572 $ $ - - - Description Sale Price Year Ended December 31, 2014 Book Value at Sale Gross Gains (In thousands) Gross Losses Sale of securities available-for-sale Mortgage-backed securities FNMA and FHLMC certificates GNMA certificates Total mortgage-backed securities Description Sale of securities available-for-sale Mortgage-backed securities GNMA certificates Total mortgage-backed securities $ $ $ $ 115,158 99,360 214,518 $ $ 110,792 99,360 210,152 $ $ 4,366 - 4,366 $ $ - - - Sale Price Year Ended December 31, 2013 Book Value at Sale Gross Gains (In thousands) Gross Losses 141,202 141,202 $ $ 141,237 141,237 $ - - $ $ 35 35 126 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The following tables show the Company’s gross unrealized losses and fair value of investment securities available-for-sale and held- to-maturity, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position at December 31, 2015 and 2014: Securities available-for-sale CMOs issued by US government-sponsored agencies Obligations of Puerto Rico government and political subdivisions Securities available-for-sale CMOs issued by US Government-sponsored agencies FNMA and FHLMC certificates Obligations of US government and sponsored agencies Securities held-to-maturity FNMA and FHLMC Certificates US Treausury Securities Securities available-for-sale CMOs issued by US Government-sponsored agencies FNMA and FHLMC certificates Obligations of Puerto Rico Government and political subdivisions Obligations of US government and sponsored agencies Securities held-to-maturity FNMA and FHLMC certificates US Treasury Securities Amortized Cost December 31, 2015 12 months or more Unrealized Loss (In thousands) Fair Value 103,340 17,801 121,141 $ $ 2,410 4,070 6,480 $ $ 100,930 13,731 114,661 Amortized Cost Less than 12 months Unrealized Loss (In thousands) Fair Value 25,736 149,480 5,122 468,487 25,032 673,857 $ $ $ $ 331 1,509 29 5,865 71 7,805 Amortized Cost Total Unrealized Loss (In thousands) 129,076 149,480 17,801 5,122 301,479 468,487 25,032 794,998 $ 2,741 1,509 4,070 29 8,349 5,865 71 14,285 $ $ $ $ $ $ 25,405 147,971 5,093 462,622 24,961 666,052 Fair Value 126,335 147,971 13,731 5,093 293,130 462,622 24,961 780,713 $ $ $ $ $ $ 127 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Securities available-for-sale Obligations of Puerto Rico government and political subdivisions CMOs issued by US government-sponsored agencies FNMA and FHLMC certificates GNMA certificates Securities available-for-sale CMOs issued by US government-sponsored agencies FNMA and FHLMC certificates Securities available-for-sale CMOs issued by US government-sponsored agencies FNMA and FHLMC certificates Obligations of Puerto Rico government and political subdivisions GNMA certificates Amortized Cost December 31, 2014 12 months or more Unrealized Loss (In thousands) Fair Value $ $ $ 20,939 143,928 113,376 77 $ 5,267 3,086 1,172 8 278,320 $ 9,533 $ 15,672 140,842 112,204 69 268,787 Amortized Cost Less than 12 months Unrealized Loss (In thousands) Fair Value 15,172 63,736 $ 78,908 $ 67 31 98 $ 15,105 63,705 78,810 Amortized Cost Total Unrealized Loss (In thousands) Fair Value 159,100 177,112 20,939 77 3,153 1,203 5,267 8 155,947 175,909 15,672 69 $ 357,228 $ 9,631 $ 347,597 128 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The Company performs valuations of the investment securities on a monthly basis. Moreover, the Company conducts quarterly reviews to identify and evaluate each investment in an unrealized loss position for other-than-temporary impairment. Any portion of a decline in value associated with credit loss is recognized in the statements of operations with the remaining noncredit-related component recognized in other comprehensive income (loss). A credit loss is determined by assessing whether the amortized cost basis of the security will be recovered by comparing the present value of cash flows expected to be collected from the security, discounted at the rate equal to the yield used to accrete current and prospective beneficial interest for the security. The shortfall of the present value of the cash flows expected to be collected in relation to the amortized cost basis is considered to be the “credit loss.” Other-than-temporary impairment analysis is based on estimates that depend on market conditions and are subject to further change over time. In addition, while the Company believes that the methodology used to value these exposures is reasonable, the methodology is subject to continuing refinement, including those made as a result of market developments. Consequently, it is reasonably possible that changes in estimates or conditions could result in the need to recognize additional other-than-temporary impairment charges in the future. Most of the investments ($777.2 million, amortized cost, or 98%) with an unrealized loss position at December 31, 2015 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 ($17.8 million, amortized cost, or 2%) with an unrealized loss position at December 31, 2015 consist of obligations issued or guaranteed by the government of Puerto Rico and its political subdivisions or instrumentalities. The 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. Moreover, the negative rating decisions taken by the credit rating agencies have affected the market value and liquidity of these securities. As of December 31, 2015, the Company performed a cash flow analysis of its Puerto Rico government bonds to calculate the cash flows expected to be collected and determine if any portion of the decline in market value of these investments was considered an other-than-temporary impairment. The analysis derives an estimate of value based on the present value of risk-adjusted future cash flows of the underlying investments, and included the following components:    The contractual future cash flows of the bonds are projected based on the key terms as set forth in the official statements for each investment. Such key terms include among others the interest rate, amortization schedule, if any, and maturity date. The risk-adjusted cash flows are calculated based on a monthly default probability and recovery rate assumptions based on the credit rating of each investment. Constant monthly default rates are assumed throughout the life of the bonds which are based on the respective security’s credit rating as of the date of the analysis. The adjusted future cash flows are then discounted at the original effective yield of each investment based on the purchase price and expected risk-adjusted future cash flows as of the purchase date of each investment. For PRHTA obligation totaling $6.7 million, amortized cost, or 36% of the obligations issued or guaranteed by the government of Puerto Rico and its political subdivisions or instrumentalities, the discounted cash flow analysis for the investments showed a cumulative default probability at maturity of 9.78%, thus reflecting that it is more likely than not that the bonds will not default at all during their remaining terms. Based on this analysis, the Company determined that it is more likely than not that it will recover all interest and principal invested in this Puerto Rico government bond and is therefore not required to recognize a credit loss as of December 31, 2015. Also, the Company’s conclusion is based on the assessment of the specific source of repayment of the outstanding bond, which continues to perform. PRHTA started principal repayments on July 1, 2014. All scheduled principal and interest payments are being collected. 129 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) For PRIDCO and PBA obligations amounting to $12.6 million, amortized cost, or 64% of the Puerto Rico government debt securities held by the Company, the discounted cash flow analysis showed a cumulative default at maturity in the range up to 46.03% using a recovery rate of 65%. Taking into consideration that the PBA bonds are guaranteed by the full faith and credit of the Commonwealth of Puerto Rico and the recent downgrades of the general obligation debts after the government announced it needs to restructure its debt, the Company concluded that it is more likely than not that this bond will default during its remaining term until maturity in 2028. Based on the above, during the year ended December 31, 2015 an other-than-temporary impairment was recorded in earnings for the amount of $1.5 million, which represents the estimated loss resulting from the discounted cash flow analysis. The non-credit related portion of the unrealized losses amounting to $3.2 million was recognized in other comprehensive income, net of related taxes. Prospectively, for debt securities for which other-than-temporary impairments was recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected will be accreted as interest income. If upon subsequent evaluation, there is a significant increase in the cash flows expected to be collected or if actual cash flows are significantly greater than cash flows previously expected, such changes will be accounted for as a prospective adjustment to the accretable yield. Subsequent increases and decreases (if not other-than-temporary impairment) in the fair value of available-for-sale securities will be included in other comprehensive income (loss). Further negative evidence impacting the liquidity and sources of repayment of the obligations of Puerto Rico and its political subdivisions, could result in a further charge to earnings to recognize estimated credit losses determined to be other-than-temporary. At December 31, 2015, the Company has cash flow capacity, sufficient liquidity and a strong capital position to maintain the bonds and does not need to sell them in a loss position and it is not likely that the Company will have to sell the investment securities prior to recovery of their amortized cost basis. The following table presents a rollforward of credit-related impairment losses recognized in earnings for the year ended December 31, 2015 (non in 2014 and 2013) on available-for-sale securities that the Company does not have the intent to sell or will not more-likely- than-not be required to sell: Balance at beginning of year Additions from credit losses recognized on available-for-sale securities that had no previous impairment losses Balance at end of year $ $ - 1,490 1,490 Year Ended December 31, 2015 130 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) NOTE 4 - PLEDGED ASSETS The following table shows a summary of pledged and not pledged assets at December 31, 2015 and 2014. Investment securities are presented at fair value, and residential mortgage loans, commercial loans and leases are presented at amortized cost: December 31, 2015 2014 (In thousands) Pledged investment securities to secure: Securities sold under agreements to repurchase Derivatives $ 1,021,370 8,100 $ Puerto Rico Cash & Money Market Fund Bond for the Bank's trust operations Total pledged investment securities Pledged residential mortgage loans to secure: Advances from the Federal Home Loan Bank Pledged commercial loans to secure: Advances from the Federal Home Loan Bank Federal Reserve Bank Credit Facility Puerto Rico public fund deposits Pledged auto loans and leases to secure: Federal Reserve Bank Credit Facility Total pledged assets Financial assets not pledged: Investment securities Residential mortgage loans Commercial loans Consumer loans Auto loans and leases Total assets not pledged 1,088,526 7,043 76,259 105 81,576 379 1,111,425 1,171,933 1,095,810 1,013,106 253,263 12,877 410,932 677,072 - 2,884,307 483,373 379,065 1,287,036 295,492 929,666 3,374,632 $ $ $ 139,043 179,895 414,481 733,419 884,339 3,802,797 207,357 586,040 1,349,467 266,498 123,258 2,532,620 $ $ $ 131 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) NOTE 5 - LOANS The Company’s loan portfolio is composed of two segments, loans initially accounted for under the amortized cost method (referred as "originated and other" loans) and loans acquired (referred as "acquired" loans). Acquired loans are further segregated between acquired BBVAPR loans and acquired Eurobank loans. Acquired Eurobank loans were purchased subject to loss-sharing agreements with the FDIC. The FDIC loss-share coverage related to commercial and other-non single family acquired Eurobank loans expired on June 30, 2015. Notwithstanding the expiration of loss share coverage of commercial loans, on July 2, 2015, the Company entered into an agreement with the FDIC pursuant to which the FDIC concurred with a potential sale of a pool of loss-share assets covered under the commercial loss-sharing agreement. Pursuant to such agreement, and as further discussed below, the FDIC agreed and paid $20 million in loss share coverage with respect to the aggregate loss resulting from any portfolio sale within 120 days of the agreement. This sale was completed on September 28, 2015. The coverage for the single family residential loans will expire on June 30, 2020. At December 31, 2015, the remaining covered loans amounting to $59.6 million, net carrying amount, are included as part of acquired Eurobank loans under the name "loans secured by 1-4 family residential properties". At December 31, 2014, covered loans amounted to $298.9 million, net carrying amount. Covered loans are no longer a material amount. Therefore, the Company changed its current and prior year loan disclosures during 2015. On September 28, 2015, the Company sold a portion of covered non-performing commercial loans amounting to $197.1 million unpaid principal balance or UPB ($100.0 million carrying amount). The sales price was 18.44% of UPB, or $36.3 million. The FDIC covered $20.0 million of losses as part of its loss-share agreement with the Company. As a result, a $20.0 million reimbursement was recorded in the statement of operations. The Company also recorded a $32.9 million provision for loan and lease losses for acquired Eurobank loans, which was partially offset by $4.6 million in cost recoveries. Also, as part of this transaction, the Company sold certain non-performing commercial loans from the BBVAPR Acquisition amounting to $38.1 million unpaid principal balance ($9.9 million carrying amount). The sales price was $5.2 million. As a result, a $5.2 million provision for loan and lease losses was recorded for BBVAPR acquired loans, which was partially offset by $2.4 million in cost recoveries. In addition, certain additional foreclosed real estate with a carrying amount of $11.0 million was sold for $1.7 million. As part of this transaction, the Company made customary representations and warranties to the purchaser regarding certain characteristics of the assets that were sold. Such representations and warranties survive for a limited period of time. To the extent that the assets sold do not meet the specified characteristics, and subject to certain notice, cure period and other conditions, the purchaser would be entitled to require the Company to repurchase such assets. 132 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The composition of the Company’s loan portfolio at December 31, 2015 and 2014 was as follows:. Originated and other loans and leases held for investment: Mortgage Commercial Consumer Auto and leasing Allowance for loan and lease losses on originated and other loans and leases Deferred loan costs, net Total originated and other loans loans held for investment, net Acquired loans: Acquired BBVAPR loans: Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium) Commercial Consumer Auto Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-20 Accounted for under ASC 310-30 (Loans acquired with deteriorated credit quality, including those by analogy) Mortgage Commercial Construction Consumer Auto Allowance for loan and lease losses on acquired BBVAPR loans accounted for under ASC 310-30 Total acquired BBVAPR loans, net Acquired Eurobank loans: Loans secured by 1-4 family residential properties Commercial and construction Consumer Total acquired Eurobank loans Allowance for loan and lease losses on Eurobank loans Total acquired Eurobank loans, net Total acquired loans, net Total held for investment, net Mortgage loans held-for-sale Total loans, net December 31, 2015 2014 (In thousands) $ 757,828 1,441,649 242,950 669,163 3,111,590 (112,626) 2,998,964 4,203 3,003,167 7,457 38,385 106,911 152,753 (5,542) 147,211 608,294 287,311 88,180 11,843 153,592 1,149,220 (25,785) 1,123,435 1,270,646 92,273 142,377 2,314 236,964 (90,178) 146,786 1,417,432 4,420,599 13,614 4,434,213 $ 791,751 1,289,732 186,760 575,582 2,843,825 (51,439) 2,792,386 4,282 2,796,668 12,675 45,344 184,782 242,801 (4,597) 238,204 656,122 452,201 106,361 29,888 247,233 1,491,805 (13,481) 1,478,324 1,716,528 102,162 256,488 4,506 363,156 (64,245) 298,911 2,015,439 4,812,107 14,539 4,826,646 $ $ At December 31, 2015 and 2014, covered loans amounted to $92.3 million and are included as part of acquired Eurobank loans under the name "loans secured by 1-4 family residential properties". At December 31, 2014, covered loans amounted to $363.2 million, gross carrying amount. Interest income recognized for covered loans during 2015 and 2014 was $33.7 million and $89.0 million, respectively. 133 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Originated and Other Loans and Leases Held for Investment The Company’s originated and other loans held for investment are encompassed within four portfolio segments: mortgage, commercial, consumer, and auto and leasing. The following tables present the aging of the recorded investment in gross originated and other loans held for investment as of December 31, 2015 and 2014 by class of loans. Mortgage loans past due include delinquent loans in the GNMA buy-back option program. Servicers of loans underlying GNMA mortgage-backed securities must report as their own assets the defaulted loans that they have the option (but not the obligation) to repurchase, even when they elect not to exercise that option. December 31, 2015 30-59 Days 60-89 Days 90+ Days Total Past Past Due Past Due Past Due Due (In thousands) Current in Non- Current Loans 90+ Days Past Due and Still Accrual Accruing Total Loans Accruing Mortgage Traditional (by origination year): Up to the year 2002 Years 2003 and 2004 $ Year 2005 Year 2006 Years 2007, 2008 and 2009 Years 2010, 2011, 2012, 2013 Years 2014 and 2015 Non-traditional Loss mitigation program Home equity secured personal loans GNMA's buy-back option program Commercial Commercial secured by real estate: Corporate Institutional Middle market Retail Floor plan Real estate Other commercial and industrial: Corporate Institutional Middle market Retail Floor plan $ $ 80 251 79 551 170 662 - 1,793 - 9,958 11,751 - - 11,751 - 213 1,174 686 - - 2,217 5,036 2,553 2,878 2,053 1,673 65 16,475 977 6,887 24,339 - - 24,339 - - 712 466 - - 3,889 5,536 3,549 7,934 14,733 10,519 663 46,823 5,079 14,930 66,832 64 7,945 74,841 - - 9,113 6,921 - - $ $ 6,186 10,823 6,181 11,363 16,956 12,854 728 65,091 6,056 31,775 102,922 64 7,945 110,931 - 213 10,999 8,073 - - 41 - - 176 - 141 - 358 13 5,593 5,964 - - 5,964 - - 1,730 1,177 - - 2,073 1,178 16,034 19,285 2,907 - - - 282 238 520 - - - 639 51 690 - - - 604 39 643 - - - 1,525 328 1,853 2,593 1,868 16,677 21,138 - 190,290 1,565 783 - 192,638 195,545 $ $ 51,562 88,623 48,040 66,864 $ 57,789 99,446 54,221 78,403 74,590 137,749 85,128 552,556 23,483 64,548 640,587 346 - 640,933 227,557 33,594 194,219 231,840 2,892 16,662 706,764 108,582 190,695 105,748 75,489 37,688 518,202 91,546 150,744 85,856 618,005 29,552 101,916 749,473 410 7,945 757,828 227,557 33,807 206,948 241,090 2,892 16,662 728,956 108,582 380,985 107,313 77,797 38,016 712,693 1,224,966 1,441,649 144 - - - 526 72 - 742 - 3,083 3,825 - - 3,825 - - - - - - - - - - - - - - 134 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) December 31, 2015 30-59 Days 60-89 Days 90+ Days Total Past Past Due Past Due Past Due Due Current in Non- Accrual Current Accruing Loans 90+ Days Past Due and Still Total Loans Accruing Consumer Credit cards Overdrafts Personal lines of credit Personal loans Cash collateral personal loans Auto and leasing Total 449 24 74 2,078 125 2,750 53,566 182 - - 1,179 17 1,378 16,898 (In thousands) 369 - 45 627 2 1,043 8,293 1,000 24 119 3,884 144 5,171 78,757 - - 19 414 - 433 49 21,766 166 2,106 196,858 16,450 237,346 590,357 22,766 190 2,244 201,156 16,594 242,950 669,163 - - - - - - - $ 70,660 $ 44,483 $ 100,854 $ 215,997 $ 201,991 $ 2,693,602 $ 3,111,590 $ 3,825 135 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) December 31, 2014 30-59 Days 60-89 Days 90+ Days Total Past Current in Non- Current Loans 90+ Days Past Due and Still Past Due Past Due Past Due Due Accrual Accruing Total Loans Accruing (In thousands) Mortgage Traditional (by origination year): Up to the year 2002 Years 2003 and 2004 Year 2005 Year 2006 Years 2007, 2008 and 2009 Years 2010, 2011, 2012, 2013 Year 2014 Non-traditional Loss mitigation program Home equity secured personal loans GNMA's buy-back option program Commercial Commercial secured by real estate: Corporate Institutional Middle market Retail Floor plan Real estate Other commercial and industrial: Corporate Institutional Middle market Retail Floor plan $ $ $ 4,128 10,484 3,824 5,706 5,283 3,394 290 33,109 1,477 8,199 42,785 - - 42,785 - - - 330 - - 330 - - - 866 - 866 1,196 $ 3,157 4,735 2,205 3,298 1,809 2,992 - 18,196 584 7,106 25,886 - - 25,886 - - 645 561 - - 1,206 - - - 412 - 412 1,618 $ 4,395 6,489 4,454 8,667 7,646 6,900 - 38,551 3,223 14,114 55,888 - 42,243 98,131 - - 396 7,275 - - 7,671 - - 618 1,061 - 1,679 9,350 $ 11,680 21,708 10,483 17,671 14,738 13,286 290 89,856 5,284 29,419 124,559 - 42,243 166,802 - - 1,041 8,166 - - 9,207 - - 618 2,339 - 2,957 12,164 - 455 131 548 761 - - 1,895 - 6,358 8,253 - - 8,253 - - 8,494 1,445 - - 9,939 - - - 1,047 - 1,047 10,986 $ 54,064 87,506 49,858 67,331 77,990 149,030 41,818 527,597 30,916 57,666 616,179 517 - 616,696 133,076 36,611 154,515 166,017 1,650 12,628 504,497 $ 65,744 109,669 60,472 85,550 93,489 162,316 42,108 619,348 36,200 93,443 748,991 517 42,243 791,751 133,076 36,611 164,050 175,628 1,650 12,628 523,643 63,746 478,935 91,716 86,785 40,903 762,085 1,266,582 63,746 478,935 92,334 90,171 40,903 766,089 1,289,732 134 - - 89 - 365 - 588 - 2,766 3,354 - - 3,354 - - - - - - - - - - - - - - 136 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) December 31, 2014 30-59 Days 60-89 Days 90+ Days Total Past Current in Non- Current Loans 90+ Days Past Due and Still Consumer Credit cards Overdrafts Personal lines of credit Personal loans Cash collateral personal loans Auto and leasing Total Past Due Past Due Past Due Due Accrual Accruing Total Loans Accruing 360 20 102 1,822 275 2,579 47,658 139 - 25 743 39 946 16,916 (In thousands) 375 - 102 678 9 1,164 7,420 874 20 229 3,243 323 4,689 71,994 - - 9 337 - 346 145 18,197 287 1,962 144,359 16,920 181,725 503,443 19,071 307 2,200 147,939 17,243 186,760 575,582 - - - - - - - $ 94,218 $ 45,366 $ 116,065 $ 255,649 $ 19,730 $ 2,568,446 $ 2,843,825 $ 3,354 During the year ended 2015, the Company changed its early delinquency reporting on mortgage loans from one scheduled payment due to two scheduled payments due in order to comply with regulatory reporting instructions and be comparable with local peers, except for troubled debt restructured loans which continue using one scheduled payment due. At December 31, 2015 and 2014, the Company had carrying balance of $334.6 million and $450.2 million, respectively, in loans granted to the Puerto Rico government, including its instrumentalities, public corporations and municipalities as part of the institutional commercial loan segment. All loans granted to Puerto Rico government were current at December 31, 2015 and 2014. We, as part of a bank syndicate, have granted various extensions to the Puerto Rico Electric Power Authority (“PREPA”) and on November 5, 2015 entered into a Restructuring Support Agreement with a view towards restructuring the debt on terms that provide for full repayment of the debt to the Bank. After the first extension in the third quarter of 2014, the Company classified the credit as substandard and a troubled-debt restructuring. The Company conducted an impairment analysis considering the probability of collection of principal and interest, which included a financial model to project the future liquidity status of PREPA under various scenarios and its capacity to service its financial obligations, and concluded that PREPA had sufficient cash flows for the repayment of the line of credit. Despite the Company’s analysis showing PREPA’s capacity to repay the line of credit, the Company placed its participation in non-accrual and recorded a $24 million provision during the first quarter of 2015, based on management’s concerns regarding PREPA’s willingness to repay the debt. During the fourth quarter of 2015, the Company recorded an additional $29.3 million provision for loan and lease losses on PREPA. Since it was placed in non-accrual, interest payments have been applied to principal. 137 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Acquired Loans Acquired loans were initially measured at fair value and subsequently accounted for under either ASC 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality) or ASC 310-20 (Non-refundable fees and Other Costs). We have acquired loans in two acquisitions, BBVAPR and Eurobank. Acquired BBVAPR Loans Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium) Credit cards, retail and commercial revolving lines of credits, floor plans and performing auto loans with FICO scores over 660 acquired at a premium, excluding the acquired Eurobank loan 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. Acquired BBVAPR loans that were accounted for under the provisions of ASC 310-20 are removed from the acquired loan category at the end of the reporting period upon refinancing, renewal or normal re-underwriting. The following tables present the aging of the recorded investment in gross acquired BBVAPR loans accounted for under ASC 310-20 as of December 31, 2015 and 2014, by class of loans: December 31, 2015 30-59 Days 60-89 Days 90+ Days Total Past Past Due Past Due Past Due Due Current in Non- Accrual Current Accruing Loans 90+ Days Past Due and Still Total Loans Accruing Commercial Commercial secured by real estate Retail Floor plan $ Other commercial and industrial Retail Floor plan Consumer Credit cards Personal loans Auto Total $ - - - 186 - 186 186 930 14 944 7,553 $ - - - 29 - 29 29 384 29 413 2,279 (In thousands) $ 228 467 695 178 7 185 880 489 46 535 831 $ 228 467 695 393 7 400 1,095 1,803 89 1,892 10,663 $ 8,683 $ 2,721 $ 2,246 $ 13,650 $ 138 - - - - - - - - - - - - $ $ - 2,422 2,422 3,331 609 3,940 6,362 33,414 3,079 36,493 96,248 $ 228 2,889 3,117 3,724 616 4,340 7,457 35,217 3,168 38,385 106,911 $ 139,103 $ 152,753 $ - - - - - - - - - - - - OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) December 31, 2014 30-59 Days 60-89 Days 90+ Days Total Past Past Due Past Due Past Due Due (In thousands) Current in Non- Current Accrual Accruing Loans 90+ Days Past Due and Still Total Loans Accruing Commercial Commercial secured by real estate Retail Floor plan $ Other commercial and industrial Retail Floor plan Consumer Credit cards Personal loans Auto Total $ - - - 155 202 357 357 1,376 151 1,527 11,003 $ - 62 62 67 134 201 263 654 47 701 3,453 $ 351 345 696 192 223 415 1,111 1,399 77 1,476 1,262 $ 351 407 758 414 559 973 1,731 3,429 275 3,704 15,718 $ 12,887 $ 4,417 $ 3,849 $ 21,153 $ - - - 2 10 12 12 - - - 76 88 $ $ - 3,724 3,724 3,705 3,503 7,208 10,932 38,419 3,221 41,640 168,988 $ 351 4,131 4,482 4,121 4,072 8,193 12,675 41,848 3,496 45,344 184,782 $ 221,560 $ 242,801 $ - - - - - - - - - - - - Acquired BBVAPR Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy) Acquired BBVAPR loans, except for credit cards, retail and commercial revolving lines of credits, floor plans and performing auto loans with FICO scores over 660 acquired at a premium, are accounted for by the Company in accordance with ASC 310-30. The carrying amount corresponding to acquired BBVAPR loans with deteriorated credit quality, including those accounted under ASC 310-30 by analogy, in the statements of financial condition at December 31, 2015 and 2014 is as follows: Contractual required payments receivable Less: Non-accretable discount Cash expected to be collected Less: Accretable yield Carrying amount, gross Less: allowance for loan and lease losses Carrying amount, net December 31, 2015 2014 (In thousands) $1,945,098 $434,190 1,510,908 361,688 1,149,220 25,785 $1,123,435 $2,394,378 $456,627 1,937,751 445,946 1,491,805 13,481 $1,478,324 At December 31, 2015 and 2014, the Company had $80.9 million and $168.8 million, respectively, in loans granted to the Puerto Rico government, including its instrumentalities, public corporations and municipalities as part of its acquired BBVAPR loans accounted for under ASC 310-30. This entire amount was current at December 31, 2015 and 2014. 139 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The following tables describe the accretable yield and non-accretable discount activity of acquired BBVAPR loans accounted for under ASC 310-30 for the years ended December 31, 2015, 2014 and 2013: Year Ended December 31, 2015 Mortgage Commercial Construction Auto Consumer Total (In thousands) Accretable Yield Activity: Balance at beginning of period Accretion Change in expected cash flows Transfer (to) from non-accretable discount $ $ 298,364 (34,842) - 5,272 $ 61,196 (39,268) 6,130 17,353 $ 25,829 (10,161) 2,402 1,545 $ 53,998 (23,463) - (8,957) $ 6,559 (4,379) (1) 4,111 445,946 (112,113) 8,531 19,324 Balance at end of period $ 268,794 $ 45,411 $ 19,615 $ 21,578 $ 6,290 $ 361,688 Non-Accretable Discount Activity: Balance at beginning of period Change in actual and expected losses Transfer from (to) accretable yield Balance at end of period Accretable Yield Activity: Balance at beginning of period Accretion $ $ $ 389,839 (9,795) (5,272) 374,772 $ $ 23,069 6,065 (17,353) 11,781 $ $ 3,486 4,823 (1,545) 6,764 $ $ 16,215 (3,133) 8,957 22,039 $ $ 24,018 (1,073) (4,111) 18,834 $ $ 456,627 (3,113) (19,324) 434,190 Year Ended December 31, 2014 Mortgage Commercial Construction Auto Consumer Total (In thousands) Transfer (to) from non-accretable discount 48,135 287,841 (37,612) $ 96,139 (49,039) 14,096 $ 42,993 (21,894) $ 4,730 $ 77,845 (39,023) 15,176 12,735 (5,968) (208) $ 517,553 (153,536) 81,929 Balance at end of period $ 298,364 $ 61,196 $ 25,829 $ 53,998 $ 6,559 $ 445,946 Non-Accretable Discount Activity: Balance at beginning of period Change in actual and expected losses Transfer from (to) accretable yield Balance at end of period $ $ 463,166 (25,192) (48,135) 389,839 $ $ 42,515 (5,350) (14,096) 23,069 $ $ 5,851 2,365 (4,730) 3,486 $ $ 39,645 (8,254) (15,176) 16,215 $ $ 28,410 (4,600) 208 24,018 $ $ 579,587 (41,031) (81,929) 456,627 140 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Year Ended December 31, 2013 Mortgage Commercial Construction Auto Consumer Total (In thousands) $ $ $ $ 328,243 (42,740) 2,338 287,841 502,857 (37,353) (2,338) 463,166 145,173 (59,998) 10,964 96,139 60,275 (6,796) (10,964) 42,515 30,802 (29,557) 41,748 42,993 62,803 (15,204) (41,748) 5,851 126,803 (55,255) 6,297 77,845 55,733 (9,791) (6,297) 39,645 24,812 (11,628) (449) 12,735 32,794 (4,833) 449 28,410 655,833 (199,178) 60,898 517,553 714,462 (73,977) (60,898) 579,587 Accretable Yield Activity: Balance at beginning of period Accretion Transfer (to) from non-accretable discount Balance at end of period Non-Accretable Discount Activity: Balance at beginning of period Change in actual and expected losses Transfer from (to) accretable yield Balance at end of period Acquired Eurobank Loans The carrying amount of acquired Eurobank loans at December 31, 2015 and 2014 is as follows: Contractual required payments receivable Less: Non-accretable discount Cash expected to be collected Less: Accretable yield Carrying amount, gross Less: Allowance for loan and lease losses Carrying amount, net December 31 2015 2014 (In thousands) $ $ $ 342,511 21,156 321,355 84,391 236,964 90,178 146,786 $ 535,425 62,410 473,015 109,859 363,156 64,245 298,911 141 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The following tables describe the accretable yield and non-accretable discount activity of acquired Eurobank loans for the years ended December 31, 2015, 2014 and 2013: Year Ended December 31, 2015 Loans Secured by 1-4 Family Residential Properties Commercial and Other Construction Construction & Development Secured by 1-4 Family Residential Properties (In thousands) Leasing Consumer Total Accretable Yield Activity: Balance at beginning of period $ 47,636 $ 37,920 $ 20,753 $ 2,479 $ 1,071 $ 109,859 Accretion Change in expected cash flows Transfer from (to) non-accretable discount (13,685) 4,631 13,372 (32,124) 44,660 (23,486) (2,513) (15,048) (937) (3,458) (51) 1,030 (631) 305 2,467 (52,411) 34,497 (7,554) Balance at end of period Non-Accretable Discount Activity: Balance at beginning of period Change in actual and expected losses Transfer from (to) accretable yield Balance at end of period $ $ $ 51,954 $ 26,970 $ 2,255 $ - $ 3,212 $ 84,391 27,348 $ 24,464 $ - $ - $ 10,598 $ 62,410 (1,107) (13,372) (47,950) 23,486 (937) 937 1,030 (1,030) 156 (2,467) 12,869 $ - $ - $ - $ 8,287 $ (48,808) 7,554 21,156 142 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Year Ended December 31, 2014 Loans Secured by 1-4 Family Residential Properties Commercial and Other Construction Construction & Development Secured by 1-4 Family Residential Properties (In thousands) Leasing Consumer Total Accretable Yield Activity: Balance at beginning of period Accretion Transfer from (to) non-accretable discount Balance at end of period Non-Accretable Discount Activity: Balance at beginning of period Change in actual and expected losses Transfer (to) from accretable yield Balance at end of period $ $ $ $ 53,250 (15,731) $ 95,093 (57,099) $ $ 1,690 (4,102) 10,238 (9,837) $ $ 2,688 (2,200) 10,117 (74) 23,165 2,078 583 162,959 (88,969) 35,869 47,636 $ 37,920 $ 20,753 $ 2,479 $ 1,071 $ 109,859 39,182 (1,717) (10,117) 27,348 $ $ 81,092 (56,702) 74 24,464 $ $ - 23,165 (23,165) - $ $ - 2,078 (2,078) - $ $ 9,203 1,978 (583) 10,598 $ $ 129,477 (31,198) (35,869) 62,410 Year Ended December 31, 2013 Loans Secured by 1-4 Family Residential Properties Commercial and Other Construction Construction & Development Secured by 1-4 Family Residential Properties (In thousands) Leasing Consumer Total Accretable Yield Activity: Balance at beginning of period $ 57,569 $ 103,591 $ 7,380 $ 16,916 $ 2,552 $ 188,008 Accretion Change in Expected Cash Flows Transfer from (to) non-accretable discount (18,784) (12,328) 26,793 (54,821) 14,743 31,580 (3,715) (2,514) 539 (13,402) 625 6,099 (1,047) (526) 1,709 (91,769) - 66,720 Balance at end of period Non-Accretable Discount Activity: Balance at beginning of period Change in actual and expected losses Transfer (to) from accretable yield Balance at end of period $ $ $ 53,250 $ 95,093 $ 1,690 $ 10,238 $ 2,688 $ 162,959 66,021 $ 154,185 $ - $ 6,345 $ 11,004 $ 237,555 (46) (26,793) (41,513) (31,580) 539 (539) (246) (6,099) (92) (1,709) (41,358) (66,720) 39,182 $ 81,092 $ - $ - $ 9,203 $ 129,477 143 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Non-accrual Loans The following table presents the recorded investment in loans in non-accrual status by class of loans as of December 31, 2015 and 2014: December 31, 2015 December 31, 2014 (In thousands) Originated and other loans and leases held for investment Mortgage Traditional (by origination year): Up to the year 2002 Years 2003 and 2004 Year 2005 Year 2006 Years 2007, 2008 and 2009 Years 2010, 2011, 2012, 2013 Years 2014 and 2015 Non-traditional Loss mitigation program Home equity loans, secured personal loans Commercial Commercial secured by real estate Middle market Retail Other commercial and industrial Institutional Middle market Retail Floor plan Consumer Credit cards Personal lines of credit Personal loans Cash collateral personal loans Auto and leasing Total non-accrual originated loans 3,786 5,737 3,627 8,189 14,625 10,588 663 47,215 5,092 20,172 72,479 64 72,543 12,729 8,726 21,455 190,290 1,565 1,932 39 193,826 215,281 369 100 1,146 16 1,631 8,418 297,873 $ $ 4,427 7,042 4,585 9,274 8,579 7,365 - 41,272 3,224 20,934 65,430 - 65,430 9,534 9,000 18,534 - 618 2,527 - 3,145 21,679 375 110 1,092 13 1,590 8,668 97,367 $ $ 144 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) December 31, 2015 December 31, 2014 (In thousands) Acquired BBVAPR loans accounted for under ASC 310-20 Commercial Commercial secured by real estate Retail Floor plan $ Other commercial and industrial Retail Floor plan Consumer Credit cards Personal loans Auto Total non-accrual acquired BBVAPR loans accounted for under ASC 310-20 Total non-accrual loans $ 228 467 695 178 7 185 880 489 46 535 831 2,246 351 407 758 195 234 429 1,187 1,399 77 1,476 1,512 4,175 $ 300,119 $ 101,542 Loans accounted for under ASC 310-30 are excluded from the above table as they are considered to be performing due to the application of the accretion method, in which these loans will accrete interest income over the remaining life of the loans using estimated cash flow analyses or are accounted under the cost recovery method. Delinquent residential mortgage loans insured or guaranteed under applicable FHA and VA programs are classified as non-performing loans when they become 90 days or more past due, but are not placed in non-accrual status until they become 18 months or more past due, since they are insured loans. Therefore, these loans are included as non-performing loans but excluded from non-accrual loans. During the first quarter of 2015, the revolving line of credit to PREPA was classified as non-accrual. At December 31, 2015, this line of credit had an unpaid principal balance of $190.3 million. Starting with the second quarter of 2015, interest payments received were applied to principal. As of December 31, 2015, the specific reserve was $53.3 million. At December 31, 2015 and 2014, loans whose terms have been extended and which are classified as troubled-debt restructurings that are not included in non-accrual loans amounted to $93.6 million and $274.4 million, respectively, as they are performing under their new terms. At December 31, 2014, the balance included the revolving line of credit to PREPA. 145 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Impaired Loans The Company evaluates all loans, some individually and others as homogeneous groups, for purposes of determining impairment. The total investment in impaired commercial loans was $235.8 million and $236.9 million at December 31, 2015 and 2014, respectively. Impaired commercial loans at December 31, 2015 and 2014 included the PREPA line of credit with an unpaid principal balance of $190.3 million and $200.0 million, respectively. The PREPA line of credit was classified as a troubled-debt restructuring during 2014. 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 $55.9 million and $841 thousand at December 31, 2015 and 2014, respectively. The valuation allowance for impaired commercial loans at December 31, 2015 includes $53.3 million of specific allowance for PREPA recorded during 2015.The total investment in impaired mortgage loans was $90.0 million and $94.2 million at December 31, 2015 and 2014, 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 $9.2 million and $9.0 million at December 31, 2015 and 2014, respectively. Originated and Other Loans and Leases Held for Investment The Company’s recorded investment in commercial and mortgage loans categorized as originated and other loans and leases held for investment that were individually evaluated for impairment and the related allowance for loan and lease losses at December 31, 2015 and 2014 are as follows: Impaired loans with specific allowance: Commercial Residential impaired and troubled-debt restructuring Impaired loans with no specific allowance: Commercial Total investment in impaired loans Impaired loans with specific allowance: Commercial Residential impaired and troubled-debt restructuring Impaired loans with no specific allowance Commercial Total investment in impaired loans December 31, 2015 Unpaid Principal Recorded Investment Related Allowance Coverage (In thousands) 199,366 89,973 35,928 325,267 $ $ 210,718 97,424 42,110 350,252 $ $ 55,947 9,233 N/A 65,180 13% 9% N/A 11% Unpaid Principal December 31, 2014 Recorded Investment Related Allowance (In thousands) Coverage 6,349 99,947 237,806 344,102 $ $ 6,226 $ 94,185 230,044 330,455 $ 841 8,968 N/A 9,809 14% 10% N/A 3% $ $ $ $ 146 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Acquired BBVAPR Loans Loans Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium) The Company’s recorded investment in acquired BBVAPR commercial loans accounted for under ASC 310-20 that were individually evaluated for impairment and the related allowance for loan and lease losses at December 31, 2015 and 2014 are as follows: Impaired loans with no specific allowance Commercial Total investment in impaired loans Impaired loans with no specific allowance Commercial Total investment in impaired loans December 31, 2015 Unpaid Principal Recorded Investment Related Allowance Coverage (In thousands) 486 486 $ $ 474 474 $ N/A - N/A - December 31, 2014 Unpaid Principal Recorded Investment Specific Allowance Coverage (In thousands) 672 672 $ $ 672 672 $ N/A - N/A - $ $ $ $ Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy) The Company’s recorded investment in acquired BBVAPR loan pools accounted for under ASC 310-30 that have recorded impairments and their related allowance for loan and lease losses at December 31, 2015 and 2014 are as follows: Impaired loan pools with specific allowance: Mortgage Commercial Construction Auto Total investment in impaired loan pools December 31, 2015 Unpaid Principal Recorded Investment Allowance (In thousands) Coverage to Recorded Investment $ $ 608,294 287,311 88,180 153,592 1,137,377 $ $ 608,294 168,107 87,983 153,592 1,017,976 $ $ 1,761 15,455 5,707 2,862 25,785 0% 9% 6% 2% 3% 147 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Impaired loan pools with specific allowance: Commercial Construction Consumer Total investment in impaired loan pools December 31 , 2014 Unpaid Principal Recorded Investment Allowance (In thousands) Coverage to Recorded Investment 289,228 90,786 35,812 415,826 $ 255,619 83,751 29,888 369,258 $ $ 5,506 7,970 5 13,481 2% 10% 0% 4% The tables above only present information with respect to acquired BBVAPR loans and loan pools accounted for under ASC 310-30 if there is a recorded impairment to such loans or loan pools and a specific allowance for loan losses. The decrease in commercial loan pools from December 31, 2014 to December 31, 2015 was mostly caused by the sale of covered commercial loans during the third quarter of 2015. As of December 31, 2015, the Company eliminated the specific allowance of $5 thousand maintained on impaired acquired BBVAPR consumer loan pool accounted under ASC 310-30 because there was an increase in the net present value of cash flows expected to be collected from such pool when compared with the recorded investment. Likewise, the increase in mortgage and auto loan pools from December 31, 2014 to December 31, 2015 was caused by the establishment of a specific reserve with respect to impaired mortgage and auto loan pools that were required based on the net present value of the cash flows expected to be collected. Acquired Eurobank Loans The Company’s recorded investment in acquired Eurobank loan pools that have recorded impairments and their related allowance for loan and lease losses as of December 31, 2015 and 2014 are as follows: December 31, 2015 Unpaid Principal Recorded Investment Allowance (In thousands) Impaired loan pools with specific allowance: Loans secured by 1-4 family residential properties Commercial and construction Consumer Total investment in impaired loan pools Impaired loan pools with specific allowance Loans secured by 1-4 family residential properties Commercial and construction Consumer Total investment in impaired loan pools $ $ $ $ 101,444 133,148 6,713 241,305 Unpaid Principal 134,579 151,017 7,992 293,588 $ $ $ $ 92,273 142,377 2,314 236,964 $ $ 22,570 67,365 243 90,178 December 31, 2014 Recorded Investment Specific Allowance (In thousands) 106,116 93,631 4,506 204,253 $ $ 15,522 48,334 389 64,245 15% 52% 9% 31% Coverage to Recorded Investment 24% 47% 11% 38% Coverage to Recorded Investment The tables above only present information with respect to acquired Eurobank loans and loan pools accounted for under ASC 310-30 if there is a recorded impairment to such loans or loan pools and a specific allowance for loan losses. The decrease in construction and development secured by 1-4 family residential properties loan pools from December 31, 2014 to December 31, 2015 was mostly caused by the sale of covered commercial loans during the quarter ended September 30, 2015. The increase in allowance for commercial and other construction loan pools from December 31, 2014 to December 31, 2015 was caused by the establishment of a specific reserve with respect to impaired commercial and other construction loan pools that was required based on the net present value of the cash flows expected to be collected. 148 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The following table presents the interest recognized in commercial and mortgage loans that were individually evaluated for impairment, excluding loans accounted for under ASC 310-30, for the years ended 2015, 2014, and 2013: 2015 2014 2013 Year Ended December 31, Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment (In thousands) $ $ 280 3,219 1,350 4,849 $ $ $ 175,115 90,736 64,356 $ 237 2,623 9,400 $ 5,899 90,383 90,748 330,207 $ 12,260 $ 187,030 $ 160 2,266 1,139 3,565 $ 12,709 82,028 26,188 $ 120,925 Originated and other loans held for investment: Impaired loans with specific allowance Commercial Residential troubled-debt restructuring Impaired loans with no specific allowance Commercial Total interest income from impaired loans 149 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Modifications The following tables present the troubled-debt restructurings during the years ended 2015, 2014 and 2013. Year Ended December 31, 2015 Number of contracts Pre-Modification Outstanding Recorded Investment Pre- Modification Weighted Average Rate Pre- Modification Weighted Average Term (in Months) (Dollars in thousands) $ Post-Modification Outstanding Recorded Investment Post- Modification Weighted Average Rate Post- Modification Weighted Average Term (in Months) Mortgage Commercial Consumer Auto $ 160 9 64 5 21,053 5,664 611 130 5.42% 6.79% 13.85% 10.51% 356 66 71 65 21,182 13,174 898 131 4.35% 4.57% 13.43% 10.87% 272 56 60 61 Year Ended December 31, 2014 Number of contracts Pre-Modification Outstanding Recorded Investment Pre- Modification Weighted Average Rate Pre- Modification Weighted Average Term (in Months) (Dollars in thousands) $ Post-Modification Outstanding Recorded Investment Post- Modification Weighted Average Rate Post- Modification Weighted Average Term (in Months) Mortgage Commercial Consumer 162 26 26 21,188 200,446 212 6.03% 7.25% 10.09% 350 3 56 20,958 200,125 240 4.25% 7.25% 12.96% 420 10 65 Year Ended December 31, 2013 Number of contracts Pre-Modification Outstanding Recorded Investment Pre- Modification Weighted Average Rate Pre- Modification Weighted Average Term (in Months) (Dollars in thousands) $ Post-Modification Outstanding Recorded Investment Post- Modification Weighted Average Rate Post- Modification Weighted Average Term (in Months) Mortgage Commercial Consumer $ 145 2 2 20,143 1,842 15 6.52% 8.99% 13.43% 340 87 75 20,971 1,842 15 4.34% 4.00% 12.67% 409 66 67 Commercial troubled-debt during the year ended December 31, 2014 included 19 contracts with PREPA which amounted to $200.0 million. 150 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The following table presents troubled-debt restructurings for which there was a payment default during the years ended 2015, 2014 and 2013: Year Ended December 31, 2015 2014 2013 Number of Contracts Recorded Investment Number of Contracts Recorded Investment Number of Contracts Recorded Investment Mortgage Consumer Auto 65 8 1 $ $ $ 7,387 177 64 Credit Quality Indicators (Dollars in thousands) $ 15 1,700 5 - $ $ 37 - 15 1 - $ $ $ 1,689 9 - The Company categorizes originated and other loans and acquired loans accounted for under ASC 310-20 into risk categories based on relevant information about the ability of borrowers to service their debt, such as economic conditions, portfolio risk characteristics, prior loss experience, and the results of periodic credit reviews of individual loans. The Company uses the following definitions for risk ratings: Pass: Loans classified as “pass” have a well-defined primary source of repayment very likely to be sufficient, with no apparent risk, strong financial position, minimal operating risk, profitability, liquidity and capitalization better than industry standards. Special Mention: Loans classified as “special mention” have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Substandard: Loans classified as “substandard” are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful: Loans classified as “doubtful” have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, questionable and improbable. Loss: Loans classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be effected in the future. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. All loans individually measured for impairment are classified as substandard or TDR as of December 31, 2015. 151 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) As of December 31, 2015 and 2014, and based on the most recent analysis performed, the risk category of gross originated and other loans and BBVAPR acquired loans accounted for under ASC 310-20 subject to risk rating by class of loans is as follows: December 31, 2015 Risk Ratings Balance Outstanding Pass Special Mention Substandard Doubtful (In thousands) Individually Measured for Impairment Commercial - originated and other loans held for investment Commercial secured by real estate: Corporate Institutional Middle market Retail Floor plan Real estate $ Other commercial and industrial: Corporate Institutional Middle market Retail Floor plan $ 227,557 33,807 206,948 241,090 2,892 16,662 728,956 108,582 380,985 107,313 77,797 38,016 712,693 $ 212,410 25,907 181,916 217,836 2,892 16,662 657,623 100,826 190,695 97,288 73,757 35,862 498,428 Total 1,441,649 1,156,051 Commercial - acquired loans (under ASC 310-20) Commercial secured by real estate: Retail Floor plan Other commercial and industrial: Retail Floor plan Total Total 228 2,889 3,117 3,724 616 4,340 7,457 1,449,106 $ $ - 602 602 3,637 609 4,246 4,848 1,160,899 $ $ 15,147 - 9,697 7,936 - - 32,780 - - 8,052 1,076 2,115 11,243 44,023 - 1,820 1,820 - - $ - - - 5,097 - - 5,097 - - - 1,184 - 1,184 6,281 228 - 228 87 - - 1,820 45,843 $ 87 315 6,596 $ - - - - - - - - - - - - - - - - - - - - - - $ - 7,900 15,335 10,221 - - 33,456 7,756 190,290 1,973 1,780 39 201,838 235,294 - 467 467 - 7 7 474 235,768 $ 152 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) December 31, 2014 Risk Ratings Balance Outstanding Pass Special Mention Substandard Doubtful (In thousands) Individually Measured for Impairment Commercial - originated and other loans held for investment Commercial secured by real estate: Corporate Institutional Middle market Retail Floor plan Real estate Other commercial and industrial: Corporate Institutional Middle market Retail Floor plan Total Commercial - acquired loans (under ASC 310-20) Commercial secured by real estate: Retail Floor plan Other commercial and industrial: Retail Floor plan $ 133,076 $ 36,611 164,050 175,628 1,650 12,628 523,643 63,746 478,935 92,334 90,171 40,903 $ 109,282 27,089 148,360 159,209 692 12,628 457,260 63,746 278,953 87,126 85,941 38,413 766,089 1,289,732 554,179 1,011,439 351 4,131 4,482 4,121 4,072 8,193 - 3,724 3,724 4,080 3,807 7,887 $ 15,615 9,284 2,817 3,690 958 - 32,364 - - 2,815 259 1,247 4,321 36,685 - - - 8 - 8 $ - - - 2,637 - - 2,637 - - - 2,575 126 2,701 5,338 351 - 351 33 - 33 Total Total 12,675 1,302,407 $ 11,611 1,023,050 $ $ 8 36,693 $ 384 5,722 $ - - - - - - - - - - - - - - - - - - - - - - $ 8,179 238 12,873 10,092 - - 31,382 - 199,982 2,393 1,396 1,117 204,888 236,270 - 407 407 - 265 265 672 236,942 $ 153 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) At December 31, 2015 and 2014, the Company had outstanding credit facilities of approximately $415.4 million and $619.0 million, respectively, granted to the Puerto Rico government, including its instrumentalities, public corporations and municipalities, included within portfolio of originated and other loans and acquired BBVAPR loans accounted for under ASC 310-30. A substantial portion of the Company’s credit exposure to Puerto Rico’s government consists of collateralized loans or obligations that have a specific source of income or revenues identified for their repayment. Approximately $204 million of these loans are general obligations of municipalities secured by ad valorem taxation, without limitation as to rate or amount, on all taxable property within the issuing municipalities. The good faith, credit and unlimited taxing power of each issuing municipality are pledged for the payment of its general obligations. In addition, 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 the Puerto Rico Electric Power Authority (“PREPA”). The Commonwealth’s instrumentalities or public corporations have varying degrees of independence from the central government. Some instrumentalities or public corporations that provide essential or important government services, such as the University of Puerto Rico, the Puerto Rico Medical Services Administration and the Puerto Rico Metropolitan Bus Authority, are supported by the Commonwealth through budget appropriations, while others, such as PREPA, are owed substantial amounts for utility services rendered to the Commonwealth. At December 31, 2015, we had approximately $212.0 million of credit facilities to central government and public corporations of the Commonwealth, including:   PREPA with an outstanding balance of $190.3 million; and The Puerto Rico Housing Finance Authority with an outstanding balance of $21.0 million to be repaid from abandoned or unclaimed funds at financial institutions that revert to the government under a Puerto Rico escheat law. The outstanding balance of credit facilities to public corporations decreased during 2015 as a result of a repayment in full of a $75 million loan by the Puerto Rico Aqueduct and Sewer Authority and a repayment in full of a $78 million loan by the State Insurance Fund Corporation. Oriental Bank is part of a four bank syndicate providing a $550 million revolving line of credit to finance the purchase of fuel for PREPA’s day-to-day power generation activities. Our participation in the line of credit has an unpaid principal balance of $190.3 million as of December 31, 2015. As part of the bank syndicate, the Bank entered into a forbearance agreement with PREPA, which was extended several times during 2015 until the execution of a Restructuring Support Agreement on November 5, 2015 with PREPA and certain other creditors. The Restructuring Support Agreement provides for the restructuring of the fuel line of credit subject to the accomplishment of several milestones, including some milestones that depend on the actions of third parties to the agreement, such as the negotiation of agreements with other creditors and legislative action. The Company has classified the credit facility to PREPA as substandard and on non-accrual status. The Company conducted an impairment analysis considering the probability of collection of principal and interest, which included a financial model to project the future liquidity status of PREPA under various scenarios and its capacity to service its financial obligations, and concluded that PREPA had sufficient cash flows for the repayment of the line of credit. Despite the Company’s analysis showing PREPA’s capacity to repay the line of credit, the Company placed its participation in non-accrual and recorded a $24 million provision during the first quarter of 2015. During the fourth quarter of 2015, the Company recorded an additional $29.3 million provision for loan and lease losses for PREPA as a result of the increased level of uncertainty as to the closing of the restructuring agreement, which is expected by the second half of 2016. Since April 1, 2015, interest payments have been applied to principal. PREPA’s enabling act provides for local receivership upon request to any Puerto Rico court of competent jurisdiction in the event of a default in debt-service payments or other obligations in connection with PREPA’s bonds. The receiver so appointed would be empowered, directly or through its agents and attorneys, to take possession of the undertakings, income and revenues pledged to the payment of the bonds in default; to have, hold, use, operate, manage and control the same; and to exercise all of PREPA’s rights and powers with respect to such undertakings. However, any such receiver would not have the power to sell, assign, mortgage or otherwise dispose of PREPA’s assets, and its powers would be limited to the operation and maintenance of such undertakings and the collection and application of the income and revenues therefrom. Although the Puerto Rico government is actively seeking the right to bankruptcy relief for some of its public instrumentalities, including PREPA, both through an amendment to the federal bankruptcy code and the enactment of a local debt restructuring law, such efforts have thus far been unsuccessful. 154 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) For residential and consumer loan classes, the Company evaluates credit quality based on the delinquency status of the loan. As of December 31, 2015 and 2014, and based on the most recent analysis performed, the risk category of gross originated and other loans and acquired BBVAPR loans accounted for under ASC 310-20 not subject to risk rating by class of loans is as follows: December 31, 2015 Delinquency Balance Outstanding 0-29 days 30-59 days 60-89 days 90-119 days 120-364 days 365+ days (In thousands) Individually Measured for Impairment Originated and other loans and leases held for investment Mortgage Traditional (by origination year) Up to the year 2002 Years 2003 and 2004 Year 2005 Year 2006 Years 2007, 2008 and 2009 $ Years 2010, 2011, 2012 2013 Years 2014 and 2015 Non-traditional Loss mitigation program Home equity secured personal loans GNMA's buy-back option program Consumer Credit cards Overdrafts Unsecured personal lines of credit Unsecured personal loans Cash collateral personal loans Auto and Leasing Acquired loans (accounted for under ASC 310-20) Consumer Credit cards Personal loans Auto Total $ 57,789 99,446 54,221 78,403 91,546 $ 50,912 87,060 47,197 63,659 71,439 $ 82 251 79 318 170 $ 2,218 4,867 2,553 2,878 1,665 150,744 85,856 618,005 29,552 101,916 749,473 410 7,945 134,945 85,128 540,340 23,497 16,031 579,868 346 - 569 - 1,469 - 4,173 5,642 - - 1,611 65 15,857 977 1,977 18,811 - - 757,828 580,214 5,642 18,811 22,766 190 2,244 201,156 16,594 242,950 669,163 1,669,941 21,766 166 2,125 197,339 16,450 237,846 590,482 1,408,542 449 24 74 2,083 125 2,755 53,549 61,946 182 - - 1,107 17 1,306 16,839 36,956 530 1,261 292 1,168 685 434 148 4,518 552 727 5,797 - 1,593 7,390 179 - 17 621 2 819 5,708 13,917 $ $ 1,504 1,353 1,068 1,895 2,972 1,982 281 11,055 2,621 1,728 15,404 64 3,578 19,046 190 - 28 6 - 224 2,585 21,855 $ 1,858 2,921 2,189 4,871 10,725 6,737 234 29,535 1,905 2,538 33,978 - 2,774 36,752 - - - - - - - 36,752 35,217 3,168 38,385 106,911 145,296 1,815,237 $ 33,414 3,079 36,493 96,247 132,740 1,541,282 $ 930 14 944 7,553 8,497 70,443 $ 384 29 413 2,279 2,692 39,648 $ 186 1 187 623 810 14,727 $ 303 45 348 209 557 22,412 $ - - - - - 36,752 $ $ 155 685 1,733 843 3,614 3,890 4,466 - 15,231 - 74,742 89,973 - - 89,973 - - - - - - - 89,973 - - - - - 89,973 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) December 31, 2014 Delinquency Balance Outstanding 0-29 days 30-59 days 60-89 days 90-119 days 120-364 days 365+ days (In thousands) Individually Measured for Impairment Originated and other loans and leases held for investment Mortgage Traditional (by origination year) Up to the year 2002 Years 2003 and 2004 Year 2005 Year 2006 Years 2007, 2008 and 2009 $ Years 2010, 2011, 2012 2013 Year 2014 Non-traditional Loss mitigation program Home equity secured personal loans GNMA's buy-back option program Consumer Credit cards Overdrafts Unsecured personal lines of credit Unsecured personal loans Cash collateral personal loans Auto and Leasing Acquired loans (accounted for under ASC 310-20) Consumer Credit cards Personal loans Auto Total 65,744 109,669 60,472 85,550 93,489 162,316 42,108 619,348 36,200 93,443 748,991 517 42,243 $ $ 53,432 86,941 49,275 65,113 76,246 148,832 41,818 521,657 30,916 10,882 563,455 517 - 3,963 10,391 3,824 5,263 4,230 2,698 290 30,659 1,477 995 33,131 - - $ $ 3,083 4,362 2,205 2,967 1,809 2,490 - 16,916 584 1,123 18,623 - - 791,751 563,972 33,131 18,623 19,071 307 2,200 147,939 17,243 186,760 575,582 1,554,093 18,198 287 1,970 144,696 16,920 182,071 503,588 1,249,631 360 20 102 1,822 275 2,579 47,658 83,368 139 - 25 743 39 946 16,916 36,485 1,044 1,657 389 1,242 337 938 - 5,607 478 802 6,887 - 6,416 13,303 171 - 38 623 9 841 5,196 19,340 $ $ 1,360 3,215 1,673 2,801 3,986 $ 1,975 1,330 1,893 4,624 2,813 1,397 - 14,432 600 405 15,437 - 20,729 36,166 203 - 62 55 - 320 2,224 38,710 1,296 - 13,931 2,096 1,246 17,273 - 15,098 32,371 - - 3 - - 3 - 32,374 41,848 3,496 45,344 184,782 230,126 1,784,219 $ 38,419 3,221 41,640 169,064 210,704 1,460,335 $ 1,376 151 1,527 11,003 12,530 95,898 $ 654 47 701 3,453 4,154 40,639 $ 589 39 628 767 1,395 20,735 $ 810 38 848 495 1,343 40,053 $ - - - - - 32,374 $ $ 156 887 1,773 1,213 3,540 4,068 4,665 - 16,146 49 77,990 94,185 - - 94,185 - - - - - - - 94,185 - - - - - 94,185 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) NOTE 6 – ALLOWANCE FOR LOAN AND LEASE LOSSES The composition of the Company’s allowance for loan and lease losses at December 31, 2015 and 2014 was as follows: Allowance for loans and lease losses on non-acquired loans: Originated and other loans and leases held for investment: Mortgage Commercial Consumer Auto and leasing Unallocated Total allowance for originated and other loans and lease losses Acquired loans: Acquired BBVAPR loans: Accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium) Commercial Consumer Auto Accounted for under ASC 310-30 (Loans acquired with deteriorated credit quality, including those by analogy) Mortgage Commercial Consumer Auto Total allowance for acquired BBVAPR loans and lease losses Acquired Eurobank loans: Loans secured by 1-4 family residential properties Commercial and other construction Consumer Total allowance for acquired Eurobank loan and lease losses Total allowance for loan and lease losses December 31, 2015 December 31, 2014 (In thousands) $ $ $ 18,352 64,791 11,197 18,261 25 112,626 26 3,429 2,087 5,542 1,678 21,161 84 2,862 25,785 143,953 32,624 57,187 367 90,178 234,131 $ 19,679 8,432 9,072 14,255 1 51,439 65 1,211 3,321 4,597 - 13,476 5 - 13,481 69,517 15,522 48,334 389 64,245 133,762 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. 157 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) As part of the Company’s continuous enhancement to the allowance for loan and lease losses methodology, during the year 2015 the following assumptions were reviewed: - - - An assessment of the look-back period and historical loss factor was performed for all portfolio segments. The analysis was based on the trends observed and their relation with the economic cycle as of the period of the analysis. As a result, for the commercial portfolio, the look-back period was changed to 36 months from the previously determined 12 months. For auto, leasing and consumer, a look-back period of 24 months was maintained. The residential mortgages portfolio, was evaluated during the fourth quarter of 2015. For this portfolio, a 12-month look-back period was maintained as management concluded that given the charge off evolution, a shorter period of losses is more representative of the recent trends and more accurate in predicting future losses. During the quarter ended June 30, 2015, an annual assessment of environmental factors was performed for commercial, auto, and consumer portfolios. As a result, the environmental factors continue to reflect our assessment of the impact to our portfolio, taking into consideration the current evolution of the portfolio and expected impact, due to recent economic developments, changes in values of collateral and delinquencies, among others. During fourth quarter the loss realization period was revised to 1.60 years for commercial real estate, other portfolios remained at 1 year. These changes in the allowance for loan and lease losses’ look-back period and loss emergence period for the commercial portfolios are considered a change in accounting estimate as per ASC 250-10 provisions, where adjustments are made prospectively. Allowance for Originated and Other Loan and Lease Losses Held for Investment The following tables presents the activity in our allowance for loan and lease losses and the related recorded investment of the originated and other loans held for investment portfolio by segment for the periods indicated: Allowance for loan and lease losses for originated and other loans: Balance at beginning of year Charge-offs Recoveries Provision for originated and other loans and lease losses Balance at end of year $ $ Mortgage Commercial Consumer Auto and Leasing Unallocated Total Year Ended December 31, 2015 (In thousands) $ 19,679 (5,397) 391 3,679 $ 8,432 (5,546) 432 61,473 $ 9,072 (8,683) 871 9,937 $ 14,255 (33,375) 13,158 24,223 18,352 $ 64,791 $ 11,197 $ 18,261 $ 1 - - 24 25 $ 51,439 (53,001) 14,852 99,336 $ 112,626 158 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Allowance for loan and lease losses for originated and other loans: Balance at beginning of year Charge-offs Recoveries Provision (recapture) for originated and other loans and lease losses Balance at end of period Allowance for loan and lease losses for originated and other loans: Balance at beginning of period Charge-offs Recoveries Provision for originated and other loans and lease losses Balance at end of period Mortgage Commercial Consumer Auto and Leasing Unallocated Total Year Ended December 31, 2014 (In thousands) $ $ $ $ $ 19,937 (5,011) 428 4,325 $ 14,897 (2,424) 333 (4,374) $ 6,006 (5,782) 570 8,278 $ 7,866 (26,041) 8,858 23,572 $ 375 - - (374) 49,081 (39,258) 10,189 31,427 19,679 $ 8,432 $ 9,072 $ 14,255 $ 1 $ 51,439 Mortgage Commercial Consumer Auto and Leasing Unallocated Total Year Ended December 31, 2013 (In thousands) $ 21,092 (36,566) 6 35,405 $ 17,072 (5,889) 383 3,331 $ 856 (1,485) 165 6,470 $ 533 (4,601) 1,568 10,366 $ 368 - - 7 39,921 (48,541) 2,122 55,579 19,937 $ 14,897 $ 6,006 $ 7,866 $ 375 $ 49,081 159 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Mortgage Commercial Consumer Auto and Leasing Unallocated Total December 31, 2015 (In thousands) Allowance for loan and lease losses on originated and other loans: Ending allowance balance attributable to loans: Individually evaluated for impairment Collectively evaluated for impairment Total ending allowance balance Loans: Individually evaluated for impairment Collectively evaluated for impairment Total ending loan balance $ $ $ $ 9,233 9,119 18,352 89,973 667,855 757,828 $ $ $ $ 55,947 8,844 64,791 235,294 1,206,355 1,441,649 $ $ $ $ - 11,197 11,197 - 242,950 242,950 $ $ $ $ - 18,261 18,261 - 669,163 669,163 Mortgage Commercial Consumer Auto and Leasing December 31, 2014 (In thousands) Allowance for loan and lease losses on originated and other loans: Ending allowance balance attributable to loans: Individually evaluated for impairment Collectively evaluated for impairment Total ending allowance balance Loans: Individually evaluated for impairment Collectively evaluated for impairment Total ending loan balance $ $ $ $ 8,968 10,711 19,679 94,185 697,566 791,751 $ $ $ $ 841 7,591 8,432 236,270 1,053,462 1,289,732 $ $ $ $ - 9,072 9,072 - 186,760 186,760 $ $ $ $ - 14,255 14,255 - 575,582 575,582 $ $ $ $ $ $ $ $ - 25 25 - - - $ $ $ $ 65,180 47,446 112,626 325,267 2,786,323 3,111,590 Unallocated Total - 1 1 - - - $ $ $ $ 9,809 41,630 51,439 330,455 2,513,370 2,843,825 160 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Allowance for BBVAPR Acquired Loan Losses Loans accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium) The following tables present the activity in our allowance for loan losses and related recorded investment of the associated loans in our BBVAPR acquired loan portfolio, excluding loans accounted for under ASC 310-30, for the periods indicated: Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20: Balance at beginning of year Charge-offs Recoveries Provision (recapture) for acquired BBVAPR loan and lease losses accounted for under ASC 310-20 Balance at end of year Year Ended December 31, 2015 Commercial Consumer Auto Unallocated Total (In thousands) $ $ 65 (42) 31 (28) $ $ 1,211 (4,755) 680 $ 3,321 (4,548) 2,110 6,293 1,204 26 $ 3,429 $ 2,087 $ - - - - - $ 4,597 (9,345) 2,821 7,469 $ 5,542 Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20: Balance at beginning of year Charge-offs Recoveries Provision (recapture) for acquired BBVAPR loan and lease losses accounted for under ASC 310-20 Balance at end of year Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20: Balance at beginning of year Charge-offs Recoveries Provision for acquired BBVAPR loan and lease losses accounted for under ASC 310-20 Balance at end of year Year Ended December 31, 2014 Commercial Consumer Auto Unallocated Total (In thousands) $ $ $ 926 (532) 73 (402) $ - (6,902) 531 7,582 $ 1,428 (6,011) 2,169 5,735 65 $ 1,211 $ 3,321 $ - - - - - $ 2,354 (13,445) 2,773 12,915 $ 4,597 Year Ended December 31, 2013 Commercial Consumer Auto Unallocated Total (In thousands) $ $ - $ - $ - $ (25) 9 (5,530) 1,035 (5,650) 3,398 942 926 $ 4,495 - $ 3,680 1,428 $ - - - - - $ $ - (11,205) 4,442 9,117 2,354 161 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Commercial Consumer Auto Unallocated Total December 31, 2015 (In thousands) Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20: Ending allowance balance attributable to loans: Collectively evaluated for impairment Total ending allowance balance Loans: Individually evaluated for impairment Collectively evaluated for impairment Total ending loan balance Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20: Ending allowance balance attributable to loans: Collectively evaluated for impairment Total ending allowance balance Loans: Individually evaluated for impairment Collectively evaluated for impairment Total ending loan balance $ $ $ $ $ $ $ $ 26 26 474 6,983 7,457 $ $ $ $ 3,429 3,429 - 38,385 38,385 $ $ $ $ 2,087 2,087 - 106,911 106,911 $ $ $ $ - - - - - $ $ $ $ 5,542 5,542 474 152,279 152,753 Commercial Consumer Auto Unallocated Total December 31, 2014 (In thousands) 65 65 672 12,003 12,675 $ $ $ $ 1,211 1,211 - 45,344 45,344 $ $ $ $ 3,321 3,321 - 184,782 184,782 $ $ $ $ - - - - - $ $ $ $ 4,597 4,597 672 242,129 242,801 162 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy) The following tables present the activity in our allowance for loan losses and related recorded investment of the acquired BBVAPR loan portfolio accounted for under ASC 310-30, for the periods indicated: Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-30: Balance at beginning of year Provision for BBVAPR loans and lease losses accounted for under ASC 310-30 Loan pools fully charged-off Balance at end of year Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-30: Balance at beginning of year Provision (recapture) for BBVAPR loans and lease losses accounted for under ASC 310-30 Balance at end of year Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-30: Balance at beginning of year Provision for BBVAPR loans and lease losses accounted for under ASC 310-30 Balance at end of year $ $ $ $ $ $ Year Ended December 31, 2015 Mortgage Commercial Consumer (In thousands) Auto Total - $ 13,476 $ 5 $ - $ 13,481 1,678 12,037 - (4,352) 1,678 $ 21,161 $ 79 - 84 2,862 16,656 - $ 2,862 $ (4,352) 25,785 Year Ended December 31, 2014 Mortgage Commercial Consumer (In thousands) Auto Total - - - $ 1,713 $ 418 $ 732 $ 2,863 11,763 13,476 $ $ (413) 5 $ (732) - $ 10,618 13,481 Year Ended December 31, 2013 Mortgage Commercial Consumer (In thousands) Auto Total - - - - - - - 1,713 1,713 $ $ 418 418 $ 732 732 $ 2,863 2,863 163 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Allowance for Acquired Eurobank Loan Losses For loans accounted for under ASC 310- 30, as part of the evaluation of actual versus expected cash flows, the Company assesses on a quarterly basis the credit quality of these loans based on delinquency, severity factors and risk ratings, among other assumptions. Migration and credit quality trends are assessed at the pool level, by comparing information from the latest evaluation period through the end of the reporting period. The changes in the allowance for loan and lease losses on acquired Eurobank loans for the years ended December 31, 2015, 2014 and 2013 were as follows: Year Ended December 31, 2015 Loans Secured by 1-4 Family Residential Properties Commercial and Construction Consumer (In thousands) Leasing Total Allowance for loan and lease losses for acquired Eurobank loans: Balance at beginning of year Provision for acquired Eurobank loans and lease losses, net Loan pools fully charged-off FDIC shared-loss portion of provision for loan and lease losses, net $ 15,523 17,718 $ $ (722) 105 48,333 $ 20,043 (13,587) 2,398 $ 389 279 (301) - Balance at end of year $ 32,624 $ 57,187 $ 367 $ - - - - - $ 64,245 38,040 (14,610) 2,503 $ 90,178 164 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Allowance for loan and lease losses for acquired Eurobank loans: Balance at beginning of year Provision for (recapture of) acquired Eurobank loans and lease losses, net FDIC shared-loss portion of provision for loan and lease losses, net Balance at end of year Allowance for loan and lease losses for Eurobank loans: Balance at beginning of year Provision for Eurobank loans and lease losses, net FDIC shared-loss portion of provision for Eurobank loans and lease losses, net Balance at end of year Year Ended December 31, 2014 Mortgage Commercial and Construction Consumer (In thousands) Leasing Total $ 12,495 $ 39,619 $ 615 $ 2,144 884 3,717 4,997 (181) (45) 15,523 $ 48,333 $ 389 $ Year Ended December 31, 2013 Mortgage Commercial and Construction Consumer (In thousands) Leasing $ 4,986 9,461 (1,952) $ 48,460 (4,110) (4,731) $ 678 (16) (47) 12,495 $ 39,619 $ 615 $ $ $ $ - - - - - - - - $ 52,729 5,680 5,836 $ 64,245 Total $ $ 54,124 5,335 (6,730) 52,729 The FDIC shared-loss portion of provision for acquired Eurobank loans and lease losses, net, represents the credit impairment losses to be covered under the FDIC loss-share agreement which is increasing the FDIC loss-share indemnification asset. The FDIC loss sharing obligations, related to commercial and other-non single family acquired Eurobank loans expired on June 30, 2015. The coverage for the single family residential loans will expire on June 30, 2020. The remaining covered loans are included as part of acquired Eurobank loans under the name "loans secured by 1-4 family residential properties." At December 31, 2015 and 2014, allowance for loan losses on loans covered by the FDIC shared-loss agreement amounted $32.6 million and $64.3 million, respectively, the provision for covered loan and lease losses for the years ended December 31, 2015, 2014, and 2013 was $17.7 million and $5.7 million, and $5.3 million, respectively. 165 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) NOTE 7- FDIC INDEMNIFICATION ASSET, TRUE-UP PAYMENT OBLIGATION, AND FDIC SHARED-LOSS EXPENSE In connection with the FDIC-assisted acquisition, the Bank and the FDIC entered into shared-loss agreements pursuant to which the FDIC covers a substantial portion of any losses on loans (and related unfunded loan commitments), foreclosed real estate and other repossessed properties covered by the agreements. 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 coverage under the commercial shared-loss agreement expired on June 30, 2015. 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 FDIC 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 indemnification asset and true-up payment obligation for the years ended December 31, 2015, 2014 and 2013: 2015 Year Ended December 31, 2014 (In thousands) 2013 FDIC indemnification asset: Balance at beginning of year Shared-loss agreements reimbursements from the FDIC Increase (decrease) in expected credit losses to be covered under shared-loss agreements, net FDIC indemnification asset expense Final settlement with the FDIC on commercial loans Incurred expenses to be reimbursed under shared-loss agreements Balance at end of year True-up payment obligation: Balance at beginning of year Change in true-up payment obligation Balance at end of year $ 97,378 $ (55,723) 189,240 (47,666) $ 302,295 (47,100) 2,503 (36,398) (1,589) 16,428 5,836 (62,285) - 12,253 (6,730) (66,253) - 7,028 22,599 $ 97,378 $ 189,240 21,981 $ 2,677 24,658 $ 18,510 3,471 21,981 $ $ 15,496 3,014 18,510 $ $ $ The FDIC shared-loss expense bears an inverse relationship with a change in the yield of covered loan pools in accordance with ASC 310-30. ASC 310-30 dictates that such pools should be subject to increases in their yield when the present value of the expected cash flows is higher than the pool’s carrying balance. When the increases in cash flow expectations are driven by reductions in the expected credit losses, the Bank recognizes that such losses are no longer expected to be collected from the FDIC. Accordingly, the Bank reduces the FDIC indemnification asset by amortizing the reduction in expected collections throughout the remaining life of the underlying pools. This amortization is recognized in the FDIC shared-loss expense. The underlying factors that caused an increase in the expected cash flows and resulting reduction in projected losses are derived from the pool-level cash flow forecasts. Credit loss assumptions used to develop each pool-level cash flow forecast are based on the behavior of defaults, recoveries and losses of the corresponding pool of covered loans. 166 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The FDIC loss-share coverage for the commercial loans was in effect until June 30, 2015. Accordingly, the Company amortized the remaining portion of the FDIC indemnification asset attributable to non-single family loans at the close of the second quarter of 2015. At December 31, 2015, the Company had no receivables from the FDIC, included in other assets in the statements of financial condition, corresponding to the loss-share certifications for commercial and other non-single family loans. At December 31, 2015, the FDIC indemnification asset reflects only the balance for single family residential mortgage loans. Notwithstanding the expiration of loss-share coverage of non-single family loans, on July 2, 2015, the Company entered into an agreement with the FDIC pursuant to which the FDIC agreed with a potential sale of a pool of loss-share assets covered under the commercial loss-sharing agreement. Pursuant to such agreement, the FDIC agreed to pay up to $20 million in loss share coverage with respect to the aggregate loss resulting from any portfolio sale within 120 days of the agreement. This sale was completed on September 28, 2015 and payment was received in December 2015. The Company have owed payments to the FDIC for the recovery of prior claims. At December 31, 2015, the liability for these payments amounted to $2.1 million and is recorded in other liabilities in the consolidated statements of financial condition until cash is paid to the FDIC. There was no liability at December 31, 2014. The FDIC indemnification asset expense decreased to $36.4 million for 2015 when compared to $62.3 million for 2014, and $66.3 million for 2013. The reduction in 2015 when compared to 2014 was principally driven by the expiration of the FDIC loss share coverage for commercial loans and other non-single family loans. During the years ended December 31, 2015, 2014 and 2013, the amortization expense totaled $2.5 million, $2.8 million, and $11.1 million, respectively, primarily as a result of stepped up cost recoveries on certain construction, commercial, and leasing pools. Also in connection with the FDIC-assisted acquisition, 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 estimated liability is included within accrued expenses and other liabilities in the consolidated statements of financial condition. This true-up payment obligation may increase if actual and expected losses decline. The Company measures the true-up payment obligation at fair value. The changes in fair value are included as change in true-up payment obligation within FDIC shared-loss expense, net in the consolidated statements of operations. The following table provides the fair value and the undiscounted amount of the true-up payment obligation at December 2015 and 2014: Carrying amount (fair value) Undiscounted amount December 31, 2015 2014 $ $ (In thousands) $ $ 24,658 34,956 21,981 40,266 167 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) In connection with the FDIC-assisted acquisition, the Company recognized an FDIC shared-loss expense, net in the consolidated statements of operations, which consists of the following, for the years ended December 31, 2015, 2014 and 2013: 2015 Year Ended December 31, 2014 (In thousands) 2013 FDIC indemnification asset expense Change in true-up payment obligation Reimbursement to FDIC for recoveries Final settlement with the FDIC on commercial loans $ (36,398) $ (2,677) (2,144) (1,589) (62,285) $ (3,471) - - (66,253) (3,014) - - Total FDIC shared-loss expense, net (42,808) $ (65,756) $ (69,267) NOTE 8 — PREMISES AND EQUIPMENT Premises and equipment at December 31, 2015 and 2014 are stated at cost less accumulated depreciation and amortization as follows: Useful Life (Years) December 31, 2015 2014 Land Buildings and improvements Leasehold improvements Furniture and fixtures Information technology and other Less: accumulated depreciation and amortization — 40 5 — 10 3 — 7 3 — 7 $ $ (In thousands) $ 5,638 64,392 20,166 13,656 23,226 127,078 (52,488) 74,590 $ 5,680 65,430 23,000 12,739 26,422 133,271 (52,672) 80,599 Depreciation and amortization of premises and equipment totaled $11.1 million in 2015, $10.2 million in 2014 and $10.3 million in 2013. These are included in the consolidated statements of operations as part of occupancy and equipment expenses. 168 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) NOTE 9 - SERVICING ASSETS The Company periodically sells or securitizes mortgage loans while retaining the obligation to perform the servicing of such loans. In addition, the Company may purchase or assume the right to service mortgage loans originated by others. Whenever the Company undertakes an obligation to service a loan, management assesses whether a servicing asset and/or liability should be recognized. A servicing asset is recognized whenever the compensation for servicing is expected to more than adequately compensate the Company for servicing the loans and leases. Likewise, a servicing liability would be recognized in the event that servicing fees to be received are not expected to adequately compensate the Company for its expected cost. All separately recognized servicing assets are recognized at fair value using the fair value measurement method. Under the fair value measurement method, the Company measures servicing rights at fair value at each reporting date, reports changes in fair value of servicing assets in earnings in the period in which the changes occur, and includes these changes, if any, with mortgage banking activities in the consolidated statements of operations. The fair value of servicing rights is subject to fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. The fair value of servicing rights 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. At December 31, 2015, the servicing asset amounted to $7.5 million ($14.0 million — December 31, 2014) related to mortgage servicing rights. During 2015, the Company completed the sale of certain servicing assets for approximately $7.0 million. The Company recognized a loss of $2.7 million related to this transaction, which is included as other non-interest (loss) income in the consolidated statements of operations. 169 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The following table presents the changes in servicing rights measured using the fair value method for years ended December 31, 2015, 2014 and 2013: Fair value at beginning of year Sale of mortgage servicing rights (MSR) Servicing from mortgage securitizations or asset transfers Changes due to payments on loans Changes in fair value related to price of MSR's held for sale Changes in fair value due to changes in valuation model inputs or assumptions Fair value at end of year $ $ Year Ended December 31, 2015 2014 (In thousands) $ 13,992 (5,927) 2,620 (1,017) (2,939) $ 13,801 - 2,149 (1,072) - 2013 (In thousands) 10,795 - 3,177 (950) - 726 7,455 $ (886) 13,992 $ 779 13,801 The following table presents key economic assumption ranges used in measuring the mortgage-related servicing asset fair value for the year ended 2015, 2014 and 2013: Constant prepayment rate Discount rate 5.23% - 15.24% 4.16% - 13.98% 10.00% - 12.00% 10.00% - 12.00% 5.78% - 14.33% 10.00% - 12.00% Year Ended December 31, 2015 2014 2013 The sensitivity of the current fair value of servicing assets to immediate 10 percent and 20 percent adverse changes in the above key assumptions were as follows: December 31, 2015 (In thousands) Mortgage-related servicing asset Carrying value of mortgage servicing asset Constant prepayment rate Decrease in fair value due to 10% adverse change Decrease in fair value due to 20% adverse change Discount rate Decrease in fair value due to 10% adverse change Decrease in fair value due to 20% adverse change $ $ $ $ $ 7,455 (202) (394) (307) (592) These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption. 170 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) 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. Servicing fee income is based on a contractual percentage of the outstanding principal balance and is recorded as income when earned. Servicing fees on mortgage loans for the years ended 2015, 2014 and 2013 totaled $4.8 million, $6.3 million and $5.5 million, respectively. NOTE 10 — DERIVATIVES The following table presents the Company’s derivative assets and liabilities at December 31, 2015 and 2014: Derivative assets: Options tied to S&P 500 Index Interest rate swaps not designated as hedges Interest rate caps Other Derivative liabilities: Interest rate swaps designated as cash flow hedges Interest rate swaps not designated as hedges Interest rate caps Other Interest Rate Swaps December 31, 2015 December 31, 2014 (In thousands) $ $ $ 1,170 1,819 32 4 3,025 4,307 1,819 32 4 6,162 $ $ $ 5,555 2,399 152 1 8,107 8,585 2,399 152 85 11,221 The Company enters into interest rate swap contracts to hedge the variability of future interest cash flows of forecasted wholesale borrowings attributable to changes in a predetermined variable index rate. The interest rate swaps effectively fix the Company’s interest payments on an amount of forecasted interest expense attributable to the variable index rate corresponding to the swap notional stated rate. These swaps are designated as cash flow hedges for the forecasted wholesale borrowing transactions, are properly documented as such, and therefore, qualify for cash flow hedge accounting. Any gain or loss associated with the effective portion of the cash flow hedges is recognized in other comprehensive income (loss) and is subsequently reclassified into operations in the period during which the hedged forecasted transactions affect earnings. Changes in the fair value of these derivatives are recorded in accumulated other comprehensive income to the extent there is no significant ineffectiveness in the cash flow hedging relationships. Currently, the Company does not expect to reclassify any amount included in other comprehensive income (loss) related to these interest rate swaps to operations in the next twelve months. 171 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The following table shows a summary of these swaps and their terms at December 31, 2015: Type Interest Rate Swaps Notional Amount (In thousands) 25,000 $ 25,000 25,000 50,000 100,000 37,982 262,982 $ Fixed Rate 2.4365% 2.6200% 2.6350% 2.6590% 2.6750% 2.4210% Variable Rate Index Trade Date Settlement Maturity Date Date 1-Month LIBOR 1-Month LIBOR 1-Month LIBOR 1-Month LIBOR 1-Month LIBOR 1-Month LIBOR 05/05/11 05/05/11 05/05/11 05/05/11 05/05/11 07/03/13 05/04/12 07/24/12 07/30/12 08/10/12 08/16/12 07/03/13 05/04/16 07/24/16 07/30/16 08/10/16 08/16/16 08/01/23 An accumulated unrealized loss of $4.3 million was recognized in accumulated other comprehensive income (loss) related to the valuation of these swaps at December 31, 2015, and the related liability is being reflected in the accompanying consolidated statements of financial condition. At December 31, 2015 and 2014, interest rate swaps not designated as hedging instruments that were offered to clients represented an asset of $1.8 million and $2.4 million, respectively, and were included as part of derivative assets in the consolidated statements of financial position. The credit risk to these clients stemming from these derivatives, if any, is not material. At December 31, 2015 and 2014, interest rate swaps not designated as hedging instruments that are the mirror-images of the derivatives offered to clients represented a liability of $1.8 million and $2.4 million, respectively, and were included as part of derivative liabilities in the 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 December 31, 2015: Type Interest Rate Swaps - Derivatives Offered to Clients Interest Rate Swaps - Mirror Image Derivatives $ $ $ $ Notional Amount (In thousands) Fixed Rate Variable Rate Index Settlement Date Maturity Date 3,774 5.1300% 1-Month LIBOR 07/03/06 07/03/16 12,500 16,274 5.5050% 1-Month LIBOR 04/11/09 04/11/19 3,774 5.1300% 1-Month LIBOR 07/03/06 07/03/16 12,500 16,274 5.5050% 1-Month LIBOR 04/11/09 04/11/19 172 OFG BANCORP NOTES TO 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 December 31, 2015 and 2014, the purchased options used to manage exposure to the S&P 500 Index on stock indexed deposits represented an asset of $1.2 million (notional amount of $3.4 million) and $5.6 million (notional amount of $10.7 million), respectively, and the options sold to customers embedded in the certificates of deposit and recorded as deposits in the consolidated statements of financial condition, represented a liability of $1.1 million (notional amount of $3.2 million) and $5.5 million (notional amount of $10.5 million), respectively. At December 31, 2015, the notional amount by expiration date is as follows:. Derivative asset (S&P purchased options) (In thousands) 3,375 3,375 $ Derivative liability (S&P embedded options) (In thousands) 3,152 3,152 $ Year Ended December 31, 2016 Interest Rate Caps The Company has entered into interest rate cap transactions with various clients with floating-rate debt who wish to protect their financial results against increases in interest rates. In these cases, the Company simultaneously enters into mirror-image interest rate cap transactions with financial counterparties. None of these cap transactions qualify for hedge accounting, and therefore, they are marked to market through earnings. The outstanding total notional amount of interest rate caps was $109.8 million and $110.0 million at December 31, 2015 and 2014 respectively. At December 31, 2015 and 2014 the interest rate caps sold to clients represented a liability of $32 thousand and $152 thousand, respectively, and were included as part of derivative liabilities in the consolidated statements of financial condition. At December 31, 2015 and 2014, the interest rate caps purchased as mirror-images represented an asset of $32 thousand and $152 thousand, respectively, and were included as part of derivative assets in the consolidated statements of financial condition. 173 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) NOTE 11 — ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS Accrued interest receivable at December 31, 2015 and 2014 consists of the following: Loans, excluding acquired loans Investments December 31, 2015 2014 (In thousands) 16,020 4,617 20,637 $ $ 17,005 4,340 21,345 $ $ Other assets at December 31, 2015 and 2014 consist of the following: FDIC receivable Prepaid expenses Other repossessed assets Core deposit and customer relationship intangibles Mortgage tax credits Investment in Statutory Trust Accounts receivable and other assets December 31, 2015 2014 (In thousands) - 11,762 6,226 7,838 6,277 1,083 42,786 75,972 $ $ 14,974 16,018 21,800 9,743 6,277 1,083 38,830 108,725 $ $ At December 31, 2014, the FDIC receivable included a $15.0 million receivable corresponding to the FDIC loss-share certification from the third quarter of 2014 that was received in January 2015. No FDIC receivable was recorded at December 31, 2015. Prepaid expenses amounting to $11.8 million and $16.0 million at December 31, 2015 and 2014, respectively, include prepaid municipal, property and income taxes aggregating to $7.0 million and $9.6 million, respectively. In connection with the FDIC-assisted acquisition and the BBVAPR Acquisition, the Company recorded a core deposit intangible representing the value of checking and savings deposits acquired. At December 31, 2015 and 2014 this core deposit intangible amounted to $5.3 million and $6.5 million, respectively. In addition, the Company recorded a customer relationship intangible representing the value of customer relationships acquired with the acquisition of the securities broker-dealer and insurance agency in the BBVAPR Acquisition. At December 31, 2015 and 2014, this customer relationship intangible amounted to $2.5 million and $3.3 million, respectively. Other repossessed assets totaled $6.2 million and $21.8 million at December 31, 2015 and 2014, respectively, include repossessed automobiles amounting to $5.5 million and $20.7 million, respectively, which are recorded at their net realizable value. At December 31, 2015 and 2014, tax credits for the Company totaled $6.3 million for both periods. These tax credits do not have an expiration date. 174 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) NOTE 12— DEPOSITS AND RELATED INTEREST Total deposits, including related accrued interest payable, as of December 31, 2015 and 2014 consist of the following: Non-interest bearing demand deposits Interest-bearing savings and demand deposits Individual retirement accounts Retail certificates of deposit Institutional certificates of deposit Total core deposits Brokered deposits Total deposits December 31, 2015 2014 (In thousands) 761,117 2,208,180 268,799 441,998 253,791 3,933,885 782,974 4,716,859 $ $ 745,142 2,544,665 303,049 452,150 260,090 4,305,096 619,310 4,924,406 $ $ Brokered deposits include $711.4 million in certificates of deposits and $71.6 million in money market accounts at December 31, 2015, and $526.2 million in certificates of deposits and $93.1 million in money market accounts at December 31, 2014. The weighted average interest rate of the Company’s deposits was 0.57% and 0.66% at December 31, 2015, and 2014 respectively, inclusive of non-interest bearing deposits of $761.1 million and $745.1 million, respectively. Interest expense for years ended December 31, 2015, 2014 and 2013 was as follows: Demand and savings deposits Certificates of deposit Year Ended December 31, 2014 2013 2015 $ $ 12,414 14,620 27,034 (In thousands) 17,724 16,230 33,954 $ $ $ $ 22,498 18,479 40,977 At December 31, 2015 and 2014, demand and interest-bearing deposits and certificates of deposit included deposits of Puerto Rico Cash & Money Market Fund, Inc., which amounted to $103.7 million and $96.8 million, respectively, with a weighted average rate of 0.77% and 0.78%, and, as required pursuant to an OCFI ruling, were collateralized with investment securities with a fair value of $81.6 million and $76.3 million, respectively. At December 31, 2015 and 2014, time deposits in denominations of $100 thousand or higher, excluding accrued interest and unamortized discounts, amounted to $597.6 million and $608.1 million, respectively. Such amounts include public fund time deposits from various Puerto Rico government municipalities, agencies, and corporations of $7.7 million and $6.9 million at a weighted average rate of 0.49% and 0.50% at December 31, 2015 and 2014, respectively. At December 31, 2015 and 2014, total public fund deposits from various Puerto Rico government municipalities, agencies, and corporations amounted to $99.0 million and $318.5 million, respectively. These public funds were collateralized with commercial loans amounting to $410.9 million at December 31, 2015 and with investment securities with a fair value of $97.8 million at such date, and commercial loans amounting to $414.5 million at December 31, 2014. 175 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Excluding equity indexed options in the amount of $1.1 million, which are used by the Company to manage its exposure to the S&P 500 Index, and also excluding accrued interest of $1.5 million and unamortized deposit discount in the amount of $311 thousand, the scheduled maturities of certificates of deposit at December 31, 2015 are as follows: Within one year: Three (3) months or less Over 3 months through 1 year Over 1 through 2 years Over 2 through 3 years Over 3 through 4 years Over 4 through 5 years December 31, 2015 (In thousands) $ $ 474,051 501,551 975,602 454,906 176,406 32,396 33,715 1,673,025 The table of scheduled maturities of certificates of deposits above includes brokered-deposits and individual retirement accounts. The aggregate amount of overdrafts in demand deposit accounts that were reclassified to loans amounted to $1.5 million and $845 thousand as of December 31, 2015 and 2014, respectively. 176 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) NOTE 13 — BORROWINGS AND RELATED INTEREST Securities Sold under Agreements to Repurchase At December 31, 2015, securities underlying agreements to repurchase were delivered to, and are being held by, the counterparties with whom the repurchase agreements were transacted. The counterparties have agreed to resell to the Company the same or similar securities at the maturity of these agreements. At December 31, 2015 and 2014, securities sold under agreements to repurchase (classified by counterparty), excluding accrued interest in the amount of $2.2 million and $2.3 million, respectively, were as follows: December 31, 2015 2014 Borrowing Balance Fair Value of Underlying Collateral Borrowing Balance Fair Value of Underlying Collateral JP Morgan Chase Bank NA Credit Suisse Securities (USA) LLC Total $ 262,500 670,000 932,500 $ (In thousands) 283,483 737,887 1,021,370 $ 307,816 670,000 977,816 $ 328,198 760,327 1,088,525 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 December 31, 2015: Year of Maturity Borrowing Balance (In thousands) 2016 2017 170,000 232,500 30,000 500,000 932,500 $ Weighted- Average Coupon Settlement Date Maturity Date 1.500% 0.950% 0.700% 4.780% 3.100% 12/6/2012 12/10/2012 12/3/2015 12/8/2016 9/30/2016 1/5/2016 3/2/2007 3/2/2017 The Company’s repurchase agreement in the amount of $232.5 million with an original amount of $255.0 million and original term of 30 months, maturing on June 13, 2015, was modified in March 2015 to (i) reduce the balance to $232.5 million, (ii) extend the maturity date to September 30, 2016, and (iii) increase the interest rate paid by the Company from 0.840% to 0.950%. In addition, 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. 177 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The following table presents the repurchase liability associated with the repurchase agreement transactions (excluding accrued interest) by maturity. Also, it includes the carrying value and approximate market value of collateral (excluding accrued interest) at December 31, 2015 and 2014. There was no cash collateral at December 31, 2015 and 2014. December 31, 2015 Market Value of Underlying Collateral Weighted FNMA and Repurchase Average FHLMC GNMA Liability Rate Certificates Certificates (Dollars in thousands) - 2,131 2,131 $ 31,961 974,698 1,006,659 $ 0.70% 3.18% 3.10% $ Less than 90 days Over 90 days Total 30,000 902,500 932,500 $ US Treasury Treasury Notes Total - 12,580 12,580 $ 31,961 989,409 1,021,370 December 31, 2014 Market Value of Underlying Collateral Weighted FNMA and Repurchase Average FHLMC GNMA Liability Rate Certificates Certificates Total Less than 90 days Over 90 days Total $ $ (Dollars in thousands) 52,816 925,000 0.39% $ 2.83% 56,066 $ - $ 1,031,206 1,253 56,066 1,032,459 977,816 2.89% $ 1,087,272 $ 1,253 $ 1,088,525 The following summarizes significant data on securities sold under agreements to repurchase as of December 31, 2015 and 2014, excluding accrued interest: December 31, 2015 2014 (In thousands) Average daily aggregate balance outstanding Maximum outstanding balance at any month-end Weighted average interest rate during the year Weighted average interest rate at year end $ $ $ $ 1,012,756 1,158,945 2.92% 3.10% 1,041,378 1,149,167 2.85% 2.95% Advances from the Federal Home Loan Bank of New York Advances are received from the Federal Home Loan Bank of New York (the “FHLB-NY”) under an agreement whereby the Company is required to maintain a minimum amount of qualifying collateral with a fair value of at least 110% of the outstanding advances. At December 31, 2015 and 2014, these advances were secured by mortgage and commercial loans amounting to $1.3 billion and $1.2 billion, respectively. Also, at December 31, 2015 and 2014, the Company had an additional borrowing capacity with the FHLB-NY of $770.6 million and $606.6 million, respectively. At December 31, 2015 and 2014, the weighted average remaining maturity of FHLB’s advances was 6.3 months and 8.8 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 December 31, 2015. 178 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The following table shows a summary of these advances and their terms, excluding accrued interest in the amount of $362 thousand, at December 31, 2015: Year of Maturity 2016 $ 2017 2018 2020 $ Borrowing Balance (In thousands) Weighted- Average Coupon Settlement Date Maturity Date 25,000 50,000 100,000 25,000 25,000 37,982 262,982 4,267 30,000 25,000 55,000 9,865 332,114 0.56% 0.66% 0.64% 0.59% 0.53% 0.49% 1.24% 2.19% 2.18% 2.59% 0.93% 12/4/2015 12/10/2015 12/16/2015 12/24/2015 12/30/2015 12/1/2015 1/4/2016 1/11/2016 1/19/2016 1/25/2016 1/29/2016 1/4/2016 4/3/2012 4/3/2017 1/16/2013 1/16/2013 1/16/2018 1/16/2018 7/19/2013 7/20/2020 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 $102.6 million and $101.6 million at December 31, 2015 and 2014, respectively. In August 2003, the Statutory Trust II, a special purpose entity of the Company, was formed for the purpose of issuing trust redeemable preferred securities. In September 2003, $35.0 million of trust redeemable preferred securities were issued by the Statutory Trust II as part of a pooled underwriting transaction. The proceeds from this issuance were used by the Statutory Trust II to purchase a like amount of a floating rate junior subordinated deferrable interest debenture issued by the Company. The subordinated deferrable interest debenture has a par value of $36.1 million, bears interest based on 3-month LIBOR plus 295 basis points (3.48% at December, 2015; 3.19% at December 31, 2014), is payable quarterly, and matures on September 17, 2033. It may be called at par after five years and quarterly thereafter (next call date March 2016). The trust redeemable preferred securities have the same maturity and call provisions as the subordinated deferrable interest debenture. The subordinated deferrable interest debenture issued by the Company is accounted for as a liability denominated as a subordinated capital note on the consolidated statements of financial condition. The subordinated capital note is treated as Tier 1 capital for regulatory purposes. Under the Dodd-Frank Act and the new capital rules issued by the federal banking regulatory agencies in July 2013, bank holding companies are prohibited from including in their Tier 1 capital hybrid debt and equity securities, including trust preferred securities, issued on or after May 19, 2010. Any such instruments issued before May 19, 2010 by a bank holding company, such as the Company, with total consolidated assets of less than $15 billion as of December 31, 2009, may continue to be included as Tier 1 capital. Therefore, the Company is permitted to continue to include its existing trust preferred securities as Tier 1 capital. Following are the outstanding subordinated capital notes, which are not trust preferred securities, and were assumed as part of the BBVAPR Acquisition on December 18, 2012: 179 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Subordinated capital notes issued in September 2006 amounting to $37.0 million at a fixed rate of 5.76% through September 29, 2011, and three-month LIBOR plus 1.56% thereafter (2.16% at December 31, 2015; 1.81 %at December 31, 2014), due September 29, 2016. Interest on these subordinated notes is payable quarterly during the floating-rate period. The Bank has the option to redeem these subordinated capital notes in whole or in part from time to time before maturity at 100% of the principal amount plus any accrued but unpaid interest to the date of redemption, beginning September 29, 2011, and at each payment date thereafter. Subordinated capital notes issued in September 2006 amounting to $30.0 million at a variable rate of three-month LIBOR plus 1.56% thereafter (2.16% at December 31, 2015; 1.81% at December 31, 2014), due September 29, 2016. Interest on these subordinated notes is payable quarterly. The Bank has the option to redeem these subordinated capital notes in whole or in part from time to time before maturity at 100% of the principal amount plus any accrued but unpaid interest to the date of redemption, beginning September 29, 2011, and at each payment date thereafter. These notes qualified as Tier 2 capital at a discounted rate, which totaled $13.4 million at December 31, 2014. They have been fully discounted at December 31, 2015. Generally speaking, subordinated notes are included as Tier 2 capital if they have an original weighted average maturity of at least 5 years and comply with certain other requirements. As the notes approach maturity, they begin to take on characteristics of a short term obligation. For this reason, the outstanding amount eligible for inclusion in Tier 2 capital is reduced, or discounted, as the instruments approach maturity: one fifth of the outstanding amount is excluded each year during the instruments last five years before maturity. When the remaining maturity is less than one year, the instrument is excluded from Tier 2 capital. 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) 61,975 $ 5,025 67,000 $ Redemption fund at December 31, 2015 2016 Other borrowings Other borrowings, presented in the consolidated statements of financial condition amounted to $1.7 million and $4.0 million at December 31, 2015 and December 31, 2014, respectively, which mainly consists of unsecured fixed-rate borrowings. For both periods, the unsecured fixed rate borrowings amounted to $1.7 million at a fixed rate of 3.0%. There are no term notes at December 31, 2015; however, at December 31, 2014, term notes tied to the S&P index amounted to $1.0 million with an index appreciation of $1.3 million. 180 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) NOTE 14 – OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES The Company’s derivatives are subject to agreements which allow a right of set-off with each respective counterparty. In addition, the Company’s securities purchased under agreements to resell and securities sold under agreements to repurchase have a right of set-off with the respective counterparty under the supplemental terms of the master repurchase agreements. In an event of default, each party has a right of set-off against the other party for amounts owed in the related agreements and any other amount or obligation owed in respect of any other agreement or transaction between them. Security collateral posted to open and maintain a master netting agreement with a counterparty, in the form of cash and securities, may from time to time be segregated in an account at a third-party custodian pursuant to a an account control agreement. The following table presents the potential effect of rights of set-off associated with the Company’s recognized financial assets and liabilities at December 31, 2015 and 2014: December 31, 2015 Gross Amounts Not Offset in the Statement of Financial Condition Gross Amount of Recognized Assets Gross Amounts Offset in the Statement of Financial Condition Net Amount of Assets Presented in Statement of Financial Condition Financial Instruments Cash Collateral Received Net Amount Derivatives $ 3,025 $ - $ (In thousands) $ 3,025 2,000 $ - $ 1,025 December 31, 2014 Gross Amounts Not Offset in the Statement of Financial Condition Gross Amount of Recognized Assets Gross Amounts Offset in the Statement of Financial Condition Net amount of Assets Presented in Statement of Financial Condition Financial Instruments Cash Collateral Received Net Amount Derivatives $ 8,107 $ - $ (In thousands) $ 8,107 2,006 $ - $ 6,101 181 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) December 31, 2015 Gross Amounts Not Offset in the Statement of Financial Condition Gross Amounts Offset in the Statement of Financial Condition Net Amount of Liabilities Presented in Statement of Financial Condition Gross Amount of Recognized Liabilities Financial Instruments Cash Collateral Provided (In thousands) Net Amount 7,257 $ 932,500 939,757 $ - - - $ $ 7,257 $ - $ 1,980 $ 5,277 932,500 939,757 $ 1,021,370 1,021,370 $ - 1,980 $ (88,870) (83,593) December 31, 2014 Gross Amounts Not Offset in the Statement of Financial Condition Gross Amounts Offset in the Statement of Financial Condition Net Amount of Liabilities Presented in Statement of Financial Condition Gross Amount of Recognized Liabilities Financial Instruments Cash Collateral Provided Net Amount 16,698 $ 977,816 994,514 $ - - - $ $ (In thousands) $ 16,698 - $ 2,980 $ 13,718 977,816 994,514 $ 1,088,525 1,088,525 $ - 2,980 $ (110,709) (96,991) $ $ $ $ Derivatives Securities sold under agreements to repurchase Total Derivatives Securities sold under agreements to repurchase Total 182 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) NOTE 15 — EMPLOYEE BENEFIT PLAN The Company has a profit sharing plan containing a cash or deferred arrangement qualified under Sections 1081.01(a) and 1081.01(d) of the 2011 Code, and Sections 401(a) and 401(k) of the United States Internal Revenue Code of 1986, as amended (the “U.S. Code”). This plan is subject to the provisions of Title I of the Employee Retirement Income Security Act of 1976, as amended (“ERISA”). This plan covers all full-time employees of the Company who are age twenty-one or older. Under this plan, participants may contribute each year up to $18,000. During 2013, the Company changed the matching contribution to 50 cents for each dollar contributed by an employee, up to 4% of such employee’s base salary. The new matching contribution is invested in accordance with the employee’s decision between the available investment alternatives provided by the plan. This plan is entitled to acquire and hold qualified employer securities as part of its investment of the trust assets pursuant to ERISA Section 407. The Company contributed $808,690, $811,513 and $657,504 in cash during 2015, 2014 and 2013, respectively. The Company did not contribute any shares during 2015 and 2014 but contributed 7,318 shares in 2013 of its common stock at a cost of approximately $110,000. The Company’s contribution becomes 100% vested once the employee completes three years of service. Effective April 1, 2013, the Plan was amended to include a new subsection which states that all employees who were employed by BBVAPR on December 17, 2012 and who became employees of the Company on December 18, 2012 as a result of the BBVAPR Acquisition by OFG Bancorp that was completed on the same date, shall be credited with all periods of service with BBVAPR for all appropriate purposes under the Plan and can participate in the Plan. Also, the Company offers to its senior management a non-qualified deferred compensation plan, where executives can defer taxable income. Both the employer and the employee have flexibility because non-qualified plans are not subject to ERISA contribution limits nor are they subject to discrimination tests in terms of who must be included in the plan. Under this plan, the employee’s current taxable income is reduced by the amount being deferred. Funds deposited in a deferred compensation plan can accumulate without current income tax to the individual. Income taxes are due when the funds are withdrawn. NOTE 16 — RELATED PARTY TRANSACTIONS The Bank grants loans to its directors, executive officers and to certain related individuals or organizations in the ordinary course of business. These loans are offered at the same terms as loans to unrelated third parties. The activity and balance of these loans for the years ended December 31, 2015, 2014 and 2013 was as follows: Balance at the beginning of year New loans and disbursements Repayments Credits of persons no longer considered related parties Balance at the end of year $ $ Year Ended December 31, 2014 2015 2013 27,011 13,581 (9,117) (In thousands) $ 18,963 $ 21,797 (13,725) - 31,475 $ (24) 27,011 $ 6,055 18,499 (4,798) (793) 18,963 183 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) NOTE 17 — INCOME TAXES The Company is subject to the dispositions of the 2011 Internal Revenue Code of the New Puerto Rico, as amended (the Code). Among others, the Code imposes a maximum corporate tax rate of 39%. Recent Code amendments have been incorporated to increase government collections in order to alleviate the governmental structural deficit. One of the Code’s amendments is Act No. 77-2014 known as “Ley de Ajustes al Sistema Contributivo” (Act of Adjustments to the Tax System). The most relevant provisions of the Act of Adjustments to the Tax System, as applicable to the Company, and effective for transactions held after June 30, 2014 are as follows: (1) the capital tax rate was increased from 15% to 20% and (2) for an asset to be considered long term capital asset, the holding period must be over a year, which before was defined with a holding period of over six months. On May 29, 2015 the Governor signed Act No. 72 of 2015. The most relevant provisions of the Act No. 72, as applicable to the Company, for taxable years beginning after December 31, 2014, are as follows: (1) establishes a new definition of “large taxpayers,” which require them to file their tax return following a special procedure established by the Secretary of the Treasury, (2) net operating losses carried forward may be deducted up to 70% of the alternative minimum net income for purposes of computing the alternative minimum tax, and (3) net operating losses carried forward may be deducted up to 80% of the net income for purposes of computing the regular corporate income tax. Other Code amendments applicable during 2015 are the increase of the Sales and Use Tax (SUT) from 7% to 11.5% beginning July 1st, 2015 and a special SUT to business to business transactions of 4%, beginning October 1st, 2015. These were implemented as a transitional phase to the enacted Value Added Tax (VAT) of 10.5%, which will be in place on April 1st, 2016, along with a Municipal SUT of 1% on certain taxable items. Under Puerto Rico law, all companies are treated as separate taxable entities and are not entitled to file consolidated tax returns. The Company and its subsidiaries are subject to Puerto Rico regular income tax or AMT on income earned from all sources. The AMT is payable if it exceeds regular income tax. The excess of AMT over regular income tax paid in any one year may be used to offset regular income tax in future years, subject to certain limitations. The components of income tax expense (benefit) for the years ended December 31, 2015, 2014 and 2013 are as follows: 2015 Year Ended December 31, 2014 (In thousands) $ Current income tax expense Deferred income tax (benefit) expense Total income tax (benefit) expense $ $ 19,775 (37,329) (17,554) $ 13,097 $ 24,155 37,252 $ 2013 2,357 (11,066) (8,709) 184 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Income tax benefit was $17.6 million of the year ended December 31, 2015, compared to the income tax expenses of $37.3 million for December 31, 2014. The income tax benefit obtained in 2015 was mainly related to the net loss for the period. In relation to the exempt income level, for 2015, 2014, and 2013 the Bank’s investment securities portfolio and loans portfolio generated net tax- exempt interest income of $17.6 million, $40.5 million, and $11.7 million, respectively. OIB generated exempt income of $6.3 million, $16.5 million and $12.1 million for the years ended 2015, 2014 and 2013, respectively. The maximum marginal-statutory rate was 39.00%, for the years ended December 31, 2015, 2014 and 2013, and the Company maintained a lower effective tax rate for 2015, 2014 and 2013. The Company’s income tax expense differs from amounts computed by applying the applicable statutory rate to income before income taxes as follow: 2015 2014 2013 Amount Rate Amount Rate Amount Rate Year Ended December 31, (Dollars in thousands) Tax (benefit) expense at statutory rates $ Tax effect of exempt income, net Effect of tax rate on capital loss carryforwards Disallowed net operating loss carryover Change in valuation allowance Release of unrecognized tax benefits, net Effect in deferred taxes due to increase in tax rates from 30.00% to 39.00% Loan tax basis change effect Effect of change in tax of IBE Unrealized capital loss Other items, net Income tax (benefit) expense (7,823) (8,625) - 556 (2,219) (385) - - - 283 659 -39.00% $ -43.00% 0.00% 2.77% -11.06% -1.92% 0.00% 0.00% 0.00% 1.41% 3.28% 47,749 (10,002) - 8,289 (958) (1,093) - (7,642) - - 909 37,252 39.00% $ -26.85% 0.00% 22.25% -2.57% -2.94% 0.00% -20.51% 0.00% 0.00% 2.00% 10.82% $ 34,997 (4,652) 840 - 1,896 (1,559) (38,068) - 148 - (2,311) (8,709) 39.00% -4.90% 0.94% 0.00% 2.11% -1.57% -43.04% 0.00% 0.17% 0.00% -2.58% -9.70% $ (17,554) -87.52% $ The Company classifies unrecognized tax benefits in income taxes payable. These gross unrecognized tax benefits would affect the effective tax rate if realized. At December 31, 2015 was $2.2 million (December 31, 2014 - $2.6 million). The Company had accrued $175 thousand at December 31, 2015 (December 31, 2014 - $470 thousand) for the payment of interest and penalties relating to unrecognized tax benefits. During 2015, $560 thousand was released based on negotiations with the IRS related to taxable dividends from the Federal Home Loan Bank. These negotiations concluded and the subject is settled with the IRS. The following table presents a reconciliation of unrecognized tax benefits: Balance at beginning of year Additions for tax positions of prior years Reduction for tax positions as a result of settlements Reduction for tax positions as a result of lapse of statute of limitations Balance at end of year Year Ended December 31, 2015 2014 2013 In thousands) $ 2,560 175 (560) - $ 4,042 187 (1,388) (281) 2,175 $ 2,560 $ 5,452 287 - (1,697) 4,042 $ $ 185 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statute of limitations, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity, and the addition elimination of uncertain tax positions. The determination of deferred tax expense or benefit is based on changes in the carrying amounts of assets and liabilities that generate temporary differences. The carrying value of the Company’s net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to record valuation allowances against its deferred tax assets resulting in additional income tax expense in the consolidated statements of operations. Deferred tax asset: Allowance for loan and lease losses and other reserves Loans and other real estate valuation adjustment Net capital and operating loss carry forwards Alternative minimum tax Deposit and borrowings valuation adjustment Unrealized net loss included in other comprehensive income S&P option contracts Acquired portfolio FDIC shared-loss indemnification asset Other assets allowances Other deferred tax assets Total gross deferred tax asset Deferred tax liability: FDIC shared-loss indemnification asset FDIC-assisted acquisition, net Customer deposit and customer relationship intangibles Loans and building valuation adjustment Unrealized net gain on available-for-sale securities Servicing asset Other deferred tax liabilities Total gross deferred tax liabilities Less: valuation allowance Net deferred tax asset $ December 31, 2015 2014 (In thousands) $ $ 129,234 10,759 11,043 16,240 133 1,680 393 37,523 2,802 1,547 5,612 216,966 - (47,956) (3,057) (9,991) (2,566) (2,907) (1,446) (67,923) (3,142) 90,090 9,295 28,973 16,208 390 3,273 1,882 46,146 - 1,424 6,262 203,943 (21,809) (40,740) (3,800) (11,656) (3,799) (5,457) (2,703) (89,964) (5,271) $ 145,901 $ 108,708 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 benefits of these deductible differences, net of the existing valuation allowances at December 31, 2015. 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 carry-forward period are reduced. 186 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The Company and its subsidiaries have operating and capital loss carry-forwards for income tax purposes which are available to offset future taxable income and capital gains. Operating loss carry-forwards are available until December 2025 and capital loss carry- forwards are available until December 2020. The majority of these operating and capital loss carry-forwards are at the Company and at the Bank amounting to approximately $27.6 million as of December 31, 2015. The Company follows a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals of litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company is potentially subject to income tax audits in the Commonwealth of Puerto Rico for taxable years 2011 to 2014, until the applicable statute of limitations expire. Tax audits by their nature are often complex and can require several years to complete. NOTE 18 — REGULATORY CAPITAL REQUIREMENTS Regulatory Capital Requirements The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and Puerto Rico banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Pursuant to the Dodd-Frank Act, federal banking regulators have adopted new capital rules that became effective January 1, 2015 for the Company and the Bank (subject to certain phase-in periods through January 1, 2019) and that replaced their general risk-based capital rules, advanced approaches rule, market risk rule, and leverage rules. Among other matters, the new capital rules: (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to prior regulations. The new capital rules prescribe a new standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I- derived categories (0%, 20%, 50% and 100%) to a larger and more risk-sensitive number of categories, depending on the nature of the assets, and resulting in higher risk weights for a variety of asset classes. Pursuant to the new capital rules, the minimum capital ratios requirements as of January 1, 2015 are as follows: 4.5% CET1 to risk-weighted assets; 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; 8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and 4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”). As of December 31, 2015 and 2014, the Company and the Bank met all capital adequacy requirements to which they are subject. As of December 31, 2015 and 2014, the Bank is “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” an institution must maintain minimum CET1 risk-based, Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios as set forth in the tables presented below. 187 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2015 and 2014 are as follows: Company Ratios As of December 31, 2015 Total capital to risk-weighted assets Tier 1 capital to risk-weighted assets Common equity tier 1 capital to risk-weighted assets Tier 1 capital to average total assets As of December 31, 2014 Total capital to risk-weighted assets Tier 1 capital to risk-weighted assets Tier 1 capital to average total assets Bank Ratios As of December 31, 2015 Total capital to risk-weighted assets Tier 1 capital to risk-weighted assets Common equity tier 1 capital to risk-weighted assets Tier 1 capital to average total assets As of December 31, 2014 Total capital to risk-weighted assets Tier 1 capital to risk-weighted assets Tier 1 capital to average total assets $ $ $ $ $ $ $ $ $ $ $ $ $ $ Actual Minimum Capital Requirement Minimum to be Well Capitalized Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) 846,748 782,912 594,482 782,912 851,437 776,525 776,525 17.29% $ 15.99% $ 12.14% $ 11.18% $ 17.57% $ 16.02% $ 10.61% $ 391,723 293,792 220,344 280,009 387,772 193,886 292,738 8.00% $ 6.00% $ 4.50% $ 4.00% $ 8.00% $ 4.00% $ 4.00% $ 489,654 391,723 318,275 350,011 484,715 290,829 365,922 10.00% 8.00% 6.50% 5.00% 10.00% 6.00% 5.00% Actual Minimum Capital Requirement Minimum to be Well Capitalized Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) 815,458 751,886 751,886 751,886 820,884 746,177 746,177 16.70% $ 15.40% $ 15.40% $ 10.80% $ 16.99% $ 15.45% $ 10.26% $ 390,688 293,016 219,762 278,399 386,444 193,222 290,879 8.00% $ 6.00% $ 4.50% $ 4.00% $ 8.00% $ 4.00% $ 4.00% $ 488,360 390,688 317,434 347,999 483,055 289,833 363,599 10.00% 8.00% 6.50% 5.00% 10.00% 6.00% 5.00% 188 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) NOTE 19 – EQUITY-BASED COMPENSATION PLAN The Omnibus Plan provides for equity-based compensation incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, and dividend equivalents, as well as equity-based performance awards. The Omnibus Plan replaced and superseded the Stock Option Plans. All outstanding stock options under the Stock Option Plans continue in full force and effect, subject to their original terms. The activity in outstanding options for the years ended December 31, 2015, 2014 and 2013 is set forth below: 2015 Weighted Average Exercise Price Number Of Options 888,571 $ 179,225 (112,704) (3,569) 951,523 $ 14.12 17.44 19.78 16.09 12.45 Beginning of year Options granted Options exercised Options forfeited End of year Year Ended December 31, 2014 Weighted Average Exercise Price 2013 Weighted Average Exercise Price Number Of Options 14.46 16.10 11.86 19.29 14.12 922,593 $ 196,000 (34,396) (176,079) 908,118 $ 14.50 14.52 12.65 15.11 14.46 Number Of Options 908,118 $ 193,100 (54,397) (158,250) 888,571 $ The following table summarizes the range of exercise prices and the weighted average remaining contractual life of the options outstanding at December 31, 2015: Range of Exercise Prices $5.63 to $8.45 8.46 to 11.26 11.27 to 14.08 14.09 to 16.90 16.91 to 19.71 19.72 to 22.53 Aggregate Intrinsic Value $ Outstanding Exercisable Number of Options Weighted Average Exercise Price 4,078 1,000 461,820 305,300 177,825 1,500 951,523 - $ 8.28 10.29 11.93 15.37 17.44 21.86 14.06 Weighted Average Contract Life Remaining (Years) 3.3 1.6 4.4 7.7 9.2 2.2 6.3 Number of Options Weighted Average Exercise Price 4,078 1,000 373,754 35,100 1,500 415,432 $ 8.28 10.29 11.95 14.52 21.86 14.22 $ - The average fair value of each option granted during 2015, 2014 and 2013 was $5.77for 2015 and 2014 and $5.94 for 2013. The average fair value of each option granted was estimated at the date of the grant using the Black-Scholes option pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no restrictions and are fully transferable and negotiable in a free trading market. Black-Scholes does not consider the employment, transfer or vesting restrictions that are inherent in the Company’s stock options. Use of an option valuation model, as required by GAAP, includes highly subjective assumptions based on long-term predictions, including the expected stock price volatility and average life of each option grant. 189 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The following assumptions were used in estimating the fair value of the options granted during the years ended December 31, 2015, 2014 and 2013: Weighted average assumptions: Dividend yield Expected volatility Risk-free interest rate Expected life (in years) Year Ended December 31, 2014 2015 2013 1.89% 40.93% 2.41% 8.0 1.87% 42.08% 2.38% 8.0 1.66% 44.34% 1.55% 8.0 The following table summarizes the activity in restricted units under the Omnibus Plan for the years ended December 31, 2015, 2014 and 2013: 2015 Year Ended December 31, 2014 2013 Weighted Average Grant Date Fair Value 14.95 16.66 11.83 15.45 16.17 Restricted Units $ 153,050 26,700 (39,750) (1,600) 138,400 $ Weighted Average Grant Date Fair Value 13.95 16.10 12.03 14.30 14.95 Restricted Units $ 158,750 39,200 (37,342) (7,558) 153,050 $ Weighted Average Grant Date Fair Value 12.13 15.86 12.34 12.87 13.95 Restricted Units $ 197,500 85,700 (113,367) (11,083) 158,750 $ Beginning of year Restricted units granted Restricted units lapsed Restricted units forfeited End of year The total unrecognized compensation cost related to non-vested restricted units to members of management at December 31, 2015 was $3.1 million and is expected to be recognized over a weighted-average period of 2.8 years. 190 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) NOTE 20 – STOCKHOLDERS’ EQUITY Additional Paid-in Capital Additional paid-in capital represents contributed capital in excess of par value of common and preferred stock net of the costs of issuance. As of December 31, 2015 and 2014 accumulated issuance costs charged against additional paid in capital amounted to $13.6 million and $10.1 million for preferred and common stock, respectively. Legal Surplus The Puerto Rico Banking Act requires that a minimum of 10% of the Bank’s net income or loss for the year be transferred to a reserve fund until such fund (legal surplus) equals the total paid in capital on common and preferred stock. At December 31, 2015 and 2014, the Bank’s legal surplus amounted to $70.4 million and $70.5million, respectively. The amount transferred to the legal surplus account is not available for the payment of dividends to shareholders. Treasury Stock Under the Company’s current stock repurchase program it is authorized to purchase in the open market up to $70 million of its outstanding shares of common stock, of which approximately $7.7 million of authority remains. The shares of common stock repurchased are to be held by the Company as treasury shares. During the year ended December 31, 2015 the Company purchased 803,985 shares under this program for a total of $8.9 million, at an average price of $11.10 per share. During the year ended December 31, 2014 the Company purchased 1,153,998 shares at an average price of $14.66 per share. Period April 2015 May 2015 June 2015 July 2015 Year Ended December 31, 2015 Period January 2014 February 2014 August 2014 October 2014 November 2014 December 2014 Year Ended December 31, 2014 Total number of shares purchased as part of stock repurchase programs Average price paid per share Dollar amount of shares repurchased (excluding commissions paid) (In thousands) 204,338 48,200 51,447 500,000 803,985 Total number of shares purchased as part of stock repurchase programs 57,700 649,700 100 381,513 63,100 1,885 1,153,998 $ $ $ $ 14.38 13.09 12.81 9.39 11.10 Average price paid per share 14.73 14.66 15.50 14.64 14.69 14.70 14.66 $ $ $ $ 2,939 631 659 4,696 8,925 Dollar amount of shares repurchased (excluding commissions paid) (In thousands) 850 9,522 2 5,585 927 28 16,914 At December 31, 2015 the number of shares that may yet be purchased under the $70 million program is estimated at 1,056,128 and was calculated by dividing the remaining balance of $7.7 million by $7.32 (closing price of the Company common stock at December 31, 2015). The Company did not purchase any shares of its common stock during the year ended December 31, 2015, other than through its publicly announced stock repurchase program. 191 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The activity in connection with common shares held in treasury by the Company for the year ended December 31, 2015 and 2014 is set forth below: 2015 Year Ended December 31, 2014 2013 Shares Dollar Amount Shares Dollar Amount Shares Dollar Amount Beginning of year Common shares used upon lapse of restricted stock units Common shares repurchased as part of the stock repurchase program Reclassification from common stock Common shares used to match defined contribution plan, net 8,012,254 $ (58,279) 803,985 - - (In thousands, except shares data) $ 7,030,101 80,642 97,070 7,090,597 $ 81,275 (641) (36,294) (384) (53,178) (556) 8,950 1,153,998 16,948 (135,551) (136) - - - - - - (7,318) (77) - - End of year 8,757,960 $ 105,379 8,012,254 $ 97,070 7,030,101 $ 80,642 NOTE 21 - ACCUMULATED OTHER COMPREHENSIVE INCOME Accumulated other comprehensive income, net of income tax, as of December 31, 2015, and 2014 consisted of: Unrealized gain on securities available-for-sale which are not other-than-temporarily impaired Unrealized loss on securities available-for-sale which are other-than-temporarily impaired Income tax effect of unrealized gain on securities available-for-sale Net unrealized gain on securities available-for-sale which are not other-than-temporarily impaired Unrealized loss on cash flow hedges Income tax effect of unrealized loss on cash flow hedges Net unrealized loss on cash flow hedges Accumulated other comprehensive income, net of taxes December 31, 2015 December 31, 2014 (In thousands) $ 22,044 $ 28,743 (3,196) (1,924) 16,924 (4,307) 1,380 (2,927) $ 13,997 $ - (2,978) 25,765 (8,585) 2,531 (6,054) 19,711 192 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The following table presents changes in accumulated other comprehensive income by component, net of taxes, for the years ended December 31, 2015, 2014 and 2013: Year Ended December 31, 2015 Net unrealized Net unrealized Accumulated gains on securities loss on other cash flow comprehensive available-for-sale hedges income (In thousands) Beginning balance $ 25,765 $ (6,054) $ 19,711 Other comprehensive income (loss) before reclassifications Other-than-temporary impairment amount reclassified from accumulated other comprehensive income Amounts reclassified out of accumulated other comprehensive income (loss) Other comprehensive income (loss) (3,250) (3,019) (4,662) - (929) (8,841) 6,146 3,127 Ending balance $ 16,924 $ (2,927) $ (6,269) (4,662) 5,217 (5,714) 13,997 Year Ended December 31, 2014 Net unrealized Net unrealized Accumulated gains on securities loss on other cash flow comprehensive available-for-sale hedges income Beginning balance Other comprehensive income (loss) before reclassifications Amounts reclassified out of accumulated other comprehensive income (loss) Other comprehensive income Ending balance $ $ (In thousands) 11,433 $ (8,242) $ 14,207 125 14,332 (5,157) 7,345 2,188 25,765 $ (6,054) $ Year Ended December 31, 2013 3,191 9,050 7,470 16,520 19,711 Net unrealized Net unrealized Accumulated gains on securities loss on other cash flow comprehensive available-for-sale hedges income Beginning balance Other comprehensive income (loss) before reclassifications Amounts reclassified out of accumulated other comprehensive income (loss) Other comprehensive income (loss) Ending balance $ $ (In thousands) 68,245 $ (12,365) $ 55,880 (56,960) (1,930) (58,890) 148 (56,812) 6,053 4,123 11,433 $ (8,242) $ 6,201 (52,689) 3,191 193 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The following table presents reclassifications out of accumulated other comprehensive income for the years ended December 31, 2015, 2014 and 2013: Cash flow hedges: Interest-rate contracts Tax effect from increase in capital gains tax rate Available-for-sale securities: Other-than-temporary impairment losses on investment securities Residual tax effect from OIB's change in applicable tax rate Tax effect from increase in capital gains tax rate $ $ Amount reclassified out of accumulated other comprehensive income Affected Line Item in Year Ended December 31, 2014 2015 2013 Consolidated Statement of Operations (In thousands) $ 6,443 (297) 6,572 773 6,053 Net interest expense Income tax expense - (1,490) - - Net impairment losses recognized in earnings 45 516 5,217 $ 170 (45) 7,470 $ 148 Income tax expense Income tax expense - 6,201 NOTE 22 – (LOSS) EARNINGS PER COMMON SHARE The calculation of (loss) earnings per common share for the years ended December 31, 2015, 2014 and 2013 is as follows: Year Ended December 31, 2014 (In thousands, except per share data) (2,504) 85,181 $ $ 2015 $ Net (loss) income Less: Dividends on preferred stock Non-convertible preferred stock (Series A, B, and D) Convertible preferred stock (Series C) (Loss) income available to common shareholders Effect of assumed conversion of the convertible ' ' preferred stock $ (6,512) (7,350) (16,366) $ 7,350 (Loss) income available to common shareholders assuming conversion $ (9,016) $ Weighted average common shares and share Average common shares outstanding equivalents: Effect of dilutive securities: Average potential common shares-options Average potential common shares-assuming ' ' conversion of convertible preferred stock Total weighted average common shares ' 'outstanding and equivalents 44,231 68 7,156 51,455 (Loss) earnings per common share - basic (Loss) earnings per common share - diluted $ $ (0.37) (0.37) $ $ 2013 98,446 (6,512) (7,350) 84,584 7,350 91,934 45,706 189 7,138 53,033 1.85 1.73 (6,512) (7,350) 71,319 7,350 78,669 45,024 155 7,147 52,326 1.58 1.50 $ $ $ $ In computing diluted (loss) earnings per common share, the 84,000 shares of convertible preferred stock, which remain outstanding at December 31, 2015, with a conversion rate, subject to certain conditions, of 86.4225 shares of common stock per share, were included as average potential common shares from the date they were issued and outstanding. Moreover, in computing diluted (loss) earnings per common share, the dividends declared during the years ended 2015, 2014 and 2013 on the convertible preferred stock were added back as income available to common shareholders. 194 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) For the years ended 2015, 2014 and 2013, weighted-average stock options with an anti-dilutive effect on (loss) earnings per share not included in the calculation amounted to 887,307, 320,772 and 230,392, respectively NOTE 23 – GUARANTEES At December 31, 2015, the unamortized balance of the obligations undertaken in issuing the guarantees under standby letters of credit represented a liability of $14.7 million (December 31, 2014- $33.0 million). As a result of the BBVAPR Acquisition, the Company assumed a liability for residential mortgage loans sold subject to credit recourse, pursuant to FNMA’s residential mortgage loan sales and securitization programs. At December 31, 2015 and 2014, the unpaid principal balance of residential mortgage loans sold subject to credit recourse was $22.4 million and $67.8 million, respectively. The following table shows the changes in the Company’s liability for estimated losses from these credit recourse agreements, included in the consolidated statements of financial condition during the years ended December 31, 2015, 2014 and 2013. Balance at beginning of year Net (charge-offs/terminations) recoveries Balance at end of year $ $ 927 $ (488) 439 $ 1,955 $ (1,028) 927 $ 2,460 (505) 1,955 2015 Year Ended December 31, 2014 (In thousands) 2013 The estimated losses to be absorbed under the credit recourse arrangements were recorded as a liability when the credit recourse was assumed, and are updated on a quarterly basis. The expected loss, which represents the amount expected to be lost on a given loan, considers the probability of default and loss severity. The probability of default represents the probability that a loan in good standing would become 120 days delinquent, in which case the Company is obligated to repurchase the loan. If a borrower defaults, pursuant to the credit recourse provided, the Company is required to repurchase the loan or reimburse the third party investor for the incurred loss. The maximum potential amount of future payments that the Company would be required to make under the recourse arrangements is equivalent to the total outstanding balance of the residential mortgage loans serviced with recourse and interest, if applicable. During 2015, the Company repurchased approximately $4.1 million of unpaid principal balance in mortgage loans subject to the credit recourse provisions. If a borrower defaults, the Company has rights to the underlying collateral securing the mortgage loan. The Company suffers losses on these mortgage loans when the proceeds from a foreclosure sale of the collateral property are less than the outstanding principal balance of the loan, any uncollected interest advanced, and the costs of holding and disposing the related property. At December 31, 2015, the Company’s liability for estimated credit losses related to loans sold with credit recourse amounted to $439 thousand (December 31, 2014– $927 thousand). When the Company sells or securitizes mortgage loans, it generally makes customary representations and warranties regarding the characteristics of the loans sold. The Company's mortgage operations division groups conforming mortgage loans into pools which are exchanged for FNMA and GNMA mortgage-backed securities, which are generally sold to private investors, or are sold directly to FNMA or other private investors for cash. As required under such mortgage backed securities programs, quality review procedures are performed by the Company to ensure that asset guideline qualifications are met. To the extent the loans do not meet specified characteristics, the Company may be required to repurchase such loans or indemnify for losses and bear any subsequent loss related to the loans. At December 31, 2015, the Company’s representation and warranty arrangements, excluding mortgage loans subject to credit recourse provisions referred to above, approximated $22.1 million in unpaid principal balance (December 31, 2014 – $10.7 million). A substantial amount of these loans are reinstated to performing status or have mortgage insurance, and thus the ultimate losses on the loans are not deemed significant. During 2015, 2014 and 2013, the Company recognized $1.4 million, $143 thousand and $281 thousand, respectively, in losses from the repurchase of residential mortgage loans sold subject to credit recourse, and $2.5 million in losses in 2015 and 2014 from the repurchase of residential mortgage loans as a result of breaches of the customary representations and warranties. 195 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Servicing agreements relating to the mortgage-backed securities programs of FNMA and GNMA, and to mortgage loans sold or serviced to certain other investors, including the Federal Home Loan Mortgage Corporation (“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 December 31, 2015, the Company serviced $664.6 million in mortgage loans for third-parties. The Company generally recovers funds advanced pursuant to these arrangements from the mortgage owner, from liquidation proceeds when the mortgage loan is foreclosed or, in the case of FHA/VA loans, under the applicable FHA and VA insurance and guarantees programs. However, in the meantime, the Company must absorb the cost of the funds it advances during the time the advance is outstanding. The Company must also bear the costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a defaulted loan is not cured, the mortgage loan would be canceled as part of the foreclosure proceedings and the Company would not receive any future servicing income with respect to that loan. At December 31, 2015, the outstanding balance of funds advanced by the Company under such mortgage loan servicing agreements was approximately $301 thousand (December 31, 2014 - $391 thousand). To the extent the mortgage loans underlying the Company's servicing portfolio experience increased delinquencies, the Company would be required to dedicate additional cash resources to comply with its obligation to advance funds as well as incur additional administrative costs related to increases in collection efforts. NOTE 24— COMMITMENTS AND CONTINGENCIES Loan Commitments In the normal course of business, the Company becomes a party to credit-related financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby and commercial letters of credit, and financial guarantees. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated statements of financial condition. The contract or notional amount of those instruments reflects the extent of the Company’s involvement in particular types of financial instruments. The Company’s exposure to credit losses in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit, including commitments under credit card arrangements, and commercial letters of credit is represented by the contractual notional amounts of those instruments, which do not necessarily represent the amounts potentially subject to risk. In addition, the measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are identified. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Credit-related financial instruments at December 31, 2015 and 2014 were as follows: Commitments to extend credit Commercial letters of credit December 31, 2015 2014 (In thousands) $ 607,051 $ 493,248 1,508 885 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 December 31, 2015 and 2014, 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 commitments to extend credit had a reserve of $667 thousand at December 31, 2015 and $621 thousand at December 31, 2014. 196 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Commercial letters of credit are issued or confirmed to guarantee payment of customers’ payables or receivables in short-term international trade transactions. Generally, drafts will be drawn when the underlying transaction is consummated as intended. However, the short-term nature of this instrument serves to mitigate the risk associated with these contracts. The summary of instruments that are considered financial guarantees in accordance with the authoritative guidance related to guarantor’s accounting and disclosure requirements for guarantees, including indirect guarantees of indebtedness of others, at December 31, 2015, and 2014, is as follows: December 31, 2015 2014 (In thousands) Standby letters of credit and financial guarantees $ 14,656 $ Loans sold with recourse Commitments to sell or securitize mortgage loans 22,374 34,888 32,970 67,803 10,207 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 years ended December 31, 2015, 2014 and 2013, amounted to $9.2 million, $9.7 million and $10.1 million, respectively, and is included in the “occupancy and equipment” caption in the consolidated statements of operations. Future rental commitments under leases in effect at December 31, 2015, exclusive of taxes, insurance, and maintenance expenses payable by the Company, are summarized as follows: Year Ending December 31, 2016 2017 2018 2019 2020 Thereafter Minimum Rent (In thousands) 7,755 $ 7,283 6,278 6,182 5,455 12,397 45,350 $ 197 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Contingencies The Company and its subsidiaries are defendants in a number of legal proceedings incidental to their business. In the ordinary course of business, the Company and its subsidiaries are also subject to governmental and regulatory examinations. Certain subsidiaries of the Company, including the Bank (and its subsidiary OIB), Oriental Financial Services, and Oriental Insurance, are subject to regulation by various U.S., Puerto Rico and other regulators. The Company seeks to resolve all litigation and regulatory matters in the manner management believes is in the best interests of the Company and its shareholders, and contests allegations of liability or wrongdoing and, where applicable, the amount of damages or scope of any penalties or other relief sought as appropriate in each pending matter. Subject to the accounting and disclosure framework under the provisions of ASC 450, it is the opinion of the Company’s management, based on current knowledge and after taking into account its current legal accruals, that the eventual outcome of all matters would not be likely to have a material adverse effect on the consolidated statements of financial condition of the Company. Nonetheless, given the substantial or indeterminate amounts sought in certain of these matters, and the inherent unpredictability of such matters, an adverse outcome in certain of these matters could, from time to time, have a material adverse effect on the Company’s consolidated results of operations or cash flows in particular quarterly or annual periods. The Company has evaluated all litigation and regulatory matters where the likelihood of a potential loss is deemed reasonably possible. The Company has determined that the estimate of the reasonably possible loss is not significant. NOTE 25 - 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 in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This framework also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Money market investments The fair value of money market investments is based on the carrying amounts reflected in the consolidated statements of financial condition as these are reasonable estimates of fair value given the short-term nature of the instruments. Investment securities The fair value of investment securities is based on quoted market prices, when available, or prices provided from contracted pricing providers, or market prices provided by recognized broker-dealers. Such securities are classified as Level 1 or Level 2 depending on the basis for determining fair value. If listed prices or quotes are not available, fair value is based upon externally developed models that use both observable and unobservable inputs depending on the market activity of the instrument, and such securities are classified as Level 3. At December 31, 2015 and 2014, the Company did not have investment securities classified as Level 3. 198 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Derivative instruments The fair value of the interest rate swaps is largely a function of the financial market’s expectations regarding the future direction of interest rates. Accordingly, current market values are not necessarily indicative of the future impact of derivative instruments on earnings. This will depend, for the most part, on the shape of the yield curve, the level of interest rates, as well as the expectations for rates in the future. The fair value of most of these derivative instruments is based on observable market parameters, which include discounting the instruments’ cash flows using the U.S. dollar LIBOR-based discount rates, and also applying yield curves that account for the industry sector and the credit rating of the counterparty and/or the Company. Certain other derivative instruments with limited market activity are valued using externally developed models that consider unobservable market parameters. Based on their valuation methodology, derivative instruments are classified as Level 2 or Level 3. 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. Impaired Loans Impaired loans are carried at the present value of expected future cash flows using the loan’s existing rate in a discounted cash flow calculation, or the fair value of the collateral if the loan is collateral-dependent. Expected cash flows are based on internal inputs reflecting expected default rates on contractual cash flows. This method of estimating fair value does not incorporate the exit-price concept of fair value described in ASC 820-10 and would generally result in a higher value than the exit-price approach. For loans measured using the estimated fair value of collateral less costs to sell, fair value is generally determined based on the fair value of the collateral, which is derived from appraisals that take into consideration prices in observed transactions involving similar assets in similar locations, in accordance with the provisions of ASC 310-10-35 less disposition costs. Currently, the associated loans considered impaired are classified as Level 3. Foreclosed real estate Foreclosed real estate includes real estate properties securing residential mortgage and commercial loans. The fair value of foreclosed real estate may be determined using an external appraisal, broker price option or an internal valuation. These foreclosed assets are classified as Level 3 given certain internal adjustments that may be made to external appraisals. Other repossessed assets Other repossessed assets include repossessed automobile loans and leases. 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. 199 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Assets and liabilities measured at fair value on a recurring and non-recurring basis, are summarized below: Recurring fair value measurements: Investment securities available-for-sale Trading securities Money market investments Derivative assets Servicing assets Derivative liabilities Non-recurring fair value measurements: Impaired commercial loans Foreclosed real estate Other repossessed assets Recurring fair value measurements: Investment securities available-for-sale Trading securities Money market investments Derivative assets Servicing assets Derivative liabilities Non-recurring fair value measurements: Impaired commercial loans Foreclosed real estate Other repossessed assets Level 1 December 31, 2015 Fair Value Measurements Level 3 Level 2 (In thousands) - - 4,699 - - - 4,699 - - - - Level 1 - - 4,675 - - - 4,675 - - - - $ $ $ $ $ $ $ $ 974,609 288 - 1,854 - (6,162) 970,589 - - - - $ $ $ $ - - - 1,171 7,455 (1,095) 7,531 235,767 58,176 6,226 300,169 December 31, 2014 Fair Value Measurements Level 3 Level 2 (In thousands) 1,216,538 1,594 - 2,552 - (11,221) 1,209,463 - - - - $ $ $ $ - - - 5,555 13,992 (5,477) 14,070 236,942 95,661 21,800 354,403 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Total 974,609 288 4,699 3,025 7,455 (7,257) 982,819 235,767 58,176 6,226 300,169 Total 1,216,538 1,594 4,675 8,107 13,992 (16,698) 1,228,208 236,942 95,661 21,800 354,403 200 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2015, 2014 and 2013.: Level 3 Instruments Only Balance at beginning of period Gains (losses) included in earnings Sale of mortgage servicing rights New instruments acquired Principal repayments Amortization Changes in fair value related to price of MSR held-for-sale Changes in fair value of servicing assets Balance at end of period Level 3 Instruments Only Balance at beginning of period Gains (losses) included in earnings Changes in fair value of investment securities available for sale included in other comprehensive income New instruments acquired Principal repayments Amortization Changes in fair value of servicing assets Balance at end of period Level 3 Instruments Only Balance at beginning of period Gains (losses) included in earnings Changes in fair value of investment securities available for sale included in other comprehensive income New instruments acquired Principal repayments Amortization Changes in fair value of servicing assets Balance at end of period Year Ended December 31, 2015 Other debt securities available-for-sale Derivative asset (S&P Purchased Options) Derivative liability (S&P Embedded Options) Servicing assets - - - - - - - - - $ $ 5,555 (4,384) 13,992 - $ (5,477) $ 4,197 - - - - - - (5,927) 2,620 (1,017) - (2,939) 726 - - - 185 - - $ 1,171 $ 7,455 $ (1,095) $ Year Ended December 31, 2014 Total 14,070 (187) (5,927) 2,620 (1,017) 185 (2,939) 726 7,531 Other debt securities available-for-sale Derivative asset (S&P Purchased Options) Derivative liability (S&P Servicing Embedded assets Options) Total 19,680 $ 16,430 $ 13,801 $ (15,736) $ 34,175 - 320 - (20,000) - - - (10,875) - - - - - - - 2,149 (1,072) - (886) 9,659 - - - 600 - (1,216) 320 2,149 (21,072) 600 (886) $ 5,555 $ 13,992 $ (5,477) $ 14,070 Year Ended December 31, 2013 Other debt securities available-for-sale Derivative asset (S&P Purchased Options) Derivative liability (S&P Servicing Embedded assets Options) Total 20,012 $ 13,233 $ 10,795 $ (12,707) $ 31,333 - (332) - - - - 3,197 - - - - - - - 3,178 (951) - 779 (5,039) - - - 2,010 - (1,842) (332) 3,178 (951) 2,010 779 19,680 $ 16,430 $ 13,801 $ (15,736) $ 34,175 $ $ $ $ $ $ 201 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) During 2015, 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. 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 December 31, 2015: Fair Value (In thousands) Valuation Technique Unobservable Input Range December 31, 2015 Derivative assets (S&P Purchased Options) Servicing assets Derivative liability (S&P Embedded Options) Collateral dependant impaired loans Puerto Rico Electric Power Authority line of credit, net Other non-collateral dependant impaired loans Foreclosed real estate Other repossessed assets $ $ $ $ $ $ $ $ 1,170 Option pricing model 7,455 Cash flow valuation Implied option volatility Counterparty credit risk (based on 5-year credit default swap ("CDS") spread) Constant prepayment rate Discount rate 34.31%- 38.61% 72.00%- 72.00% 5.23% - 15.24% 10.00% - 12.00% (1,095) Option pricing model Implied option volatility 34.31%- 38.61% Counterparty credit risk (based on 5-year CDS spread) 72.00%- 72.00% 40,532 Fair value of property or collateral Appraised value less disposition costs 28.20% - 44.20% 190,290 Cash flow valuation Discount rate 7.25% 4,945 Cash flow valuation Discount rate 5.75% - 16.95% 58,176 Fair value of property or collateral Appraised value less disposition costs 28.20% - 44.20% 6,226 Fair value of property or collateral Appraised value less disposition costs 28.20% - 44.20% 202 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Information about Sensitivity to Changes in Significant Unobservable Inputs 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. 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. 203 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The estimated fair value and carrying value of the Company’s financial instruments at December 31, 2015 and 2014 is as follows: December 31, 2015 December 31, 2014 Fair Value Carrying Value Fair Value Carrying Value (In thousands) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 536,709 3,349 $ 573,427 8,407 288 974,609 620,189 20,783 3 1,855 1,594 1,216,538 164,154 21,169 3 2,552 6,162 11,221 4,434,213 1,170 22,599 20,637 7,455 42,786 4,715,764 934,691 332,476 1,734 102,633 92,935 1,095 4,909,361 5,555 75,969 21,345 13,992 38,830 4,887,770 1,020,621 339,172 3,979 104,288 133,290 5,477 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 573,427 8,407 1,594 1,216,538 162,752 21,169 3 2,552 11,221 4,826,646 5,555 97,378 21,345 13,992 38,830 4,918,929 980,087 334,331 4,004 101,584 133,290 5,477 Level 1 Financial Assets: Cash and cash equivalents Restricted cash Level 2 Financial Assets: Trading securities Investment securities available-for-sale Investment securities held-to-maturity Federal Home Loan Bank (FHLB) stock Other investments Derivative assets Financial Liabilities: Derivative liabilities Level 3 Financial Assets: Total loans (including loans held-for-sale) Derivative assets FDIC indemnification asset Accrued interest receivable Servicing assets Accounts receivable and other assets Financial Liabilities: Deposits Securities sold under agreements to repurchase Advances from FHLB Other borrowings Subordinated capital notes Accrued expenses and other liabilities Derivative liabilities embedded in deposits $ 536,709 3,349 288 974,609 614,679 20,783 3 1,855 6,162 4,101,219 1,170 17,786 20,637 7,455 42,786 4,705,878 955,859 335,812 2,593 94,940 92,935 1,095 204 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The following methods and assumptions were used to estimate the fair values of significant financial instruments at December 31, 2015 and 2014: • Cash and cash equivalents (including money market investments and time deposits with other banks), restricted cash, accrued interest receivable, accounts receivable and other assets and accrued expenses and other liabilities have been valued at the carrying amounts reflected in the consolidated statements of financial condition as these are reasonable estimates of fair value given the short-term nature of the instruments. • Investments in FHLB-NY stock are valued at their redemption value. • The fair value of investment securities, including trading securities and other investments, is based on quoted market prices, when available or prices provided from contracted pricing providers, or market prices provided by recognized broker-dealers. If listed prices or quotes are not available, fair value is based upon externally developed models that use both observable and unobservable inputs depending on the market activity of the instrument. • The fair value of the FDIC indemnification asset 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 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 asset is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions. • The fair values of the derivative instruments are provided by valuation experts and counterparties. Certain derivatives with limited market activity are valued using externally developed models that consider unobservable market parameters. 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 loan portfolio (including loans held-for-sale) is estimated by segregating by type, such as mortgage, commercial, consumer, auto and leasing. Each loan segment is further segmented into fixed and adjustable interest rates and by performing and non-performing categories. The fair value of performing loans is calculated by discounting contractual cash flows, adjusted for prepayment estimates (voluntary and involuntary), if any, using estimated current market discount rates that reflect the credit and interest rate risk inherent in the loan. This fair value is not currently an indication of an exit price as that type of assumption could result in a different fair value estimate. Non-performing loans have been valued at the carrying amounts. • The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is based on the discounted value of the contractual cash flows, using estimated current market discount rates for deposits of similar remaining maturities. • The fair value of long-term borrowings, which include securities sold under agreements to repurchase, advances from FHLB-NY, other borrowings, 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. 205 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) NOTE 26 – BUSINESS SEGMENTS The Company segregates its businesses into the following major reportable segments of business: Banking, Wealth Management, and Treasury. Management established the reportable segments based on the internal reporting used to evaluate performance and to assess where to allocate resources. Other factors such as the Company’s organization, nature of its products, distribution channels and economic characteristics of the products were also considered in the determination of the reportable segments. The Company measures the performance of these reportable segments based on pre-established goals of different financial parameters such as net income, net interest income, loan production, and fees generated. The Company’s methodology for allocating non-interest expenses among segments is based on several factors such as revenue, employee headcount, occupied space, dedicated services or time, among others. These factors are reviewed on a periodical basis and may change if the conditions warrant. Banking includes the Bank’s branches and traditional banking products such as deposits and commercial, consumer and mortgage loans. Mortgage banking activities are carried out by the Bank’s mortgage banking division, whose principal activity is to originate mortgage loans for the Company’s own portfolio. As part of its mortgage banking activities, the Company may sell loans directly into the secondary market or securitize conforming loans into mortgage-backed securities. Wealth Management is comprised of the Bank’s trust division, Oriental Financial Services, Oriental Insurance, and OPC. The core operations of this segment are financial planning, money management and investment banking, brokerage services, insurance sales activity, corporate and individual trust and retirement services, as well as retirement plan administration services. The Treasury segment encompasses all of the Company’s asset/liability management activities, such as purchases and sales of investment securities, interest rate risk management, derivatives, and borrowings. Intersegment sales and transfers, if any, are accounted for as if the sales or transfers were to third parties, that is, at current market prices. 206 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Following are the results of operations and the selected financial information by operating segment for the years ended December 31, 2015, 2014 and 2013: Banking Wealth Management Treasury Total Major Segments Eliminations Consolidated Total Year Ended December 31, 2015 Interest income Interest expense Net interest income Provision for loan and lease losses Non-interest income Non-interest expenses Intersegment revenue Intersegment expenses $ $ 367,620 (28,425) 339,195 (161,501) 23,900 (219,415) 1,427 (948) Income (loss) before income taxes $ (17,342) $ $ 95 - 95 - 28,288 (22,564) - (1,027) 4,792 (In thousands) $ 38,853 (40,771) (1,918) - 284 (6,422) 948 (400) 406,568 (69,196) 337,372 (161,501) 52,472 (248,401) 2,375 (2,375) $ $ - - - - - - (2,375) 2,375 (7,508) $ (20,058) $ - $ 406,568 (69,196) 337,372 (161,501) 52,472 (248,401) - - (20,058) Total assets 5,867,874 $ 22,349 $ 2,126,921 $ 8,017,144 $ (917,995) $ 7,099,149 Wealth Total Major Consolidated Banking Management Treasury Segments Eliminations Total Year Ended December 31, 2014 Interest income Interest expense Net interest income Provision for loan and lease losses Non-interest (loss) income Non-interest expenses Intersegment revenue Intersegment expenses Income before income taxes Total assets Interest income Interest expense Net interest income Provision for loan and lease losses Non-interest (loss) income Non-interest expenses Intersegment revenue Intersegment expenses (In thousands) $ $ 435,580 (34,721) 400,859 (60,640) (13,389) (213,935) 1,410 (327) 174 - 174 - 28,525 (21,748) - (1,089) $ 49,503 (42,061) $ 7,442 - 2,187 (7,042) 327 (321) $ 485,257 (76,782) 408,475 (60,640) 17,323 (242,725) 1,737 (1,737) $ - - - - - - (1,737) 1,737 $ $ 113,978 6,454,015 $ $ 5,862 21,644 $ $ 2,593 1,940,504 $ $ 122,433 8,416,163 $ $ Wealth Year Ended December 2013 Total Major Banking Management Treasury Segments (In thousands) $ $ 445,363 (42,044) 403,319 (72,894) (17,438) (222,408) 618 - 354 - 354 - 30,614 (26,603) - (1,813) $ 47,915 (41,916) $ 5,999 - 3,919 (15,125) 1,195 $ 493,632 (83,960) 409,672 (72,894) 17,095 (264,136) 1,813 (1,813) 485,257 (76,782) 408,475 (60,640) 17,323 (242,725) - - 122,433 7,449,109 Consolidated Total 493,632 (83,960) 409,672 (72,894) 17,095 (264,136) - - 89,737 8,158,015 - $ (967,054) $( $ 9 6 7, 0 5 4) Eliminations $ - - - - - - (1,813) 1,813 - $ (770,400) $( $ 9 6 7, 0 5 4) Income (loss) before income taxes Total assets $ $ 91,197 5,820,726 $ $ 2,552 23,280 $ $ (4,012) $ $ 3,084,409 89,737 8,928,415 $ $ 207 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) NOTE 27 – OFG BANCORP (HOLDING COMPANY ONLY) FINANCIAL INFORMATION As a bank holding company subject to the regulations and supervisory guidance of the Federal Reserve Board, the Company generally should inform the Federal Reserve Board and eliminate, defer or significantly reduce its dividends if: (i) its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition; or (iii) it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The payment of dividends by the Bank to the Company may also be affected by other regulatory requirements and policies, such as the maintenance of certain regulatory capital levels. During 2015, Oriental Insurance and Oriental Financial Services did not pay any dividends to the Company. During 2014, Oriental Insurance and Oriental Financial Services paid $2.70 million and $3.2 million, respectively, in dividends to the Company. During 2013, Oriental Insurance and Oriental Financial Services paid $12.4 million and $3.2 million, respectively, in dividends to the Company. The following condensed financial information presents the financial position of the holding company only as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years ended December 31, 2015, 2014 and 2013: OFG BANCORP CONDENSED STATEMENTS OF FINANCIAL POSITION INFORMATION (Holding Company Only) ASSETS Cash and cash equivalents Investment securities available-for-sale, at fair value Investment in bank subsidiary, equity method Investment in nonbank subsidiaries, equity method Due from bank subsidiary, net Deferred tax asset, net Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Dividend payable Deferred tax liabilities, net Due to affiliates Accrued expenses and other liabilities Subordinated capital notes Total liabilities Stockholders’ equity December 31, 2015 2014 (In thousands) $ $ 20,240 6,017 890,449 19,137 119 3,047 2,042 16,824 8,244 943,664 17,071 87 - 2,089 $ 941,051 $ 987,979 6,098 - 9 1,784 36,083 43,974 897,077 7,927 75 9 1,688 36,083 45,782 942,197 Total liabilities and stockholders’ equity $ 941,051 $ 987,979 208 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) OFG BANCORP CONDENSED STATEMENTS OF OPERATIONS INFORMATION (Holding Company Only) Income: Interest income Investment trading activities, net and other Total income Expenses: Interest expense Operating expenses Total expenses (Loss) before income taxes Income tax expense (benefit) (Loss) before changes in undistributed earnings of subsidiaries Bank subsidiary Nonbank subsidiaries Net (loss) income 2015 Year Ended December 31, 2014 (In thousands) 2013 $ $ $ 321 4,007 4,328 $ 404 4,308 4,712 1,222 6,866 8,088 (3,760) 3,088 (672) (3,804) 1,972 (2,504) $ 1,201 6,607 7,808 (3,096) - (3,096) 84,787 3,490 85,181 $ 400 3,668 4,068 1,219 6,003 7,222 (3,154) (2) (3,156) 98,133 3,469 98,446 OFG BANCORP CONDENSED STATEMENTS OF COMPREHENSIVE INCOME INFORMATION (Holding Company Only) 2015 Year ended December 31, 2014 (In thousands) 85,181 $ $ (2,504) (170) (5,578) (5,748) 34 (5,714) (8,218) $ 209 16,361 16,570 (50) 16,520 101,701 $ 2013 98,446 (519) (52,249) (52,768) 79 (52,689) 45,757 Net (loss) income Other comprehensive (loss) income before tax: Unrealized (loss) gain on securities available-for-sale Other comprehensive (loss) income from Bank subsidiary Other comprehensive (loss) income before taxes Income tax effect Other comprehensive income (loss) after taxes Comprehensive income (loss) $ $ 209 OFG BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) OFG BANCORP CONDENSED STATEMENTS OF CASH FLOWS INFORMATION (Holding Company Only) Cash flows from operating activities: Net (loss) income Adjustments to reconcile net (loss) income to net cash provided by operating activities: Equity in undistributed earnings from banking subsidiary Equity in undistributed earnings from nonbanking subsidiaries Amortization of investment securities premiums, net of accretion of discounts Other impairments on securities Stock-based compensation Deferred income tax, net Net decrease in other assets Net (decrease) in accrued expenses, other liabilities, and dividend payable Dividends from banking subsidiary Dividends from non-banking subsidiary Net cash provided by operating activities Cash flows from investing activities: Maturities and redemptions of investment securities available-for-sale Net (increase) decrease in due from bank subsidiary, net Capital contribution to banking subsidiary Capital contribution to non-banking subsidiary Additions to premises and equipment Net cash provided by investing activities Cash flows from financing activities: Proceeds from (payments to) exercise of stock options and lapsed restricted units, net Proceeds from issuance of common stock, net Proceeds from issuance of preferred stock, net Purchase of treasury stock Dividends paid Net cash used in financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 2015 Year Ended December 31, 2014 (In thousands) 2013 $ (2,504) $ 85,181 $ 98,446 3,804 (1,972) 44 - 1,637 (3,088) 148 (221) 45,000 - 42,848 2,013 317 (1,167) (94) (132) 937 204 - - (8,950) (31,623) (40,369) 3,416 16,824 20,240 $ (84,787) (3,490) 21 62 1,036 - 554 (696) 28,000 5,900 31,781 1,318 (218) (892) (76) - 132 643 - - (16,948) (28,341) (44,646) (12,733) 29,557 16,824 $ (98,133) (3,469) 141 7 1,823 2,272 11 (2,051) - 15,600 14,647 4,676 2,461 (1,385) (99) - 5,653 (572) (16) (25) - (24,651) (25,264) (4,964) 34,521 29,557 $ 210 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures The Company’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of December 31, 2015, 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. Based upon such evaluation, the CEO and CFO have concluded that, as of the end of the period covered by this annual report on Form 10-K, 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 Securities Exchange Act of 1934. 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. Management’s Annual Report on Internal Control over Financial Reporting The Management’s Annual Report on Internal Control over Financial Reporting is included in Item 8 of this report. Report of the Registered Public Accounting Firm The registered public accounting firm’s report on the Company’s internal control over financial reporting is included in Item 8 of this report. Changes in 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 last quarter of the year ended December 31, 2015, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. 211 Items 10 through 14 are incorporated herein by reference to the Company’s definitive proxy statement to be filed with the SEC no later than 120 days after the end of the fiscal year covered by this report, except with respect to the information set forth below under Item 12. PART III ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The Company’s 2007 Omnibus Performance Incentive Plan, as amended and restated (the “Omnibus Plan”), provides for equity-based compensation incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted units and dividend equivalents, as well as equity-based performance awards. The Omnibus Plan was adopted in 2007, amended and restated in 2008, and further amended in 2010. It replaced and superseded the Company’s 1996, 1998 and 2000 Incentive Stock Option Plans (the “Stock Option Plans”). All outstanding stock options under the Stock Option Plans continue in full force and effect, subject to their original terms and conditions. The following table shows certain information pertaining to the awards under the Omnibus Plan and the Stock Option Plans as of December 31, 2015: (a) (b) Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding those reflected in column (a)) Plan Category Equity compensation plans approved by shareholders: Omnibus Plan Stock Option Plans (1) Includes 886,523 stock options and 138,400 restricted stock units. (2) Exercise price related to stock options. 1,024,923 (1) $ 65,000 1,089,923 $ $ 12.27 (2) (2) 12.42 12.28 979,870 - 979,870 The Company recorded approximately $1.637 million, $1.036 million and $1.823 million related to stock-based compensation expense during the years ended December 31, 2015, 2014 and 2013, respectively. Other information required by this Item is incorporated herein by reference to the Company’s definitive proxy statement to be filed with the SEC no later than 120 days after the end of the fiscal year covered by this report. 212 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES The following financial statements are filed as part of this report under Item 8 — Financial Statements and Supplementary Data. PART IV Management’s Report on Internal Control Over Financial Reporting Financial Statements: Reports of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting Consolidated Statements of Financial Condition as of December 31, 2015 and 2014 Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 Notes to the Consolidated Financial Statements Financial Statement Schedules No schedules are presented because the information is not applicable or is included in the accompanying consolidated financial statements or in the notes thereto described above. 213 Exhibits Exhibit No.: Description Of Document: 2.1 2.2 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 12.1 21.1 23.1 31.1 Purchase and Assumption Agreement — Whole Bank, All Deposits, dated as of April 30, 2010, among the Federal Deposit Insurance Corporation, Receiver of Eurobank, San Juan, Puerto Rico, the Federal Deposit Insurance Corporation, and Oriental Bank and Trust.(1) Acquisition Agreement dated as of June 28, 2012 between the Company and BBVA relating to the purchase and sale of 100% of the Common Stock of BBVAPR Holding and BBVA Securities.(2) Composite Certificate of Incorporation. By-Laws.(3) Certificate of Designation of the 7.125% Noncumulative Monthly Income Preferred Stock, Series A.(4) Certificate of Designation of the 7.0% Noncumulative Monthly Income Preferred Stock, Series B.(5) Certificate of Designations of 8.750% Non-Cumulative Convertible Perpetual Preferred Stock, Series C.(6) Certificate of Designations of 7.125% Non-Cumulative Perpetual Preferred Stock, Series D.(7) Form of Certificate for the 7.125% Noncumulative Monthly Income Preferred Stock, Series A.(8) Form of Certificate for the 7.0% Noncumulative Monthly Income Preferred Stock, Series B.(9) Form of Certificate for the 8.750% Non-Cumulative Convertible Perpetual Preferred Stock, Series C. (6) Form of Certificate for the 7.125% Non-Cumulative Perpetual Preferred Stock, Series D.(7) Subscription Agreement, dated June 28, 2012, between the Company and each of the purchasers of the Convertible Preferred Stock. (10) Lease Agreement between the Company and Professional Office Park V, Inc. (11) First Amendment to Lease Agreement Dated May 18, 2004, between the Company and Professional Office Park V, Inc.(12) Change in Control Compensation Agreement between the Company and José R. Fernández.(13) Change in Control Compensation Agreement between the Company and Ganesh Kumar (14) Technology Outsourcing Agreement between the Company and Metavante Corporation.(15) OFG Bancorp 2007 Omnibus Performance Incentive Polan, as amended and restated.(16) Form of qualified stock option award and agreement (17) Form of restricted stock award and agreement (18) Form of restricted unit award and agreement (19) Employment Agreement between the Company and José R. Fernández (20) Amendment to Technology Outsourcing Agreement between the Company and Metavante Corporation (21) Computation of Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividends (included in Item 6 hereof ) List of subsidiaries Consent of KPMG LLP Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 214 Exhibit No.: Description Of Document: 31.2 32.1 32.2 101.1 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 The following materials from the Company’s annual report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Financial Condition, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Changes in Stockholders’ Equity, (iv) Consolidated Statements of Comprehensive Income, and (v) Consolidated Statements of Cash Flow. (1) (2) (3) (4) (5) (6) (7) (8) (9) Incorporated herein by reference to Exhibit 2.1 of the Company’s current report on Form 8-K filed with the SEC on May 6, 2010. Incorporated herein by reference to Exhibit 2.1 of the Company’s current report on Form 8-K filed with the SEC on July 3, 2012. Incorporated herein by reference to Exhibit 3.1 of the Company’s quarterly report on Form 10-Q filed with the SEC on August 8, 2014. Incorporated herein by reference to Exhibit 4.1 of the Company’s registration statement on Form 8-A filed with the SEC on April 30, 1999. Incorporated herein by reference to Exhibit 4.1 of the Company’s registration statement on Form 8-A filed with the SEC on September 26, 2003. Incorporated herein by reference to Exhibit 3.1 of the Company’s current report on Form 8-K filed with the SEC on July 3, 2012. Incorporated herein by reference to Exhibit 3.1 of the Company’s current report on Form 8-K filed with the SEC on November 8, 2012. Incorporated herein by reference to Exhibit 4.2 of the Company’s registration statement on Form S-3 filed with the SEC on April 2, 1999. Incorporated herein by reference to Exhibit 4.2 of the Company’s registration statement on Form S-3, as amended, filed with the SEC on September 23, 2003. (10) Incorporated herein by reference to Exhibit 10.1 of the Company’s quarterly report on Form 10-Q filed with the SEC on August 3, 2012. (11) Incorporated herein by reference to Exhibit 10.5 of the Company’s annual report on Form 10-K filed with the SEC on September 13, 2005. (12) Incorporated herein by reference to Exhibit 10.6 of the Company’s annual report on Form 10-K filed with the SEC on September 13, 2005. (13) Incorporated herein by reference to Exhibit 10.12 of the Company’s annual report on Form 10-K filed with the SEC on September 13, 2005. (14) Incorporated herein by reference to Exhibit 10.14 of the Company’s annual report on Form 10-K filed with the SEC on September 13, 2005. (15) Incorporated herein by reference to Exhibit 10.23 of the Company’s annual report on Form 10-K filed with the SEC on March 28, 2007. (16) Incorporated herein by reference to Exhibit 4.1 of the Company’s registration statement on Form S-8 filed with the SEC on October 7, 2013. (17) Incorporated herein by reference to Exhibit 10.1 of the Company’s registration statement on Form S-8 filed with the SEC on November 30, 2007. (18) Incorporated herein by reference to Exhibit 10.2 of the Company’s registration statement on Form S-8 filed with the SEC on November 30, 2007. (19) Incorporated herein by reference to Exhibit 10.1 of the Company’s quarterly report on Form 10-Q filed with the SEC on May 8, 2015. (20) Incorporated herein by reference to Exhibit 10 of the Company’s quarterly report on Form 10-Q filed with the SEC on November 12, 2013. (21) 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. 215 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 SIGNATURES /s/ José Rafael Fernández By: José Rafael Fernández President and Chief Executive Officer /s/ Ganesh Kumar By: Ganesh Kumar Executive Vice President and Chief Financial Officer /s/ Maritza Arizmendi Díaz By: Maritza Arizmendi Díaz Senior Vice President and Chief Accounting Officer Dated: March 14, 2016 Dated: March 14, 2016 Dated: March 14, 2016 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated. /s/ Julian Inclán By: Julian Inclán Chairman of the Board /s/ José Rafael Fernández By: José Rafael Fernández Vice Chairman of the Board /s/ Juan Carlos Aguayo By: Juan Carlos Aguayo Director /s/ Francisco Arriví By: Francisco Arriví Director /s/ Pedro Morazzani By: Pedro Morazzani Director /s/ Rafael Martínez-Margarida By: Rafael Martínez-Margarida Director /s/ Néstor de Jesús By: Néstor de Jesús Director Dated: March 14, 2016 Dated: March 14, 2016 Dated: March 14, 2016 Dated: March 14, 2016 Dated: March 14, 2016 Dated: March 14, 2016 Dated: March 14, 2016 216 This page intentionally left blank. General Information Main Office Oriental Center 254 Muñoz Rivera Avenue San Juan, PR 00918 Telephone: (787) 771-6800 Transfer Agent and Register American Stock Transfer & Trust Company 6201 15th Avenue Brooklyn, NY 11219 Telephone: (718) 921-8257 Dividend Reinvestment Plan Corporate Legal Department OFG Bancorp PO Box 195115 San Juan, PR 00919 Telephone: (787) 771-6800 Independent Certified Public Accountants KPMG LLP 250 Muñoz Rivera Avenue, Suite 1100 San Juan, PR 00918 Form 10-K Annual Report on Form 10-K filed with the SEC is available on request at: www.proxyvote.com Annual Meeting The Annual Meeting of Stockholders will be held April 27, 2016 at 10:00 am (EST) Oriental Center Lobby 254 Muñoz Rivera Avenue San Juan, PR 00918 Annual Certifications Our President and CEO has submitted to the New York Stock Eexchange the Domestic Company Section 303A Annual CEO Certification regarding our compliance with the corporate governance listing standards of the NYSE. Also, we have filed with the SEC, as exhibits 31.1 and 31.2 to our annual report on Form 10-K for fiscal 2015, the Sarbanes-Oxley Act Section 302 Certifications of both our CEO and CFO regarding the quality of our public disclosures. Branch Offices (48) Aibonito Aguadilla Arecibo Bayamón (3) Caguas - Bairoa Caguas - Las Catalinas Caguas - Plaza Centro Canóvanas Carolina - 65 Infantería Carolina - Plaza Escorial Carolina - Los Colobos Cataño Cayey Ceiba Coamo Guaynabo - San Patricio Guaynabo- Santa María Guayama Hatillo Humacao Isabela Juana Díaz Las Piedras Manatí Mayagüez (2) Peñuelas Ponce - Hostos Ponce - Plaza del Caribe Ponce - Ponce Plaza Ponce - Las Américas Ponce - La Rambla San Juan - Condado San Juan - Hato Rey (2) San Juan - Los Paseos San Juan - Miramar San Juan - Plaza Las Américas San Juan - San Roberto San Juan - Santurce Parada 23 San Juan - Viejo San Juan San Lorenzo Toa Baja - Levitown Vega Alta Yabucoa Yauco Business Lines Banking: Retail, Commercial & Wholesale Auto Lending Mortgage Lending Wealth Management Trust and Retirement Services Insurance . G N I T N R P I T E S F F O L E D O M : G N I T N R P I . Y N A P M O C & R E D E R N A : T X E T I L A R O T I D E . P U O R G D I H T I W N O I T A R O B A L L O C N I I N E T S & M A H K R A M : I N G S E D E V I T A E R C Vive la Diferencia Live the Difference OFG’s Oriental launched its “Vive la diferencia” campaign in 2014. We wanted to invite consumers to experience how we are different from other banks. How we offer great customer service with a positive attitude, speed and accessibility. How we are totally committed to excellence and convenience in our products and services. The results are in: Our Clients Our clients are our brand ambassadors. They inspire us to be the best bank in Puerto Rico. In 2015 we measured our market attractiveness and operational success. Oriental received the top marks on both counts among all local banks. Our Community As part of our service to our customers, we also want to demonstrate our service to our communities. To do that, we launched a Corporate Social Responsibility Program. The goal is to offer a different approach to social and economic problems in Puerto Rico, by showing people that they have the power to change their lives for the better. • Social Innovation Summit in PR. First encounter that provoked new creative design thinking to local Non-Government Organizations (NGOs) through social innovation. • Box of Hope. Inspired children with boxes of school supplies, to motivate them to stay in school and see education as a window of opportunity. In 2015, we delivered 900 boxes. • Employee Volunteer Hours. Over 1003 hours were invested by our more than 1,500 employees in our communities in 2015. Our People Key to servicing our clients and communities is the commitment of our employees. To do that, we need to know they believe we are on the right track. One of the main tools we use to measure our progress is Gallup’s employee engagement survey. In 2015, we ranked among the top third of all organizations surveyed worldwide. OFG Bancorp (NYSE:OFG) www.OFGBancorp.com 

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