THE ORIENTAL BANK CODA PROFIT SHARING PLAN
Statement of Changes in Net Assets Available for Benefits
Year ended December 31, 2022
| | | | | |
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| 2022 |
| Additions to net assets attributed to: | |
| |
| Dividends | $ | 198,819 |
| Interest and other | 25,884 |
| Contributions: | |
| Participants | 5,891,799 |
| Employer | 2,314,255 |
| Total additions | 8,430,757 |
| Deductions from assets attributed to: | |
| Benefits paid to participants | (10,526,083) | |
| Net depreciation in fair value of investments | (21,579,909) | |
| Administrative fees | (118,056) | |
| Total deductions | (32,224,048) | |
| Net decrease | (23,793,291) | |
| |
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| Net assets available for benefits: | |
| Beginning of year | 134,206,482 |
| End of year | $ | 110,413,191 |
| |
| See accompanying notes to financial statements. |
THE ORIENTAL BANK CODA PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022 AND 2021, AND YEAR ENDED DECEMBER 31, 2022
(1)Description of the Plan
The following description of The Oriental Bank CODA Profit Sharing Plan (the “Plan”) provides only general information. Participants should refer to the plan agreement for complete description of the Plan’s provisions.
a)General
The Plan was organized on January 1, 1992 as a defined contribution plan originally maintained by Oriental Bank (the “Employer”), a wholly owned subsidiary of OFG Bancorp (the “Company”), for the benefit of the Employer’s and its affiliated companies’ employees who are residents of Puerto Rico and are age 21 or older. The Plan is intended to be a qualified plan pursuant to the Puerto Rico Internal Revenue Code of 2011, as amended (the “PR Code”). In 2016, the Plan was amended or restated to meet the requirements of Sections 401(a) and (k) of the U.S. Internal Revenue Code of 1986, as amended (the “US Code”). In 2018, the Puerto Rico Treasury Department (the “PR Treasury”) reaffirmed the Plan’s qualification under the PR Code. It contains a cash or deferred arrangement qualifying under the PR Code and is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). As such, the Plan must comply with reporting and disclosure requirements, participation and vesting standards, and fiduciary standards and duties, among other requirements. The U.S. Department of Labor (“DOL”) has full authority to regulate and investigate the Plan.
In November 2021, the Plan’s custodian changed and assets were transferred from Transamerica Retirement Solutions Corporation (“Transamerica”) to Mid Atlantic Capital Group (“Mid Atlantic”).
Effective December 31, 2022, the Company sold its retirement plan record keeping and third-party administration business conducted through Oriental Pension Consultants ("OPC"), a wholly owned subsidiary of the Company, to National Professional Planning Group, Inc. ("NPPG"). Oriental Bank continues to provide the Plan with record keeping, administration, and trustee services as per the Retirement Plan Services Agreement dated July 1, 2012. It is expected that during 2023, the Plan will contract NPPG to provide it with record keeping and administration services, thus replacing Oriental Bank in that role.
b)Contributions
Each year, participants may contribute up to the maximum deferral amount under the provisions of Section 402(g) of the US Code as annually indexed by the U.S. Internal Revenue Service (the “IRS”). For both periods ended December 31, 2022 and 2021, the limit was $20,500 and $19,500, respectively. If, in addition to a deferral election under the Plan, participants contribute to an individual retirement account (“IRA”) in Puerto Rico, pre-tax contributions to both the Plan and the Puerto Rico IRA in the aggregate cannot exceed the sum of the annual deferral limit under the PR Code ($20,500 and $19,500 for tax years ended December 31, 2022 and 2021, respectively). Participants may also contribute amounts representing distributions from other Puerto Rico and U.S. qualified defined benefit or contribution plans and allowed catch up contributions for participants over 50 up to $1,500 for both periods ended December 31, 2022 and 2021.
Participants direct the investment of their contributions into various investment options offered by the Plan. The Plan currently offers mutual funds, a stable value fund, and shares of common stock of the Company as investment options. Participants direct the investment of their matching contributions in the Plan. The Employer provides a discretionary matching contribution of 50% of each participant’s contributions up to a maximum contribution for matching purposes of 8% of the participant’s compensation per year.
c)Participant Accounts
Each participant’s account is credited with the participant’s contribution and allocations of the Employer’s contribution and Plan earnings and charged with an allocation of administrative fees. Allocations are based
THE ORIENTAL BANK CODA PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022 AND 2021, AND YEAR ENDED DECEMBER 31, 2022
on participant earnings or account balances, as defined. The benefit to which a participant is entitled to is the benefit that can be provided from the participant’s vested account.
d)Vesting
Participants are immediately vested in their contributions plus actual earnings thereon. The Employer’s contribution portion of their accounts plus actual earnings thereon vest upon the occurrence of any of the following events: completion of three years of credited service; attaining age 65; total disability while employed by the Employer; or death while employed by the Employer.
e)Payment of Benefits
Plan participants are permitted to make withdrawals from the Plan, subject to provisions in the Plan agreement. On termination of service due to death, disability, or retirement, a participant or its heirs may elect to receive the value of the vested interest in his or her account in either a lump sum amount, a fixed period that may not exceed the participant’s life expectancy or through a fixed annuity contract. For termination of service for other reasons, a participant may receive the value of the vested interest in his or her account as a lump sum distribution. The Plan allows for participants to receive hardship distributions.
During 2022, the Plan allowed eligible plan participants who were Puerto Rico residents in 2022 to make Hurricane Fiona Puerto Rico Eligible Distributions through December 31, 2022 pursuant to the Treasury Department Administrative Determinations 22-08 and 22-13. These distributions, which were available in a lump sum payment only, were limited to $100,000 overall and received favorable tax benefits under the administrative determinations. The first $10,000 of an eligible distribution was exempt from income taxes and the alternative minimum tax (AMT) under the 2011 PR Code. Eligible distributions over $10,000 were subject to a flat 10% income tax rate as long as the tax is withheld at the time of the distribution. During 2022, the Plan made a total of $4.1 million in distributions under these administrative determinations.
f)Notes Receivable from Participants
The Plan does not allow for loans to participants. However, on December 31, 2019, the Company purchased from the Bank of Nova Scotia all the outstanding common stock of Scotiabank de Puerto Rico (“SBPR”). In December 2020, the balances of the Retirement Plan of SBPR employee accounts were transferred to the Plan including its existing participant loans. As of December 31, 2022 and 2021 these loans amounted to $411,144 and $749,077, respectively, and they will be extinguished as they are repaid by participants. Loan terms range from 1-5 years or up to 30 years for a home loan. The loans are secured by the balance in the participant’s account and bear interest at a rate commensurate with the interest rate charged by persons in the business of lending money for loans which would be made under similar circumstances. Principal and interest are paid ratably through payroll deductions. No additional loans will be granted to participants.
g)Forfeited Accounts
Employer contributions that are not vested upon termination of employment are forfeited and may be used to pay administrative expenses and then reduce future contributions to the Plan by the Employer. During the year ended December 31, 2021, forfeitures totaling approximately $53,000 were used to offset Employer contributions. During the year ended December 31, 2022, no forfeitures were used to offset Employer contributions. At December 31, 2022, the Plan had $32,377 in forfeitures available to pay administrative expenses and reduce future Employer contributions.
h)Plan Termination
Although it has not expressed any intent to do so, the Employer has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to ERISA provisions. In the event of Plan termination, participants will become 100% vested in their Employer’s contributions.
THE ORIENTAL BANK CODA PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022 AND 2021, AND YEAR ENDED DECEMBER 31, 2022
(2)Summary of Significant Accounting Policies
Following are the significant accounting policies followed by the Plan:
a)Basis of Presentation
The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with accounting policies generally accepted in the United States of America (“GAAP”).
b)Use of Estimates
The preparation of financial statements in conformity with GAAP requires the plan administrator to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term is the valuation of investments.
c)Risks and Uncertainties
The Plan invests in various financial instruments. Investment securities are exposed to various risks, such as interest rate, credit, and market risks. Due to the level of risk associated with certain investments and the level of uncertainty related to changes in the values of investments, it is reasonably possible that changes in the fair values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the statements of net assets available for benefits and the statement of changes in net assets available for benefits.
d)Investments Valuation and Income Recognition
Plan investments are stated at fair value. See Note 3 for further information regarding valuation of the Plan’s investments.
Collective investment trust is valued based upon the net asset value of units owned by the Plan at year-end. The net asset value is used as a practical expedient to estimate fair value and it is based on the fair value of the underlying investments held by the fund that are traded in an active market, less its liabilities. The collective investment trust is not included in the fair value hierarchy.
Purchases and sales of securities are recorded on a trade date basis. Interest income is recorded on the accrual basis and dividends are recorded on the declaration date, taking into consideration the ex-dividend date. The Plan presents in the statement of changes in net assets available for benefits the net appreciation (depreciation) in the fair value of its investments which consists of realized gains and losses on investments purchased and sold during the period as well as unrealized appreciation (depreciation) on those investments held at year end.
e)Payments of Benefits
Benefits are recorded when paid.
f)Plan Expenses
Under the Plan’s contract entered into with Mid Atlantic, custody, trading and 3(38) fiduciary fees are billed quarterly in advance based on assets balances at the time of calculation. The annual fee for 3(38) fiduciary services equals to 5 basis points of the market value of the included assets and it is paid quarterly. Market value of the Plan assets is the value of assets as reported by Mid Atlantic. These charges are presented as administrative fees in the Plan’s statement of changes in net assets available for benefits.
THE ORIENTAL BANK CODA PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022 AND 2021, AND YEAR ENDED DECEMBER 31, 2022
Administrative expenses, including trustee, legal, auditing, and other fees, may be paid out of the invested assets unless paid by the Employer. Expenses assumed and paid by the Employer during the year ended December 31, 2022 amounted to $284,364.
(3)Fair Value Measurements
The Plan measures fair value as required by Accounting Standard Codification (“ASC”) Subtopic 820-10, “Fair Value Measurements” which provides a framework for measuring fair value under accounting principles generally accepted in the United States. Under ASC 820, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This guidance also establishes a fair value hierarchy for classifying financial instruments. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are:
Level 1 – assets include equity securities that are traded in an active exchange market, as well as certain money market instruments. Valuations are obtained from readily available pricing sources for market transactions involving identical assets.
Level 2 – observable inputs other than Level 1 prices, such as quoted prices for similar assets; 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.
Level 3 – unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets. Level 3 assets include financial instruments whose value is determined using pricing models, for which the determination of fair value requires significant management judgment or estimation. As of December 31, 2022, and 2021, the Plan did not have such assets.
The following is a description of the valuation methodologies used for instruments measured at fair value:
Shares of the Company’s common stock: valued at quoted closing market prices (“Level 1”).
Money Market Instruments: stated at fair value, which approximates cost plus accumulated interest earnings less distributions to date (“Level 1”).
Mutual funds: stated at fair value, and valued daily at the quoted net asset value of shares held by the Plan (“Level 1”).
The estimated fair value is subjective in nature and 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.
There were no transfers into or out of Level 1, Level 2, and Level 3 fair value measurements during the years ended December 31, 2022 and 2021.
THE ORIENTAL BANK CODA PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022 AND 2021, AND YEAR ENDED DECEMBER 31, 2022
The following tables set forth by level, within the fair value hierarchy, the Plan’s fair value measurements at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Fair Value Measurements |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Cash and money market instruments | $ | 13,524 | | $ | — | | $ | — | | $ | 13,524 |
| Common stock | 7,808,128 | | — | | — | | 7,808,128 |
| Mutual funds | 91,875,659 | | — | | — | | 91,875,659 |
| $ | 99,697,311 | | $ | — | | $ | — | | $ | 99,697,311 |
| | | | | | | |
Investment measured using net asset value as a practical expedient | | | | | | | 10,031,732 |
| | | | | | | $ | 109,729,043 |
| | | | | | | |
| December 31, 2021 |
| Fair Value Measurements |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Cash and money market instruments | $ | 537,978 | | $ | — | | $ | — | | $ | 537,978 |
| Common stock | 7,755,587 | | — | | — | | 7,755,587 |
| Mutual funds | 115,566,080 | | — | | — | | 115,566,080 |
| $ | 123,859,645 | | $ | — | | $ | — | | $ | 123,859,645 |
| | | | | | | |
Investment measured using net asset value as a practical expedient | | | | | | | 9,635,881 |
| | | | | | | $ | 133,495,526 |
Investments can be redeemed with no advance notice on any day on which the New York Stock Exchange is open for trading.
Mid Atlantic makes available a stable value fund offered by Metropolitan Life Insurance Company (“MetLife”) that the participant may elect to transfer all or part of his or her funds. The stable value fund is considered a collective trust holding a fully benefit responsive group annuity contract with MetLife. The Plan's investments in this stable value fund is valued based upon the net asset value of units owned by the Plan at year-end. The net asset value of the collective trust fund, as provided by MetLife, is used as a practical expedient to estimate fair value and it is based on the fair value of the underlying investments held by the fund that are traded in an active market, less its liabilities. The estimated value of the collective trust fund at December 31, 2022 and 2021 was $10,031,732 and $9,635,881, respectively. The investment has a fixed interest rate for a fixed period that will apply to the entire guaranteed value. The effective credited interest rate is set quarterly. Interest rates will reflect, in addition to the fees by the contract, capital market developments, the performance of the separate account assets backing the contract, and the expected and actual contributions and withdrawals of all of the retirement plans participating in the contract.
THE ORIENTAL BANK CODA PROFIT SHARING PLAN
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2022 AND 2021, AND YEAR ENDED DECEMBER 31, 2022
(4)Related-Party Transactions
At December 31, 2022 and 2021, the Plan held 283,314 and 292,002 shares of the Company’s common stock, the Employer's Parent Company, with a fair value of $7,808,128 and $7,755,587, respectively. The Employer is the Plan sponsor and trustee and a wholly owned subsidiary of the Company and, therefore, qualifies as a party-in-interest. The Plan also held notes receivable from participants which also qualify as party-in-interest transactions. At December 31, 2022 and 2021, these notes receivables amounted to $411,144 and $749,077, respectively.
Mid Atlantic serves as the custodian and trading partner and manages the stable value fund and, therefore, qualifies as a party-in-interest.
Oriental Bank, a subsidiary of the Company, provides record keeping, administration, and trustee services to the Plan as per the Retirement Plan Services Agreement dated July 1, 2012.
(5)Income Taxes
The trust that forms part of the Plan (the “Trust”) is intended to be exempt from Puerto Rico and U.S. federal incomes taxes pursuant to the PR Code and the US Code, respectively. The Plan sponsor has adopted a volume submitter plan document. The IRS has issued an opinion, dated April 22, 2016, that the form of the volume submitter document is acceptable under Section 401 of the US Code, and, therefore, the Trust is not subject to U.S. federal income tax. The PR Treasury ruled on March 28, 2018 that the Plan constitutes a qualified plan pursuant to the provisions of Section 1081.01 of the PR Code and, therefore, the Trust is not subject to Puerto Rico income tax. As applicable, the Plan is required to operate in accordance with the provisions of the PR Code and the US Code to maintain its qualification. Effective in 2020, the Employer, adopted an amendment for the benefit of employees eligible to participate in the Plan, which complies with the provisions of PR Treasury’s Circular Letters No. 11-10, 13-02 and 16-08, and on April 9, 2021, the Plan requested from the PR Treasury a favorable determination letter with respect to such amendment. Although the Plan has been amended, the Plan sponsor believes that the Plan is designed and is being operated within the applicable requirements of the PR Code and the US Code, therefore, remains qualified under the PR Code and the US Code.
U.S. generally accepted accounting principles require plan management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS and the PR Treasury. As of December 31, 2022, and 2021, there are no uncertain tax positions taken or expected to be taken that would require recognition or disclosure in the financial statements. The Plan is subject to routine audits by taxing jurisdictions. However, there are currently no audits in progress for any tax periods. The Plan is no longer subject to income tax examinations for the years prior to 2015.
(6)Excess Contributions Payable to Participants
The Plan is subject to certain non-discrimination rules under the PR Code. As of December 31, 2022 and 2021, the Plan failed certain of the non-discrimination tests under the PR Code due to lower contribution percentages by non-highly compensated eligible employees relative to the contribution percentages of highly compensated eligible employees. In order to meet the requirements of the non-discrimination rules, the Plan refunded a portion of the contributions made by highly compensated participants, in accordance with applicable provisions of the PR Code. The refund for 2022, paid in March 2023, totaled $77,822. The refund for 2021, paid in March 2022, totaled $73,161. These refunds are included as other liabilities in the Plan’s statements of net assets available for benefits.
(7) Subsequent Events
The Plan has evaluated subsequent events from the statement of net assets available for benefits date through June 27, 2023, the filing date of this Annual Report on Form 11-K for the year ended December 31, 2022.
SCHEDULE I
THE ORIENTAL BANK CODA PROFIT SHARING PLAN
Schedule H, Line 4i - Schedule of Assets (Held at End of Year)
December 31, 2022
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| | (b) | | (c) | (d) | (e) |
| (a) | | Identity of issue, borrower, lessor, or similar party | | Description of Investment, including maturity date, rate of interest, collateral, par, or maturity value | | | Cost | Current value |
| | Participant directed: | | | | |
| * | | OFG Bancorp | | OFG Bancorp: | | | | |
| | | | Common Stock | 283,314 | shares | ** | $ | 7,808,128 | |
| | | | | | | | |
| * | | Mid Atlantic | | Mutual Funds: | | | | |
| | | | American Century Government Bond Fund Investor Class | 230,736 | units | ** | 2,212,754 |
| | | | American Funds New World Fund Class R-6 | 74 | units | ** | 4,890 |
| | | | Calvert Balanced Fund Class R6 | 215 | units | ** | 7,617 |
| | | | Columbia Small Cap Index Fund Institutional 2 Class | 25,216 | units | ** | 580,984 |
| | | | Fidelity 500 Index | 3,068 | units | ** | 408,462 |
| | | | Fidelity Advisor Stock Selector Sm Cp Z | 59,217 | units | ** | 1,666,950 |
| | | | Fidelity Multi-Asset Index | 145,728 | units | ** | 6,857,944 |
| | | | Franklin Small-Mid Cap Growth Fund Class R6 | 103,583 | units | ** | 3,493,839 |
| | | | Impax International Sustainable Economy Fund Institutional Class | 149 | units | ** | 1,286 |
| | | | Janus Henderson Balanced Fund Class N | 1,309,862 | units | ** | 49,237,710 |
| | | | Loomis Sayles Investment Grade Bond Fund Class Y | 265,804 | units | ** | 2,562,347 |
| | | | | | | | |
| | | | MFS Core Equity Fund Class R6 | 197,701 | units | ** | 8,068,184 |
| | | | MFS International Diversification Fund Class R6 | 96 | units | ** | 1,934 |
| | | | PIMCO StocksPLUS Long Duration Instl | 2,002 | units | ** | 8,868 |
| | | | Schwab Fundamental International Large Company Index Fund | 266,927 | units | ** | 2,415,692 |
| | | | TCW High Yield Bond Fund Class Institutional | 103,790 | units | ** | 607,170 |
| | | | TIAA-CREF Core Impact Bond Fund Institutional Class | 5,579 | units | ** | 49,261 |
| | | | Vanguard FTSE Social Index Fund Admiral | 679 | units | ** | 23,578 |
| | | | Vanguard Mid-Cap Index Fund Admiral Shares | 233 | units | ** | 58,725 |
| | | | Vanguard Small-Cap Growth Index Fund Admiral Shares | 9,805 | units | ** | 691,317 |
| | | | Vanguard U.S. Growth Fund Admiral Shares | 70,811 | units | ** | 7,174,583 |
| | | | | | | | |
SCHEDULE I
THE ORIENTAL BANK CODA PROFIT SHARING PLAN
Schedule H, Line 4i - Schedule of Assets (Held at End of Year)
December 31, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | | Vanguard Value Index Fund Admiral Shares | 32,935 | units | ** | 1,803,494 |
| | | | Vanguard Wellesley Income Inv | 161,000 | units | ** | 3,938,070 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | 91,875,659 | |
| | | | Cash and money markets: | | | | |
| * | | Mid Atlantic | | Cash and Bank Deposit Sweep Program | | | ** | 13,524 |
| | | | | | | | |
| | | | Collective investment trust: | | | | |
| * | | Mid Atlantic | | MetLife Unified Trust Stable Value Fund | 497,334 | units | ** | 10,031,732 |
| | | | | | | | |
| * | | Participant Loans | | Notes, with interest rate from 4.25% to 6.5%; maturities range through 2048 | | | ** | 411,144 |
| | | | | | | | $ | 110,140,187 | |
| * | | Party-in-interest as defined by ERISA | | | | |
| ** | | Not applicable as these are participant directed. | | | | |
| | | | | | | | |
| See the accompanying report of independent registered public accounting firm. |
INDEX OF EXHIBITS
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| Exhibit No. | Description of Document |
| Consent of KPMG LLP |
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SIGNATURES
The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized.
THE ORIENTAL BANK CODA
PROFIT SHARING PLAN
(Name of Plan)
Date: June 27, 2023 /s/ Maritza Arizmendi
Maritza Arizmendi
Chief Financial Officer
/s/ Juan J. Santiago
Director of Trust Sales
and Trust Officer
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