FDIC Indemnification Asset and True-up Payment Obligation

12 Months Ended

Dec. 31, 2015

FDIC Indemnification Asset and True-up Payment Obligation [Text Block]

NOTE 7- FDIC INDEMNIFICATION ASSET, TRUE-UP PAYMENT OBLIGATION, AND FDIC SHARED-LOSS EXPENSE

In connection with the FDIC-assisted acquisition, the Bank and the FDIC entered into shared-loss agreements pursuant to which the FDIC covers a substantial portion of any losses on loans (and related unfunded loan commitments), foreclosed real estate and other repossessed properties covered by the agreements.

The acquired loans, foreclosed real estate, and other repossessed properties subject to the shared-loss agreements are collectively referred to as “covered assets.” Under the terms of the shared-loss agreements, the FDIC absorbs 80% of losses and shares in 80% of loss recoveries on covered assets. The term of the shared-loss agreement covering single family residential mortgage loans is ten years with respect to losses and loss recoveries, while the term of the shared-loss agreement covering commercial loans is five years with respect to losses and eight years with respect to loss recoveries, from the April 30, 2010 acquisition date. The coverage under the commercial shared-loss agreement expired on June 30, 2015. The shared-loss agreements also provide for certain costs directly related to the collection and preservation of covered assets to be reimbursed at an 80% level. The FDIC indemnification asset represents the portion of estimated losses covered by the shared-loss agreements between the Bank and the FDIC.

The following table presents the activity in the FDIC indemnification asset and true-up payment obligation for the years ended December 31, 2015, 2014 and 2013:

	Year Ended December 31,
	2015		2014		2013
	(In thousands)
FDIC indemnification asset:
Balance at beginning of year	$	97,378	$	189,240	$	302,295
Shared-loss agreements reimbursements from the FDIC		(55,723)		(47,666)		(47,100)
Increase (decrease) in expected credit losses to be covered under shared-loss agreements, net		2,503		5,836		(6,730)
FDIC indemnification asset expense		(36,398)		(62,285)		(66,253)
Final settlement with the FDIC on commercial loans		(1,589)		-		-
Incurred expenses to be reimbursed under shared-loss agreements		16,428		12,253		7,028
Balance at end of year	$	22,599	$	97,378	$	189,240

True-up payment obligation:
Balance at beginning of year	$	21,981	$	18,510	$	15,496
Change in true-up payment obligation		2,677		3,471		3,014
Balance at end of year	$	24,658	$	21,981	$	18,510

The FDIC shared-loss expense bears an inverse relationship with a change in the yield of covered loan pools in accordance with ASC 310-30. ASC 310-30 dictates that such pools should be subject to increases in their yield when the present value of the expected cash flows is higher than the pool’s carrying balance. When the increases in cash flow expectations are driven by reductions in the expected credit losses, the Bank recognizes that such losses are no longer expected to be collected from the FDIC. Accordingly, the Bank reduces the FDIC indemnification asset by amortizing the reduction in expected collections throughout the remaining life of the underlying pools. This amortization is recognized in the FDIC shared-loss expense.

The underlying factors that caused an increase in the expected cash flows and resulting reduction in projected losses are derived from the pool-level cash flow forecasts. Credit loss assumptions used to develop each pool-level cash flow forecast are based on the behavior of defaults, recoveries and losses of the corresponding pool of covered loans.

The FDIC loss-share coverage for the commercial loans was in effect until June 30, 2015. Accordingly, the Company amortized the remaining portion of the FDIC indemnification asset attributable to non-single family loans at the close of the second quarter of 2015. At December 31, 2015, the Company had no receivables from the FDIC, included in other assets in the statements of financial condition, corresponding to the loss-share certifications for commercial and other non-single family loans. At December 31, 2015, the FDIC indemnification asset reflects only the balance for single family residential mortgage loans. Notwithstanding the expiration of loss-share coverage of non-single family loans, on July 2, 2015, the Company entered into an agreement with the FDIC pursuant to which the FDIC agreed with a potential sale of a pool of loss-share assets covered under the commercial loss-sharing agreement. Pursuant to such agreement, the FDIC agreed to pay up to $20 million in loss share coverage with respect to the aggregate loss resulting from any portfolio sale within 120 days of the agreement. This sale was completed on September 28, 2015 and payment was received in December 2015.

The Company have owed payments to the FDIC for the recovery of prior claims. At December 31, 2015, the liability for these payments amounted to $2.1 million and is recorded in other liabilities in the consolidated statements of financial condition until cash is paid to the FDIC. There was no liability at December 31, 2014.

The FDIC indemnification asset expense decreased to $36.4 million for 2015 when compared to $62.3 million for 2014, and $66.3 million for 2013. The reduction in 2015 when compared to 2014 was principally driven by the expiration of the FDIC loss share coverage for commercial loans and other non-single family loans. During the years ended December 31, 2015, 2014 and 2013, the amortization expense totaled $2.5 million, $2.8 million, and $11.1 million, respectively, primarily as a result of stepped up cost recoveries on certain construction, commercial, and leasing pools.

Also in connection with the FDIC-assisted acquisition, the Bank agreed to make a true-up payment, also known as clawback liability or clawback provision, 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 shared-loss agreements in the event losses thereunder fail to reach expected levels. Under the shared-loss agreements, the Bank will pay to the FDIC 50% of the excess, if any, of: (i) 20% of the Intrinsic Loss Estimate of $906.0 million (or $181.2 million) (as determined by the FDIC) less (ii) the sum of: (A) 25% of the asset discount (per bid) (or $227.5 million); plus (B) 25% of the cumulative shared-loss payments (defined as the aggregate of all of the payments made or payable to the Bank 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 shared-loss agreements during which the shared-loss provisions of the applicable shared-loss 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 estimated liability is included within accrued expenses and other liabilities in the consolidated statements of financial condition.

This true-up payment obligation may increase if actual and expected losses decline. The Company measures the true-up payment obligation at fair value. The changes in fair value are included as change in true-up payment obligation within FDIC shared-loss expense, net in the consolidated statements of operations.

The following table provides the fair value and the undiscounted amount of the true-up payment obligation at December 2015 and 2014:

2.1

	December 31,
	2015		2014
	(In thousands)
Carrying amount (fair value)	$	24,658	$	21,981
Undiscounted amount	$	34,956	$	40,266

In connection with the FDIC-assisted acquisition, the Company recognized an FDIC shared-loss expense, net in the consolidated statements of operations, which consists of the following, for the years ended December 31, 2015, 2014 and 2013:

	Year Ended December 31,
	2015		2014		2013
	(In thousands)
FDIC indemnification asset expense	$	(36,398)	$	(62,285)	$	(66,253)
Change in true-up payment obligation		(2,677)		(3,471)		(3,014)
Reimbursement to FDIC for recoveries		(2,144)		-		-
Final settlement with the FDIC on commercial loans		(1,589)		-		-
Total FDIC shared-loss expense, net		(42,808)	$	(65,756)	$	(69,267)