ALLOWANCE FOR CREDIT LOSSES

6 Months Ended

Jun. 30, 2023

OFG measures its allowance for credit losses 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 June 30, 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 June 30, 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 collateral changes in real estate 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 June 30, 2023, the allowance for credit losses increased by $7.3 million when compared to December 31, 2022. The provision for credit losses for the six month period ended June 30, 2023 reflected a provision of $12.5 million related to the growth in loan balances, a provision of $13.5 million related to commercial-specific loan reserves, mainly in the US commercial loan portfolio, and $1.0 million associated with qualitative adjustments. The increases to the provision were partially offset by releases of $3.1 million for changes in the economic and loss rate models.

The net charge-offs for the six month period ended June 30, 2023, amounted to $16.7 million, an increase of $11.6 million when compared to the same period of 2022. The increase is mainly due to increases of $6.0 million in commercial loans, $3.8 million in consumer loans, and $2.1 million in mortgage loans, offset by a decrease of $392 thousand in auto loans and leases.

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, 2023 and 2022:


	Quarter Ended June 30, 2023
	Commercial		Mortgage		Consumer		Auto and Leasing		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	37,774	$	9,083	$	24,664	$	69,864	$	141,385
Provision for (recapture of) credit losses	14,089		(556)		4,517		(1,800)		16,250
Charge-offs	(3,496)		(191)		(5,518)		(9,169)		(18,374)
Recoveries	237		334		2,003		8,332		10,906
Balance at end of period	$	48,604	$	8,670	$	25,666	$	67,227	$	150,167
PCD:
Balance at beginning of period	$	1,693	$	8,717	$	12	$	77	$	10,499
(Recapture of) provision for credit losses	(604)		(679)		78		(401)		(1,606)
Charge-offs	—		(1)		(124)		(34)		(159)
Recoveries	319		260		42		401		1,022
Balance at end of period	$	1,408	$	8,297	$	8	$	43	$	9,756
Total allowance for credit losses at end of period	$	50,012	$	16,967	$	25,674	$	67,270	$	159,923


	Six Month Period Ended June 30, 2023
	Commercial		Mortgage		Consumer		Auto loans and leases		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	39,158	$	9,571	$	23,264	$	69,848	$	141,841
Provision for (recapture of) credit losses	13,754		(1,059)		10,491		1,096		24,282
Charge-offs	(4,871)		(392)		(10,958)		(18,648)		(34,869)
Recoveries	563		550		2,869		14,931		18,913
Balance at end of period	$	48,604	$	8,670	$	25,666	$	67,227	$	150,167
PCD:
Balance at beginning of period	$	1,388	$	9,359	$	14	$	71	$	10,832
Provision for (recapture of) credit losses	1,316		(1,493)		278		(408)		(307)
Charge-offs	(2,104)		(76)		(337)		(121)		(2,638)
Recoveries	808		507		53		501		1,869
Balance at end of period	$	1,408	$	8,297	$	8	$	43	$	9,756
Total allowance for credit losses at end of period	$	50,012	$	16,967	$	25,674	$	67,270	$	159,923


	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 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 loans and leases		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 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