ALLOWANCE FOR CREDIT LOSSES

12 Months Ended

Dec. 31, 2022

On January 1, 2020, OFG adopted the 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 ACL is estimated using quantitative methods that consider a variety of factors such as historical loss experience, the current credit quality of the portfolio, and 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. For more information on OFG’s credit loss accounting policies, including the allowance for credit losses, see Note 1 - Summary of Significant Accounting Policies.

At December 31, 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 December 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 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’s fiscal and monetary actions resulting from the effect of inflation and geopolitical tension from the military conflict between Ukraine and Russia.

As of December 31, 2022, the allowance for credit losses decreased by $3.3 million when compared to December 31, 2021. The provision for credit losses for 2022 reflected a provision of $25.9 million related to the growth in loan balances, a provision of $11.8 million related to commercial-specific loan reserves due to certain commercial loans placed in non-accrual status, and a provision of $1.9 million for changes in the economic and loss rate models, offset by a $15.2 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 2022, amounted to $27.7 million, a decrease of $22.1 million when compared to 2021. The decrease is mainly due to reductions of $27.1 million in mortgage loans and $7.3 million in commercial loans, offset by increases of $8.9 million in auto loans and leases, and $3.4 million in consumer loans. During 2021, OFG recognized $30.1 million net charge-offs related to the decision to sell $65.5 million past due loans, which were subsequently sold during 2022.

The following tables present the activity in OFG’s allowance for credit losses by segment for 2022, 2021 and 2020:




















	Year Ended December 31, 2022
	Commercial		Mortgage		Consumer		Auto loans and leases		Total
	(In thousands)
Non-PCD:
Balance at beginning of year	$	32,262	$	15,299	$	19,141	$	65,363	$	132,065
Provision for (recapture of) credit losses	19,076		(8,758)		16,084		16,016		42,418
Charge-offs	(13,380)		(284)		(15,198)		(32,662)		(61,524)
Recoveries	1,200		3,314		3,237		21,131		28,882
Balance at end of year	$	39,158	$	9,571	$	23,264	$	69,848	$	141,841
PCD:
Balance at beginning of year	$	4,508	$	19,018	$	34	$	312	$	23,872
(Recapture) provision of credit losses	(6,855)		(10,629)		62		(588)		(18,010)
Charge-offs	(69)		(1,695)		(176)		(310)		(2,250)
Recoveries	3,804		2,665		94		657		7,220
Balance at end of year	$	1,388	$	9,359	$	14	$	71	$	10,832
Total allowance for credit losses at end of year	$	40,546	$	18,930	$	23,278	$	69,919	$	152,673

Total commercial charge-offs for 2022 included $12.3 million charge-offs that were previously reserved for four commercial loans, two of them were sold during 2022.

Total recoveries for 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.





















	Year Ended December 31, 2021
	Commercial		Mortgage		Consumer		Auto loans and leases		Total
	(In thousands)
Non-PCD:
Balance at beginning of year	$	45,779	$	19,687	$	25,253	$	70,296	$	161,015

(Recapture of) provision for credit losses	(7,130)		(242)		2,868		(2,373)		(6,877)
Charge-offs	(8,788)		(5,789)		(11,880)		(26,530)		(52,987)
Recoveries	2,401		1,643		2,900		23,970		30,914
Balance at end of year	$	32,262	$	15,299	$	19,141	$	65,363	$	132,065
PCD:
Balance at beginning of year	$	16,405	$	26,389	$	57	$	943	$	43,794

(Recapture of) provision for credit losses	(2,585)		11,556		(317)		(894)		7,760
Charge-offs	(12,241)		(20,350)		(22)		(946)		(33,559)
Recoveries	2,929		1,423		316		1,209		5,877
Balance at end of year	$	4,508	$	19,018	$	34	$	312	$	23,872
Total allowance for credit losses at end of year	$	36,770	$	34,317	$	19,175	$	65,675	$	155,937

As a result of the decision to sell mortgage and commercial loans during 2021, OFG recognized $30.1 million in net charge-offs and an additional provision of $9.7 million, decreasing the allowance for credit losses by $20.4 million.


	Year Ended December 31, 2020
	Commercial		Mortgage		Consumer		Auto loans and leases		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

The allowance for credit losses for 2020 included a $39.9 million provision to incorporate changes in the macro-economic scenario and qualitative adjustments as a result of the Covid-19 pandemic.