ALLOWANCE FOR LOAN AND LEASE LOSSES

12 Months Ended

Dec. 31, 2018

Loans and Leases Receivable Disclosure [Abstract]

ALLOWANCE FOR LOAN AND LEASE LOSSES [Text Block]

The changes in the allowance for loan and lease losses were as follows:
	Residential		Commercial		Commercial and		Construction		Consumer
Year Ended December 31, 2018	Mortgage Loans		Mortgage Loans		Industrial Loans		Loans		Loans		Total
(In thousands)
Allowance for loan and lease losses:
Beginning balance	$	58,975	$	48,493	$	48,871	$	4,522	$	70,982	$	231,843
Charge-offs		(24,775)		(23,911)		(9,704)		(8,296)		(50,106)		(116,792)
Recoveries		3,392		7,925		1,819		334		8,588		22,058
Provision (release)		13,202		23,074		(8,440)		7,032		24,385		59,253
Ending balance	$	50,794	$	55,581	$	32,546	$	3,592	$	53,849	$	196,362
Ending balance: specific reserve for impaired loans	$	19,965	$	17,684	$	9,693	$	760	$	5,874	$	53,976
Ending balance: purchased credit-impaired loans (1)	$	10,954	$	400	$	-	$	-	$	-	$	11,354
Ending balance: general allowance	$	19,875	$	37,497	$	22,853	$	2,832	$	47,975	$	131,032
Loans held for investment:
Ending balance	$	3,163,208	$	1,522,662	$	2,148,111	$	79,429	$	1,944,713	$	8,858,123
Ending balance: impaired loans	$	403,732	$	227,426	$	91,192	$	6,593	$	31,326	$	760,269
Ending balance: purchased credit-impaired loans	$	143,176	$	3,464	$	-	$	-	$	-	$	146,640
Ending balance: loans with general allowance	$	2,616,300	$	1,291,772	$	2,056,919	$	72,836	$	1,913,387	$	7,951,214

	Residential		Commercial		Commercial and		Construction		Consumer
Year Ended December 31, 2017	Mortgage Loans		Mortgage Loans		Industrial Loans		Loans		Loans		Total
(In thousands)
Allowance for loan and lease losses:
Beginning balance	$	33,980	$	57,261	$	61,953	$	2,562	$	49,847	$	205,603
Charge-offs		(28,186)		(39,092)		(19,855)		(3,607)		(44,030)		(134,770)
Recoveries		2,437		270		5,755		732		7,562		16,756
Provision		50,744		30,054		1,018		4,835		57,603		144,254
Ending balance	$	58,975	$	48,493	$	48,871	$	4,522	$	70,982	$	231,843
Ending balance: specific reserve for impaired loans	$	22,086	$	9,783	$	12,359	$	2,017	$	5,165	$	51,410
Ending balance: purchased credit-impaired loans (1)	$	10,873	$	378	$	-	$	-	$	-	$	11,251
Ending balance: general allowance	$	26,016	$	38,332	$	36,512	$	2,505	$	65,817	$	169,182
Loans held for investment:
Ending balance	$	3,290,957	$	1,614,972	$	2,083,253	$	111,397	$	1,749,897	$	8,850,476
Ending balance: impaired loans	$	433,434	$	152,914	$	118,300	$	47,266	$	38,394	$	790,308
Ending balance: purchased credit-impaired loans	$	153,991	$	4,183	$	-	$	-	$	-	$	158,174
Ending balance: loans with general allowance	$	2,703,532	$	1,457,875	$	1,964,953	$	64,131	$	1,711,503	$	7,901,994

The tables below present the allowance for loan and lease losses and the carrying value of loans by portfolio segment as of December 31, 2018 and 2017:
As of December 31, 2018	Residential Mortgage Loans			Commercial Mortgage Loans			Commercial and Industrial Loans						Consumer Loans
										Construction Loans
(Dollars in thousands)																Total
Impaired loans without specific reserves:
Principal balance of loans, net of charge-offs	$	110,238		$	43,358		$	30,030		$	2,431		$	2,340		$	188,397
Impaired loans with specific reserves:
Principal balance of loans, net of charge-offs		293,494			184,068			61,162			4,162			28,986			571,872
Allowance for loan and lease losses		19,965			17,684			9,693			760			5,874			53,976
Allowance for loan and lease losses to
principal balance		6.80	%		9.61	%		15.85	%		18.26	%		20.26	%		9.44	%
PCI loans:
Carrying value of PCI loans		143,176			3,464			-			-			-			146,640
Allowance for PCI loans		10,954			400			-			-			-			11,354
Allowance for PCI loans to carrying value		7.65	%		11.55	%		-			-			-			7.74	%
Loans with general allowance:
Principal balance of loans		2,616,300			1,291,772			2,056,919			72,836			1,913,387			7,951,214
Allowance for loan and lease losses		19,875			37,497			22,853			2,832			47,975			131,032
Allowance for loan and lease losses to
principal balance		0.76	%		2.90	%		1.11	%		3.89	%		2.51	%		1.65	%
Total loans held for investment:
Principal balance of loans	$	3,163,208		$	1,522,662		$	2,148,111		$	79,429		$	1,944,713		$	8,858,123
Allowance for loan and lease losses		50,794			55,581			32,546			3,592			53,849			196,362
Allowance for loan and lease losses to
principal balance (1)		1.61	%		3.65	%		1.52	%		4.52	%		2.77	%		2.22	%

	Residential Mortgage Loans			Commercial Mortgage Loans			Commercial and Industrial Loans						Consumer Loans
										Construction Loans
(Dollars in thousands)																Total
As of December 31, 2017
Impaired loans without specific reserves:
Principal balance of loans, net of charge-offs	$	116,818		$	65,100		$	28,292		$	48		$	2,788		$	213,046
Impaired loans with specific reserves:
Principal balance of loans, net of charge-offs		316,616			87,814			90,008			47,218			35,606			577,262
Allowance for loan and lease losses		22,086			9,783			12,359			2,017			5,165			51,410
Allowance for loan and lease losses to
principal balance		6.98	%		11.14	%		13.73	%		4.27	%		14.51	%		8.91	%
PCI loans:
Carrying value of PCI loans		153,991			4,183			-			-			-			158,174
Allowance for PCI loans		10,873			378			-			-			-			11,251
Allowance for PCI loans to carrying value		7.06	%		9.04	%		-			-			-			7.11	%
Loans with general allowance:
Principal balance of loans		2,703,532			1,457,875			1,964,953			64,131			1,711,503			7,901,994
Allowance for loan and lease losses		26,016			38,332			36,512			2,505			65,817			169,182
Allowance for loan and lease losses to
principal balance		0.96	%		2.63	%		1.86	%		3.91	%		3.85	%		2.14	%
Total loans held for investment:
Principal balance of loans	$	3,290,957		$	1,614,972		$	2,083,253		$	111,397		$	1,749,897		$	8,850,476
Allowance for loan and lease losses		58,975			48,493			48,871			4,522			70,982			231,843
Allowance for loan and lease losses to
principal balance (1)		1.79	%		3.00	%		2.35	%		4.06	%		4.06	%		2.62	%
(1) Loans used in the denominator include PCI loans of $146.6 million and $158.2 million as of December 31, 2018 and 2017, respectively. However, the Corporation separately tracks and reports PCI loans and excludes these loans from the amounts of nonaccrual loans, impaired loans, TDRs and non-performing assets.

As of December 31, 2018, the Corporation maintained a $0.4million reserve for unfunded loan commitments (compared to $0.7 million as of December 31, 2017), mainly related to outstanding commitments on floor plan revolving lines of credit. 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 statements of financial condition and any changes to the reserve is included as part of other non-interest expenses in the consolidated statements of income.

During the second quarter of 2018, the Corporation implemented certain enhancements to the methodology for the calculation of the allowance for commercial loans, which include, among others, a revised procedure whereby historical loss rates for each commercial loan regulatory-based credit risk category (i.e., pass, special mention, substandard, and doubtful) are now calculated using the historical charge-offs and portfolio balances over their average loss emergence period (the “raw loss rate”) for each credit risk classification. However, when not enough loss experience is observed in a particular risk-rated category and the calculation results in a loss rate for such risk-rated category that is lower than the loss rate of a less severe risk-rated category, the Corporation now uses the loss rate of such less severe category.

As a result of these revisions, the Corporation’s method for determining the allowance for loan losses differs from the method that it used as of March 31, 2018, which was to allocate historical losses and portfolio balances of special mention loans to pass or substandard categories based on the historical proportion of loans in this risk category that ultimately cured or became uncollectible, and the method that it used as of December 31, 2017, which was to use blended loss rates for commercial loans risk-rated special mention, substandard, and doubtful.

In addition, during the second quarter of 2018, the Corporation implemented refinements to the measurement of qualitative factors in the estimation process of the allowance for loan losses for commercial and consumer loans, primarily consisting of the incorporation of a basis point adjustment derived from the difference between the average raw loss rate and the highest loss rates observed during a look-back period that management determined was appropriate to use for each region to identify any relevant effect during an economic cycle.

Although the net effect of these refinements was immaterial to the total provision expense, on a portfolio basis, these enhancements resulted in a $1.6 million decrease in the provision for commercial and construction loans, offset by a $1.6 million increase in the provision for consumer loans in the second quarter of 2018.

Hurricane-Related Qualitative Allowance for Loan and Lease Losses

As described in Note 2 – Effects of Natural Disasters, two strong hurricanes affected the Corporation’s service areas during September 2017. These hurricanes caused widespread property damage, flooding, power outages, and water and communication service interruptions, and severely disrupted normal economic activity in the affected areas. During the third quarter of 2017, the Corporation recorded a $66.5 million charge to the provision related to the establishment of qualitative reserves associated with the effects of Hurricanes Irma and Maria. Models were developed based on a regression modeling approach in which relationships between portfolio-level loss rates and key economic indicators were derived based on historical behavior. Accordingly, the qualitative reserves were initially determined based on the estimated effect that the hurricanes could have on employment levels and economic activity in the Corporation’s service areas, and the time that it could take for the affected regions to return to a more normalized operating environment. For large commercial and construction loan relationships, loan officers performed individual reviews of the effect of the hurricanes on these borrowers’ sources of repayments. These large relationships, that represented 80% of the outstanding balance of the Corporation’s commercial and construction loan portfolio, were analyzed and divided into three hurricane-affected categories (i.e., Low, Medium and High). This stratification was used to stress the general reserve loss factors applicable to these loans to reflect higher default probabilities than those reflected in the historical data. During 2018, the Corporation performed additional procedures to evaluate the adequacy of the qualitative reserve, including the consideration of updated payment patterns and probability of default credit risk analyses applied to consumer loan borrowers subject to payment deferral programs that expired early in 2018. For the determination of the hurricane-related qualitative reserve for residential mortgage loans as of December 31, 2018, the Corporation stressed the loss factors derived from its base methodologyby incorporating assumptions of further deterioration in the housing price index and higher loan modification levels. Although the foreclosure moratoriums extended by the FHA to hurricane-affected individuals ended on September 15, 2018, there are likely to be additional delays in foreclosure actions due to court related backlogs. For the determination of the hurricane-related qualitative reserve for commercial and construction loans not individually reviewed as of December 31, 2018, the Corporation segregated the portfolio based on delinquency levels and stressed the general reserve loss factors applicable to 30-89 days past due loans to reflect higher default probabilities. As of December 31, 2018, the hurricane-related qualitative reserve was $19.2 million (2017 - $55.6 million), composed of $17.2 million for Puerto Rico (2017 - $50.2 million) and $2.0 million for the Virgin Islands (2017 - $5.4 million). On a portfolio basis, the hurricane-related qualitative reserve as of December 31, 2018 and 2017 was composed of: (i) $8.8 million for residential mortgage loans (2017 - $9.2 million); (ii) $3.4 million for commercial and industrial loans (2017 - $13.1 million); (iii) $3.8 million for commercial mortgage loans (2017 - $7.5 million); (iv) $0 for construction loans (2017 - $0.7 million); and (v) $3.2 million for consumer loans (2017 - $25.0 million). Refer to Note 1 – Nature of Business and Summary of Significant Accounting Policies, for additional information about the Corporation’s approach to estimating the hurricane-related qualitative reserve.

Relationship officers have continued to closely monitor the performance of hurricane-affected commercial loan customers during 2018. Information provided by these commercial loan officers, including information derived from regularly scheduled annual reviews, and statistics on the performance of consumer and residential credits were factored into the determination of the allowance for loan and lease losses as of December 31, 2018. Although the identification and evaluation of hurricane-affected credits has been completed, management’s assessment of the hurricanes’ effect is still subject to uncertainties, both those specific to some individual customers, such as the resolution of insurance claims, and those applicable to the overall economic prospects of the hurricane-affected areas as a whole.

During 2018, the Corporation recorded a net loan loss reserve release of $16.9 million in connection with revised estimates associated with the effects of the hurricanes. In addition to the above-mentioned updated assessments of financial performance and repayment prospects of certain individually-assessed commercial credits and updated payment patterns and probability of default credit risk analyses applied to consumer borrowers that were subject to payment deferral programs, the reserve releases in 2018 reflect the effect of payments received during 2018 that reduced the balance of the consumer and residential mortgage loan portfolios outstanding on the dates of the hurricanes. The individual review of large commercial loans also resulted in downgrades in the credit risk classification of certain loans and their hurricane-related qualitative reserves of approximately $5.7 million were transferred to the general reserve and the reserve for such loans are now determined following the methodology applicable to criticized and adversely classified loans, as appropriate. In addition, approximately $10.9 million of the consumer loan charge-offs recorded in 2018 were taken against previously-established hurricane-related qualitative reserves associated with Hurricanes Irma and Maria. As of December 31, 2018, the hurricane-related qualitative allowance amounted to $19.2 million (compared to $55.6 million as of December 31. 2017). With the ongoing collection of information on individual commercial customers and statistics on the consumer and residential mortgage loans portfolios, the loss estimate will be revised as needed.