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Allowance for Credit Losses

12 Months Ended

Dec. 31, 2020

Allowance for Credit Losses [Abstract]

NOTE 7 – 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 first quarter of 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, until the third quarter of 2020, Oriental was fully weighted to a moderate recessionary economic environment within the forecast period. For the fourth quarter, due to the recent trajectory of the virus and the expected federal funds from the fiscal relief package, our key economic indicators show improvements in comparison with previous quarters. As a result, Oriental used the weighted approach based on the Federal Package Relief's approval, which is consistent with the baseline scenario in contrast with the management view that the inoculation process will take longer in Puerto Rico. These risks suggest that middle ground between baseline and a moderate recession will be more likely to occur in the island’s near economic future. In addition, the allowance for credit losses at December 31, 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 year ended December 31, 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 tables present the activity in Oriental’s allowance for credit losses by segment for the years ended December 31, 2020, 2019 and 2018:

	Year Ended December 31, 2020
	Commercial		Mortgage		Consumer		Auto		Total
	(In thousands)
Non-PCD:
Balance at beginning of year	$	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		18,462		258		16,579		51,233		86,532
Charge-offs		(4,979)		(884)		(21,772)		(48,547)		(76,182)
Recoveries		2,741		606		3,582		19,494		26,423
Balance at end of year	$	45,779	$	19,687	$	25,253	$	70,296	$	161,015
PCD:
Balance at beginning of year	$	8,893	$	21,655	$	-	$	947	$	31,495
Impact of ASC 326 adoption		42,143		7,830		181		368		50,522
Provision for credit losses		480		6,392		126		187		7,185
Charge-offs		(36,097)		(10,342)		(542)		(2,023)		(49,004)
Recoveries		986		854		292		1,464		3,596
Balance at end of year	$	16,405	$	26,389	$	57	$	943	$	43,794
Total allowance for credit losses at end of year	$	62,184	$	46,076	$	25,310	$	71,239	$	204,809

	Year ended 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:
Balance at beginning of year	$	19,783	$	30,348	$	17,476	$	29,643	$	97,250
Provision (recapture) for credit losses		5,975		6,731		19,038		30,789		62,533
Charge-offs		(18,564)		(12,196)		(20,435)		(47,498)		(98,693)
Recoveries		1,533		1,110		2,367		18,944		23,954
Balance at end of year	$	8,727	$	25,993	$	18,446	$	31,878	$	85,044
Allowance for loan and lease losses for acquired loans accounted for under ASC 310-30:
Balance at beginning of year	$	30,607	$	30,226	$	4	$	6,144	$	66,981
Provision (recapture) for credit losses		23,703		13,484		-		(2,928)		34,259
Allowance de-recognition		(32,655)		(34,817)		(4)		(2,269)		(69,745)
Balance at end of year	$	21,655	$	8,893	$	-	$	947	$	31,495
Total allowance for loan and lease losses at end of year	$	30,382	$	34,886	$	18,446	$	32,825	$	116,539

	Year Ended December 31, 2018
	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 year	$	20,439	$	30,300	$	19,679	$	26,162	$	96,580
Provision (recapture) for credit losses		3,594		6,159		15,648		26,363		51,764
Charge-offs		(5,297)		(6,788)		(20,088)		(43,057)		(75,230)
Recoveries		1,047		677		2,237		20,175		24,136
Balance at end of year	$	19,783	$	30,348	$	17,476	$	29,643	$	97,250
Allowance for loan and lease losses for acquired loans accounted for under ASC 310-30:
Balance at beginning of year	$	29,272	$	33,674	$	22	$	7,961	$	70,929
Provision (recapture) for credit losses		3,137		2,121		(18)		(887)		4,353
Allowance de-recognition		(1,802)		(5,569)		-		(930)		(8,301)
Balance at end of year	$	30,607	$	30,226	$	4	$	6,144	$	66,981
Total allowance for loan and lease losses at end of year	$	50,390	$	60,574	$	17,480	$	35,787	$	164,231

The following table presents the recorded investment, excluding loans accounted for under ASC 310-30, by segment for the year ended December 31, 2019:

	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