Allowance for Loan and Lease Losses

12 Months Ended

Dec. 31, 2017

Allowance for loan and lease losses [Abstract]

NOTE 7 – ALLOWANCE FOR LOAN AND LEASE LOSSES

The composition of Oriental’s allowance for loan and lease losses at December 31, 2017 and 2016 was as follows:

	December 31,
	2017		2016
	(In thousands)
Allowance for loans and lease losses:
Originated and other loans and leases held for investment:
Mortgage	$	20,439	$	17,344
Commercial		30,258		8,995
Consumer		16,454		13,067
Auto and leasing		25,567		19,463
Unallocated		-		431
Total allowance for originated and other loans and lease losses		92,718		59,300

Acquired BBVAPR loans:
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Commercial		42		169
Consumer		3,225		3,028
Auto		595		1,103
		3,862		4,300
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage		14,085		2,682
Commercial		23,691		23,452
Consumer		18		-
Auto		7,961		4,922
		45,755		31,056
Total allowance for acquired BBVAPR loans and lease losses		49,617		35,356
Acquired Eurobank loans:
Loans secured by 1-4 family residential properties		15,187		11,947
Commercial		9,982		9,328
Consumer		5		6
Total allowance for acquired Eurobank loan and lease losses		25,174		21,281
Total allowance for loan and lease losses	$	167,509	$	115,937

Oriental maintains an allowance for loan and lease losses at a level that management considers adequate to provide for probable losses based upon an evaluation of known and inherent risks. Oriental’s allowance for loan and lease losses policy provides for a detailed quarterly analysis of probable losses. The analysis includes a review of historical loan loss experience, value of underlying collateral, current economic conditions, financial condition of borrowers and other pertinent factors. While management uses available information in estimating probable loan losses, future additions to the allowance may be required based on factors beyond Oriental’s control. We also maintain an allowance for loan losses on acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition.

As discussed in Note 2, during 2017, hurricanes Irma and Maria caused catastrophic damages throughout Puerto Rico. Although the effect of the hurricanes on Oriental's loan portfolio is difficult to predict at this time, management performed an evaluation of the loan portfolios in order to assess the impact on repayment sources and underlying collateral that could result in additional losses.

For the commercial portfolio, the framework for the analysis was based on our current ALLL methodology with additional considerations according to the estimated impact categorized as low, medium or high. From this impact assessment, additional reserve levels were estimated by increasing default probabilities (“PD”) and loss given default expectations (“LGD”) of each allowance segment.

As part of the process, Oriental contacted its clients to evaluate the impact of the hurricanes on their business operations and collateral. The impact was then categorized as follows: (i) low risk, for clients that had no business impact or relatively insignificant impact; (ii) medium risk, for clients that had a business impact on their primary or secondary sources of repayment, but had adequate cash flow to cover operations and to satisfy their obligations; or (iii) high risk, for clients that had potentially significant problems that affected primary, secondary and tertiary (collateral) sources of repayment. This criterion was used to model adjusted PDs and LGDs considering internal and external sources of information available to support our estimation process and output.

During the fourth quarter, Oriental performed an update of the initial estimate, taking into consideration the most recent available information gathered through additional visits and interviews with clients and the economic environment in Puerto Rico.

For the retail portfolios, mortgage, consumer and auto, the assumptions established in the initial estimate were based on the historical losses of each ALLL segment and then further adjusted based on parameters used as key risk indicators, such as the industry of employment for all portfolios and the location of the collateral for mortgage loans. During the fourth quarter of 2017, Oriental performed additional procedures to evaluate the reasonability of the initial estimate based on the payment experience % of borrowers for which the deferral period expired. The analysis took into consideration historical payment behavior and loss experience of borrowers (PDs and LGDs) of each portfolio segment to develop a range of estimated potential losses. Management understands that this approach is reasonable given the lack of historical information related to the behavior of local borrowers in such an unprecedented event. The amount used in the analysis represents the average of potential outcomes of expected losses.

The documentation for the assessments considers all information available at the moment. Oriental will continue to assess the impact to our customers and our businesses as a result of the hurricanes and refine our estimates as more information becomes available.

Based on the analysis above and in accordance with ASC 450-20-25-2, we have increased our provision for loan losses during 2017 for $32.4 million. The increase in the allowance corresponding to our originated loan portfolio was $17.5 million: $3.8 million in mortgage loans, $7.3 million in commercial loans, $1.7 million in consumer loans, and $4.7 million in auto loans. The increase in the allowance corresponding to our acquired loan portfolio was $14.9 million: $6.7 million in mortgage loans, $7.9 million in commercial loans, and $0.3 million in auto loans.

The documentation for the assessments considers all information available at the moment; gathered through visits or interviews with our clients, inspections of collaterals, identification of most affected areas and industries. Oriental will continue to assess the impact to our customers and our businesses as a result of the hurricanes and refine our estimates as more information becomes available.

As part of Oriental’s continuous enhancement to the allowance for loan and lease losses methodology, and taking into consideration the effect of the hurricanes, during 2017 the following assumptions were reviewed:

An assessment of the look-back period and historical loss factor was performed for all portfolio segments. The analysis was based on the trends observed and their relation with the economic cycle as of the period of the analysis. As a result of the assessment, the commercial portfolio look-back period was maintained at 36 months. Also, for the auto, leasing and consumer portfolios, a look-back period of 24 months was maintained. For the residential mortgages portfolio a 12-month look-back period was maintained as management concluded that, given the charge off evolution, a shorter period of losses is more representative of the recent trends and more accurate in predicting future losses.

During the fourth quarter of 2017, an assessment of environmental factors was performed for commercial, auto, and consumer portfolios. As a result, the environmental factors continue to reflect our assessment of their impact to our portfolio, taking into consideration the current evolution of the portfolios and expected impact, due to recent economic developments, changes in values of collateral and delinquencies, among others.

During the fourth quarter of 2017, the loss realization period was revised to 2.09 years from 2.10 in 2016 for commercial real estate portfolio, other portfolios remained at one year.

These changes in the allowance for loan and lease losses are considered a change in accounting estimate as per ASC 250-10 provisions, where adjustments are made prospectively.

Allowance for Originated and Other Loan and Lease Losses Held for Investment

The following tables presents the activity in our allowance for loan and lease losses and the related recorded investment of the originated and other loans held for investment portfolio by segment for the periods indicated:

	Year Ended December 31, 2017
	Mortgage		Commercial		Consumer		Auto and Leasing		Unallocated		Total
	(In thousands)
Allowance for loan and lease losses for originated and other loans:
Balance at beginning of year	$	17,344	$	8,995	$	13,067	$	19,463	$	431	$	59,300
Charge-offs		(6,623)		(7,684)		(13,641)		(33,908)		-		(61,856)
Recoveries		585		1,281		1,209		12,314		-		15,389
Provision (recapture) for loan and lease losses		9,133		27,666		15,819		27,698		(431)		79,885
Balance at end of year	$	20,439	$	30,258	$	16,454	$	25,567	$	-	$	92,718

	Year Ended December 31, 2016
	Mortgage		Commercial		Consumer		Auto and Leasing		Unallocated		Total
	(In thousands)
Allowance for loan and lease losses for originated and other loans:
Balance at beginning of year	$	18,352	$	64,791	$	11,197	$	18,261	$	25	$	112,626
Charge-offs		(6,767)		(62,445)		(11,554)		(31,731)		-		(112,497)
Recoveries		330		460		452		12,871		-		14,113
Provision (recapture) for loan and lease losses		5,429		6,189		12,972		20,062		406		45,058
Balance at end of year	$	17,344	$	8,995	$	13,067	$	19,463	$	431	$	59,300


	Year Ended December 31, 2015
	Mortgage		Commercial		Consumer		Auto and Leasing		Unallocated		Total
	(In thousands)
Allowance for loan and lease losses for originated and other loans:
Balance at beginning of year	$	19,679	$	8,432	$	9,072	$	14,255	$	1	$	51,439
Charge-offs		(5,397)		(5,546)		(8,683)		(33,375)		-		(53,001)
Recoveries		391		432		871		13,158		-		14,852
Provision (recapture) for loan and lease losses		3,679		61,473		9,937		24,223		24		99,336
Balance at end of year	$	18,352	$	64,791	$	11,197	$	18,261	$	25	$	112,626

	December 31, 2017
	Mortgage		Commercial		Consumer		Auto and Leasing		Unallocated		Total
	(In thousands)
Allowance for loan and lease losses on originated and other loans:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	9,121	$	10,573	$	-	$	-	$	-	$	19,694
Collectively evaluated for impairment		11,318		19,685		16,454		25,567		-		73,024
Total ending allowance balance	$	20,439	$	30,258	$	16,454	$	25,567	$	-	$	92,718
Loans:
Individually evaluated for impairment	$	85,403	$	71,538	$	-	$	-	$	-	$	156,941
Collectively evaluated for impairment		598,204		1,235,723		330,039		883,985		-		3,047,951
Total ending loan balance	$	683,607	$	1,307,261	$	330,039	$	883,985	$	-	$	3,204,892

	December 31, 2016
	Mortgage		Commercial		Consumer		Auto and Leasing		Unallocated		Total
	(In thousands)
Allowance for loan and lease losses on originated and other loans:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	7,761	$	1,626	$	-	$	-	$	-	$	9,387
Collectively evaluated for impairment		9,583		7,369		13,067		19,463		431		49,913
Total ending allowance balance	$	17,344	$	8,995	$	13,067	$	19,463	$	431	$	59,300
Loans:
Individually evaluated for impairment	$	91,650	$	53,139	$	-	$	-	$	-	$	144,789
Collectively evaluated for impairment		629,844		1,224,727		290,515		756,395		-		2,901,481
Total ending loan balance	$	721,494	$	1,277,866	$	290,515	$	756,395	$	-	$	3,046,270

Allowance for BBVAPR Acquired Loan Losses

Loans accounted for under ASC 310-20 (Loans with revolving feature and/or acquired at a premium)

The following tables present the activity in our allowance for loan losses and related recorded investment of the associated loans in our BBVAPR acquired loan portfolio accounted for under ASC 310-20, for the periods indicated:

	Year Ended December 31, 2017
	Commercial		Consumer		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Balance at beginning of year	$	169	$	3,028	$	1,103	$	4,300
Charge-offs		(132)		(3,048)		(976)		(4,156)
Recoveries		5		446		1,420		1,871
Provision (recapture) for acquired BBVAPR loan and lease losses accounted for under ASC 310-20		-		2,799		(952)		1,847
Balance at end of year	$	42	$	3,225	$	595	$	3,862

	Year Ended December 31, 2016
	Commercial		Consumer		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Balance at beginning of year	$	26	$	3,429	$	2,087	$	5,542
Charge-offs		(42)		(3,619)		(2,155)		(5,816)
Recoveries		73		301		1,945		2,319
Provision (recapture) for acquired BBVAPR loan and lease losses accounted for under ASC 310-20		112		2,917		(774)		2,255
Balance at end of year	$	169	$	3,028	$	1,103	$	4,300

	Year Ended December 31, 2015
	Commercial		Consumer		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Balance at beginning of year	$	65	$	1,211	$	3,321	$	4,597
Charge-offs		(42)		(4,755)		(4,548)		(9,345)
Recoveries		31		680		2,110		2,821
Provision (recapture) for acquired loan and lease losses accounted for under ASC 310-20		(28)		6,293		1,204		7,469
Balance at end of year	$	26	$	3,429	$	2,087	$	5,542

	December 31, 2017
	Commercial		Consumer		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	20	$	-	$	-	$	20
Collectively evaluated for impairment		22		3,225		595		3,842
Total ending allowance balance	$	42	$	3,225	$	595	$	3,862
Loans:
Individually evaluated for impairment	$	747	$	-	$	-	$	747
Collectively evaluated for impairment		3,633		28,915		21,969		54,517
Total ending loan balance	$	4,380	$	28,915	$	21,969	$	55,264

	December 31, 2016
	Commercial		Consumer		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	141	$	-	$	-	$	141
Collectively evaluated for impairment		28		3,028		1,103		4,159
Total ending allowance balance	$	169	$	3,028	$	1,103	$	4,300
Loans:
Individually evaluated for impairment	$	1,150	$	-	$	-	$	1,150
Collectively evaluated for impairment		4,412		32,862		53,026		90,300
Total ending loan balance	$	5,562	$	32,862	$	53,026	$	91,450

Loans Accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)

For loans accounted for under ASC 310- 30, as part of the evaluation of actual versus expected cash flows, Oriental assesses on a quarterly basis the credit quality of these loans based on delinquency, severity factors and risk ratings, among other assumptions. Migration and credit quality trends are assessed at the pool level, by comparing information from the latest evaluation period through the end of the reporting period.

The following tables present the activity in our allowance for loan losses and related recorded investment of the acquired BBVAPR loan portfolio accounted for under ASC 310-30 for the periods indicated:

	Year Ended December 31, 2017
	Mortgage		Commercial		Consumer		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-30:
Balance at beginning of year	$	2,682	$	23,452	$	-	$	4,922	$	31,056
Provision for BBVAPR loans and lease losses accounted for under ASC 310-30		11,497		9,758		18		3,408		24,681
Allowance de-recognition		(94)		(9,519)		-		(369)		(9,982)
Balance at end of year	$	14,085	$	23,691	$	18	$	7,961	$	45,755

	Year Ended December 31, 2016
	Mortgage		Commercial		Consumer		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-30:
Balance at beginning of year	$	1,762	$	21,161	$	-	$	2,862	$	25,785
Provision (recapture) for BBVAPR loans and lease losses accounted for under ASC 310-30		1,105		11,710		-		2,693		15,508
Loan pools fully charged-off		(14)		(66)		-		(202)		(282)
Allowance de-recognition		(171)		(9,353)		-		(431)		(9,955)
Balance at end of year	$	2,682	$	23,452	$	-	$	4,922	$	31,056

	Year Ended December 31, 2015
	Mortgage		Commercial		Consumer		Auto		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-30:
Balance at beginning of year	$	5		13,476		-		-		13,481
Provision for BBVAPR loans and lease losses accounted for under ASC 310-30		1,757		12,037		-		2,862		16,656
Loan pools fully charged-off		-		(4,352)		-		-		(4,352)
Balance at end of year	$	1,762	$	21,161	$	-	$	2,862	$	25,785

Allowance for Acquired Eurobank Loan Losses

The changes in the allowance for loan and lease losses on acquired Eurobank loans for the years ended December 31, 2017, 2016 and 2015 were as follows:

	Year Ended December 31, 2017
	Loans Secured by 1-4 Family Residential Properties		Commercial		Consumer		Total
	(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of period	$	11,947	$	9,328	$	6	$	21,281
Provision for covered loan and lease losses, net		5,045		1,680		-		6,725
Allowance de-recognition		(1,805)		(1,026)		(1)		(2,832)
Balance at end of period	$	15,187	$	9,982	$	5	$	25,174


	Year Ended December 31, 2016
	Loans Secured by 1-4 Family Residential Properties		Commercial		Consumer		Total
	(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of period	$	22,570	$	67,365	$	243	$	90,178
Provision for covered loan and lease losses, net		1,080		1,183		(8)		2,255
Loan pools fully charged-off		-		(134)		-		(134)
Allowance de-recognition		(15,094)		(59,086)		(229)		(74,409)
FDIC shared-loss portion of provision for covered loan and lease losses, net		3,391		-		-		3,391
Balance at end of period	$	11,947	$	9,328	$	6	$	21,281

	Year Ended December 31, 2015
	Loans Secured by 1-4 Family Residential Properties		Commercial		Consumer		Total
	(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of period	$	5,469	$	58,511	$	265	$	64,245
Provision for covered loan and lease losses, net		17,718	$	20,043		279		38,040
Loan pools fully charged-off		(722)		(13,587)		(301)		(14,610)
FDIC shared-loss portion of provision for covered loan and lease losses, net		105		2,398		-		2,503
Balance at end of period	$	22,570	$	67,365	$	243	$	90,178