ALLOWANCE FOR LOAN AND LEASE LOSSES

3 Months Ended

Sep. 30, 2014

ALLOWANCE FOR LOAN AND LEASE LOSSES

NOTE 7 – ALLOWANCE FOR LOAN AND LEASE LOSSES

The changes in the allowance for loan and lease losses were as follows:
(In thousands)	Residential Mortgage Loans		Commercial Mortgage Loans		Commercial & Industrial Loans		Construction Loans		Consumer Loans		Total
Quarter ended September 30, 2014
Allowance for loan and lease losses:
Beginning balance	$	29,755	$	48,578	$	76,890	$	21,292	$	64,662	$	241,177
Charge-offs		(5,970)		(2,823)		(17,605)		(7,691)		(19,848)		(53,937)
Recoveries		236		3,939		1,174		4,486		1,360		11,195
Provision (release)		5,885		2,721		3,017		(3,652)		19,028		26,999
Ending balance	$	29,906	$	52,415	$	63,476	$	14,435	$	65,202	$	225,434
Ending balance: specific reserve for impaired loans	$	11,658	$	14,128	$	21,267	$	2,936	$	5,295	$	55,284
Ending balance: purchased credit-impaired loans	$	-	$	-	$	-	$	-	$	-	$	-
Ending balance: general allowance	$	18,248	$	38,287	$	42,209	$	11,499	$	59,907	$	170,150
Loans held for investment:
Ending balance	$	2,819,648	$	1,812,094	$	2,515,384	$	141,689	$	2,026,587	$	9,315,402
Ending balance: impaired loans	$	421,823	$	238,332	$	241,413	$	39,441	$	32,005	$	973,014
Ending balance: purchased credit-impaired loans	$	99,535	$	3,418	$	-	$	-	$	1,360	$	104,313
Ending balance: loans with general allowance	$	2,298,290	$	1,570,344	$	2,273,971	$	102,248	$	1,993,222	$	8,238,075
(In thousands)	Residential Mortgage Loans		Commercial Mortgage Loans		Commercial & Industrial Loans		Construction Loans		Consumer Loans		Total
Nine-Month period ended September 30, 2014
Allowance for loan and lease losses:
Beginning balance	$	33,110	$	73,138	$	85,295	$	35,814	$	58,501	$	285,858
Charge-offs		(17,379)		(22,056)		(59,516)		(11,322)		(56,425)		(166,698)
Recoveries		605		8,271		2,253		5,158		4,329		20,616
Provision (release)		13,570		(6,938)		35,444		(15,215)		58,797		85,658
Ending balance	$	29,906	$	52,415	$	63,476	$	14,435	$	65,202	$	225,434
Ending balance: specific reserve for impaired loans	$	11,658	$	14,128	$	21,267	$	2,936	$	5,295	$	55,284
Ending balance: purchased credit-impaired loans	$	-	$	-	$	-	$	-	$	-	$	-
Ending balance: general allowance	$	18,248	$	38,287	$	42,209	$	11,499	$	59,907	$	170,150
Loans held for investment:
Ending balance	$	2,819,648	$	1,812,094	$	2,515,384	$	141,689	$	2,026,587	$	9,315,402
Ending balance: impaired loans	$	421,823	$	238,332	$	241,413	$	39,441	$	32,005	$	973,014
Ending balance: purchased credit-impaired loans	$	99,535	$	3,418	$	-	$	-	$	1,360	$	104,313
Ending balance: loans with general allowance	$	2,298,290	$	1,570,344	$	2,273,971	$	102,248	$	1,993,222	$	8,238,075

(In thousands)		Residential Mortgage Loans		Commercial Mortgage Loans		Commercial & Industrial Loans		Construction Loans		Consumer Loans		Total
Quarter ended September 30, 2013
Allowance for loan and lease losses:
Beginning balance		$	35,581	$	88,013	$	87,677	$	34,728	$	55,048	$	301,047
Charge-offs			(8,698)		(5,944)		(7,419)		(1,824)		(15,559)		(39,444)
Recoveries			241		26		1,701		1,895		1,718		5,581
Provision (release)			4,663		(59)		1,090		1,304		15,197		22,195
Ending balance		$	31,787	$	82,036	$	83,049	$	36,103	$	56,404	$	289,379
Ending balance: specific reserve for impaired loans		$	17,982	$	28,316	$	34,438	$	21,785	$	3,654	$	106,175
Ending balance: purchased credit-impaired loans		$	-	$	-	$	-	$	-	$	-	$	-
Ending balance: general allowance		$	13,805	$	53,720	$	48,611	$	14,318	$	52,750	$	183,204
Loans held for investment:
Ending balance		$	2,519,457	$	1,857,794	$	2,908,347	$	163,610	$	2,059,426	$	9,508,634
Ending balance: impaired loans		$	397,025	$	205,654	$	200,285	$	73,482	$	28,063	$	904,509
Ending balance: purchased credit-impaired loans		$	-	$	-	$	-	$	-	$	5,963	$	5,963
Ending balance: loans with general allowance		$	2,122,432	$	1,652,140	$	2,708,062	$	90,128	$	2,025,400	$	8,598,162
(In thousands)		Residential Mortgage Loans		Commercial Mortgage Loans		Commercial & Industrial Loans		Construction Loans		Consumer Loans		Total
Nine-Month period ended September 30, 2013
Allowance for loan and lease losses:
Beginning balance		$	68,354	$	97,692	$	146,900	$	61,600	$	60,868	$	435,414
Charge-offs			(25,351)		(25,214)		(54,849)		(30,070)		(46,673)		(182,157)
Charge-offs related to bulk sale			(98,972)		(40,057)		(44,678)		(12,784)		-		(196,491)
Recoveries			868		64		3,460		2,042		5,397		11,831
Provision			86,888		38,860		41,656		16,566		36,812		220,782
Reclassification (1)			-		10,691		(9,440)		(1,251)		-		-
Ending balance		$	31,787	$	82,036	$	83,049	$	36,103	$	56,404	$	289,379
Ending balance: specific reserve for impaired loans		$	17,982	$	28,316	$	34,438	$	21,785	$	3,654	$	106,175
Ending balance: purchased credit-impaired loans		$	-	$	-	$	-	$	-	$	-	$	-
Ending balance: general allowance		$	13,805	$	53,720	$	48,611	$	14,318	$	52,750	$	183,204
Loans held for investment:
Ending balance		$	2,519,457	$	1,857,794	$	2,908,347	$	163,610	$	2,059,426	$	9,508,634
Ending balance: impaired loans		$	397,025	$	205,654	$	200,285	$	73,482	$	28,063	$	904,509
Ending balance: purchased credit-impaired loans		$	-	$	-	$	-	$	-	$	5,963	$	5,963
Ending balance: loans with general allowance		$	2,122,432	$	1,652,140	$	2,708,062	$	90,128	$	2,025,400	$	8,598,162
(1)	During the second quarter of 2013, after a comprehensive review of substantially all of the loans in our commercial portfolios, the classification of certain loans was revised to more accurately depict the nature of the underlying loans. This reclassification resulted in a net increase of $269.0 million in commercial mortgage loans, since the principal source of repayment for such loans is derived primarily from the operation of the underlying real estate, with a corresponding decrease of $246.8 million in commercial and industrial loans and a $22.2 million decrease in construction loans. The Corporation evaluated the impact of this reclassification on the provision for loan losses and determined that the effect of this adjustment was not material to any previously reported results.

During the second quarter of 2014, the Corporation made certain enhancements to the general allowance estimation process for commercial loans which mainly consisted of the following:

Utilization of longer historical loss periods to better reflect the level of incurred losses in portfolio. Historical charge-off rates are calculated by the Corporation on a quarterly basis by tracking cumulative charge-offs experienced over a two-year loss period on loans according to their internal risk rating (referred to as “base rate” for the quarter). Prior to the second quarter enhancements, the Corporation would use the base rate of the current quarter or the average of the last 4 quarters, if greater. During the second quarter of 2014, the Corporation eliminated the use of the “greater of” approach and adopted the utilization of the base rate average of the last 8 quarters. This change captures a longer historical period that would help mitigate period to period volatility in the loss rates.

Enhancements of the environmental factors adjustment. Prior to the second quarter of 2014 enhancements, these adjustments were applied in the form of basis points additions to the loss ratio based on changes in credit and economic indicators observed in the most recent periods. Beginning in the second quarter of 2014, the resulting factor derived from a set of risk-based ratings and weights assigned to credit and economic indicators activity over a reasonable period is now applied to a developed expected range of historical losses, in order to adjust the base rates. These enhancements result in a framework that can be applied more consistently, by having a more granular analysis that better captures trends in economic conditions and the impact in the Corporation's portfolio.

In addition, the calculation of loss rates for asset classifications with limited or zero loss history was improved to consider these loans' migration experience.

The Corporation maintained a parallel computation of the general reserve for commercial loans. The enhancements to the general allowance estimation process resulted in a net decrease to the allowance for loan losses of $4.8 million as of the implementation date of May 31, 2014.

In the third quarter of 2014, similar enhancements to the environmental factors adjustment framework were applied to the consumer loans portfolio. The framework was defined for secured and unsecured loans to consider the specific behaviors separately. With respect to the historical charge-off rates, during the third quarter of 2014, the Corporation adopted the utilization of the base rate calculated as the average of net charge-off ratio for the 12 month period preceding the most recent four quarters. Previously, the base rate was calculated as the average of the last two years annual net charge-off ratio. The effect of these enhancements on the allowance for consumer loans was immaterial as of the implementation date of August 31, 2014.

The bulk sale of approximately $217.7 million of adversely classified assets in the first quarter of 2013, mainly commercial loans, resulted in charge-offs of approximately $98.5 million. In determining the historical loss rate for the computation of the general reserve for commercial loans, the Corporation includes the portion of these charge-offs that was related to the acceleration of previously reserved credit losses amounting to approximately $39.9 million.  The Corporation considered that the portion not deemed to be credit-related losses was not indicative of the ultimate losses that may have occurred had the assets been resolved on an individual basis, over time and not in a steeply discounted bulk sale. A transaction, such as this one, entered into to expedite the reduction of non-performing and adversely classified assets, can result in charge-offs that are not reflective of true credit-related charge-off history since there is a component related to the discounted value realized on a bulk sale basis. Accordingly, the Corporation concluded that it is reasonable to exclude the component related to the discounted value from its historical charge-off analysis used in estimating its allowance for loan losses.

As of September 30, 2014, the Corporation maintained a $0.2 million reserve for unfunded loan commitments mainly related to outstanding construction and commercial and industrial loan commitments. The reserve for unfunded loan commitments is an estimate of the losses inherent in off-balance sheet loan commitments to borrowers that are experiencing financial difficulties 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.