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Allowance for Credit Losses

9 Months Ended

Sep. 30, 2020

Allowance for Credit Losses [Abstract]

NOTE 6 – ALLOWANCE FOR CREDIT LOSSES

On January 1, 2020, Oriental adopted the new accounting standard that requires the measurement of the allowance for credit losses to be based on management’s best estimate of lifetime expected credit losses inherent in Oriental’s relevant financial assets. Upon adoption of the new accounting standard, Oriental recorded a $89.7 million increase in the allowance for credit losses on January 1, 2020. For Non-PCD loans, which represents 70% of the total loan portfolio, a $39.2 million allowance was recorded. For PCD loans, which represents 30% of the total loan portfolio, a $50.5 million adjustment was made through the allowance and loan balances with no impact in capital.

The allowance for credit losses is estimated using quantitative methods that consider a variety of factors such as historical loss experience, the current credit quality of the portfolio as well as an economic outlook over the life of the loan. Also included in the ACL are qualitative reserves to cover losses that are expected but, in Oriental's assessment, may not be adequately represented in the quantitative methods or the economic assumptions. In its loss forecasting framework, Oriental incorporates forward-looking information through the use of macroeconomic scenarios applied over the forecasted life of the assets. The scenarios that are chosen each quarter and the amount of weighting given to each scenario depend on a variety of factors including recent economic events, leading economic indicators, views of internal as well as third-party economists and industry trends. For more information on Oriental's credit loss accounting policies, including the allowance for credit losses, see Note 1 – Summary of Significant Accounting Policies.

As of January 1, 2020, Oriental used a probability weighted scenario approach as it is expected that Puerto Rico’s economic forecast should be close to an average between the baseline, which represents the middle of all projections, and a moderate recession, which places itself in the downside alternative. During the quarter ended March 31, 2020, there was a significant change in the economic outlook impacting the allowance for credit losses, with key economic factors such as the unemployment rate and gross national product projected to deteriorate sharply driven by the impact of COVID-19. In response to these changes, Oriental reassessed the selection and probability weightings as well as analyzed various scenarios with immediate deterioration in economic variables followed by different recovery assumptions as part of the process for setting the allowance for credit loss reserve. Based on these analyses, Oriental is now effectively fully weighted to a moderate recessionary economic environment within our forecast period. In addition, the allowance for credit losses at September 30, 2020 continues to include qualitative reserves for certain segments that Oriental views as higher risk that may not be fully recognized through its quantitative models such as commercial loans concentrated in certain industries. As a result of these developments, Oriental increased the provision for credit losses in the nine-month period ended September 30, 2020 by $39.1 million. There are still many unknowns including the duration of the impact of COVID-19 on the economy and the results of the government fiscal and monetary actions along with recently implemented payment deferral programs.

Loans acquired in the Scotiabank PR & USVI Acquisition were recognized at fair value as of December 31, 2019, which included the impact of expected credit losses, and therefore, no allowance for credit losses was recorded at acquisition date.

The following table presents the activity in our allowance for credit losses by segment for the periods indicated:

	Quarter Ended September 30, 2020
	Commercial		Mortgage		Consumer		Auto		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	43,011	$	19,973	$	31,954	$	56,569	$	151,507
Provision for credit losses		(1,771)		(564)		(378)		16,071		13,358
Charge-offs		(298)		(56)		(5,114)		(10,123)		(15,591)
Recoveries		253		269		663		5,950		7,135
Balance at end of period	$	41,195	$	19,622	$	27,125	$	68,467	$	156,409
PCD:
Balance at beginning of period	$	48,913	$	30,920	$	169	$	1,192	$	81,194
Provision for credit losses		(1,262)		1,077		-		9		(176)
Charge-offs		(293)		(1,677)		(60)		(474)		(2,504)
Recoveries		91		89		(1)		211		390
Balance at end of period	$	47,449	$	30,409	$	108	$	938	$	78,904
Total allowance for credit losses at end of period	$	88,644	$	50,031	$	27,233	$	69,405	$	235,313

	Nine-Month Period Ended September 30, 2020
	Commercial		Mortgage		Consumer		Auto		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	25,993	$	8,727	$	18,446	$	31,878	$	85,044
Impact of ASC 326 adoption		3,562		10,980		8,418		16,238		39,198
Provision for credit losses		13,799		47		13,827		43,261		70,934
Charge-offs		(4,566)		(659)		(15,316)		(36,476)		(57,017)
Recoveries		2,407		527		1,750		13,566		18,250
Balance at end of period	$	41,195	$	19,622	$	27,125	$	68,467	$	156,409
PCD:
Balance at beginning of period	$	8,893	$	21,655	$	-	$	947	$	31,495
Impact of ASC 326 adoption		42,143		7,830		181		368		50,522
Provision for credit losses		(1,303)		9,131		356		289		8,473
Charge-offs		(3,036)		(8,998)		(521)		(1,449)		(14,004)
Recoveries		752		791		92		783		2,418
Balance at end of period	$	47,449	$	30,409	$	108	$	938	$	78,904
Total allowance for credit losses at end of period	$	88,644	$	50,031	$	27,233	$	69,405	$	235,313

	Quarter Ended September 30, 2019
	Mortgage		Commercial		Consumer		Auto and Leasing		Total
	(In thousands)
Allowance for loan and lease losses, excluding loans accounted for under ASC 310-30:
Balance at beginning of period	$	15,361	$	29,265	$	17,448	$	29,563	$	91,637
Provision (recapture) for credit losses		8,836		1,324		3,181		10,087		23,428
Charge-offs		(16,299)		(8,421)		(5,316)		(12,383)		(42,419)
Recoveries		493		175		1,463		5,802		7,933
Balance at end of period	$	8,391	$	22,343	$	16,776	$	33,069	$	80,579
Allowance for loan and lease losses for acquired loans accounted for under ASC 310-30:
Balance at beginning of period	$	42,421	$	25,448	$	-	$	3,136	$	71,005
Provision (recapture) for credit losses		8,906		11,832		-		(396)		20,342
Allowance de-recognition		(17,060)		(72)		-		(451)		(17,583)
Balance at end of period	$	34,267	$	37,208	$	-	$	2,289	$	73,764
Total allowance for loan and lease losses at end of period	$	42,658	$	59,551	$	16,776	$	35,358	$	154,343

	Nine-Month Period Ended September 30, 2019
	Mortgage		Commercial		Consumer		Auto and Leasing		Total
	(In thousands)
Allowance for loan and lease losses, excluding loans accounted for under ASC 310-30:
Balance at beginning of period	$	19,783	$	30,348	$	17,476	$	29,643	$	97,250
Provision (recapture) for credit losses		5,002		3,225		12,277		23,171		43,675
Charge-offs		(17,490)		(11,733)		(15,148)		(34,567)		(78,938)
Recoveries		1,096		503		2,171		14,822		18,592
Balance at end of period	$	8,391	$	22,343	$	16,776	$	33,069	$	80,579
Allowance for loan and lease losses for acquired loans accounted for under ASC 310-30:
Balance at beginning of period	$	30,607	$	30,226	$	4	$	6,144	$	66,981
Provision (recapture) for credit losses		21,330		11,429		-		(2,710)		30,049
Allowance de-recognition		(17,670)		(4,447)		(4)		(1,145)		(23,266)
Balance at end of period	$	34,267	$	37,208	$	-	$	2,289	$	73,764
Total allowance for loan and lease losses at end of period	$	42,658	$	59,551	$	16,776	$	35,358	$	154,343

	December 31, 2019
	Mortgage		Commercial		Consumer		Auto and Leasing		Total
	(In thousands)
Allowance for loan and lease losses, excluding loans accounted for under ASC 310-30:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	6,874	$	8,217	$	-	$	-	$	15,091
Collectively evaluated for impairment		1,853		17,776		18,446		31,878		69,953
Total ending allowance balance	$	8,727	$	25,993	$	18,446	$	31,878	$	85,044
Loans:
Individually evaluated for impairment	$	71,196	$	61,128	$	-	$	-	$	132,324
Collectively evaluated for impairment		506,220		1,608,507		382,432		1,277,867		3,775,026
Total ending loan balance	$	577,416	$	1,669,635	$	382,432	$	1,277,867	$	3,907,350