ALLOWANCE FOR CREDIT LOSSES

9 Months Ended

Sep. 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 September 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 uses a higher probability level in the moderate recessionary scenario. In addition, the ACL at September 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 auto loan portfolio credit trends and 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 September 30, 2023, the allowance for credit losses increased by $4.9 million when compared to December 31, 2022. The provision for credit losses for the nine-month period ended September 30, 2023 reflected a provision of $23.8 million related to the growth in loan balances, a provision of $14.7 million related to commercial-specific loan reserves, mainly in the US commercial loan portfolio, and $5.1 million associated with qualitative adjustments mostly to the auto loan and US commercial loan portfolios. The increases to the provision were partially offset by releases of $3.2 million for changes in the economic and loss rate models.

The net charge-offs for the nine-month period ended September 30, 2023, amounted to $35.6 million, an increase of $19.1 million when compared to the same period of 2022. The increase is mainly due to increases of $8.3 million in commercial loans, $5.7 million in consumer loans, $2.4 million in mortgage loans and $2.7 million in auto loans. During nine-month period ended September 30, 2023, OFG charged-off $9.8 million for three US commercial loans and $906 thousand for a small portfolio of non-performing small business commercial loans that were transferred to the held for sale category at the end of the period; partially offset by a recovery of $3.7 million from the sale of older, fully charged off auto and 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, 2023 and 2022:


	Quarter Ended September 30, 2023
	Commercial		Mortgage		Consumer		Auto		Total
	(In thousands)
Non-PCD:
Balance at beginning of period	$	48,604	$	8,670	$	25,666	$	67,227	$	150,167
Provision for (recapture of) credit losses	1,103		(273)		6,026		9,804		16,660
Charge-offs	(8,254)		(218)		(5,894)		(10,458)		(24,824)
Recoveries	174		185		655		5,193		6,207
Balance at end of period	$	41,627	$	8,364	$	26,453	$	71,766	$	148,210
PCD:
Balance at beginning of period	$	1,408	$	8,297	$	8	$	43	$	9,756
Provision for (recapture of) credit losses	60		(226)		15		(67)		(218)
Charge-offs	(690)		(148)		(39)		(37)		(914)
Recoveries	494		80		23		98		695
Balance at end of period	$	1,272	$	8,003	$	7	$	37	$	9,319
Total allowance for credit losses at end of period	$	42,899	$	16,367	$	26,460	$	71,803	$	157,529


	Nine-Month Period Ended September 30, 2023
	Commercial		Mortgage		Consumer		Auto		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	14,857		(1,332)		16,517		10,900		40,942
Charge-offs	(13,125)		(610)		(16,852)		(29,106)		(59,693)
Recoveries	737		735		3,524		20,124		25,120
Balance at end of period	$	41,627	$	8,364	$	26,453	$	71,766	$	148,210
PCD:
Balance at beginning of period	$	1,388	$	9,359	$	14	$	71	$	10,832
Provision for (recapture of) credit losses	1,376		(1,719)		293		(475)		(525)
Charge-offs	(2,794)		(224)		(376)		(158)		(3,552)
Recoveries	1,302		587		76		599		2,564
Balance at end of period	$	1,272	$	8,003	$	7	$	37	$	9,319
Total allowance for credit losses at end of period	$	42,899	$	16,367	$	26,460	$	71,803	$	157,529


	Quarter Ended September 30, 2022
	Commercial		Mortgage		Consumer		Auto		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 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		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