Note 11 – FDIC loss share asset

In connection with the Westernbank FDIC-assisted transaction, BPPR entered into loss sharing agreements with the FDIC with respect to the covered loans and other real estate owned. Pursuant to the terms of the loss sharing agreements, the FDIC’s obligation to reimburse BPPR for losses with respect to covered assets begins with the first dollar of loss incurred. The FDIC will reimburse BPPR for 80% of losses with respect to covered assets, and BPPR will reimburse the FDIC for 80% of recoveries with respect to losses for which the FDIC paid BPPR 80% reimbursement under the loss sharing agreements. The loss sharing agreement applicable to single-family residential mortgage loans provides for FDIC loss and recoveries sharing for ten years. The loss sharing agreement applicable to commercial and consumer loans provides for FDIC loss sharing for five years and BPPR reimbursement to the FDIC for eight years, in each case, on the same terms and conditions as described above.

In addition, as disclosed in the 2010 Annual Report, BPPR has agreed to make a true-up payment to the FDIC on the date that is 45 days following the last day (the “True-Up Measurement Date”) of the final shared-loss month, or upon the final disposition of all covered assets under the loss sharing agreements in the event losses on the loss sharing agreements fail to reach expected levels. The estimated true-up payment is recorded as a reduction of the FDIC loss share asset. As of June 30, 2011, the carrying amount (discounted value) of the true-up provision was estimated at approximately $95 million (December 31, 2010 - $92 million; June 30, 2010 - $89 million).

The following table sets forth the activity in the FDIC loss share asset for the periods presented.


(In thousands)	2011			2010
Balance at beginning of year	$	2,318,183		$	—
FDIC loss share indemnification asset recorded at business combination		—			2,337,748
Accretion of loss share indemnification asset, net		31,389			17,665
Credit impairment losses to be covered under loss sharing agreements		51,329			—
Decrease due to reciprocal accounting on the discount accretion for loans and unfunded commitments accounted for under ASC Subtopic 310-20		(30,003	)		(32,702	)
Credit impairment losses reclassified to claims receivables, net of recoveries		(579,294	)		—
Other net benefits attributable to FDIC loss sharing agreements		13,156			7,695
Claims receivables filed with FDIC and outstanding [1]		545,416			—

Balance at June 30	$	2,350,176		$	2,330,406

[1]	Represent claims filed with the FDIC for losses on covered assets and reimbursable expenses. The Corporation received payment from the FDIC amounting to $545 million in July 2011.

The loss share agreements contain specific terms and conditions regarding the management of the covered assets that BPPR must follow to receive reimbursement on losses from the FDIC. Under the loss share agreements, BPPR must:

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manage and administer the covered assets and collect and effect charge-offs and recoveries with respect to such covered assets in a manner consistent with its usual and prudent business and banking practices and, with respect to single family shared-loss loans, the procedures (including collection procedures) customarily employed by BPPR in servicing and administering mortgage loans for its own account and the servicing procedures established by FNMA or FHLMC, as in effect from time to time, and in accordance with accepted mortgage servicing practices of prudent lending institutions;

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exercise its best judgment in managing, administering and collecting amounts on covered assets and effecting charge-offs with respect to the covered assets;

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use commercially reasonable efforts to maximize recoveries with respect to losses on single family shared-loss assets and best efforts to maximize collections with respect to commercial shared-loss assets;

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retain sufficient staff to perform the duties under the loss share agreements;

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adopt and implement accounting, reporting, record-keeping and similar systems with respect to the commercial shared-loss assets;

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comply with the terms of the modification guidelines approved by the FDIC with or another federal agency for any single-family shared loss loan;

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provide notice with respect to proposed transactions pursuant to which a third party or affiliate will manage, administer or collect any commercial shared-loss assets; and

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file monthly and quarterly certificates with the FDIC specifying the amount of losses, charge-offs and recoveries.

Under the loss share agreements, BPPR is also required to maintain books and records sufficient to ensure and document compliance with the terms of the loss share agreements.