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Allowance for Loan and Lease Losses

9 Months Ended

Sep. 30, 2017

Allowance for loan and lease losses [Abstract]

Allowance For Credit Losses Text Block

NOTE 6 – ALLOWANCE FOR LOAN AND LEASE LOSSES

The composition of Oriental’s allowance for loan and lease losses at September 30, 2017 and December 31, 2016 was as follows:

	September 30,			December 31,
	2017			2016
	(In thousands)
Allowance for loans and lease losses:
Originated and other loans and leases held for investment:
Mortgage	$	22,308		$	17,344
Commercial		24,278			8,995
Consumer		15,793			13,067
Auto and leasing		25,162			19,463
Unallocated		-			431
Total allowance for originated and other loans and lease losses		87,541			59,300
Acquired BBVAPR loans:
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Commercial		41			169
Consumer		2,591			3,028
Auto		731			1,103
		3,363			4,300
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage		8,931			2,682
Commercial		23,941			23,452
Auto		7,238			4,922
		40,110			31,056
Total allowance for acquired BBVAPR loans and lease losses		43,473			35,356
Acquired Eurobank loans:
Loans secured by 1-4 family residential properties		14,219			11,947
Commercial		8,922			9,328
Consumer		5			6
Total allowance for acquired Eurobank loan and lease losses		23,146			21,281
Total allowance for loan and lease losses	$	154,160		$	115,937

Oriental 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. Oriental’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 Oriental’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.

During the third quarter of 2017, in the span of two weeks in September, hurricanes Irma and Maria caused catastrophic damages throughout Puerto Rico. Although the effect of the hurricanes on Oriental's loan portfolio is difficult to predict at this time, management performed an evaluation of the loan portfolios in order to assess the impact on repayment sources and underlying collateral that could result in additional losses.

The framework for the analysis was based on our current ALLL methodology with additional considerations according to the estimated impact categorized as low, medium or high. From this impact assessment, additional reserve levels were estimated by increasing default probabilities (“PD”) and loss given default expectations (“LGD”) of each allowance segment.

For commercial portfolios, Oriental contacted its clients to evaluate the impact of the hurricanes on their business operations and collateral. The impact was then categorized as follows: (i) low risk, for clients that had no business impact or relatively insignificant impact; (ii) medium risk, for clients that had a business impact on their primary or secondary sources of repayment, but had adequate cash flow to cover operations and to satisfy their obligations; or (iii) high risk, for clients that had potentially significant problems that affected primary, secondary and tertiary (collateral) sources of repayment. This criterion was used to model adjusted PDs and LGDs considering internal and external sources of information available to support our estimation process and output. For retail portfolios (residential mortgage, consumer and auto), management established assumptions based on the historical losses of each ALLL segment and then further adjusted based on parameters used as key risk indicators, such as the industry of employment (for all portfolios) and the location of the collateral (for residential loans).

Based on our assessment of the facts related to these hurricanes, we have increased our provision for loan losses $27.0 million. The increase in the allowance corresponding to our originated loan portfolio was $16.8 million: $3.8 million in mortgage loans, $7.6 million in commercial loans, $800 thousand in consumer loans, and $4.6 million in auto loans. The increase in the allowance corresponding to our acquired loan portfolio was $10.2 million: $2.7 million in mortgage loans, $7.0 million in commercial loans, $100 thousand in consumer loans, and $400 thousand in auto loans.

The documentation for the assessment considers all information available at the moment; gathered through visits or interviews with our clients, inspections of collaterals, identification of most affected areas and industries. Oriental will continue to assess the impact to our customers and our businesses as a result of the hurricanes and refine our estimates as more information becomes available.

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:

	Quarter Ended September 30, 2017
	Mortgage			Commercial			Consumer			Auto and Leasing			Unallocated			Total
	(In thousands)
Allowance for loan and lease losses for originated and other loans:
Balance at beginning of period	$	18,664		$	17,279		$	14,981		$	18,742		$	-		$	69,666
Charge-offs		(834)			(727)			(4,424)			(9,387)			-			(15,372)
Recoveries		341			654			168			2,394			-			3,557
Provision for originated and other loans and lease losses		4,137			7,072			5,068			13,413			-			29,690
Balance at end of period	$	22,308		$	24,278		$	15,793		$	25,162		$	-		$	87,541

	Nine-Month Period Ended September 30, 2017
	Mortgage			Commercial			Consumer			Auto and Leasing			Unallocated			Total
	(In thousands)
Allowance for loan and lease losses for originated and other loans:
Balance at beginning of period	$	17,344		$	8,995		$	13,067		$	19,463		$	431		$	59,300
Charge-offs		(5,375)			(6,424)			(11,792)			(24,726)			-			(48,317)
Recoveries		458			880			1,113			9,864			-			12,315
Provision for originated and other loans and lease losses		9,881			20,827			13,405			20,561			(431)			64,243
Balance at end of period	$	22,308		$	24,278		$	15,793		$	25,162		$	-		$	87,541

	September 30, 2017
	Mortgage			Commercial			Consumer			Auto and Leasing			Unallocated			Total
	(In thousands)
Allowance for loan and lease losses on originated and other loans:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	9,524		$	5,223		$	-		$	-		$	-		$	14,747
Collectively evaluated for impairment		12,784			19,055			15,793			25,162			-			72,794
Total ending allowance balance	$	22,308		$	24,278		$	15,793		$	25,162		$	-		$	87,541
Loans:
Individually evaluated for impairment	$	86,511		$	67,039		$	-		$	-		$	-		$	153,550
Collectively evaluated for impairment		607,965			1,178,672			316,357			831,437			-			2,934,431
Total ending loan balance	$	694,476		$	1,245,711		$	316,357		$	831,437		$	-		$	3,087,981

	Quarter Ended September 30, 2016
	Mortgage			Commercial			Consumer			Auto and Leasing			Unallocated			Total
	(In thousands)
Allowance for loan and lease losses for originated and other loans:
Balance at beginning of period	$	18,537		$	63,144		$	11,771		$	19,259		$	101		$	112,812
Charge-offs		(1,656)			(56,700)			(3,173)			(7,804)			-			(69,333)
Recoveries		21			93			120			3,747			-			3,981
Provision (recapture) for originated and other loan and lease losses		1,625			5,770			3,571			3,800			(58)			14,708
Balance at end of period	$	18,527		$	12,307		$	12,289		$	19,002		$	43		$	62,168

	Nine-Month Period Ended September 30, 2016
	Mortgage			Commercial			Consumer			Auto and Leasing			Unallocated			Total
	(In thousands)
Allowance for loan and lease losses for originated and other loans:
Balance at beginning of period	$	18,352		$	64,791		$	11,197		$	18,261		$	25		$	112,626
Charge-offs		(4,692)			(58,544)			(8,310)			(24,267)			-			(95,813)
Recoveries		204			407			355			9,969			-			10,935
Provision (recapture) for originated and other loan and lease losses		4,663			5,653			9,047			15,039			18			34,420
Balance at end of period	$	18,527		$	12,307		$	12,289		$	19,002		$	43		$	62,168

	December 31, 2016
	Mortgage			Commercial			Consumer			Auto and Leasing			Unallocated			Total
	(In thousands)
Allowance for loan and lease losses on originated and other loans:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	7,761		$	1,626		$	-		$	-		$	-		$	9,387
Collectively evaluated for impairment		9,583			7,369			13,067			19,463			431			49,913
Total ending allowance balance	$	17,344		$	8,995		$	13,067		$	19,463		$	431		$	59,300
Loans:
Individually evaluated for impairment	$	91,650		$	53,139		$	-		$	-		$	-		$	144,789
Collectively evaluated for impairment		629,844			1,224,727			290,515			756,395			-			2,901,481
Total ending loan balance	$	721,494		$	1,277,866		$	290,515		$	756,395		$	-		$	3,046,270

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 accounted for under ASC 310-20, for the periods indicated:

	Quarter Ended September 30, 2017
	Commercial			Consumer			Auto				Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Balance at beginning of period	$	41		$	2,623		$	684			$	3,348
Charge-offs		-			(711)			(222)				(933)
Recoveries		1			33			202				236
Provision (recapture) for acquired BBVAPR loan and lease losses accounted for under ASC 310-20		(1)			646			67				712
Balance at end of period	$	41		$	2,591		$	731			$	3,363

	Nine-Month Period Ended September 30, 2017
	Commercial			Consumer			Auto			Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Balance at beginning of year	$	169		$	3,028		$	1,103		$	4,300
Charge-offs		(132)			(2,367)			(705)			(3,204)
Recoveries		6			392			1,251			1,649
Provision (recapture) for acquired BBVAPR loan and lease losses accounted for under ASC 310-20		(2)			1,538			(918)			618
Balance at end of year	$	41		$	2,591		$	731		$	3,363

	September 30, 2017
	Commercial			Consumer			Auto			Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	12		$	-		$	-		$	12
Collectively evaluated for impairment		29			2,591			731			3,351
Total ending allowance balance	$	41		$	2,591		$	731		$	3,363
Loans:
Individually evaluated for impairment	$	748		$	-		$	-		$	748
Collectively evaluated for impairment		3,864			29,464			26,562			59,890
Total ending loan balance	$	4,612		$	29,464		$	26,562		$	60,638

	Quarter Ended September 30, 2016
	Commercial			Consumer			Auto			Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Balance at beginning of period	$	21		$	3,002		$	1,464		$	4,487
Charge-offs		(2)			(889)			(475)			(1,366)
Recoveries		16			67			461			544
Provision (recapture) for acquired loan and lease losses accounted for under ASC 310-20		(17)			766			(201)			548
Balance at end of period	$	18		$	2,946		$	1,249		$	4,213

	Nine-Month Period Ended September 30, 2016
	Commercial			Consumer			Auto			Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Balance at beginning of year	$	26		$	3,429		$	2,087		$	5,542
Charge-offs		(21)			(2,714)			(1,783)			(4,518)
Recoveries		56			236			1,505			1,797
Provision (recapture) for acquired loan and lease losses accounted for under ASC 310-20		(43)			1,995			(560)			1,392
Balance at end of period	$	18		$	2,946		$	1,249		$	4,213

	December 31, 2016
	Commercial			Consumer			Auto			Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	141		$	-		$	-		$	141
Collectively evaluated for impairment		28			3,028			1,103			4,159
Total ending allowance balance	$	169		$	3,028		$	1,103		$	4,300
Loans:
Individually evaluated for impairment	$	1,150		$	-		$	-		$	1,150
Collectively evaluated for impairment		4,412			32,862			53,026			90,300
Total ending loan balance	$	5,562		$	32,862		$	53,026		$	91,450

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

For loans accounted for under ASC 310- 30, as part of the evaluation of actual versus expected cash flows, Oriental 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 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:

	Quarter Ended September 30, 2017
	Mortgage			Commercial			Auto			Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-30:
Balance at beginning of period	$	4,141		$	25,614		$	7,739		$	37,494
Provision for BBVAPR loans and lease losses accounted for under ASC 310-30		4,790			6,810			- 501			11,099
Allowance de-recognition		-			(8,483)			-			(8,483)
Balance at end of period	$	8,931		$	23,941		$	7,238		$	40,110
	Nine-Month Period Ended September 30, 2017
	Mortgage			Commercial			Auto			Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-30:
Balance at beginning of period	$	2,682		$	23,452		$	4,922		$	31,056
Provision (recapture) for BBVAPR loans and lease losses accounted for under ASC 310-30		6,345			9,768			2,685			18,798
Allowance de-recognition		(96)			(9,279)			(369)			(9,744)
Balance at end of period	$	8,931		$	23,941		$	7,238		$	40,110

	Quarter Ended September 30, 2016
	Mortgage			Commercial			Auto			Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-30:
Balance at beginning of period	$	1,585		$	15,863		$	5,353		$	22,801
Provision (recapture) for acquired BBVAPR loans and lease losses accounted for under ASC 310-30		1,079			6,324			-			7,403
Allowance de-recognition		-			(189)			(196)			(385)
Balance at end of period	$	2,664		$	21,998		$	5,157		$	29,819
	Nine-Month Period Ended September 30, 2016
	Mortgage			Commercial			Auto			Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-30:
Balance at beginning of period	$	1,678		$	21,245		$	2,862		$	25,785
Provision for acquired BBVAPR loans and lease losses accounted for under ASC 310-30		1,000			9,552			2,693			13,245
Loan pools fully charged-off		(14)			(66)			(202)			(282)
Allowance de-recogntion		-			(8,733)			(196)			(8,929)
Balance at end of period	$	2,664		$	21,998		$	5,157		$	29,819

Allowance for Acquired Eurobank Loan Losses

The changes in the allowance for loan and lease losses on acquired Eurobank loans for the quarters and nine-month periods ended September 30, 2017 and 2016 were as follows:

	Quarter Ended September 30, 2017
	Loans Secured by 1-4 Family Residential Properties			Commercial			Consumer			Total
	(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of period	$	13,651		$	8,131		$	5		$	21,787
Provision for (recapture) acquired Eurobank loans and lease losses, net		1,139			1,402			-			2,541
Allowance de-recognition		(571)			(611)			-			(1,182)
Balance at end of period	$	14,219		$	8,922		$	5		$	23,146
	Nine-Month Period Ended September 30, 2017
	Loans Secured by 1-4 Family Residential Properties			Commercial			Consumer			Total
	(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of period	$	11,947		$	9,328		$	6		$	21,281
Provision for (recapture) acquired Eurobank loans and lease losses, net		4,011		$	562			-			4,573
Allowance de-recognition		(1,739)			(968)			(1)			(2,708)
Balance at end of period	$	14,219		$	8,922		$	5		$	23,146

	Quarter Ended September 30, 2016
	Loans secured by 1-4 Family Residential Properties			Commercial			Consumer			Total
	(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of period	$	11,016		$	11,096		$	4		$	22,116
Provision for (recapture) acquired Eurobank loan and lease losses, net		893			(74)			-			819
Loan pools fully charged-off		818			-			-			818
Allowance de-recognition		(459)			(478)			(4)			(941)
Balance at end of period	$	12,268		$	10,544		$	-		$	22,812
	Nine-Month Period Ended September 30, 2016
	Loans secured by 1-4 Family Residential Properties			Commercial			Consumer			Total
	(In thousands)
Allowance for loan and lease losses for Eurobank loans:
Balance at beginning of period	$	22,570		$	67,365		$	243		$	90,178
Provision for (recapture) acquired Eurobank loan and lease losses, net		1,077			1,585			(7)			2,655
FDIC shared-loss portion of provision for covered loan and lease losses, net		3,213			-			-			3,213
Loan pools fully charged-off		-			(134)			-			(134)
Allowance de-recognition		(14,592)			(58,272)			(236)			(73,100)
Balance at end of period	$	12,268		$	10,544		$	-		$	22,812

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The entire disclosure for allowance for credit losses.

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