Allowance for Loan and Lease Losses

6 Months Ended

Jun. 30, 2018

Allowance for loan and lease losses [Abstract]

NOTE 6 – ALLOWANCE FOR LOAN AND LEASE LOSSES

The composition of Oriental’s allowance for loan and lease losses at June 30, 2018 and December 31, 2017 was as follows:

	June 30,		December 31,
	2018		2017
	(In thousands)
Allowance for loans and lease losses:
Originated and other loans and leases held for investment:
Mortgage	$	19,323	$	20,439
Commercial		31,480		30,258
Consumer		16,192		16,454
Auto and leasing		27,223		25,567
Total allowance for originated and other loans and lease losses		94,218		92,718

Acquired BBVAPR loans:
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Commercial		86		42
Consumer		2,357		3,225
Auto		283		595
		2,726		3,862
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage		14,567		14,085
Commercial		23,019		23,691
Consumer		18		18
Auto		6,572		7,961
		44,176		45,755
Total allowance for acquired BBVAPR loans and lease losses		46,902		49,617
Acquired Eurobank loans:
Loans secured by 1-4 family residential properties		15,170		15,187
Commercial		9,140		9,982
Consumer		4		5
Total allowance for acquired Eurobank loan and lease losses		24,314		25,174
Total allowance for loan and lease losses	$	165,434	$	167,509

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.

As discussed in Note 2, during 2017, hurricanes Irma and Maria caused catastrophic damages throughout Puerto Rico. Management performed an evaluation of the loan portfolios to assess the impact on repayment sources and underlying collateral that could result in additional losses.

For the commercial portfolio, 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.

As part of the process, 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 still 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.

During the fourth quarter, Oriental performed an update of the initial estimate, taking into consideration the most recent available information gathered through additional visits and interviews with clients and the economic environment in Puerto Rico.

For the retail portfolios, mortgage, consumer and auto, the assumptions established in the initial estimate were 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 mortgage loans. During the fourth quarter of 2017, Oriental performed additional procedures to evaluate the reasonability of the initial estimate based on the payment experience percentage of borrowers for which the deferral period expired. The analysis took into consideration historical payment behavior and loss experience of borrowers (PDs and LGDs) of each portfolio segment to develop a range of estimated potential losses. Management understands that this approach is reasonable given the lack of historical information related to the behavior of local borrowers in such an unprecedented event. The amount used in the analysis represents the average of potential outcomes of expected losses.

During the first quarter of 2018, Oriental updated the previous performed analysis to estimate probable losses related to the hurricanes. Analyses were based on the payment experience percentage of borrowers for which the deferral period expired in retail portfolios. For commercial portfolio, no changes in the level of impact assessed were identified based on communications with credit officers. During the second quarter of 2018, Oriental continued its monitoring process of the performance of those affected borrowers. As information became available, it was incorporated into the allowance framework.

At June 30, 2018 and December 31, 2017, Oriental's allowance for loan and lease losses incorporated all risks associated to our loan portfolio, including the impact of hurricanes Irma and Maria.

As part of Oriental’s continuous enhancement to the allowance for loan and lease losses methodology, during the second quarter of 2018 the following assumptions were reviewed:

An assessment of the look-back period and historical loss factor was performed for auto and leasing, consumer and commercial loan portfolios. The analysis was based on the trends observed and their relation with the economic cycle as of the period ended June 30, 2018. As a result, for the commercial portfolio, the look-back period was revised to 40 months from 36 months. Also, for auto and consumer portfolios, a look back period of 24 months was maintained. For the residential mortgages portfolio, the factor was reviewed to 24 months from 12 months.

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, credit quality, expected impact due to recent economic developments, and changes in values of collateral, among others.

The loss realization period was revised to 2.38 years from 2.13 years in 2017 for the commercial real estate portfolio, and other portfolios remained at one year.

These changes in the allowance for loan and lease losses’ look-back period and the result of the assessment in economic factors for the commercial, auto, and consumer portfolios are considered a change in accounting estimate as per ASC 250-10 provisions, where adjustments should be made prospectively.

Allowance for Originated and Other Loan and Lease Losses Held for Investment

The following tables present 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 June 30, 2018
	Mortgage		Commercial		Consumer		Auto and Leasing		Total
	(In thousands)
Allowance for loan and lease losses for originated and other loans:
Balance at beginning of period	$	18,983	$	33,174	$	18,023	$	26,652	$	96,832
Charge-offs		(1,328)		(1,998)		(4,588)		(13,748)		(21,662)
Recoveries		466		227		240		5,280		6,213
Provision for loan and lease losses		1,202		77		2,517		9,039		12,835
Balance at end of period	$	19,323	$	31,480	$	16,192	$	27,223	$	94,218

	Six-Month Period Ended June 30, 2018
	Mortgage		Commercial		Consumer		Auto and Leasing		Total
	(In thousands)
Allowance for loan and lease losses for originated and other loans:
Balance at beginning of period	$	20,439	$	30,258	$	16,454	$	25,567	$	92,718
Charge-offs		(2,298)		(3,147)		(8,847)		(22,731)		(37,023)
Recoveries		786		409		479		9,056		10,730
Provision for loan and lease losses		396		3,960		8,106		15,331		27,793
Balance at end of period	$	19,323	$	31,480	$	16,192	$	27,223	$	94,218

	June 30, 2018
	Mortgage		Commercial		Consumer		Auto and Leasing		Total
	(In thousands)
Allowance for loan and lease losses on originated and other loans:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	9,862	$	9,906	$	-	$	-	$	19,768
Collectively evaluated for impairment		9,461		21,574		16,192		27,223		74,450
Total ending allowance balance	$	19,323	$	31,480	$	16,192	$	27,223	$	94,218
Loans:
Individually evaluated for impairment	$	84,520	$	69,052	$	-	$	-	$	153,572
Collectively evaluated for impairment		593,739		1,438,316		339,341		1,014,664		3,386,060
Total ending loan balance	$	678,259	$	1,507,368	$	339,341	$	1,014,664	$	3,539,632

	Quarter Ended June 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	$	18,578	$	9,888	$	13,394	$	18,621	$	2	$	60,483
Charge-offs		(2,162)		(4,841)		(4,012)		(7,775)		-		(18,790)
Recoveries		63		136		780		4,176		-		5,155
Provision (recapture) for originated and other loan and lease losses		2,185		12,096		4,819		3,720		(2)		22,818
Balance at end of period	$	18,664	$	17,279	$	14,981	$	18,742	$	-	$	69,666

	Six-Month Period Ended June 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		(4,541)		(5,697)		(7,368)		(15,339)		-		(32,945)
Recoveries		119		226		945		7,470		-		8,760
Provision (recapture) for originated and other loan and lease losses		5,742		13,755		8,337		7,148		(431)		34,551
Balance at end of period	$	18,664	$	17,279	$	14,981	$	18,742	$	-	$	69,666

	December 31, 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	$	9,121	$	10,573	$	-	$	-	$	-	$	19,694
Collectively evaluated for impairment		11,318		19,685		16,454		25,567		-		73,024
Total ending allowance balance	$	20,439	$	30,258	$	16,454	$	25,567	$	-	$	92,718
Loans:
Individually evaluated for impairment	$	85,403	$	71,538	$	-	$	-	$	-	$	156,941
Collectively evaluated for impairment		598,204		1,235,723		330,039		883,985		-		3,047,951
Total ending loan balance	$	683,607	$	1,307,261	$	330,039	$	883,985	$	-	$	3,204,892

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 June 30, 2018
	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	$	37	$	2,659	$	488	$	3,184
Charge-offs		(5)		(420)		(88)		(513)
Recoveries		12		94		244		350
Provision (recapture) for acquired BBVAPR loan and lease losses accounted for under ASC 310-20		42		24		(361)		(295)
Balance at end of period	$	86	$	2,357	$	283	$	2,726

	Six-Month Period Ended June 30, 2018
	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	$	42	$	3,225	$	595	$	3,862
Charge-offs		(5)		(1,442)		(213)		(1,660)
Recoveries		15		148		472		635
Provision (recapture) for acquired BBVAPR loan and lease losses accounted for under ASC 310-20		34		426		(571)		(111)
Balance at end of period	$	86	$	2,357	$	283	$	2,726

	June 30, 2018
	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	$	68	$	-	$	-	$	68
Collectively evaluated for impairment		18		2,357		283		2,658
Total ending allowance balance	$	86	$	2,357	$	283	$	2,726
Loans:
Individually evaluated for impairment	$	747	$	-	$	-	$	747
Collectively evaluated for impairment		2,162		25,736		11,283		39,181
Total ending loan balance	$	2,909	$	25,736	$	11,283	$	39,928

	Quarter Ended June 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	$	183	$	2,591	$	841	$	3,615
Charge-offs		(126)		(771)		(205)		(1,102)
Recoveries		2		295		597		894
Provision (recapture) for acquired loan and lease losses accounted for under ASC 310-20		(18)		508		(549)		(59)
Balance at end of period	$	41	$	2,623	$	684	$	3,348

	Six-Month Period Ended June 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)		(1,656)		(483)		(2,271)
Recoveries		3		359		1,049		1,411
Provision (recapture) for acquired loan and lease losses accounted for under ASC 310-20		1		892		(985)		(92)
Balance at end of period	$	41	$	2,623	$	684	$	3,348

	December 31, 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	$	20	$	-	$	-	$	20
Collectively evaluated for impairment		22		3,225		595		3,842
Total ending allowance balance	$	42	$	3,225	$	595	$	3,862
Loans:
Individually evaluated for impairment	$	747	$	-	$	-	$	747
Collectively evaluated for impairment		3,633		28,915		21,969		54,517
Total ending loan balance	$	4,380	$	28,915	$	21,969	$	55,264

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 June 30, 2018
	Mortgage		Commercial		Consumer			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	$	14,331	$	22,047	$	18	$	6,770	43,166
Provision for acquired BBVAPR loans and lease losses accounted for under ASC 310-30		236		1,306		-		-	1,542
Allowance de-recognition		-		(334)		-		(198)	(532)
Balance at end of period	$	14,567	$	23,019	$	18	$	6,572	44,176


	Six-Month Period Ended June 30, 2018
	Mortgage		Commercial		Consumer		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	$	14,085	$	23,691	$	18	$	7,961	45,755
Provision (recapture) for acquired BBVAPR loans and lease losses accounted for under ASC 310-30		550		2,058		-		(887)	1,721
Allowance de-recogntion		(68)		(2,730)		-		(502)	(3,300)
Balance at end of period	$	14,567	$	23,019	$	18	$	6,572	44,176

	Quarter Ended June 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	$	3,573	$	23,528	$	7,829	$	34,930
Provision (recapture) for acquired BBVAPR loans and lease losses accounted for under ASC 310-30		630		2,735		-		3,365
Allowance de-recognition		(62)		(649)		(90)		(801)
Balance at end of period	$	4,141	$	25,614	$	7,739	$	37,494


	Six-Month Period Ended June 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 for acquired BBVAPR loans and lease losses accounted for under ASC 310-30		1,552		2,958		3,186		7,696
Allowance de-recogntion		(93)		(796)		(369)		(1,258)
Balance at end of period	$	4,141	$	25,614	$	7,739	$	37,494

Allowance for Acquired Eurobank Loan Losses

The changes in the allowance for loan and lease losses on acquired Eurobank loans for the quarters and six-month periods ended June 30, 2018 and 2017 were as follows:

	Quarter Ended June 30, 2018
	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	$	15,414	$	9,992	$	5	$	25,411
Provision for loan and lease losses, net		605		60		-		665
Allowance de-recognition		(849)		(912)		(1)		(1,762)
Balance at end of period	$	15,170	$	9,140	$	4	$	24,314


	Six-Month Period Ended June 30, 2018
	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	$	15,187	$	9,982	$	5	$	25,174
Provision for loan and lease losses, net		784		21		-		805
Allowance de-recognition		(801)		(863)		(1)		(1,665)
Balance at end of period	$	15,170	$	9,140	$	4	$	24,314

	Quarter Ended June 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	$	14,168	$	7,833	$	5	$	22,006
Provision for (recapture) acquired Eurobank loan and lease losses, net		474		(62)		-		412
Allowance de-recognition		(991)		360		-		(631)
Balance at end of period	$	13,651	$	8,131	$	5	$	21,787


	Six-Month Period Ended June 30, 2017
	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	$	11,947	$	9,328	$	6	$	21,281
Provision for (recapture) acquired Eurobank loan and lease losses, net		2,872		(840)		-		2,032
Allowance de-recognition		(1,168)		(357)		(1)		(1,526)
Balance at end of period	$	13,651	$	8,131	$	5	$	21,787