ALLOWANCE FOR CREDIT LOSSES

6 Months Ended

Jun. 30, 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 June 30, 2022, OFG used an economic probability weighted scenario approach consisting of the baseline and moderate recession scenarios, giving more weight to the baseline scenario. Except for the US loan segment that was updated to the same level of probability in both economic scenarios. In addition, the ACL at June 30, 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, which will put more pressure on inflation due to its disruption of oil, natural gas and other commodity markets.

As of June 30, 2022, the allowance for credit losses increased by $3.1 million when compared to December 31, 2021. The provision for credit losses for the six-month period ended June 30, 2022 reflected a provision of $9.1 million related to the growth in loan balances and a provision of $9.5 million related to commercial-specific loan reserves due to certain commercial loans placed in non-accrual status, offset by a $9.6 million release associated with qualitative adjustment due to improvement in the performance of the portfolios and in Puerto Rico’s labor market.

The net charge-offs for the six-month period ended June 30, 2022, amounted to $5.1 million, a decrease of $6.1 million compared to the same period of 2021. The decrease is mainly due to a reduction of $7.0 million in mortgage loans and $1.5 million in consumer loans, offset by an increase of $1.3 million in auto loans and leases, and $1.1 million in commercial loans.

The following tables present the activity in OFG’s allowance for credit losses by segment for the quarters and six-month periods ended June 30, 2022 and 2021:


	Quarter Ended June 30, 2022
	Commercial		Mortgage		Consumer		Auto and Leasing		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	37,097	$	14,952	$	21,100	$	64,195	$	137,344
Provision for (recapture of) credit losses	7,368		(3,122)		4,521		3,535		12,302
Charge-offs	(2,907)		(259)		(3,307)		(6,428)		(12,901)
Recoveries	456		335		795		5,565		7,151
Balance at end of period	$	42,014	$	11,906	$	23,109	$	66,867	$	143,896
PCD:
Balance at beginning of period	$	3,622	$	15,881	$	31	$	197	$	19,731
Recapture of provision for credit losses	(1,444)		(4,183)		(16)		(152)		(5,795)
Charge-offs	—		(183)		(8)		(75)		(266)
Recoveries	249		1,026		13		185		1,473
Balance at end of period	$	2,427	$	12,541	$	20	$	155	$	15,143
Total allowance for credit losses at end of period	$	44,441	$	24,447	$	23,129	$	67,022	$	159,039


	Six-Month Period Ended June 30, 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	12,555		(5,540)		8,484		5,366		20,865
Charge-offs	(3,451)		(262)		(5,966)		(14,318)		(23,997)
Recoveries	648		2,409		1,450		10,456		14,963
Balance at end of period	$	42,014	$	11,906	$	23,109	$	66,867	$	143,896
PCD:
Balance at beginning of period	$	4,508	$	19,018	$	34	$	312	$	23,872
Recapture of provision for credit losses	(5,319)		(7,031)		(3)		(290)		(12,643)
Charge-offs	(34)		(1,317)		(47)		(189)		(1,587)
Recoveries	3,272		1,871		36		322		5,501
Balance at end of period	$	2,427	$	12,541	$	20	$	155	$	15,143
Total allowance for credit losses at end of period	$	44,441	$	24,447	$	23,129	$	67,022	$	159,039

Total commercial charge-offs for the quarter and six-month period ended June 30, 2022 includes a $2.5 million charge-off from a previously reserved commercial loan sold during the quarter ended June 30, 2022.

Total recoveries for the six-month period ended June 30, 2022 includes a $2.8 million recovery from a Puerto Rico government public corporation PCD commercial loan repaid during the first quarter of 2022 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 June 30, 2021
	Commercial		Mortgage		Consumer		Auto and Leasing		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	47,683	$	17,035	$	21,191	$	71,069	$	156,978

(Recapture of) provision for credit losses	(4,503)		(592)		74		(2,538)		(7,559)
Charge-offs	(653)		(268)		(2,897)		(5,170)		(8,988)
Recoveries	996		193		697		5,997		7,883
Balance at end of period	$	43,523	$	16,368	$	19,065	$	69,358	$	148,314
PCD:
Balance at beginning of period	$	14,306	$	29,939	$	52	$	698	$	44,995

(Recapture of) provision for credit losses	(1,974)		1,727		(47)		(285)		(579)
Charge-offs	(6)		(1,742)		—		(226)		(1,974)
Recoveries	430		184		33		314		961
Balance at end of period	$	12,756	$	30,108	$	38	$	501	$	43,403
Total allowance for credit losses at end of period	$	56,279	$	46,476	$	19,103	$	69,859	$	191,717

	Six-Month Period Ended June 30, 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

(Recapture of) provision for credit losses	(2,961)		(3,071)		(85)		1,501		(4,616)
Charge-offs	(720)		(1,056)		(7,366)		(14,253)		(23,395)
Recoveries	1,425		808		1,263		11,814		15,310
Balance at end of period	$	43,523	$	16,368	$	19,065	$	69,358	$	148,314
PCD:
Balance at beginning of period	$	16,405	$	26,389	$	57	$	943	$	43,794

(Recapture of) provision for credit losses	(4,466)		7,721		(52)		(457)		2,746
Charge-offs	(50)		(4,332)		(22)		(682)		(5,086)
Recoveries	867		330		55		697		1,949
Balance at end of period	$	12,756	$	30,108	$	38	$	501	$	43,403
Total allowance for credit losses at end of period	$	56,279	$	46,476	$	19,103	$	69,859	$	191,717