Allowance for Loan and Lease Losses

6 Months Ended

Jun. 30, 2011

Allowance for Loan and Lease Losses [Abstract]

ALLOWANCE FOR LOAN AND LEASE LOSSES

7 — ALLOWANCE FOR LOAN AND LEASE LOSSES

The changes in the allowance for loan and lease losses were as follows:

(Dollars in thousands)	Residential			Commercial			Commercial &			Construction			Consumer
Quarter ended June 30, 2011	Mortgage Loans			Mortgage Loans			Industrial Loans			Loans			Loans			Total
Allowance for loan and lease losses:
Beginning balance	$	63,496		$	87,873		$	177,839		$	157,197		$	75,290		$	561,695
Charge-offs		(9,091	)		(3,160	)		(11,811	)		(47,310	)		(12,113	)		(83,485	)
Recoveries		154			10			1,048			103			2,169			3,484
Provision		12,845			6,062			21,486			21,354			(2,563	)		59,184
Ending balance	$	67,404		$	90,785		$	188,562		$	131,344		$	62,783		$	540,878
Ending balance: specific reserve for impaired loans	$	52,073		$	30,402		$	92,162		$	71,149		$	678		$	246,464
Ending balance: general allowance	$	15,331		$	60,383		$	96,400		$	60,195		$	62,105		$	294,414
Loans receivables:
Ending balance	$	2,880,989		$	1,590,633		$	4,165,648		$	515,934		$	1,612,321		$	10,765,525
Ending balance: impaired loans	$	567,926		$	242,294		$	370,544		$	290,859		$	11,607		$	1,483,230
Ending balance: loans with general allowance	$	2,313,063		$	1,348,339		$	3,795,104		$	225,075		$	1,600,714		$	9,282,295

	Residential			Commercial			Commercial &			Construction			Consumer
(Dollars in thousands)	Mortgage Loans			Mortgage Loans			Industrial Loans			Loans			Loans			Total
Six-month period ended June 30, 2011
Allowance for loan and lease losses:
Beginning balance	$	62,330		$	105,596		$	152,641		$	151,972		$	80,486		$	553,025
Charge-offs		(14,495	)		(34,331	)		(28,155	)		(66,475	)		(24,082	)		(167,538	)
Recoveries		397			77			1,104			2,030			3,867			7,475
Provision		19,172			19,443			62,972			43,817			2,512			147,916
Ending balance	$	67,404		$	90,785		$	188,562		$	131,344		$	62,783		$	540,878
Ending balance: specific reserve for impaired loans	$	52,073		$	30,402		$	92,162		$	71,149		$	678		$	246,464
Ending balance: general allowance	$	15,331		$	60,383		$	96,400		$	60,195		$	62,105		$	294,414
Loans receivables:
Ending balance	$	2,880,989		$	1,590,633		$	4,165,648		$	515,934		$	1,612,321		$	10,765,525
Ending balance: impaired loans	$	567,926		$	242,294		$	370,544		$	290,859		$	11,607		$	1,483,230
Ending balance: loans with general allowance	$	2,313,063		$	1,348,339		$	3,795,104		$	225,075		$	1,600,714		$	9,282,295

     There were no significant purchases of loans during 2011. The Corporation did sell approximately $518 million of performing residential mortgage loans to another financial institution and $55.7 million of performing residential mortgage loans in the secondary market to FNMA and FHLMC during the first half of 2011. Also, the Corporation securitized approximately $90.3 million of FHA/VA mortgage loans to GNMA mortgage-backed securities during 2011. Refer to Note 8 — Loans held for sale for additional information about loans sold during 2011.

Changes in the allowance for the quarter and six-month period ended June 30, 2010 were as follows:

				Six-month
	Quarter ended			period ended
	June 30,			June 30,
	2010			2010
	(In thousands)
Balance at beginning of the period	$	575,303		$	528,120
Provision for loan and lease losses		146,793			317,758
Losses charged against the allowance		(120,516	)		(246,822	)
Recoveries credited to the allowance		2,724			5,248
Balance at end of period	$	604,304		$	604,304

     The allowance for impaired loans is part of the allowance for loan and lease losses. The allowance for impaired loans covers those loans for which management has determined that it is probable that the debtor will be unable to pay all the amounts due in accordance with the contractual terms of the loan agreement, and does not necessarily represent loans for which the Corporation will incur a loss.

Information regarding impaired loans for the quarter and six-month period ended June 30, 2011 and for the year ended December 31, 2010 was as follows:

Impaired Loans									Interest		Interest
(Dollars in thousands)			Unpaid				Average		Income		Income
	Recorded		Principal		Related		Recorded		Recognized		Recognized
As of June 30, 2011	Investment		Balance		Allowance		Investment		Quarter to date		Year to date
With no related allowance recorded:
FHA/VA Guaranteed loans	$	—	$	—	$	—	$	—	$	—	$	—
Other residential mortage loans		170,109		189,377		—		164,348		2,081		3,297
Commercial:
Commercial mortgage loans		23,357		25,033		—		24,771		488		697
Commercial & Industrial Loans		59,138		68,940		—		59,033		223		633
Construction Loans		22,533		34,090		—		28,506		45		77
Consumer:
Auto loans		—		—		—		—		—		—
Finance leases		—		—		—		—		—		—
Other consumer loans		1,545		2,215		—		1,115		12		21
	$	276,682	$	319,655	$	—	$	277,773	$	2,849	$	4,725
With an allowance recorded:
FHA/VA Guaranteed loans	$	—	$	—	$	—	$	—	$	—	$	—
Other residential mortage loans		397,817		432,995		52,073		398,995		2,753		4,985
Commercial:
Commercial mortgage loans		218,937		270,901		30,402		194,269		1,957		4,308
Commercial & Industrial Loans		311,406		415,101		92,162		323,088		1,858		4,116
Construction Loans		268,326		368,129		71,149		277,933		218		1,754
Consumer:
Auto loans		2,754		2,754		42		918		69		98
Finance leases		1,385		1,385		32		462		33		42
Other consumer loans		5,923		6,151		604		2,895		125		145
	$	1,206,548	$	1,497,416	$	246,464	$	1,198,560	$	7,013	$	15,448
Total:
FHA/VA Guaranteed loans	$	—	$	—	$	—	$	—	$	—	$	—
Other residential mortage loans		567,926		622,372		52,073		563,343		4,834		8,282
Commercial:
Commercial mortgage loans		242,294		295,934		30,402		219,040		2,445		5,005
Commercial & Industrial Loans		370,544		484,041		92,162		382,121		2,081		4,749
Construction Loans		290,859		402,219		71,149		306,439		263		1,831
Consumer:
Auto loans		2,754		2,754		42		918		69		98
Finance leases		1,385		1,385		32		462		33		42
Other consumer loans		7,468		8,366		604		4,010		137		166
	$	1,483,230	$	1,817,071	$	246,464	$	1,476,333	$	9,862	$	20,173

			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
As of December 31, 2010
With no related allowance recorded:
FHA/VA Guaranteed loans	$	—	$	—	$	—
Other residential mortage loans		244,648		253,636		—
Commercial:
Commercial mortgage loans		32,328		32,868		—
Commercial & Industrial Loans		54,631		58,927		—
Construction Loans		25,074		26,557		—
Consumer:
Auto loans		—		—		—
Finance leases		—		—		—
Other consumer loans		659		1,015		—
	$	357,340	$	373,003	$	—
With an allowance recorded:
FHA/VA Guaranteed loans	$	—	$	—	$	—
Other residential mortage loans		311,187		350,576		42,666
Commercial:
Commercial mortgage loans		150,442		186,404		26,869
Commercial & Industrial Loans		325,206		416,919		65,030
Construction Loans		237,970		323,127		57,833
Consumer:
Auto loans		—		—		—
Finance leases		—		—		—
Other consumer loans		1,496		1,496		264
	$	1,026,301	$	1,278,522	$	192,662
Total:
FHA/VA Guaranteed loans	$	—	$	—	$	—
Other residential mortage loans		555,835		604,212		42,666
Commercial:
Commercial mortgage loans		182,770		219,272		26,869
Commercial & Industrial Loans		379,837		475,846		65,030
Construction Loans		263,044		349,684		57,833
Consumer:
Auto loans		—		—		—
Finance leases		—		—		—
Other consumer loans		2,155		2,511		264
	$	1,383,641	$	1,651,525	$	192,662

     Interest income of approximately $8.2 million and $15.2 million was recognized on impaired loans for the second quarter and first half of 2010, respectively. The average recorded investment in impaired loans for the first half of 2010 was $1.8 billion.

The following tables show the activity for impaired loans and the related specific reserve for the quarter and six-month period ended June 30, 2011 and 2010:

	Quarter ended						Six-month period ended
	June 30,			June 30,			June 30,			June 30,
	2011			2010			2011			2010
				(In thousands)
Impaired Loans:
Balance at beginning of period	$	1,562,122		$	1,846,086		$	1,383,641		$	1,656,264
Loans determined impaired during the period		62,124			253,195			339,672			570,528
Net charge-offs		(66,271	)		(98,376	)		(126,891	)		(199,635	)
Loans sold, net of charge-offs		—			(52,000	)		(850	)		(70,749	)
Loans foreclosed, paid in full and partial payments or no longer considered impaired, net		(74,745	)		(78,073	)		(112,342	)		(85,576	)
Balance at end of period	$	1,483,230		$	1,870,832		$	1,483,230		$	1,870,832

	Quarter ended						Six-month period ended
	June 30,			June 30,			June 30,			June 30,
	2011			2010			2011			2010
				(In thousands)
Specific Reserve:
Balance at beginning of period	$	253,476		$	245,300		$	192,662		$	182,145
Provision for loan losses		59,259			130,718			180,693			295,132
Net charge-offs		(66,271	)		(98,376	)		(126,891	)		(199,635	)
Balance at end of period	$	246,464		$	277,642		$	246,464		$	277,642

     The Corporation’s credit quality indicators by loan type as of June 30, 2011 and December 31, 2010 are summarized below:

	Commercial Credit Exposure-Credit risk Profile based on
	Creditworthiness category:
June 30, 2011	Adversely Classified (1)		Total Portfolio
	(In thousands)
Commercial Mortgage	$	305,405	$	1,590,633
Construction		333,968		515,934
Commercial and Industrial		581,068		4,165,648

	Commercial Credit Exposure-Credit risk Profile based on
	Creditworthiness category:
December 31, 2010	Adversely Classified (1)		Total Portfolio
	(In thousands)
Commercial Mortgage	$	353,860	$	1,670,161
Construction		323,880		700,579
Commercial and Industrial		558,937		4,151,764

(1) Excludes $5.1 million (construction) as of June 30, 2011 and $261.8 million as of December 31, 2010 ($205.7 million construction; $35.4 million commercial mortgage; $20.7 million commercial and industrial) of adversely classified loans held for sale.

     The Corporation considered a loan as adversely classified if its risk rating is Substandard, Doubtful or Loss. These categories are defined as follows:

Substandard- A Substandard Asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful- Doubtful classifications have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. A Doubtful classification may be appropriate in cases where significant risk exposures are perceived, but Loss cannot be determined because of specific reasonable pending factors which may strengthen the credit in the near term.

Loss- Assets classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. There is little or no prospect for near term improvement and no realistic strengthening action of significance pending.

June 30, 2011	Consumer Credit Exposure-Credit risk Profile based on payment activity
	Residential Real-Estate				Consumer
	FHA/VA/Guaranteed		Other residential loans		Auto		Finance Leases		Other Consumer
			(In thousands)
Performing	$	249,981	$	2,250,843	$	940,491	$	260,015	$	369,750
Non-performing		—		380,165		19,884		3,208		18,973
Total	$	249,981	$	2,631,008	$	960,375	$	263,223	$	388,723

December 31, 2010	Consumer Credit Exposure-Credit risk Profile based on payment activity
	Residential Real-Estate				Consumer
	FHA/VA/Guaranteed		Other residential loans		Auto		Finance Leases		Other Consumer
			(In thousands)
Performing	$	232,522	$	2,792,761	$	983,626	$	278,969	$	403,529
Non-performing		—		392,134		25,350		3,935		20,106
Total	$	232,522	$	3,184,895	$	1,008,976	$	282,904	$	423,635

     The Corporation provides homeownership preservation assistance to its customers through a loss mitigation program in Puerto Rico and through programs sponsored by the Federal Government. Depending upon the nature of borrowers’ financial condition, restructurings or loan modifications through this program as well as other restructurings of individual commercial, commercial mortgage, construction and residential mortgage loans in the U.S. mainland fit the definition of TDR. A restructuring of a debt constitutes a TDR if the creditor for economic or legal reasons related to the debtor’s financial difficulties grants a concession to the debtor that it would not otherwise consider. Modifications involve changes in one or more of the loan terms that bring a defaulted loan current and provide sustainable affordability. Changes may include the refinancing of any past-due amounts, including interest and escrow, the extension of the maturity of the loan and modifications of the loan rate. As of June 30, 2011, the Corporation’s TDR loans consisted of $303.0 million of residential mortgage loans, $49.4 million commercial and industrial loans, $151.3 million commercial mortgage loans, $14.1 million of construction loans and $9.2 million of consumer loans. Outstanding unfunded loan commitments on TDR loans amounted to $1.1 million as of June 30, 2011.

     Included in the $151.3 million of commercial mortgage TDR loans are certain loan relationships restructured through loan splitting, two in the second quarter of 2011, one in the first quarter of 2011 and one in the fourth quarter of 2010. Each of these loan relationships were restructured into two notes; one that represents the portion of the loan that is expected to be fully collected along with contractual interest and the second note that represents the portion of the original loan that was charged-off. The renegotiations of these loans have been made after analyzing the borrowers’ and guarantors capacity to repay the debt and ability to perform under the modified terms. For the first relationship restructured in the second quarter, the first note amounting to $2.1 million was placed on a monthly amortization schedule that amortizes the debt over 30 years and the second note for $3.6 million represents mainly previously taken charge-offs on this loan. For the second relationship restructured in the second quarter, the first note of $3.9 million was placed on a 30 year amortization schedule at a market rate of interest, while the second note of $1.3 million, was charged-off. For the relationship restructured in the first quarter of 2011, the first note of $57.5 million was placed on a monthly payment that amortize the debt over 30 years at a market rate of interest. The second note, amounting to $28.3 million was fully charged-off. For the relationship restructured in the fourth quarter of 2010, as part of the renegotiation of the loans, the first note of $17 million was placed on a monthly payment schedule that amortizes the debt over 30 years at a market rate of interest. The second note for $2.7 million was fully charged-off. The following tables provide additional information about the volume of this type of loan restructurings and the effect on the allowance for loan and lease losses in 2011.

Principal balance deemed collectible at end of period	$	80,189
Amount charged-off during the first half of 2011	$	29,576
Charges to the provision for loan losses	$	5,989
Allowance for loan losses as of June 30, 2011	$	1,034

     The loans comprising the $80.2 million that have been deemed collectible were placed in accruing status as the borrowers have exhibited a period of sustained performance but continue to be individually evaluated for impairment purposes. These loans contributed to a $110.0 million decrease in non-performing loans over the last three quarters.

     As of June 30, 2011, the Corporation maintains a $5.3 million reserve for unfunded loan commitments mainly related to outstanding construction loans commitments. The reserve for unfunded loan commitments is an estimate of the losses inherent in off-balance sheet loan commitments at the balance sheet date. It is calculated by multiplying an estimated loss factor by an estimated probability of funding, and then by the period-end amounts for unfunded commitments. The reserve for unfunded loan commitments is included as part of accounts payable and other liabilities in the consolidated statement of financial condition.