ALLOWANCE FOR LOAN AND LEASE LOSSES

9 Months Ended

Sep. 30, 2016

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, 2016
Allowance for loan and lease losses:
Beginning balance		$	38,955	$	69,799	$	69,789	$	2,747	$	53,164	$	234,454
Charge-offs			(8,514)		(13,730)		(10,587)		(19)		(13,716)		(46,566)
Recoveries			972		335		929		140		2,303		4,679
Provision (release)			4,553		(152)		5,597		2,480		9,025		21,503
Ending balance		$	35,966	$	56,252	$	65,728	$	5,348	$	50,776	$	214,070
Ending balance: specific reserve for impaired loans		$	9,667	$	25,907	$	28,668	$	3,004	$	5,436	$	72,682
Ending balance: purchased credit-impaired loans (1)		$	6,638	$	219	$	-	$	-	$	-	$	6,857
Ending balance: general allowance		$	19,661	$	30,126	$	37,060	$	2,344	$	45,340	$	134,531
Loans held for investment:
Ending balance		$	3,299,942	$	1,545,014	$	2,167,011	$	124,298	$	1,727,389	$	8,863,654
Ending balance: impaired loans		$	444,039	$	198,500	$	178,174	$	47,707	$	44,434	$	912,854
Ending balance: purchased credit-impaired loans		$	165,014	$	3,127	$	-	$	-	$	-	$	168,141
Ending balance: loans with general allowance		$	2,690,889	$	1,343,387	$	1,988,837	$	76,591	$	1,682,955	$	7,782,659
(In thousands)		Residential Mortgage Loans		Commercial Mortgage Loans		Commercial & Industrial Loans		Construction Loans		Consumer Loans		Total
Nine-Month Period Ended September 30, 2016
Allowance for loan and lease losses:
Beginning balance		$	39,570	$	68,211	$	68,768	$	3,519	$	60,642	$	240,710
Charge-offs			(27,352)		(15,742)		(16,260)		(623)		(41,490)		(101,467)
Recoveries			2,159		414		1,885		301		6,526		11,285
Provision			21,589		3,369		11,335		2,151		25,098		63,542
Ending balance		$	35,966	$	56,252	$	65,728	$	5,348	$	50,776	$	214,070
Ending balance: specific reserve for impaired loans		$	9,667	$	25,907	$	28,668	$	3,004	$	5,436	$	72,682
Ending balance: purchased credit-impaired loans (1)		$	6,638	$	219	$	-	$	-	$	-	$	6,857
Ending balance: general allowance		$	19,661	$	30,126	$	37,060	$	2,344	$	45,340	$	134,531
Loans held for investment:
Ending balance		$	3,299,942	$	1,545,014	$	2,167,011	$	124,298	$	1,727,389	$	8,863,654
Ending balance: impaired loans		$	444,039	$	198,500	$	178,174	$	47,707	$	44,434	$	912,854
Ending balance: purchased credit-impaired loans		$	165,014	$	3,127	$	-	$	-	$	-	$	168,141
Ending balance: loans with general allowance		$	2,690,889	$	1,343,387	$	1,988,837	$	76,591	$	1,682,955	$	7,782,659
(1)	Refer to Note 6 - Loans Held for Investment -PCI loans for a detail of changes in the allowance for loan losses related to PCI loans.

(In thousands)	Residential Mortgage Loans		Commercial Mortgage Loans		Commercial & Industrial Loans		Construction Loans		Consumer Loans		Total
Quarter ended September 30, 2015
Allowance for loan and lease losses:
Beginning balance	$	33,783	$	49,092	$	63,900	$	11,865	$	62,878	$	221,518
Charge-offs		(5,094)		(3,677)		(1,267)		(103)		(15,926)		(26,067)
Recoveries		214		20		327		176		1,602		2,339
Provision (release)		6,958		6,668		3,807		(139)		13,882		31,176
Ending balance	$	35,861	$	52,103	$	66,767	$	11,799	$	62,436	$	228,966
Ending balance: specific reserve for impaired loans	$	18,705	$	4,886	$	17,540	$	2,128	$	8,600	$	51,859
Ending balance: purchased credit-impaired loans	$	3,061	$	102	$	-	$	-	$	-	$	3,163
Ending balance: general allowance	$	14,095	$	47,115	$	49,227	$	9,671	$	53,836	$	173,944
Loans held for investment:
Ending balance	$	3,330,089	$	1,562,538	$	2,222,324	$	163,956	$	1,861,555	$	9,140,462
Ending balance: impaired loans	$	459,311	$	104,046	$	174,983	$	66,123	$	38,250	$	842,713
Ending balance: purchased credit-impaired loans	$	172,927	$	3,158	$	-	$	-	$	-	$	176,085
Ending balance: loans with general allowance	$	2,697,851	$	1,455,334	$	2,047,341	$	97,833	$	1,823,305	$	8,121,664
(In thousands)	Residential Mortgage Loans		Commercial Mortgage Loans		Commercial & Industrial Loans		Construction Loans		Consumer Loans		Total
Nine-Month Period Ended September 30, 2015
Allowance for loan and lease losses:
Beginning balance	$	27,301	$	50,894	$	63,721	$	12,822	$	67,657	$	222,395
Charge-offs		(13,815)		(54,115)		(30,090)		(4,787)		(48,221)		(151,028)
Recoveries		584		6,515		3,386		2,379		6,323		19,187
Provision		21,791		48,809		29,750		1,385		36,677		138,412
Ending balance	$	35,861	$	52,103	$	66,767	$	11,799	$	62,436	$	228,966
Ending balance: specific reserve for impaired loans	$	18,705	$	4,886	$	17,540	$	2,128	$	8,600	$	51,859
Ending balance: purchased credit-impaired loans	$	3,061	$	102	$	-	$	-	$	-	$	3,163
Ending balance: general allowance	$	14,095	$	47,115	$	49,227	$	9,671	$	53,836	$	173,944
Loans held for investment:
Ending balance	$	3,330,089	$	1,562,538	$	2,222,324	$	163,956	$	1,861,555	$	9,140,462
Ending balance: impaired loans	$	459,311	$	104,046	$	174,983	$	66,123	$	38,250	$	842,713
Ending balance: purchased credit-impaired loans	$	172,927	$	3,158	$	-	$	-	$	-	$	176,085
Ending balance: loans with general allowance	$	2,697,851	$	1,455,334	$	2,047,341	$	97,833	$	1,823,305	$	8,121,664

As discussed in Note 6, under the heading “Bulk Sale of Assets,” during the second quarter of 2015, the Corporation completed the sale of commercial and construction loans with a book value of $147.5 million, mostly comprised of non-performing and adversely classified loans. This transaction resulted in charge-offs of approximately $61.4 million.

The Corporation incorporated the charge-offs information from the second quarter 2015 bulk sale in its measurement of credit impairment for loans collectively measured. In the second quarter of 2015, the total bulk sale charge offs were included in the determination of historical loss rates with no reduction for the additional market discount related to the bulk sale resolution. In the past, the Corporation had separated the market component of the loss. The decision to include total charge-offs, with no qualitative adjustment for the steep discount on this bulk sale, considered the potential use of similar credit resolution strategies in the future in light of the current economic conditions in Puerto Rico. The effect of this position resulted in an increase of $15.5 million in the related allowance in the second quarter of 2015. During the third quarter of 2015, the Corporation further refined its methodology by allocating the second quarter 2015 bulk sale losses over an estimated realization period of eight quarters, which would reflect a more typical loss resolution pattern. Management believes that this loss estimation process is more indicative of the current experience related to the average period for a loan to migrate to asset classification categories and the eventual charge-off.

As of September 30, 2016, the Corporation maintained a $2.1 million reserve for unfunded loan commitments ($0.5 million as of September 30, 2015) mainly related to an outstanding adversely classified floor plan relationship. 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.