Allowance for Loan and Lease Losses

9 Months Ended

Sep. 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 September 30, 2018 and December 31, 2017 was as follows:

	September 30,		December 31,
	2018		2017
	(In thousands)
Allowance for loans and lease losses:
Originated and other loans and leases held for investment:
Mortgage	$	19,545	$	20,439
Commercial		32,491		30,258
Consumer		15,715		16,454
Auto and leasing		27,485		25,567
Total allowance for originated and other loans and lease losses		95,236		92,718

Acquired BBVAPR loans:
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Commercial		17		42
Consumer		2,140		3,225
Auto		193		595
		2,350		3,862
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage		15,258		14,085
Commercial		22,256		23,691
Consumer		18		18
Auto		6,343		7,961
		43,875		45,755
Total allowance for acquired BBVAPR loans and lease losses		46,225		49,617
Acquired Eurobank loans:
Loans secured by 1-4 family residential properties		15,155		15,187
Commercial		9,122		9,983
Consumer		4		4
Total allowance for acquired Eurobank loan and lease losses		24,281		25,174
Total allowance for loan and lease losses	$	165,742	$	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 of 2017, 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 and third 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 September 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.

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 September 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	$	19,323	$	31,480	$	16,192	$	27,223	$	94,218
Charge-offs		(1,429)		(3,249)		(4,591)		(9,111)		(18,380)
Recoveries		139		119		278		5,442		5,978
Provision for loan and lease losses		1,512		4,141		3,836		3,931		13,420
Balance at end of period	$	19,545	$	32,491	$	15,715	$	27,485	$	95,236

	Nine-Month Period Ended September 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		(3,727)		(6,396)		(13,438)		(31,842)		(55,403)
Recoveries		919		528		757		14,498		16,702
Provision for loan and lease losses		1,914		8,101		11,942		19,262		41,219
Balance at end of period	$	19,545	$	32,491	$	15,715	$	27,485	$	95,236

	September 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	$	10,620	$	7,607	$	-	$	-	$	18,227
Collectively evaluated for impairment		8,925		24,884		15,715		27,485		77,009
Total ending allowance balance	$	19,545	$	32,491	$	15,715	$	27,485	$	95,236
Loans:
Individually evaluated for impairment	$	85,119	$	68,892	$	-	$	-	$	154,011
Collectively evaluated for impairment		582,105		1,471,135		345,399		1,084,912		3,483,551
Total ending loan balance	$	667,224	$	1,540,027	$	345,399	$	1,084,912	$	3,637,562

	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 (recapture) for originated and other loan 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 (recapture) for originated and other loan 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

	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 September 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	$	86	$	2,357	$	283	$	2,726
Charge-offs		(1)		(638)		(72)		(711)
Recoveries		3		95		169		267
Provision (recapture) for acquired BBVAPR loan and lease losses accounted for under ASC 310-20		(71)		326		(187)		68
Balance at end of period	$	17	$	2,140	$	193	$	2,350

	Nine-Month Period Ended September 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		(6)		(2,080)		(285)		(2,371)
Recoveries		18		243		641		902
Provision (recapture) for acquired BBVAPR loan and lease losses accounted for under ASC 310-20		(37)		752		(758)		(43)
Balance at end of period	$	17	$	2,140	$	193	$	2,350

	September 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	$	4	$	-	$	-	$	4
Collectively evaluated for impairment		13		2,140		193		2,346
Total ending allowance balance	$	17	$	2,140	$	193	$	2,350
Loans:
Individually evaluated for impairment	$	747	$	-	$	-	$	747
Collectively evaluated for impairment		2,031		24,914		7,494		34,439
Total ending loan balance	$	2,778	$	24,914	$	7,494	$	35,186

	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 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 loan and lease losses accounted for under ASC 310-20		(2)		1,538		(918)		618
Balance at end of period	$	41	$	2,591	$	731	$	3,363

	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 September 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	$	14,567	$	23,019	$	18	$	6,572	44,176
Provision for acquired BBVAPR loans and lease losses accounted for under ASC 310-30		746		61		-		-	807
Allowance de-recognition		(55)		(824)		-		(229)	(1,108)
Balance at end of period	$	15,258	$	22,256	$	18	$	6,343	43,875


	Nine-Month Period Ended September 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		1,296		2,119		-		(887)	2,528
Allowance de-recogntion		(123)		(3,554)		-		(731)	(4,408)
Balance at end of period	$	15,258	$	22,256	$	18	$	6,343	43,875

	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 (recapture) for acquired 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 for acquired BBVAPR loans and lease losses accounted for under ASC 310-30		6,345		9,768		2,685		18,798
Allowance de-recogntion		(96)		(9,279)		(369)		(9,744)
Balance at end of period	$	8,931	$	23,941	$	7,238	$	40,110

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, 2018 and 2017 were as follows:

	Quarter Ended September 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	$	15,170	$	9,140	$	4	$	24,314
Provision for loan and lease losses, net		231		75		-		306
Allowance de-recognition		(246)		(93)		-		(339)
Balance at end of period	$	15,155	$	9,122	$	4	$	24,281


	Nine-Month Period Ended September 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	$	9,983	$	4	$	25,174
Provision for loan and lease losses, net		1,015		95		-		1,110
Allowance de-recognition		(1,047)		(956)		-		(2,003)
Balance at end of period	$	15,155	$	9,122	$	4	$	24,281

	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	$	4	$	21,786
Provision for (recapture) acquired Eurobank loan 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	$	4	$	23,145


	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 Eurobank loans:
Balance at beginning of period	$	11,947	$	9,328	$	6	$	21,281
Provision for (recapture) acquired Eurobank loan and lease losses, net		4,011		562		-		4,573
Allowance de-recognition		(1,739)		(968)		(2)		(2,709)
Balance at end of period	$	14,219	$	8,922	$	4	$	23,145