ALLOWANCE FOR CREDIT LOSSES

3 Months Ended

Mar. 31, 2022

On January 1, 2020, OFG 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 OFG’s relevant financial assets.

The allowance for credit losses (“ACL”) 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 OFG’s assessment, may not be adequately represented in the quantitative methods or the economic assumptions. In its loss forecasting framework, OFG 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.

At March 31, 2022, OFG used an economic probability weighted scenario approach which consist of the baseline and moderate recession scenarios, giving more weight to the baseline scenario. In addition, the ACL at March 31, 2022 continues to include qualitative reserves for certain segments that OFG views as higher risk that may not be fully recognized through its quantitative models such as commercial loans concentrated in certain industries and consumer retail portfolios. 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 resulting from the effect of inflation. Also, geopolitical tension resulted from the military conflict between Ukraine and Russia will put more pressure on inflation due to disruption to oil, natural gas and other commodity markets.

As of March 31, 2022, the allowance for credit losses increased by $1.1 million when compared to December 31, 2021. The provision for credit losses for the quarter ended March 31, 2022 includes a provision of $4.0 million related to growth in loan balances, an increase of $4.2 million related to a commercial loan previously placed in non-accrual status, and a decrease of $5.7 million associated with qualitative adjustment due to improvement in the performance of the portfolios and in the labor market of the island. The provision for credit losses for the quarter ended March 31, 2021 included a $3.7 million release of Covid-19-related loan reserves and a $3.5 million provision for a commercial loan in workout prior to the pandemic.

The following tables present the activity in OFG’s allowance for credit losses by segment for the quarters ended March 31, 2022 and 2021:


	Quarter Ended March 31, 2022
	Commercial		Mortgage		Consumer		Auto and Leasing		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	32,262	$	15,299	$	19,141	$	65,363	$	132,065
Provision for (recapture of) credit losses	5,187		(2,418)		3,963		1,831		8,563
Charge-offs	(544)		(3)		(2,659)		(7,890)		(11,096)
Recoveries	192		2,074		655		4,891		7,812
Balance at end of period	$	37,097	$	14,952	$	21,100	$	64,195	$	137,344
PCD:
Balance at beginning of period	$	4,508	$	19,018	$	34	$	312	$	23,872
(Recapture of) provision for credit losses	(3,875)		(2,848)		13		(138)		(6,848)
Charge-offs	(34)		(1,134)		(39)		(114)		(1,321)
Recoveries	3,023		845		23		137		4,028
Balance at end of period	$	3,622	$	15,881	$	31	$	197	$	19,731
Total allowance for credit losses at end of period	$	40,719	$	30,833	$	21,131	$	64,392	$	157,075

Total recoveries for the first quarter of 2022 includes a $2.8 million recovery from a Puerto Rico government public corporation acquired PCD commercial loan repaid during the quarter and $1.1 million recoveries associated with the final

settlement of the past due mortgage loans transferred to held for sale during the fourth quarter of 2021 and subsequently sold during the first quarter of 2022.


	Quarter Ended March 31, 2021
	Commercial		Mortgage		Consumer		Auto and Leasing		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	45,779	$	19,687	$	25,253	$	70,296	$	161,015

Provision for (recapture of) credit losses	1,542		(2,480)		(158)		4,039		2,943
Charge-offs	(68)		(787)		(4,469)		(9,083)		(14,407)
Recoveries	430		615		565		5,817		7,427
Balance at end of period	$	47,683	$	17,035	$	21,191	$	71,069	$	156,978
PCD:
Balance at beginning of period	$	16,405	$	26,389	$	57	$	943	$	43,794

(Recapture of) provision for credit losses	(2,492)		5,994		(4)		(172)		3,326
Charge-offs	(43)		(2,590)		(22)		(456)		(3,111)
Recoveries	436		146		21		383		986
Balance at end of period	$	14,306	$	29,939	$	52	$	698	$	44,995
Total allowance for credit losses at end of period	$	61,989	$	46,974	$	21,243	$	71,767	$	201,973