ALLOWANCE FOR CREDIT LOSSES

3 Months Ended

Mar. 31, 2023

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” included in OFG’s 2022 Form 10-K.

At March 31, 2023, 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 use a higher probability level in the moderate recessionary scenario. In addition, the ACL at March 31, 2023 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.

As of March 31, 2023, the allowance for credit losses decreased by $789 thousand when compared to December 31, 2022. The provision for credit losses for the quarter ended March 31, 2023 reflected a provision of $6.1 million related to the growth in loan balances and a provision of $4.1 million related to commercial-specific loan reserves. The increases to the provision were partially offset by releases of $619 thousand associated with qualitative adjustment due to improvement in the performance of the portfolios and in Puerto Rico’s labor market and $293 thousand for changes in the economic and loss rate models.

The net charge-offs for the quarter ended March 31, 2023, amounted to $10.1 million, an increase of $9.5 million when compared to the same period of 2022. The increase is mainly due to increases of $5.3 million in commercial loans, $2.7 million in consumer loans, and $1.6 million in mortgage loans, offset by a decrease of $109 thousand in auto loans and leases.

The following tables present the activity in OFG’s allowance for credit losses by segment for quarters ended March 31, 2023 and 2022:


	Quarter Ended March 31, 2023
	Commercial		Mortgage		Consumer		Auto and Leasing		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	39,158	$	9,571	$	23,264	$	69,848	$	141,841
(Recapture of) provision for credit losses	(335)		(503)		5,974		2,896		8,032
Charge-offs	(1,375)		(201)		(5,440)		(9,479)		(16,495)
Recoveries	326		216		866		6,599		8,007
Balance at end of period	$	37,774	$	9,083	$	24,664	$	69,864	$	141,385
PCD:
Balance at beginning of period	$	1,388	$	9,359	$	14	$	71	$	10,832
Provision for (recapture of) credit losses	1,920		(814)		200		(7)		1,299
Charge-offs	(2,104)		(75)		(213)		(87)		(2,479)
Recoveries	489		247		11		100		847
Balance at end of period	$	1,693	$	8,717	$	12	$	77	$	10,499
Total allowance for credit losses at end of period	$	39,467	$	17,800	$	24,676	$	69,941	$	151,884


	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