FDIC Loss-sharing Asset and Covered Assets

We are a party to eight loss-sharing agreements with the FDIC relating to four FDIC-assisted acquisitions. Such agreements cover a substantial portion of losses incurred on acquired covered loans and OREO. The loss-sharing agreements relate to the acquisitions of (1) Columbia River Bank in January 2010, (2) American Marine Bank in January 2010, (3) Summit Bank in May 2011, and (4) First Heritage Bank in May 2011. Under the terms of the loss-sharing agreements, the FDIC will absorb 80% of losses and share in 80% of loss recoveries up to specified amounts. With respect to loss-sharing agreements for two acquisitions completed in 2010, after those specified amounts, the FDIC will absorb 95% of losses and share in 95% of loss recoveries. The loss-sharing provisions of the agreements for non-single family and single family mortgage loans are in effect for five and ten years, respectively, and the loss recovery provisions are in effect for eight and ten years, respectively. The loss-sharing provisions for the Columbia River Bank and American Marine Bank non-single family covered assets were effective through the end of the first quarter of 2015. In addition, the loss-sharing provisions for the Summit Bank and First Heritage Bank non-single family covered assets expired at the end of the second quarter of 2016. Accordingly, further activity will be limited to recoveries through the first quarter of 2018 and second quarter of 2019, respectively, for assets covered by these loss-sharing agreements.

Ten years and forty-five days after the applicable acquisition dates, the Bank must pay to the FDIC a clawback in the event the losses from the acquisitions fail to reach stated levels. The amount of the clawback is determined by a formula specified in each individual loss-sharing agreement. As of September 30, 2016, the net present value of the Bank’s estimated clawback liability was $5.5 million, which was included in other liabilities on the consolidated balance sheets.

At September 30, 2016, the FDIC loss-sharing asset was comprised of a $3.2 million FDIC indemnification asset and a $438 thousand FDIC receivable. The indemnification asset represents the net present value of cash flows the Company expects to collect from the FDIC under the loss-sharing agreements and the FDIC receivable represents amounts from the FDIC for which the Company has requested reimbursement but has not yet received reimbursement.

For PCI loans, the Company remeasures contractual and expected cash flows on a quarterly basis. When the quarterly remeasurement process results in a decrease in expected cash flows due to an increase in expected credit losses, impairment is recorded. As a result of this impairment, for loans covered by loss-sharing agreements with respect to which the loss-sharing provisions are still effective, the indemnification asset is increased to reflect anticipated future cash to be received from the FDIC. Consistent with the loss-sharing agreements between the Company and the FDIC, the amount of the increase to the indemnification asset is measured as 80% of the resulting impairment.

Alternatively, when the quarterly remeasurement results in an increase in expected future cash flows due to a decrease in expected credit losses, the nonaccretable difference decreases and the effective yield of the related loan portfolio is increased. As a result of the improved expected cash flows, for loans covered by loss-sharing agreements with respect to which the loss-sharing provisions are still effective, the indemnification asset would be reduced first by the amount of any impairment previously recorded and, second, by increased amortization over the remaining life of the related loss-sharing agreement.

The following table shows a detailed analysis of the FDIC loss-sharing asset for the three and nine months ended September 30, 2016 and 2015:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(in thousands)
Balance at beginning of period	$	4,266		$	9,344		$	6,568		$	15,174
Adjustments not reflected in income:
Cash (received from) paid to the FDIC, net	20			799			(23		)	(2,723		)
FDIC reimbursable recoveries, net	(590		)	(362		)	(756		)	(1,326		)
Adjustments reflected in income:
Amortization, net	(315		)	(1,416		)	(2,530		)	(5,086		)
Loan impairment (recapture)	266			(119		)	393			1,413
Sale of other real estate	(49		)	(126		)	71			(753		)
Valuation adjustments of other real estate owned	—			25			(22		)	1,148
Other	(6		)	1			(109		)	299
Balance at end of period	$	3,592		$	8,146		$	3,592		$	8,146

The following table presents information about the composition of the FDIC loss-sharing asset, the clawback liability, and the non-single family and the single family covered assets as of the date indicated:



	September 30, 2016
	Columbia River Bank		American Marine Bank		Summit Bank		First Heritage Bank			Total
	(in thousands)
FDIC loss-sharing asset (liability)	$	349	$	1,959	$	1,577	$	(293	)	$	3,592
Clawback liability	$	3,474	$	1,280	$	—	$	708		$	5,462
Non-single family covered assets	$	61,040	$	9,366	$	6,700	$	12,145		$	89,251
Single family covered assets	$	6,110	$	18,563	$	5,077	$	1,645		$	31,395

Loss-sharing expiration dates:
Non-single family	Expired		Expired		Expired		Expired
Single family	First Quarter 2020		First Quarter 2020		Second Quarter 2021		Second Quarter 2021
Recovery-sharing expiration dates:
Non-single family	First Quarter 2018		First Quarter 2018		Second Quarter 2019		Second Quarter 2019
Single family	First Quarter 2020		First Quarter 2020		Second Quarter 2021		Second Quarter 2021