Allowance for Loan and Lease Losses

9 Months Ended

Sep. 30, 2016

NOTE 5 – ALLOWANCE FOR LOAN AND LEASE LOSSES

The composition of the Company’s allowance for loan and lease losses at September 30, 2016 and December 31, 2015 was as follows:

	September 30,		December 31,
	2016		2015
	(In thousands)
Allowance for loans and lease losses on non-acquired loans:
Originated and other loans and leases held for investment:
Mortgage	$	18,527	$	18,352
Commercial		12,307		64,791
Consumer		12,289		11,197
Auto and leasing		19,002		18,261
Unallocated		43		25
Total allowance for originated and other loans and lease losses		62,168		112,626

Acquired loans:
Acquired BBVAPR loans:
Accounted for under ASC 310-20 (Loans with revolving feature and/or
acquired at a premium)
Commercial		18		26
Consumer		2,946		3,429
Auto		1,249		2,087
		4,213		5,542
Accounted for under ASC 310-30 (Loans acquired with deteriorated
credit quality, including those by analogy) (a)
Mortgage		2,664		1,762
Commercial		21,998		21,161
Auto		5,157		2,862
		29,819		25,785
Total allowance for acquired BBVAPR loans and lease losses		34,032		31,327
Acquired Eurobank loans: (a)
Loans secured by 1-4 family residential properties		12,268		22,570
Commercial and other construction		10,544		67,365
Consumer		-		243
Total allowance for acquired Eurobank loan and lease losses (a)		22,812		90,178
Total allowance for loan and lease losses (a)	$	119,012	$	234,131

(a) A portion of the allowance for loan and lease losses associated with purchased credit impaired loans was de-recognized due to the revision in the de-recognition policy for these loans during the second quarter of 2016 .

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.

Effective June 30, 2016, pursuant to supervisory direction, the Company revised its purchase credit impaired policy for all loans accounted for under ASC 310-30. Under the revised policy, the Company writes-off the loan’s recorded investment and derecognizes the associated allowance for loan and lease losses for loans that exit the pools. The revised policy was implemented prospectively due to the immaterial impact of retrospective adoption. Prior to June 30, 2016, the pool’s carrying value and allowance was determined by discounting expected cash flows at the pool’s effective yield. The allowance for loan and lease losses was maintained until all of the loans in the pool were paid off or charged-off. During the nine-month period ended September 30, 2016, the Company de-recognized $8.9 million and $73.1 million in the recorded investment balance and associated allowance for loans that had exited the pools for acquired BBVAPR loans and acquired Eurobank loans, respectively, with no impact to the provision for loan and lease losses.

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 originated and other loans held for investment by segment for the periods indicated:

	Quarter Ended September 30, 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 period	$	18,537	$	63,144	$	11,771	$	19,259	$	101	$	112,812
Charge-offs		(1,656)		(56,700)		(3,173)		(7,804)		-		(69,333)
Recoveries		21		93		120		3,747		-		3,981
Provision (recapture) for originated and other loans and lease losses		1,625		5,770		3,571		3,800		(58)		14,708
Balance at end of period	$	18,527	$	12,307	$	12,289	$	19,002	$	43	$	62,168

	Nine-Month Period Ended September 30, 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 period	$	18,352	$	64,791	$	11,197	$	18,261	$	25	$	112,626
Charge-offs		(4,692)		(58,544)		(8,310)		(24,267)		-		(95,813)
Recoveries		204		407		355		9,969		-		10,935
Provision for originated and other loans and lease losses		4,663		5,653		9,047		15,039		18		34,420
Balance at end of period	$	18,527	$	12,307	$	12,289	$	19,002	$	43	$	62,168

	September 30, 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	$	8,725	$	5,572	$	-	$	-	$	-	$	14,297
Collectively evaluated for impairment		9,802		6,735		12,289		19,002		43		47,871
Total ending allowance balance	$	18,527	$	12,307	$	12,289	$	19,002	$	43	$	62,168
Loans:
Individually evaluated for impairment	$	92,343	$	36,369	$	-	$	-	$	-	$	128,712
Collectively evaluated for impairment		643,024		1,230,808		278,666		730,589		-		2,883,087
Total ending loan balance	$	735,367	$	1,267,177	$	278,666	$	730,589	$	-	$	3,011,799

	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 year	$	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 for originated and other loans and lease losses		1,104		29,037		7,471		16,666		44		54,322
Balance at end of year	$	17,292	$	35,524	$	10,816	$	16,674	$	45	$	80,351

	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

During the third quarter of 2016, the Company entered into an agreement to sell its outstanding participation in the PREPA line of credit. As a result of this transaction, the Company recognized a $56.2 million charge-off and a $2.9 million provision for loan and lease losses during the quarter ended September 30, 2016

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, 2016
	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	$	21	$	3,002	$	1,464	$	-	$	4,487
Charge-offs		(2)		(889)		(475)		-		(1,366)
Recoveries		16		67		461		-		544
Provision (recapture) for acquired BBVAPR loan and lease losses accounted for under ASC 310-20		(17)		766		(201)		-		548
Balance at end of period	$	18	$	2,946	$	1,249	$	-	$	4,213

	Nine-Month Period Ended September 30, 2016
	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	$	26	$	3,429	$	2,087	$	-	$	5,542
Charge-offs		(21)		(2,714)		(1,783)		-		(4,518)
Recoveries		56		236		1,505		-		1,797
Provision (recapture) for acquired BBVAPR loan and lease losses accounted for under ASC 310-20		(43)		1,995		(560)		-		1,392
Balance at end of year	$	18	$	2,946	$	1,249	$	-	$	4,213

	September 30, 2016
	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	$	18	$	2,946	$	1,249	$	-	$	4,213
Total ending allowance balance	$	18	$	2,946	$	1,249	$	-	$	4,213
Loans:
Collectively evaluated for impairment		5,755		34,215		64,393		-		104,363
Total ending loan balance	$	5,755	$	34,215	$	64,393	$	-	$	104,363

	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 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 year	$	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 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

	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

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:

	Quarter Ended September 30, 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 period	$	1,585	$	15,863	$	-	$	5,353	$	22,801
Provision for BBVAPR loans and lease losses accounted for under ASC 310-30		1,079		6,324		-		-		7,403
Allowance de-recognition (a)		-		(189)		-		(196)		(385)
Balance at end of period	$	2,664	$	21,998	$	-	$	5,157	$	29,819
(a) A portion of the allowance for loan and lease losses associated with purchased credit impaired loans was de-recognized due to the revision in the de-recognition policy for these loans during the second quarter of 2016.

	Nine-Month Period Ended September 30, 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 period	$	1,678	$	21,245	$	-	$	2,862	$	25,785
Provision for BBVAPR loans and lease losses accounted for under ASC 310-30		1,000		9,552		-		2,693		13,245
Loan pools fully charged-off		(14)		(66)		-		(202)		(282)
Allowance de-recognition (a)		-		(8,733)		-		(196)		(8,929)
Balance at end of period	$	2,664	$	21,998	$	-	$	5,157	$	29,819
(a) A portion of the allowance for loan and lease losses associated with purchased credit impaired loans was de-recognized due to the revision in the de-recognition policy for these loans during the second quarter of 2016.

	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 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 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

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 quarters and nine-month periods ended September 30, 2016 and 2015 were as follows:


	Quarter Ended September 30, 2016
	Loans Secured by 1-4 Family Residential Properties		Commercial and Construction		Consumer		Total
	(In thousands)
Allowance for loan and lease losses for acquired Eurobank loans:
Balance at beginning of period	$	11,016	$	11,096	$	4	$	22,116
Provision (recapture) for acquired Eurobank loans and lease losses, net		893		(74)		-		819
FDIC shared-loss portion of provision for covered loan and lease losses, net		818		-		-		818
Allowance de-recognition (a)		(459)		(478)		(4)		(941)
Balance at end of period	$	12,268	$	10,544	$	-	$	22,812
(a) A portion of the allowance for loan and lease losses associated with purchased credit impaired loans was de-recognized due to the revision in the de-recognition policy for these loans during the second quarter of 2016.

	Nine-Month Period Ended September 30, 2016
	Loans Secured by 1-4 Family Residential Properties		Commercial and Construction		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 (recapture) for acquired Eurobank loans and lease losses, net		1,077		1,585		(7)		2,655
FDIC shared-loss portion of provision for covered loan and lease losses, net		3,213		-		-		3,213
Loan pools fully charged-off		-		(134)		-		(134)
Allowance de-recognition (a)		(14,592)		(58,272)		(236)		(73,100)
Balance at end of year	$	12,268	$	10,544	$	-	$	22,812
(a) A portion of the allowance for loan and lease losses associated with purchased credit impaired loans was de-recognized due to the revision in the de-recognition policy for these loans during the second quarter of 2016.

	Quarter Ended September 30, 2015
	Mortgage		Commercial and Construction		Consumer		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 Eurobank loans and lease losses, net		15,813		17,398		279		33,490
Loans 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
	Mortgage		Commercial and Construction		Consumer		Total
	(In thousands)
Allowance for loan and lease losses for Eurobank loans:
Balance at beginning of year	$	15,522	$	48,334	$	389	$	64,245
Provision for Eurobank loans and lease losses, net		17,779		20,136		279		38,194
FDIC shared-loss portion of provision for covered loan and lease losses, net		105		2,398		-		2,503
Loans pools fully charged-off		(721)		(13,588)		(301)		(14,610)
Balance at end of year	$	32,685	$	57,280	$	367	$	90,332

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 obligation, 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, 2016 and December 31, 2015, allowance for loan losses on loans covered by the FDIC shared-loss agreement amounted to $12.3 million and $22.6 million, respectively. The provision for covered loan and lease losses for the quarters ended September 30, 2016 and 2015 was $893 thousand and $15.8 million, respectively.