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Allowance for Loan and Lease Losses

12 Months Ended

Dec. 31, 2018

Allowance for loan and lease losses [Abstract]

Allowance For Credit Losses Text Block

NOTE 7 – ALLOWANCE FOR LOAN AND LEASE LOSSES

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

	December 31,
	2018			2017
	(In thousands)
Allowance for loans and lease losses:
Originated and other loans and leases held for investment:
Mortgage	$	19,783		$	20,439
Commercial		30,326			30,258
Consumer		15,571			16,454
Auto and leasing		29,508			25,567
Total allowance for originated and other loans and lease losses		95,188			92,718
Acquired BBVAPR loans:
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Commercial		22			42
Consumer		1,905			3,225
Auto		135			595
		2,062			3,862
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage		15,225			14,085
Commercial		20,641			23,691
Consumer		-			18
Auto		6,144			7,961
		42,010			45,755
Total allowance for acquired BBVAPR loans and lease losses		44,072			49,617
Acquired Eurobank loans:
Loans secured by 1-4 family residential properties		15,382			15,187
Commercial		9,585			9,983
Consumer		4			4
Total allowance for acquired Eurobank loan and lease losses		24,971			25,174
Total allowance for loan and lease losses	$	164,231		$	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 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 December 31, 2018 and 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:

	Year Ended December 31, 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 year	$	20,439		$	30,258		$	16,454		$	25,567		$	92,718
Charge-offs		(5,297)			(6,782)			(17,629)			(42,685)			(72,393)
Recoveries		1,047			654			1,757			19,344			22,802
Provision for loan and lease losses		3,594			6,196			14,989			27,282			52,061
Balance at end of year	$	19,783		$	30,326		$	15,571		$	29,508		$	95,188

	Year Ended December 31, 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 year	$	17,344		$	8,995		$	13,067		$	19,463		$	431		$	59,300
Charge-offs		(6,623)			(7,684)			(13,641)			(33,908)			-			(61,856)
Recoveries		585			1,281			1,209			12,314			-			15,389
Provision (recapture) for originated and other loan and lease losses		9,133			27,666			15,819			27,698			(431)			79,885
Balance at end of year	$	20,439		$	30,258		$	16,454		$	25,567		$	-		$	92,718

	Year Ended December 31, 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 year	$	18,352		$	64,791		$	11,197		$	18,261		$	25		$	112,626
Charge-offs		(6,767)			(62,445)			(11,554)			(31,731)			-			(112,497)
Recoveries		330			460			452			12,871			-			14,113
Provision for originated and other loan and lease losses		5,429			6,189			12,972			20,062			406			45,058
Balance at end of year	$	17,344		$	8,995		$	13,067		$	19,463		$	431		$	59,300

	December 31, 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	$	10,186		$	8,434		$	-		$	-		$	18,620
Collectively evaluated for impairment		9,597			21,892			15,571			29,508			76,568
Total ending allowance balance	$	19,783		$	30,326		$	15,571		$	29,508		$	95,188
Loans:
Individually evaluated for impairment	$	84,174		$	81,229		$	-		$	-		$	165,403
Collectively evaluated for impairment		584,635			1,516,359			348,980			1,129,695			3,579,669
Total ending loan balance	$	668,809		$	1,597,588		$	348,980		$	1,129,695		$	3,745,072

	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:

	Year Ended December 31, 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 year	$	42		$	3,225		$	595		$	3,862
Charge-offs		(6)			(2,459)			(372)			(2,837)
Recoveries		23			480			831			1,334
Provision (recapture) for acquired BBVAPR loan and lease losses accounted for under ASC 310-20		(37)			659			(919)			(297)
Balance at end of year	$	22		$	1,905		$	135		$	2,062

	Year Ended 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:
Balance at beginning of year	$	169		$	3,028		$	1,103		$	4,300
Charge-offs		(132)			(3,048)			(976)			(4,156)
Recoveries		5			446			1,420			1,871
Provision (recapture) for acquired loan and lease losses accounted for under ASC 310-20		-			2,799			(952)			1,847
Balance at end of year	$	42		$	3,225		$	595		$	3,862
	Year Ended 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:
Balance at beginning of year	$	26		$	3,429		$	2,087		$	5,542
Charge-offs		(42)			(3,619)			(2,155)			(5,816)
Recoveries		73			301			1,945			2,319
Provision (recapture) for acquired loan and lease losses accounted for under ASC 310-20		112			2,917			(774)			2,255
Balance at end of year	$	169		$	3,028		$	1,103		$	4,300

	December 31, 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	$	14		$	-		$	-		$	14
Collectively evaluated for impairment		8			1,905			135			2,048
Total ending allowance balance	$	22		$	1,905		$	135		$	2,062
Loans:
Individually evaluated for impairment	$	747		$	-		$	-		$	747
Collectively evaluated for impairment		1,799			23,988			4,435			30,222
Total ending loan balance	$	2,546		$	23,988		$	4,435		$	30,969

	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:

	Year Ended December 31, 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 year	$	14,085		$	23,691		$	18	$	7,961		45,755
Provision (recapture) for acquired BBVAPR loans and lease losses accounted for under ASC 310-30		1,331			1,360			(18)		(887)		1,786
Allowance de-recognition		(191)			(4,410)			-		(930)		(5,531)
Balance at end of year	$	15,225		$	20,641		$	-	$	6,144		42,010

	Year Ended December 31, 2017
	Mortgage			Commercial			Consumer			Auto			Total
	(In thousands)
Allowance for loan and lease losses foracquired BBVAPR loans accounted for underASC 310-30:
Balance at beginning of year	$	2,682		$	23,452		$	-		$	4,922		$	31,056
Provision for acquired BBVAPR loans andlease losses accounted for under ASC 310-30		11,497			9,758			18			3,408			24,681
Allowance de-recognition		(94)			(9,519)			-			(369)			(9,982)
Balance at end of year	$	14,085		$	23,691		$	18		$	7,961		$	45,755
	Year Ended December 31, 2016
	Mortgage			Commercial			Consumer			Auto			Total
	(In thousands)
Allowance for loan and lease losses foracquired BBVAPR loans accounted for underASC 310-30:
Balance at beginning of year	$	1,762		$	21,161		$	-		$	2,862		$	25,785
Provision for acquired BBVAPR loans and ease losses accounted for under ASC 310-30		1,105			11,710			-			2,693			15,508
Loan pools fully charged-off		(14)			(66)			-			(202)			(282)
Allowance de-recognition		(171)			(9,353)			-			(431)			(9,955)
Balance at end of year	$	2,682		$	23,452		$	-		$	4,922		$	31,056

Allowance for Acquired Eurobank Loan Losses

The changes in the allowance for loan and lease losses on acquired Eurobank loans for the years ended December 31, 2018, 2017 and 2016 were as follows:

	Year Ended December 31, 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 year	$	15,187		$	9,983		$	4		$	25,174
Provision for loan and lease losses, net		1,806			761			-			2,567
Allowance de-recognition		(1,611)			(1,159)			-			(2,770)
Balance at end of year	$	15,382		$	9,585		$	4		$	24,971

	Year Ended December 31, 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 year	$	11,947		$	9,328		$	6		$	21,281
Provision for acquired Eurobank loan and lease losses, net		5,045			1,680			-			6,725
Allowance de-recognition		(1,805)			(1,025)			(2)			(2,832)
Balance at end of year	$	15,187		$	9,983		$	4		$	25,174
	Year Ended December 31, 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 year	$	22,570		$	67,365		$	243		$	90,178
Provision (recapture) for acquired Eurobank loan and lease losses, net		1,080			1,183			(8)			2,255
FDIC shared-loss portion of provision for covered loan and lease losses, net		3,391			-			-			3,391
Loan pools fully charged-off		-			(134)			-			(134)
Allowance de-recognition		(15,094)			(59,086)			(229)			(74,409)
Balance at end of year	$	11,947		$	9,328		$	6		$	21,281

X

- Definition

The entire disclosure for allowance for credit losses.

+ References

Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 310
-URI http://asc.fasb.org/topic&trid=2196771

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- References

No definition available.

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