FDIC loss share asset and true up payment obligation

6 Months Ended

Jun. 30, 2015

Notes to Financial Statements [Abstract]

Note 13 – FDIC loss share asset and true-up payment obligation

In connection with the Westernbank FDIC-assisted transaction, BPPR entered into loss share arrangements with the FDIC with respect to the covered loans and other real estate owned. Pursuant to the terms of the loss share arrangements, the FDIC’s obligation to reimburse BPPR for losses with respect to covered assets begins with the first dollar of loss incurred. The FDIC reimburses BPPR for 80% of losses with respect to covered assets, and BPPR reimburses the FDIC for 80% of recoveries with respect to losses for which the FDIC paid 80% reimbursement under loss share arrangements. The loss share agreement applicable to single-family residential mortgage loans provides for FDIC loss and recoveries sharing for ten years expiring at the end of the quarter ending June 30, 2020. The loss share arrangements applicable to commercial (including construction) and consumer loans expired during the quarter ended June 30, 2015 and provides for reimbursement to the FDIC through the quarter ending June 30, 2018.

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

		Quarters ended June 30,				Six months ended June 30,
(In thousands)		2015		2014		2015		2014
Balance at beginning of period	$	409,844	$	798,460	$	542,454	$	909,414
Amortization of loss share indemnification asset		(31,065)		(72,095)		(58,381)		(121,041)
Credit impairment losses to be covered under loss sharing agreements		7,647		10,372		15,893		25,462
Reimbursable expenses		42,730		11,085		64,275		23,830
Net payments from FDIC under loss sharing agreements		(32,158)		(29,291)		(164,423)		(110,618)
Other adjustments attributable to FDIC loss sharing agreements		(4,051)		(5,662)		(6,871)		(14,178)
Balance at end of period	$	392,947	$	712,869	$	392,947	$	712,869

During the second quarter of 2014, the Corporation revised its analysis of expected cash flows which resulted in a net decrease in estimated credit losses, which was driven mainly by certain commercial loan pools. Though this had a positive impact on the Corporation’s interest accretion in future periods, the carrying value of the indemnification asset was amortized to reflect lower levels of expected losses. The amortization of the FDIC loss share asset is recognized over the shorter of the remaining life of the loan pools, or the indemnification asset

As a result of the expiration of the shared-loss arrangement under the commercial loss share agreement on June 30, 2015, loans with a carrying amount of approximately $248.7 million, which were reclassified to “non-covered” in the accompanying statement of financial condition as of June 30, 2015, are subject to the resolution of several arbitration proceedings currently ongoing with the FDIC related primarily to (i) the FDIC’s denial of reimbursements for certain charge-offs claimed by BPPR with respect to certain loans and the treatment of those loans as “shared-loss assets” under the commercial loss share agreement; and (ii) the denial by the FDIC of portfolio sale proposals submitted by BPPR pursuant to the applicable commercial shared loss agreement provision governing portfolio sales. Until the disputes described above are finally resolved, the terms of the commercial loss share agreement will remain in effect with respect to any such items under dispute. As of June 30, 2015, losses amounting to $141.3 million related to these assets are reflected in the FDIC indemnification asset as a receivable from the FDIC. Refer to additional information of these disputes on Note 26, Commitments and Contingencies.

The weighted average life of the single family loan portfolio subject to the FDIC loss sharing agreement at June 30, 2015 is 7.63 years.

As part of the loss share agreements, BPPR has agreed to make a true-up payment to the FDIC on the date that is 45 days following the last day (such day, the “true-up measurement date”) of the final shared-loss month, or upon the final disposition of all covered assets under the loss share agreements, in the event losses on the loss share agreements fail to reach expected levels. The estimated fair value of such true-up payment obligation is recorded as contingent consideration, which is included in the caption of other liabilities in the consolidated statements of financial condition. Under the loss sharing agreements, BPPR will pay to the FDIC 50% of the excess, if any, of: (i) 20% of the intrinsic loss estimate of $4.6 billion (or $925 million) (as determined by the FDIC) less (ii) the sum of: (A) 25% of the asset discount (per bid) (or ($1.1 billion)); plus (B) 25% of the cumulative shared-loss payments (defined as the aggregate of all of the payments made or payable to BPPR minus the aggregate of all of the payments made or payable to the FDIC); plus (C) the sum of the period servicing amounts for every consecutive twelve-month period prior to and ending on the true-up measurement date in respect of each of the loss sharing agreements during which the loss sharing provisions of the applicable loss sharing agreement is in effect (defined as the product of the simple average of the principal amount of shared loss loans and shared loss assets at the beginning and end of such period times 1%).

The following table provides the fair value and the undiscounted amount of the true-up payment obligation at June 30, 2015 and December 31, 2014.

(In thousands)		June 30, 2015		December 31, 2014
Carrying amount (fair value)	$	121,469	$	129,304
Undiscounted amount	$	172,026	$	187,238

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

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 the Federal Home Loan Mortgage Corporation (“FHLMC”), as in effect from time to time, and in accordance with accepted mortgage servicing practices of prudent lending institutions;
exercise its best judgment in managing, administering and collecting amounts on covered assets and effecting charge-offs with respect to the covered assets;
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;
retain sufficient staff to perform the duties under the loss share agreements;
adopt and implement accounting, reporting, record-keeping and similar systems with respect to the commercial shared-loss assets;
comply with the terms of the modification guidelines approved by the FDIC or another federal agency for any single-family shared-loss loan;
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;
file monthly and quarterly certificates with the FDIC specifying the amount of losses, charge-offs and recoveries; and
maintain books and records sufficient to ensure and document compliance with the terms of the loss share agreements.

Refer to Note 26, Commitment and Contingencies, for additional information on the settlement of the arbitration proceedings with the FDIC regarding the commercial loss share agreement.