Allowance for Loan and Lease Losses

12 Months Ended

Dec. 31, 2015

NOTE 6 – ALLOWANCE FOR LOAN AND LEASE LOSSES

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

	December 31,		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	$	18,352	$	19,679
Commercial		64,791		8,432
Consumer		11,197		9,072
Auto and leasing		18,261		14,255
Unallocated		25		1
Total allowance for originated and other loans and lease losses		112,626		51,439

Acquired loans:
Acquired BBVAPR loans:
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Commercial		26		65
Consumer		3,429		1,211
Auto		2,087		3,321
		5,542		4,597
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy)
Mortgage		1,678		-
Commercial		21,161		13,476
Consumer		84		5
Auto		2,862		-
		25,785		13,481
Total allowance for acquired BBVAPR loans and lease losses		143,953		69,517
Acquired Eurobank loans:
Loans secured by 1-4 family residential properties		32,624		15,522
Commercial and other construction		57,187		48,334
Consumer		367		389
Total allowance for acquired Eurobank loan and lease losses		90,178		64,245
Total allowance for loan and lease losses	$	234,131	$	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 year 2015 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, for the commercial portfolio, the look-back period was changed to 36 months from the previously determined 12 months. For auto, leasing and consumer, a look-back period of 24 months was maintained. The residential mortgages portfolio, was evaluated during the fourth quarter of 2015. For this 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 quarter ended June 30, 2015, an annual 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.

During fourth quarter the loss realization period was revised to 1.60 years for commercial real estate, other portfolios remained at 1 year.

These changes in the allowance for loan and lease losses’ look-back period and loss emergence period for the commercial portfolios 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, 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 for originated and other loans 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

	Year Ended December 31, 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 year	$	19,937	$	14,897	$	6,006	$	7,866	$	375	$	49,081
Charge-offs		(5,011)		(2,424)		(5,782)		(26,041)		-		(39,258)
Recoveries		428		333		570		8,858		-		10,189
Provision (recapture) for originated and other loans and lease losses		4,325		(4,374)		8,278		23,572		(374)		31,427
Balance at end of period	$	19,679	$	8,432	$	9,072	$	14,255	$	1	$	51,439


	Year Ended December 31, 2013
	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	$	21,092	$	17,072	$	856	$	533	$	368	$	39,921
Charge-offs		(36,566)		(5,889)		(1,485)		(4,601)		-		(48,541)
Recoveries		6		383		165		1,568		-		2,122
Provision for originated and other loans and lease losses		35,405		3,331		6,470		10,366		7		55,579
Balance at end of period	$	19,937	$	14,897	$	6,006	$	7,866	$	375	$	49,081

	December 31, 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	$	9,233	$	55,947	$	-	$	-	$	-	$	65,180
Collectively evaluated for impairment		9,119		8,844		11,197		18,261		25		47,446
Total ending allowance balance	$	18,352	$	64,791	$	11,197	$	18,261	$	25	$	112,626
Loans:
Individually evaluated for impairment	$	89,973	$	235,294	$	-	$	-	$	-	$	325,267
Collectively evaluated for impairment		667,855		1,206,355		242,950		669,163		-		2,786,323
Total ending loan balance	$	757,828	$	1,441,649	$	242,950	$	669,163	$	-	$	3,111,590

	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

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:

	Year Ended December 31, 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 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 BBVAPR 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

	Year Ended 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:
Balance at beginning of year	$	926	$	-	$	1,428	$	-	$	2,354
Charge-offs		(532)		(6,902)		(6,011)		-		(13,445)
Recoveries		73		531		2,169		-		2,773
Provision (recapture) for acquired BBVAPR loan and lease losses accounted for under ASC 310-20		(402)		7,582		5,735		-		12,915
Balance at end of year	$	65	$	1,211	$	3,321	$	-	$	4,597


	Year Ended December 31, 2013
	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 year	$	-	$	-	$	-	$	-	$	-
Charge-offs		(25)		(5,530)		(5,650)		-		(11,205)
Recoveries		9		1,035		3,398		-		4,442
Provision for acquired BBVAPR loan and lease losses accounted for under ASC 310-20		942		4,495		3,680		-		9,117
Balance at end of year	$	926	$	-	$	1,428	$	-	$	2,354

	December 31, 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	$	26	$	3,429	$	2,087	$	-	$	5,542
Total ending allowance balance	$	26	$	3,429	$	2,087	$	-	$	5,542
Loans:
Individually evaluated for impairment	$	474	$	-	$	-	$	-	$	474
Collectively evaluated for impairment		6,983		38,385		106,911		-		152,279
Total ending loan balance	$	7,457	$	38,385	$	106,911	$	-	$	152,753

	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 acquired BBVAPR loan portfolio accounted for under ASC 310-30, for the periods indicated:

	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	$	-	$	13,476	$	5	$	-	$	13,481
Provision for BBVAPR loans and lease losses accounted for under ASC 310-30		1,678		12,037		79		2,862		16,656
Loan pools fully charged-off		-		(4,352)		-		-		(4,352)
Balance at end of year	$	1,678	$	21,161	$	84	$	2,862	$	25,785


	Year Ended December 31, 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 year	$	-	$	1,713	$	418	$	732	$	2,863
Provision (recapture) for BBVAPR loans and lease losses accounted for under ASC 310-30		-		11,763		(413)		(732)		10,618
Balance at end of year	$	-	$	13,476	$	5	$	-	$	13,481


	Year Ended December 31, 2013
	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	$	-		-		-		-		-
Provision for BBVAPR loans and lease losses accounted for under ASC 310-30		-		1,713		418		732		2,863
Balance at end of year	$	-	$	1,713	$	418	$	732	$	2,863

Allowance for Acquired Eurobank Loan Losses

For loans accounted for under ASC 310- 30, as part of the evaluation of actual versus expected cash flows, the Company 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 changes in the allowance for loan and lease losses on acquired Eurobank loans for the years ended December 31, 2015, 2014 and 2013 were as follows:

	Year Ended December 31, 2015
	Loans Secured by 1-4 Family Residential Properties		Commercial and Construction		Consumer		Leasing		Total
	(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of year	$	15,523	$	48,333	$	389	$	-	$	64,245
Provision for acquired Eurobank loans 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 loan and lease losses, net		105		2,398		-		-		2,503
Balance at end of year	$	32,624	$	57,187	$	367	$	-	$	90,178

	Year Ended December 31, 2014
	Mortgage		Commercial and Construction		Consumer		Leasing		Total
	(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of year	$	12,495	$	39,619	$	615	$	-	$	52,729
Provision for (recapture of) acquired Eurobank loans and lease losses, net		2,144		3,717		(181)		-		5,680
FDIC shared-loss portion of provision for loan and lease losses, net		884		4,997		(45)		-		5,836
Balance at end of year	$	15,523	$	48,333	$	389	$	-	$	64,245


	Year Ended December 31, 2013
	Mortgage		Commercial and Construction		Consumer		Leasing		Total
	(In thousands)
Allowance for loan and lease losses for Eurobank loans:
Balance at beginning of year	$	4,986	$	48,460	$	678	$	-	$	54,124
Provision for Eurobank loans and lease losses, net		9,461		(4,110)		(16)		-		5,335
FDIC shared-loss portion of provision for Eurobank loans and lease losses, net		(1,952)		(4,731)		(47)		-		(6,730)
Balance at end of year	$	12,495	$	39,619	$	615	$	-	$	52,729

The FDIC shared-loss portion of provision for acquired Eurobank loans and lease losses, net, represents the credit impairment losses to be covered under the FDIC loss-share agreement which is increasing 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 December 31, 2015 and 2014, allowance for loan losses on loans covered by the FDIC shared-loss agreement amounted $32.6 million and $64.3 million, respectively, the provision for covered loan and lease losses for the years ended December 31, 2015, 2014, and 2013 was $17.7 million and $5.7 million, and $5.3 million, respectively.