ALLOWANCE FOR CREDIT LOSSES

12 Months Ended

Dec. 31, 2023

OFG measures its ACL 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 weight 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 ACL, see “Note 1 – Summary of Significant Accounting Policies”.

At December 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 uses a higher probability level in the moderate recessionary scenario. In addition, the ACL at December 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 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 December 31, 2023, the allowance for credit losses increased by $8.4 million when compared to December 31, 2022. The provision for credit losses for 2023 reflected a provision of $42.6 million related to the growth in loan balances, a provision of $13.1 million related to commercial-specific loan reserves, mainly in the US commercial loan portfolio, and $4.8 million associated with qualitative adjustments mostly to the auto loan and US commercial loan portfolios.

The net charge-offs for 2023, amounted to $51.8 million, an increase of $24.2 million when compared to 2022. The increase is mainly due to increases of $8.0 million in consumer loans, $7.0 million in auto loans, $6.0 million in commercial loans and $3.2 million in mortgage loans. During 2023, OFG charged-off $10.5 million of 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 and sold subsequently; partially offset by a recovery of $3.7 million from the sale of older, previously fully charged-off auto and consumer loans.

The following tables present the activity in OFG’s allowance for credit losses by segment for 2023, 2022 and 2021:




















	Year Ended December 31, 2023
	Commercial		Mortgage		Consumer		Auto		Total
	(In thousands)
Non-PCD:
Balance at beginning of year	$	39,158	$	9,571	$	23,264	$	69,848	$	141,841
Provision for (recapture of) credit losses	18,200		(2,031)		23,302		22,294		61,765
Charge-offs	(14,191)		(759)		(23,655)		(43,764)		(82,369)
Recoveries	874		1,217		4,175		25,107		31,373
Balance at end of year	$	44,041	$	7,998	$	27,086	$	73,485	$	152,610
PCD:
Balance at beginning of year	$	1,388	$	9,359	$	14	$	71	$	10,832
Provision for (recapture of) credit losses	901		(2,389)		518		(518)		(1,488)
Charge-offs	(2,794)		(317)		(621)		(170)		(3,902)
Recoveries	1,618		698		96		642		3,054
Balance at end of year	$	1,113	$	7,351	$	7	$	25	$	8,496
Total allowance for credit losses at end of year	$	45,154	$	15,349	$	27,093	$	73,510	$	161,106





















	Year Ended December 31, 2022
	Commercial		Mortgage		Consumer		Auto		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 of) provision for 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 $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		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 ACL by $20.4 million.