Allowance for Loan and Lease Losses

9 Months Ended

Sep. 30, 2015

NOTE 5 – ALLOWANCE FOR LOAN AND LEASE LOSSES

The composition of the Company’s allowance for loan and lease losses at September 30, 2015 and December 31, 2014 was as follows:

	September 30,		December 31,
	2015		2014
	(In thousands)
Allowance for loans and lease losses on non-acquired loans:
Originated and other loans and leases held for investment:
Mortgage	$	17,292	$	19,679
Commercial		35,524		8,432
Consumer		10,816		9,072
Auto and leasing		16,674		14,255
Unallocated		45		1
Total allowance for originated and other loans and lease losses		80,351		51,439

Acquired loans:
Acquired BBVAPR loans:
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Commercial		22		65
Consumer		3,057		1,211
Auto		2,394		3,321
		5,473		4,597
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage		473		-
Commercial		16,567		13,476
Consumer		84		5
Auto		2,862		-
		19,986		13,481
Total allowance for acquired BBVAPR loans and lease losses		105,810		69,517
Acquired Eurobank loans:
Loans secured by 1-4 family residential properties		32,685		15,522
Commercial and other construction		57,280		48,334
Consumer		367		389
Total allowance for acquired Eurobank loan and lease losses		90,332		64,245
Total allowance for loan and lease losses	$	196,142	$	133,762

The Company 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. The Company’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 the Company’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 part of the Company’s continuous enhancement to the allowance for loan and lease losses methodology, during the quarter ended June 30, 2015 an assessment of the look-back period and historical loss factor was performed for auto and leasing and consumer and commercial loan portfolios. The analysis was based on the trends observed and their relation with the economic cycle as of the period ended June 30, 2015. As a result, for the commercial portfolio, the look-back period was changed to 36 months from the previously determined 12 months. For auto and leasing and consumer, a look back period of 24 months was maintained. In addition, during the quarter ended June 30, 2015, 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 the impact to our portfolio, taking into consideration the current evolution of the portfolio and expected impact, due to recent economic developments, changes in values of collateral and delinquencies, among others. These changes in the allowance for loan and lease losses’ look-back period and the result of the assessment in economic factors for the commercial, auto, and consumer portfolios are considered a change in accounting estimate as per ASC 250-10 provisions, where adjustments should be made prospectively. No changes were made during the quarter ended September 30, 2015.

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

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

	Quarter Ended September 30, 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 period	$	18,076	$	34,779	$	10,464	$	15,064	$	606	$	78,989
Charge-offs		(1,058)		(828)		(2,471)		(8,510)		-		(12,867)
Recoveries		270		63		186		3,251		-		3,770
Provision (recapture) for originated and other loans and lease losses		4		1,510		2,637		6,869		(561)		10,459
Balance at end of period	$	17,292	$	35,524	$	10,816	$	16,674	$	45	$	80,351

	Nine-Month Period Ended September 30, 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 period	$	19,679	$	8,432	$	9,072	$	14,255	$	1	$	51,439
Charge-offs		(3,829)		(2,317)		(6,456)		(24,307)		-		(36,909)
Recoveries		338		372		729		10,060		-		11,499
Provision (recapture) for originated and other loans and lease losses		1,104		29,037		7,471		16,666		44		54,322
Balance at end of period	$	17,292	$	35,524	$	10,816	$	16,674	$	45	$	80,351

	September 30, 2015
	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	$	8,249	$	26,809	$	-	$	-	$	-	$	35,058
Collectively evaluated for impairment		9,043		8,715		10,816		16,674		45		45,293
Total ending allowance balance	$	17,292	$	35,524	$	10,816	$	16,674	$	45	$	80,351
Loans:
Individually evaluated for impairment	$	90,530	$	233,114	$	-	$	-	$	-	$	323,644
Collectively evaluated for impairment		672,106		1,156,239		227,756		647,544		-		2,703,645
Total ending loan balance	$	762,636	$	1,389,353	$	227,756	$	647,544	$	-	$	3,027,289

	Quarter Ended September 30, 2014
	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 period	$	19,062	$	12,423	$	7,887	$	11,127	$	139	$	50,638
Charge-offs		(1,563)		(1,081)		(1,585)		(7,393)		-		(11,622)
Recoveries		138		56		66		2,434		-		2,694
Provision (recapture) for originated and other loan and lease losses		1,235		(2,286)		2,341		7,236		43		8,569
Balance at end of period	$	18,872	$	9,112	$	8,709	$	13,404	$	182	$	50,279

	Nine-Month Period Ended September 30, 2014
	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 period	$	19,937	$	14,897	$	6,006	$	7,866	$	375	$	49,081
Charge-offs		(3,764)		(2,043)		(3,820)		(17,994)		-		(27,621)
Recoveries		374		269		457		6,094		-		7,194
Provision (recapture) for originated and other loan and lease losses		2,325		(4,011)		6,066		17,438		(193)		21,625
Balance at end of period	$	18,872	$	9,112	$	8,709	$	13,404	$	182	$	50,279

	December 31, 2014
	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	$	8,968	$	841	$	-	$	-	$	-	$	9,809
Collectively evaluated for impairment		10,711		7,591		9,072		14,255		1		41,630
Total ending allowance balance	$	19,679	$	8,432	$	9,072	$	14,255	$	1	$	51,439
Loans:
Individually evaluated for impairment	$	94,185	$	236,270	$	-	$	-	$	-	$	330,455
Collectively evaluated for impairment		697,566		1,053,462		186,760		575,582		-		2,513,370
Total ending loan balance	$	791,751	$	1,289,732	$	186,760	$	575,582	$	-	$	2,843,825

During the quarter ended March 31, 2015 the Company placed its $200 million participation in a line of credit to PREPA on non-accrual status and recorded a $24.0 million provision for loan and lease losses. Since April 1, 2015, interest payments received have been applied to principal. As of September 30, 2015, the specific reserve was maintained at $23.4 million.

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, excluding loans accounted for under ASC 310-30, for the periods indicated:

	Quarter Ended September 30, 2015
	Commercial		Consumer		Auto		Unallocated		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Balance at beginning of period	$	54	$	2,616	$	2,859	$	-	$	5,529
Charge-offs		(22)		(1,103)		(1,150)		-		(2,275)
Recoveries		7		59		502		-		568
Provision (recapture) for acquired BBVAPR loan and lease losses accounted for under ASC 310-20		(17)		1,485		183		-		1,651
Balance at end of period	$	22	$	3,057	$	2,394	$	-	$	5,473

	Nine-Month Period Ended September 30, 2015
	Commercial		Consumer		Auto		Unallocated		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Balance at beginning of period	$	65	$	1,211	$	3,321	$	-	$	4,597
Charge-offs		(38)		(3,789)		(3,454)		-		(7,281)
Recoveries		24		622		1,574		-		2,220
Provision (recapture) for acquired BBVAPR loan and lease losses accounted for under ASC 310-20		(29)		5,013		953		-		5,937
Balance at end of period	$	22	$	3,057	$	2,394	$	-	$	5,473

	September 30, 2015
	Commercial		Consumer		Auto		Unallocated		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:
Collectively evaluated for impairment	$	22	$	3,057	$	2,394	$	-	$	5,473
Total ending allowance balance	$	22	$	3,057	$	2,394	$	-	$	5,473
Loans:
Individually evaluated for impairment	$	485	$	-	$	-	$	-	$	485
Collectively evaluated for impairment		7,251		39,774		124,120		-		171,145
Total ending loan balance	$	7,736	$	39,774	$	124,120	$	-	$	171,630

	Quarter Ended September 30, 2014
	Commercial		Consumer		Auto		Unallocated		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Balance at beginning of period	$	464	$	338	$	2,642	$	-	$	3,444
Charge-offs		(228)		(1,432)		(1,748)		-		(3,408)
Recoveries		35		139		519		-		693
Provision (recapture) for acquired loan and lease losses accounted for under ASC 310-20		(1)		1,986		1,746		-		3,731
Balance at end of period	$	270	$	1,031	$	3,159	$	-	$	4,460

	Nine-Month Period Ended September 30, 2014
	Commercial		Consumer		Auto		Unallocated		Total
	(In thousands)
Allowance for loan and lease losses for acquired BBVAPR loans accounted for under ASC 310-20:
Balance at beginning of period	$	926	$	-	$	1,428	$	-	$	2,354
Charge-offs		(512)		(5,442)		(4,414)		-		(10,368)
Recoveries		65		363		1,504		-		1,932
Provision (recapture) for acquired loan and lease losses accounted for under ASC 310-20		(209)		6,110		4,641		-		10,542
Balance at end of period	$	270	$	1,031	$	3,159	$	-	$	4,460

	December 31, 2014
	Commercial		Consumer		Auto		Unallocated		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:
Collectively evaluated for impairment	$	65	$	1,211	$	3,321	$	-	$	4,597
Total ending allowance balance	$	65	$	1,211	$	3,321	$	-	$	4,597
Loans:
Individually evaluated for impairment	$	672	$	-	$	-	$	-	$	672
Collectively evaluated for impairment		12,003		45,344		184,782		-		242,129
Total ending loan balance	$	12,675	$	45,344	$	184,782	$	-	$	242,801

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

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

	Quarter Ended September 30, 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 period	$	473	$	14,940	$	84	$	2,862	$	18,359
Provision (recapture) for acquired BBVAPR loans and lease losses accounted for under ASC 310-30		-		5,979		-		-		5,979
Loan pools fully charged-off		-		(4,352)		-		-		(4,352)
Balance at end of period	$	473	$	16,567	$	84	$	2,862	$	19,986


	Nine-Month Period Ended September 30, 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 period	$	-	$	13,476	$	5	$	-	$	13,481
Provision (recapture) for acquired BBVAPR loans and lease losses accounted for under ASC 310-30		473		7,443		79		2,862		10,857
Loan pools fully charged-off		-		(4,352)		-		-		(4,352)
Balance at end of period	$	473	$	16,567	$	84	$	2,862	$	19,986

	Quarter Ended September 30, 2014
	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 period	$	-	$	6,216	$	62	$	-	$	6,278
Provision (recapture) for acquired BBVAPR loans and lease losses accounted for under ASC 310-30		-		3,899		(57)		-		3,842
Balance at end of period	$	-	$	10,115	$	5	$	-	$	10,120


	Nine-Month Period Ended September 30, 2014
	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 period	$	-	$	1,713	$	418	$	732	$	2,863
Provision (recapture) for acquired BBVAPR loans and lease losses accounted for under ASC 310-30		-		8,402		(413)		(732)		7,257
Balance at end of period	$	-	$	10,115	$	5	$	-	$	10,120

Allowance for Acquired Eurobank Loan Losses

The changes in the allowance for loan and lease losses on acquired Eurobank loans for the quarters and nine-month periods ended September 30, 2015 and 2014 were as follows:

	Quarter Ended September 30, 2015
	Loans Secured by 1-4 Family Residential Properties		Commercial		Consumer		Leasing		Total
	(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of period	$	17,593	$	53,470	$	389	$	-	$	71,452
Provision for acquired Eurobank loans and lease losses, net		15,813		17,398		279		-		33,490
Loan pools fully charged-off		(721)		(13,588)		(301)		-		(14,610)
Balance at end of period	$	32,685	$	57,280	$	367	$	-	$	90,332


	Nine-Month Period Ended September 30, 2015
	Loans Secured by 1-4 Family Residential Properties		Commercial		Consumer		Leasing		Total
	(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of period	$	15,522	$	48,334	$	389	$	-	$	64,245
Provision for acquired Eurobank loans and lease losses, net		17,779	$	20,136		279		-		38,194
Loan pools fully charged-off		(721)		(13,588)		(301)		-		(14,610)
FDIC shared-loss portion of provision for loan and lease losses, net		105		2,398		-		-		2,503
Balance at end of period	$	32,685	$	57,280	$	367	$	-	$	90,332

	Quarter Ended September 30, 2014
	Mortgage		Commercial		Consumer		Leasing		Total
	(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of period	$	14,924	$	43,976	$	615	$	-	$	59,515
Provision for (recapture of) acquired Eurobank loans and lease losses, net		(165)		1,461		(181)		-		1,115
FDIC shared-loss portion of provision for loan and lease losses, net		493		1,149		(45)		-		1,597
Balance at end of period	$	15,252	$	46,586	$	389	$	-	$	62,227


	Nine-Month Period Ended September 30, 2014
	Mortgage		Commercial		Consumer		Leasing		Total
	(In thousands)
Allowance for loan and lease losses for Eurobank loans:
Balance at beginning of period	$	12,495	$	39,619	$	615	$	-	$	52,729
Provision for Eurobank loans and lease losses, net		2,144		2,376		(181)		-		4,339
FDIC shared-loss portion of provision for Eurobank loans and lease losses, net		613		4,591		(45)		-		5,159
Balance at end of period	$	15,252	$	46,586	$	389	$	-	$	62,227

The FDIC shared-loss portion of provision for (recapture of) acquired Eurobank loans and lease losses, net, represents the credit impairment losses to be covered under the FDIC loss-share agreement which is increasing (decreasing) the FDIC loss-share indemnification asset. The FDIC loss sharing obligations, related to commercial and other-non single family acquired Eurobank loans expired on June 30, 2015. The coverage for the single family residential loans will expire on June 30, 2020. The remaining covered loans are included as part of acquired Eurobank loans under the name "loans secured by 1-4 family residential properties." At September 30, 2015, allowance for loan losses on loans covered by the FDIC shared-loss agreement amounted $32.7 million and the provision for loan losses for the quarter and nine-month period ended September 30, 2015 was $15.8 million and $18.1 million, respectively.