ALLOWANCE FOR CREDIT LOSSES

9 Months Ended

Sep. 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 September 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 used the same level of probability in both economic scenarios. In addition, the ACL at September 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 the evolution of risk ratings applied to the commercial loans and consumer retail portfolios. There are still many unknown variables including the results of the government fiscal and monetary actions resulting from the effect of inflation and geopolitical tension from the military conflict between Ukraine and Russia. Qualitative reserves for the quarter ended September 30, 2022 also includes $6.9 million for anticipated Hurricane Fiona-related losses.

As of September 30, 2022, the allowance for credit losses decreased by $775 thousand when compared to December 31, 2021. The provision for credit losses for the nine-months period ended September 30, 2022 reflected a provision of $16.7 million related to the growth in loan balances, a provision of $8.9 million related to commercial-specific loan reserves due to certain commercial loans placed in non-accrual status, offset by a $8.6 million release associated with qualitative adjustment due to improvement in the performance of the portfolios and in Puerto Rico’s labor market, net of the $6.9 million provision for anticipated Hurricane Fiona-related losses, and a $1.6 million release for changes in the economic and loss rate models and other miscellaneous reserves.

The net charge-offs for the nine-months period ended September 30, 2022, amounted to $16.5 million, a decrease of $806 thousand compared to the same period of 2021. The decrease is mainly due to a reduction of $7.2 million in mortgage loans, offset by increases of $4.4 million in auto loans and leases, $1.4 million in commercial loans and a $593 thousand in consumer loans.

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


	Quarter Ended September 30, 2022
	Commercial		Mortgage		Consumer		Auto and Leasing		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	42,014	$	11,906	$	23,109	$	66,867	$	143,896
Provision for (recapture of) credit losses	3,108		(1,741)		4,555		4,325		10,247
Charge-offs	(6,485)		(14)		(4,163)		(7,964)		(18,626)
Recoveries	214		280		732		5,674		6,900
Balance at end of period	$	38,851	$	10,431	$	24,233	$	68,902	$	142,417
PCD:
Balance at beginning of period	$	2,427	$	12,541	$	20	$	155	$	15,143
(Recapture of) provision for credit losses	(786)		(1,735)		(40)		(216)		(2,777)
Charge-offs	(23)		(270)		(9)		(56)		(358)
Recoveries	268		191		47		231		737
Balance at end of period	$	1,886	$	10,727	$	18	$	114	$	12,745
Total allowance for credit losses at end of period	$	40,737	$	21,158	$	24,251	$	69,016	$	155,162


	Nine-Month Period Ended September 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	15,663		(7,281)		13,039		9,691		31,112
Charge-offs	(9,936)		(276)		(10,129)		(22,282)		(42,623)
Recoveries	862		2,689		2,182		16,130		21,863
Balance at end of period	$	38,851	$	10,431	$	24,233	$	68,902	$	142,417
PCD:
Balance at beginning of period	$	4,508	$	19,018	$	34	$	312	$	23,872
Recapture of credit losses	(6,105)		(8,766)		(43)		(506)		(15,420)
Charge-offs	(57)		(1,587)		(56)		(245)		(1,945)
Recoveries	3,540		2,062		83		553		6,238
Balance at end of period	$	1,886	$	10,727	$	18	$	114	$	12,745
Total allowance for credit losses at end of period	$	40,737	$	21,158	$	24,251	$	69,016	$	155,162

Total commercial charge-offs for the quarter and nine-months period ended September 30, 2022 included $6.6 million charge-offs, of which $5.5 million were previously reserved for two commercial loans, one of which was subsequently sold on October 7, 2022. In addition, total commercial charge-offs for the nine-months period ended September 30, 2022 also included a $2.5 million charge-off from a previously reserved commercial loan sold during the second quarter of 2022.

Total recoveries for the nine-months period ended September 30, 2022 included 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 September 30, 2021
	Commercial		Mortgage		Consumer		Auto and Leasing		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	43,523	$	16,368	$	19,065	$	69,358	$	148,314

(Recapture of) provision for credit losses	(3,323)		240		259		676		(2,148)
Charge-offs	(7,518)		(160)		(2,370)		(4,989)		(15,037)
Recoveries	558		419		894		5,874		7,745
Balance at end of period	$	33,240	$	16,867	$	17,848	$	70,919	$	138,874
PCD:
Balance at beginning of period	$	12,756	$	30,108	$	38	$	501	$	43,403

(Recapture of) provision for credit losses	(2,838)		649		(220)		(237)		(2,646)
Charge-offs	(68)		(1,008)		—		(124)		(1,200)
Recoveries	1,316		641		219		265		2,441
Balance at end of period	$	11,166	$	30,390	$	37	$	405	$	41,998
Total allowance for credit losses at end of period	$	44,406	$	47,257	$	17,885	$	71,324	$	180,872

	Nine-Month Period Ended September 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	(6,284)		(2,831)		174		2,177		(6,764)
Charge-offs	(8,238)		(1,216)		(9,736)		(19,242)		(38,432)
Recoveries	1,983		1,227		2,157		17,688		23,055
Balance at end of period	$	33,240	$	16,867	$	17,848	$	70,919	$	138,874
PCD:
Balance at beginning of period	$	16,405	$	26,389	$	57	$	943	$	43,794

(Recapture of) provision for credit losses	(7,304)		8,370		(272)		(694)		100
Charge-offs	(118)		(5,340)		(22)		(806)		(6,286)
Recoveries	2,183		971		274		962		4,390
Balance at end of period	$	11,166	$	30,390	$	37	$	405	$	41,998
Total allowance for credit losses at end of period	$	44,406	$	47,257	$	17,885	$	71,324	$	180,872

Total commercial charge-offs for the nine-months period ended September 30, 2021 included a $6.5 million charge-off for a previously reserved amount.