NOTE 9 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The Company’s loan portfolio includes originated and purchased loans. Originated and purchased loans, for which there was no evidence of credit deterioration at their acquisition date, are referred to collectively as non-PCI loans. Purchased credit impaired (“PCI”) loans are accounted for in accordance with ASC Subtopic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. A purchased loan is deemed to be credit impaired when there is evidence of credit deterioration since its origination and it is probable at the acquisition date that the Company would be unable to collect all contractually required payments. PCI loans consist of loans acquired with deteriorated quality from the United Commercial Bank (“UCB”) FDIC assisted acquisition on November 6, 2009, the Washington First International Bank (“WFIB”) FDIC assisted acquisition on June 11, 2010 and, to a lesser extent, a small portion of loans acquired from the MetroCorp acquisition on January 17, 2014. Refer to Note 3 — Business Combination, included in this report, for further details on the MetroCorp acquisition and Note 8 — Covered Assets and FDIC Indemnification Asset to the Consolidated Financial Statements of the Company’s 2014 Form 10-K for additional details related to the WFIB and UCB acquisitions.

The following table presents the composition of the Company’s non-PCI and PCI loans as of June 30, 2015 and December 31, 2014:




	June 30, 2015									December 31, 2014
($ in thousands)	Non-PCI Loans			PCI Loans ⁽¹⁾			Total ⁽¹⁾			Non-PCI Loans			PCI Loans ⁽¹⁾			Total ⁽¹⁾
CRE:
Income Producing	$	6,087,661		$	626,504		$	6,714,165		$	5,568,046		$	688,013		$	6,256,059
Construction	370,323			7,451			377,774			319,843			12,444			332,287
Land	182,337			12,597			194,934			214,327			16,840			231,167
Total CRE	6,640,321			646,552			7,286,873			6,102,216			717,297			6,819,513
C&I:
Commercial business	7,311,273			66,332			7,377,605			7,097,853			83,336			7,181,189
Trade finance	768,279			4,780			773,059			889,728			6,284			896,012
Total C&I	8,079,552			71,112			8,150,664			7,987,581			89,620			8,077,201
Residential:
Single-family	3,119,679			203,473			3,323,152			3,647,262			219,519			3,866,781
Multifamily	1,250,436			224,044			1,474,480			1,184,017			265,891			1,449,908
Total residential	4,370,115			427,517			4,797,632			4,831,279			485,410			5,316,689
Consumer	1,702,822			26,621			1,729,443			1,483,956			29,786			1,513,742
Total loans	$	20,792,810		$	1,171,802		$	21,964,612		$	20,405,032		$	1,322,113		$	21,727,145
Unearned fees, premiums, and discounts, net	(5,948		)	—			(5,948		)	2,804			—			2,804
Allowance for loan losses	(260,617		)	(612		)	(261,229		)	(260,965		)	(714		)	(261,679		)
Loans, net	$	20,526,245		$	1,171,190		$	21,697,435		$	20,146,871		$	1,321,399		$	21,468,270

(1) Loans net of ASC 310-30 discount.

The Company’s CRE lending activities include loans to finance income-producing properties, construction and land loans. The Company’s C&I lending activities include commercial business financing for small and middle-market businesses in a wide spectrum of industries. Included in commercial business loans are loans for working capital, accounts receivable lines, inventory lines, Small Business Administration loans and lease financing. The Company also offers a variety of international trade finance services and products, including letters of credit, revolving lines of credit, import loans, bankers’ acceptances, working capital lines, domestic purchase financing and pre-export financing.

The Company’s single-family residential loans are primarily comprised of adjustable rate (“ARM”) first mortgage loans secured by one-to-four unit residential properties. The Company’s ARM single-family residential loan programs generally have a one-year or three-year initial fixed period. The Company’s multifamily residential loans are primarily comprised of variable rate loans that have a six-month or three-year initial fixed period. As of June 30, 2015 and December 31, 2014, consumer loans were primarily composed of home equity lines of credit (“HELOCs”).

All loans originated are subject to the Company’s underwriting guidelines and loan origination standards. Management believes that the Company’s underwriting criteria and procedures adequately consider the unique risks which may come from these products. The Company conducts a variety of quality control procedures and periodic audits, including review of criteria for lending and legal requirements, to ensure it is in compliance with its origination standards.

As of June 30, 2015 and December 31, 2014, loans totaling $15.40 billion and $14.66 billion, respectively, were pledged to secure borrowings and to provide additional borrowing capacity from the FHLB and the Federal Reserve Bank.

Credit Quality Indicators

All loans are subject to the Company’s internal and external credit review and monitoring. Loans are risk rated based on analysis of the current state of the borrower’s credit quality. The analysis of credit quality includes a review of all repayment sources, the borrower’s current payment performance/delinquency, current financial and liquidity status and all other relevant information. For single-family residential loans, payment performance/delinquency is the driving indicator for the risk ratings. However, the risk ratings remain the overall credit quality indicator for the Company as well as the credit quality indicator utilized for estimating the appropriate allowance for loan losses. The Company utilizes a seven-grade risk rating system, which can be classified within the following categories: Pass, Watch, Special Mention, Substandard, Doubtful and Loss. The risk ratings reflect the relative strength of the repayment sources.

Pass and Watch loans are generally considered to have sufficient sources of repayment in order to repay the loan in full in accordance with all terms and conditions. These borrowers may have some credit risks that require monitoring, but full repayments are expected. Special Mention loans are considered to have potential weaknesses that warrant closer attention by management. Special Mention is considered a transitory grade. If any potential weaknesses are resolved, the loan is upgraded to a Pass or Watch grade. If negative trends in the borrower’s financial status or other information indicates that the repayment sources may become inadequate, the loan is downgraded to a Substandard grade. Substandard loans are considered to have well-defined weaknesses that jeopardize the full and timely repayment of the loan. Substandard loans have a distinct possibility of loss if the deficiencies are not corrected. Additionally, when management has assessed a potential for loss but a distinct possibility of loss is not recognizable, the loan is still classified as Substandard. Doubtful loans have insufficient sources of repayment and a high probability of loss. Loss loans are considered to be uncollectible and of such little value that they are no longer considered bankable assets. These internal risk ratings are reviewed routinely and adjusted due to changes in the borrowers’ status and likelihood of loan repayment.

The following tables present the credit risk rating for non-PCI loans by portfolio segment as of June 30, 2015 and December 31, 2014:




($ in thousands)	Pass/Watch		Special Mention		Substandard		Doubtful		Loss		Total Non-PCI Loans
June 30, 2015
CRE:
Income producing	$	5,810,946	$	48,382	$	228,333	$	—	$	—	$	6,087,661
Construction	366,869		—		3,454		—		—		370,323
Land	159,751		—		22,586		—		—		182,337
C&I:
Commercial business	6,978,635		162,020		166,851		3,767		—		7,311,273
Trade finance	726,648		19,193		22,438		—		—		768,279
Residential:
Single-family	3,095,832		5,627		18,220		—		—		3,119,679
Multifamily	1,186,826		985		62,625		—		—		1,250,436
Consumer	1,698,617		1,359		2,846		—		—		1,702,822
Total	$	20,024,124	$	237,566	$	527,353	$	3,767	$	—	$	20,792,810




($ in thousands)	Pass/Watch		Special Mention		Substandard		Doubtful		Loss		Total Non-PCI Loans
December 31, 2014
CRE:
Income producing	$	5,243,640	$	54,673	$	269,733	$	—	$	—	$	5,568,046
Construction	310,259		11		9,573		—		—		319,843
Land	185,220		5,701		23,406		—		—		214,327
C&I:
Commercial business	6,836,914		130,319		130,032		533		55		7,097,853
Trade finance	845,889		13,031		30,808		—		—		889,728
Residential:
Single-family	3,627,491		3,143		16,628		—		—		3,647,262
Multifamily	1,095,982		5,124		82,911		—		—		1,184,017
Consumer	1,480,208		1,005		2,743		—		—		1,483,956
Total	$	19,625,603	$	213,007	$	565,834	$	533	$	55	$	20,405,032

The following tables present the credit risk rating for PCI loans by portfolio segment as of June 30, 2015 and December 31, 2014:




($ in thousands)	Pass/Watch		Special Mention		Substandard		Doubtful		Total PCI Loans
June 30, 2015
CRE:
Income producing	$	505,872	$	6,920	$	113,712	$	—	$	626,504
Construction	584		—		6,867		—		7,451
Land	10,333		—		2,264		—		12,597
C&I:
Commercial business	58,216		930		7,186		—		66,332
Trade finance	3,073		—		1,707		—		4,780
Residential:
Single-family	198,113		957		4,403		—		203,473
Multifamily	193,061		664		30,319		—		224,044
Consumer	26,018		113		490		—		26,621
Total ⁽¹⁾	$	995,270	$	9,584	$	166,948	$	—	$	1,171,802

(1) Loans net of ASC 310-30 discount.




($ in thousands)	Pass/Watch		Special Mention		Substandard		Doubtful		Total PCI Loans
December 31, 2014
CRE:
Income producing	$	534,015	$	9,960	$	144,038	$	—	$	688,013
Construction	589		1,744		10,111		—		12,444
Land	7,012		5,391		4,437		—		16,840
C&I:
Commercial business	70,586		1,103		11,647		—		83,336
Trade finance	4,620		—		1,664		—		6,284
Residential:
Single-family	213,829		374		5,316		—		219,519
Multifamily	230,049		—		35,842		—		265,891
Consumer	29,026		116		644		—		29,786
Total ⁽¹⁾	$	1,089,726	$	18,688	$	213,699	$	—	$	1,322,113

(1) Loans net of ASC 310-30 discount.

Nonaccrual and Past Due Loans

The following tables present the aging analysis on non-PCI loans as of June 30, 2015 and December 31, 2014:




($ in thousands)	Accruing Loans 30-59 Days Past Due		Accruing Loans 60-89 Days Past Due		Total Accruing Past Due Loans		Nonaccrual Loans Less Than 90 Days Past Due		Nonaccrual Loans 90 or More Days Past Due		Total Nonaccrual Loans		Current Accruing Loans		Total Non-PCI Loans
June 30, 2015
CRE:
Income producing	$	6,761	$	3,762	$	10,523	$	18,858	$	12,193	$	31,051	$	6,046,087	$	6,087,661
Construction	4,982		—		4,982		14		—		14		365,327		370,323
Land	5,701		—		5,701		308		4,743		5,051		171,585		182,337
C&I:
Commercial business	2,973		11,429		14,402		6,987		23,508		30,495		7,266,376		7,311,273
Trade finance	2,500		470		2,970		—		—		—		765,309		768,279
Residential:
Single-family	8,081		4,167		12,248		2,736		5,713		8,449		3,098,982		3,119,679
Multifamily	945		1,999		2,944		10,034		1,375		11,409		1,236,083		1,250,436
Consumer	2,839		959		3,798		163		525		688		1,698,336		1,702,822
Total	$	34,782	$	22,786	$	57,568	$	39,100	$	48,057	$	87,157	$	20,648,085	$	20,792,810
Unearned fees, premiums and discounts, net															(5,948		)
Total recorded investment in non-PCI loans															$	20,786,862




($ in thousands)	Accruing Loans 30-59 Days Past Due		Accruing Loans 60-89 Days Past Due		Total Accruing Past Due Loans		Nonaccrual Loans Less Than 90 Days Past Due		Nonaccrual Loans 90 or More Days Past Due		Total Nonaccrual Loans		Current Accruing Loans		Total Non-PCI Loans
December 31, 2014
CRE:
Income producing	$	14,171	$	3,593	$	17,764	$	19,348	$	9,165	$	28,513	$	5,521,769	$	5,568,046
Construction	—		—		—		15		6,898		6,913		312,930		319,843
Land	—		—		—		221		2,502		2,723		211,604		214,327
C&I:
Commercial business	3,187		4,361		7,548		6,623		21,813		28,436		7,061,869		7,097,853
Trade finance	—		—		—		73		292		365		889,363		889,728
Residential:
Single-family	6,381		1,294		7,675		2,861		5,764		8,625		3,630,962		3,647,262
Multifamily	4,425		507		4,932		12,460		8,359		20,819		1,158,266		1,184,017
Consumer	2,154		162		2,316		169		3,699		3,868		1,477,772		1,483,956
Total	$	30,318	$	9,917	$	40,235	$	41,770	$	58,492	$	100,262	$	20,264,535	$	20,405,032
Unearned fees, premiums and discounts, net															2,804
Total recorded investment in non-PCI loans															$	20,407,836

Non-PCI loans that are 90 or more days past due are generally placed on nonaccrual status, at which point interest accrual is discontinued and all unpaid accrued interest is reversed against interest income. Additionally, non-PCI loans that are not 90 or more days past due but have identified deficiencies are also placed on nonaccrual status. Interest payments received on nonaccrual loans are reflected as a reduction of principal and not as interest income. A loan is returned to accrual status when the borrower has demonstrated a satisfactory payment trend subject to management’s assessment of the borrower’s ability to repay the loan.

PCI loans are excluded from the above aging analysis table as such loans continue to earn interest from accretable yield, independent of performance in accordance with their contractual terms. $59.1 million and $63.4 million of PCI loans were on nonaccrual status as of June 30, 2015 and December 31, 2014, respectively.

Loans in Process of Foreclosure

As of June 30, 2015 and December 31, 2014, the Company had $22.2 million and $16.9 million, respectively, of recorded investment in consumer mortgage loans secured by residential real estate properties, for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction, which were not included in OREO. Foreclosed residential real estate properties with carrying amount of $4.1 million were included in total net OREO of $25.8 million as of June 30, 2015. In comparison, foreclosed residential real estate properties with carrying amount of $3.5 million were included in total net OREO of $32.1 million as of December 31, 2014.

Troubled Debt Restructurings

A troubled debt restructuring (“TDR”) is a modification of the terms of a loan when the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including a below-market change in the stated interest rate, reduction in the loan balance or accrued interest, extension of the maturity date with a stated interest rate lower than the current market rate or note splits referred to as A/B notes. In A/B note restructurings, the original note is bifurcated into two notes where the A note represents the portion of the original loan which allows for acceptable loan-to-value and debt coverage on the collateral and is expected to be collected in full and the B note represents the portion of the original loan where there is a shortfall in value and is fully charged off. The A/B note balance is comprised of the A note balance only. A notes are not disclosed as TDRs in subsequent years after the year of restructuring if the restructuring agreement specifies an interest rate equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, the loan is not impaired based on the terms specified by the restructuring agreement and has demonstrated a period of sustained performance under the modified terms. The Company had $2.8 million and $2.9 million of performing A/B notes as of June 30, 2015 and December 31, 2014, respectively.

Potential TDRs are individually evaluated and the type of restructuring is selected based on the loan type and the circumstances of the borrower’s financial difficulty in order to maximize the Company’s recovery. During the three months ended June 30, 2015, the Company restructured $38.1 million of C&I loans primarily through principal and interest reductions and extensions and $100 thousand of CRE loans through other modified terms. During the three months ended June 30, 2014, the Company restructured $5.3 million of CRE loans primarily through principal and interest reductions, $4.0 million of residential loans through principal deferments and other modified terms and $1.2 million of C&I loans primarily through extensions. During the six months ended June 30, 2015, the Company restructured $918 thousand of CRE loans through principal and interest deferments and other modified terms, $38.3 million of C&I loans primarily through principal and interest reductions and extensions and $281 thousand of residential loans through principal deferments. During the six months ended June 30, 2014, the Company restructured $8.1 million residential loans through extensions, rate reductions, principal deferments and other modified terms, $5.3 million of CRE loans primarily through principal and interest reductions and $2.8 million of C&I loans primarily through extensions and principal deferments.

The following tables present the additions to non-PCI TDRs during the three and six months ended June 30, 2015 and 2014:




	Loans Modified as TDRs During the Three Months Ended June 30,
	2015							2014
($ in thousands)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment⁽¹⁾		Financial Impact ⁽²⁾		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment⁽¹⁾		Financial Impact⁽²⁾
CRE:
Income producing	—	$	—	$	—	$	—	2	$	5,318	$	5,254	$	—
Land	1	$	171	$	100	$	102	—	$	—	$	—	$	—
C&I:
Commercial business	12	$	37,924	$	38,117	$	5,465	2	$	1,165	$	1,155	$	563
Residential:
Single-family	—	$	—	$	—	$	—	1	$	1,032	$	1,030	$	—
Multifamily	—	$	—	$	—	$	—	1	$	2,513	$	2,973	$	—




	Loans Modified as TDRs During the Six Months Ended June 30,
	2015							2014
($ in thousands)	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment⁽¹⁾		Financial Impact ⁽²⁾		Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment⁽¹⁾		Financial Impact⁽²⁾
CRE:
Income producing	1	$	828	$	818	$	—	2	$	5,318	$	5,254	$	—
Land	1	$	171	$	100	$	102	—	$	—	$	—	$	—
C&I:
Commercial business	13	$	38,090	$	38,280	$	5,497	7	$	2,886	$	2,828	$	1,811
Residential:
Single-family	1	$	281	$	281	$	2	4	$	6,855	$	5,105	$	—
Multifamily	—	$	—	$	—	$	—	1	$	2,513	$	2,973	$	—

(1) Includes subsequent payments after modification and reflects the balance as of June 30, 2015 and 2014.

(2) The financial impact includes charge-offs and specific reserves recorded at modification date.

Subsequent to restructuring, a TDR that becomes delinquent, generally beyond 90 days, is considered to have defaulted. There were no subsequent defaults during the three and six months ended June 30, 2015 for non-PCI loans that were modified as TDRs within the previous 12 months. Non-PCI loans that were modified as TDRs within the previous 12 months that have subsequently defaulted during the three months ended June 30, 2014 consisted of one C&I TDR contract with a recorded investment of $500 thousand. Non-PCI loans that were modified as TDRs within the previous 12 months that have subsequently defaulted during the six months ended June 30, 2014 consisted of one CRE TDR contract with a recorded investment of $2.7 million and one C&I with a recorded investment of $500 thousand.

TDRs may be designated as performing or nonperforming. A TDR may be designated as performing if the loan has demonstrated sustained performance under the modified terms. The period of sustained performance may include the periods prior to modification if prior performance has met or exceeded the modified terms. A loan will remain on nonaccrual status until the borrower demonstrates a sustained period of performance, generally six consecutive months of payments.

TDRs are included in the impaired loan quarterly valuation allowance process. See Allowance for Loan Losses and Impaired Loans sections below for complete discussion. All portfolio segments of TDRs are reviewed for necessary specific reserves in the same manner as impaired loans of the same portfolio segment which have not been identified as TDRs. The modification of the terms of each TDR is considered in the current impairment analysis of the respective TDR. For all portfolio segments of nonperforming TDRs, when the restructured loan is deemed to be uncollectible under modified terms and its fair value is less than the recorded investment in the loan, the deficiency is charged off against the allowance for loan losses. If the loan is a performing TDR, the deficiency is included in the specific reserves of the allowance for loan losses, as appropriate. The amount of additional funds committed to lend to borrowers whose terms have been modified were immaterial as of June 30, 2015 and December 31, 2014.

Impaired Loans

The Company’s loans are grouped into heterogeneous and homogeneous (mostly consumer loans) categories. Classified loans in the heterogeneous category are identified and evaluated for impairment on an individual basis. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all scheduled payments of principal or interest due according to the original contractual terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent, less costs to sell. When the value of an impaired loan is less than the recorded investment in the loan and the loan is classified as nonperforming and uncollectible, the deficiency is charged-off against the allowance for loan losses. Impaired loans exclude the homogeneous consumer loan portfolio which is evaluated collectively for impairment. The Company’s impaired loans predominantly include non-PCI loans held-for-investment on nonaccrual status and any non-PCI loans modified in a TDR, on both accrual and nonaccrual status.

The following tables present the non-PCI impaired loans as of June 30, 2015 and December 31, 2014:




($ in thousands)	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
June 30, 2015
CRE:
Income producing	$	53,002	$	34,274	$	11,295	$	45,569	$	1,447
Construction	57		—		14		14		3
Land	10,755		4,455		1,354		5,809		191
C&I:
Commercial business	83,775		18,687		52,778		71,465		22,584
Trade finance	11,452		—		11,452		11,452		106
Residential:
Single-family	16,926		5,930		9,606		15,536		493
Multifamily	25,899		17,299		6,241		23,540		250
Consumer	1,253		643		610		1,253		2
Total	$	203,119	$	81,288	$	93,350	$	174,638	$	25,076




($ in thousands)	Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
December 31, 2014
CRE:
Income producing	$	58,900	$	35,495	$	15,646	$	51,141	$	1,581
Construction	6,913		6,913		—		6,913		—
Land	13,291		2,838		5,622		8,460		1,906
C&I:
Commercial business	44,569		12,723		25,717		38,440		15,174
Trade finance	12,967		6,431		274		6,705		28
Residential:
Single-family	18,908		6,003		11,398		17,401		461
Multifamily	37,649		21,523		12,890		34,413		313
Consumer	1,259		1,151		108		1,259		1
Total	$	194,456	$	93,077	$	71,655	$	164,732	$	19,464

The following table presents the average recorded investment and the amount of interest income recognized on non-PCI impaired loans for the three and six months ended June 30, 2015 and 2014:




	Three Months Ended June 30,								Six Months Ended June 30,
	2015				2014				2015				2014
($ in thousands)	Average Recorded Investment		Recognized Interest Income ⁽¹⁾		Average Recorded Investment		Recognized Interest Income ⁽¹⁾		Average Recorded Investment		Recognized Interest Income ⁽¹⁾		Average Recorded Investment		Recognized Interest Income ⁽¹⁾
CRE:
Income producing	$	46,042	$	134	$	59,121	$	281	$	46,897	$	268	$	59,917	$	627
Construction	14		—		6,888		—		14		—		6,888		—
Land	5,876		10		12,128		75		5,951		20		12,179		149
C&I:
Commercial business	73,306		761		41,592		209		71,644		1,550		42,682		420
Trade finance	11,623		51		546		4		11,739		134		559		8
Residential:
Single-family	15,595		68		15,131		57		15,658		137		14,034		115
Multifamily	23,690		190		36,683		180		23,757		379		36,817		360
Consumer	1,256		12		755		7		1,258		23		752		14
Total impaired non-PCI loans	$	177,402	$	1,226	$	172,844	$	813	$	176,918	$	2,511	$	173,828	$	1,693


(1)	Includes interest recognized on accruing non-PCI TDRs. Interest payments received on nonaccrual non-PCI loans are generally reflected as a reduction of principal and not as interest income.

Allowance for Loan Losses

The allowance for loan losses on non-PCI loans consists of specific reserves and general reserves. The Company’s non-PCI loans fall into heterogeneous and homogeneous categories. Impaired loans are subject to specific reserves. Loans in the homogeneous category, as well as non-impaired loans in the heterogeneous category, are evaluated as part of the general reserves. General reserves are calculated by utilizing both quantitative and qualitative factors. There are different qualitative risks for the loans in each portfolio segment. The residential and CRE segments’ predominant risk characteristics are the collateral and the geographic location of the property collateralizing the loan. The risk is qualitatively assessed based on the total real estate loan concentration in those geographic areas. The C&I segment’s predominant risk characteristics are the global cash flows of the borrowers and guarantors and economic and market conditions. Consumer loans are largely comprised of HELOCs for which the predominant risk characteristic is the real estate collateral securing the loans.

The Company also maintains an allowance for loan losses on PCI loans when there is deterioration in credit quality subsequent to acquisition. Based on the Company’s estimates of cash flows expected to be collected, the Company establishes an allowance for the PCI loans, with a charge to income through the provision for loan losses. As of June 30, 2015, the Company has established an allowance of $612 thousand on $1.17 billion of PCI loans. As of December 31, 2014, an allowance of $714 thousand was established on $1.32 billion of PCI loans. The allowance balances for both periods were allocated mainly to the PCI CRE loan pools.

The Company’s methodology to determine the overall appropriateness of the allowance is based on a classification migration model and qualitative considerations. The migration model examines pools of loans having similar characteristics and analyzes their loss rates over a historical period. The Company assigns loss rates to each loan grade within each pool of loans. Loss rates derived by the migration model are based predominantly on historical loss trends that may not be entirely indicative of the actual or inherent loss potential. As such, the Company utilizes qualitative and environmental factors as adjusting mechanisms to supplement the historical results of the classification migration model. Qualitative considerations include, but are not limited to, prevailing economic or market conditions, relative risk profiles of various loan segments, volume concentrations, growth trends, delinquency and nonaccrual status, problem loan trends and geographic concentrations. Qualitative and environmental factors are reflected as percentage adjustments and are added to the historical loss rates derived from the classified asset migration model to determine the appropriate allowance for each loan pool.

When determined uncollectible, it is the Company’s policy to promptly charge-off the difference in the outstanding loan balance and the fair value of the collateral or the discounted value of expected cash flows. Recoveries are recorded when payment is received on loans that were previously charged-off through the allowance for loan losses. Allocation of a portion of the allowance to one segment of the loan portfolio does not preclude its availability to absorb losses in other segments.

The following tables present a summary of the activity in the allowance for loan losses on non-PCI loans, by portfolio segment, and PCI loans for the three and six months ended June 30, 2015 and 2014:




	Non-PCI Loans
($ in thousands)	CRE			C&I			Residential			Consumer			Unallocated			Total			PCI Loans			Total
Three Months Ended June 30, 2015
Beginning balance	$	69,740		$	133,914		$	42,990		$	10,451		$	—		$	257,095		$	643		$	257,738
Provision for (reversal of) loan losses	5,739			(2,716		)	(3,318		)	(289		)	4,109			3,525			(31		)	3,494
Provision allocation for unfunded loan commitments and letters of credit	—			—			—			—			(4,109		)	(4,109		)	—			(4,109		)
Charge-offs	(348		)	(2,843		)	(1		)	—			—			(3,192		)	—			(3,192		)
Recoveries	365			5,607			997			329			—			7,298			—			7,298
Net recoveries	17			2,764			996			329			—			4,106			—			4,106
Ending balance	$	75,496		$	133,962		$	40,668		$	10,491		$	—		$	260,617		$	612		$	261,229
Ending balance allocated to:
Individually evaluated for impairment	$	1,641		$	22,690		$	743		$	2		$	—		$	25,076		$	—		$	25,076
Collectively evaluated for impairment	73,855			111,272			39,925			10,489			—			235,541			—			235,541
Acquired with deteriorated credit quality	—			—			—			—			—			—			612			612
Ending balance	$	75,496		$	133,962		$	40,668		$	10,491		$	—		$	260,617		$	612		$	261,229




	Non-PCI Loans
($ in thousands)	CRE			C&I			Residential			Consumer			Unallocated			Total			PCI Loans			Total
Three Months Ended June 30, 2014
Beginning balance	$	63,627		$	127,156		$	47,995		$	11,156		$	—		$	249,934		$	2,202		$	252,136
(Reversal of) provision for loan losses	(2,387		)	10,918			(2,048		)	809			829			8,121			(121		)	8,000
Provision allocation for unfunded loan commitments and letters of credit	—			—			—			—			(829		)	(829		)	—			(829		)
Charge-offs	(894		)	(7,413		)	(61		)	(80		)	—			(8,448		)	(523		)	(8,971		)
Recoveries	549			396			63			4			—			1,012			—			1,012
Net (charge-offs) recoveries	(345		)	(7,017		)	2			(76		)	—			(7,436		)	(523		)	(7,959		)
Ending balance	$	60,895		$	131,057		$	45,949		$	11,889		$	—		$	249,790		$	1,558		$	251,348
Ending balance allocated to:
Individually evaluated for impairment	$	4,546		$	18,918		$	1,377		$	—		$	—		$	24,841		$	—		$	24,841
Collectively evaluated for impairment	56,349			112,139			44,572			11,889			—			224,949			—			224,949
Acquired with deteriorated credit quality	—			—			—			—			—			—			1,558			1,558
Ending balance	$	60,895		$	131,057		$	45,949		$	11,889		$	—		$	249,790		$	1,558		$	251,348




	Non-PCI Loans
($ in thousands)	CRE			C&I			Residential			Consumer			Unallocated			Total			PCI Loans			Total
Six Months Ended June 30, 2015
Beginning balance	$	72,263		$	134,598		$	43,856		$	10,248		$	—		$	260,965		$	714		$	261,679
Provision for (reversal of) loan losses	3,406			2,662			(4,889		)	375			7,029			8,583			(102		)	8,481
Provision allocation for unfunded loan commitments and letters of credit	—			—			—			—			(7,029		)	(7,029		)	—			(7,029		)
Charge-offs	(1,350		)	(9,432		)	(747		)	(463		)	—			(11,992		)	—			(11,992		)
Recoveries	1,177			6,134			2,448			331			—			10,090			—			10,090
Net (charge-offs) recoveries	(173		)	(3,298		)	1,701			(132		)	—			(1,902		)	—			(1,902		)
Ending balance	$	75,496		$	133,962		$	40,668		$	10,491		$	—		$	260,617		$	612		$	261,229
Ending balance allocated to:
Individually evaluated for impairment	$	1,641		$	22,690		$	743		$	2		$	—		$	25,076		$	—		$	25,076
Collectively evaluated for impairment	73,855			111,272			39,925			10,489			—			235,541			—			235,541
Acquired with deteriorated credit quality	—			—			—			—			—			—			612			612
Ending balance	$	75,496		$	133,962		$	40,668		$	10,491		$	—		$	260,617		$	612		$	261,229




	Non-PCI Loans
($ in thousands)	CRE			C&I			Residential			Consumer			Unallocated			Total			PCI Loans			Total
Six Months Ended June 30, 2014
Beginning balance	$	70,154		$	115,184		$	50,716		$	11,352		$	—		$	247,406		$	2,269		$	249,675
(Reversal of) provision for loan losses	(9,423		)	27,510			(4,623		)	613			1,044			15,121			(188		)	14,933
Provision allocation for unfunded loan commitments and letters of credit	—			—			—			—			(1,044		)	(1,044		)	—			(1,044		)
Charge-offs	(1,213		)	(12,944		)	(344		)	(83		)	—			(14,584		)	(523		)	(15,107		)
Recoveries	1,377			1,307			200			7			—			2,891			—			2,891
Net recoveries (charge-offs)	164			(11,637		)	(144		)	(76		)	—			(11,693		)	(523		)	(12,216		)
Ending balance	$	60,895		$	131,057		$	45,949		$	11,889		$	—		$	249,790		$	1,558		$	251,348
Ending balance allocated to:
Individually evaluated for impairment	$	4,546		$	18,918		$	1,377		$	—		$	—		$	24,841		$	—		$	24,841
Collectively evaluated for impairment	56,349			112,139			44,572			11,889			—			224,949			—			224,949
Acquired with deteriorated credit quality	—			—			—			—			—			—			1,558			1,558
Ending balance	$	60,895		$	131,057		$	45,949		$	11,889		$	—		$	249,790		$	1,558		$	251,348

The following tables present the Company’s recorded investments in total loans as of June 30, 2015 and December 31, 2014 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology:




($ in thousands)	CRE		C&I		Residential		Consumer		Total
As of June 30, 2015
Individually evaluated for impairment	$	51,392	$	82,917	$	39,076	$	1,253	$	174,638
Collectively evaluated for impairment	6,588,929		7,996,635		4,331,039		1,701,569		20,618,172
Acquired with deteriorated credit quality⁽¹⁾	646,552		71,112		427,517		26,621		1,171,802
Ending Balance⁽¹⁾	$	7,286,873	$	8,150,664	$	4,797,632	$	1,729,443	$	21,964,612

(1) Loans net of ASC 310-30 discount.




($ in thousands)	CRE		C&I		Residential		Consumer		Total
As of December 31, 2014
Individually evaluated for impairment	$	66,514	$	45,145	$	51,814	$	1,259	$	164,732
Collectively evaluated for impairment	6,035,702		7,942,436		4,779,465		1,482,697		20,240,300
Acquired with deteriorated credit quality ⁽¹⁾	717,297		89,620		485,410		29,786		1,322,113
Ending Balance⁽¹⁾	$	6,819,513	$	8,077,201	$	5,316,689	$	1,513,742	$	21,727,145

(1) Loans net of ASC 310-30 discount.

Allowance for Unfunded Loan Commitments, Off-Balance Sheet Credit Exposures and Recourse Provisions

The allowance for unfunded loan commitments, off-balance sheet credit exposures, and recourse provisions is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to these unfunded credit facilities. The determination of the adequacy of the allowance is based on periodic evaluations of the unfunded credit facilities including an assessment of the probability of commitment usage, credit risk factors for loans outstanding to these same customers, and the terms and expiration dates of the unfunded credit facilities. Refer to Note 12 — Commitments and Contingencies for additional information.

PCI Loans

As of the respective acquisition dates, PCI loans were pooled and accounted for at fair value, which represents the discounted value of the expected cash flows of the loan portfolio. The nonaccretable difference represents the Company’s estimate of the expected credit losses, which was considered in determining the fair value of the loans as of the respective acquisition dates. In estimating the nonaccretable difference, the Company (a) calculated the contractual amount and timing of undiscounted principal and interest payments (the “undiscounted contractual cash flows”) and (b) estimated the amount and timing of undiscounted expected principal and interest payments (the “undiscounted expected cash flows”). The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows is the nonaccretable difference. The amount by which the undiscounted expected cash flows exceed the estimated fair value (the “accretable yield”) is accreted into interest income over the life of the loans.

Covered assets consist of loans receivable and OREO that were acquired in the WFIB acquisition on June 11, 2010 and in the UCB acquisition on November 6, 2009 for which the Company entered into shared-loss agreements with the FDIC. Pursuant to the terms of the shared-loss agreements, the FDIC is obligated to reimburse the Company 80% of eligible losses for both UCB and WFIB with respect to covered assets. For the UCB covered assets, the FDIC will reimburse the Company for 95% of eligible losses in excess of $2.05 billion. The Company has a corresponding obligation to reimburse the FDIC for 80% or 95%, as applicable, of eligible recoveries with respect to covered assets. The shared-loss coverage of the UCB commercial loans ended after December 31, 2014. The shared-loss coverage of the WFIB commercial loans ended after June 30, 2015. The shared-loss coverage for both UCB and WFIB residential loans will extend through November 30, 2019 and June 30, 2020, respectively. Refer to Note 8 — Covered Assets and FDIC Indemnification Asset to the Consolidated Financial Statements of the Company’s 2014 Form 10-K for additional details related to the shared-loss agreements. Of the total $1.17 billion PCI loans as of June 30, 2015, $297.6 million were covered under shared-loss agreements. Of the total $1.32 billion PCI loans as of December 31, 2014, $1.23 billion were covered under shared-loss agreements. As of June 30, 2015 and December 31, 2014, $339.5 million and $1.48 billion of total loans were covered under shared-loss agreements, respectively.

The following table presents the changes in the accretable yield for the PCI loans for the three and six months ended June 30, 2015 and 2014:




	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2015			2014			2015			2014
Beginning balance	$	293,155		$	430,456		$	311,688		$	461,545
Addition	—			—			—			6,745
Accretion	(23,359		)	(65,623		)	(53,928		)	(127,569		)
Changes in expected cash flows	2,066			28,061			14,102			52,173
Ending balance	$	271,862		$	392,894		$	271,862		$	392,894

FDIC Indemnification Asset/Net Payable to FDIC

The Company is amortizing the difference between the recorded amount of the FDIC indemnification asset and the expected reimbursement from the FDIC over the life of the indemnification asset. Due to continued payoffs and improved credit performance of the covered portfolio as compared to the Company’s original estimates, the expected reimbursement from the FDIC under the shared-loss agreements has decreased and a net payable to the FDIC has been recorded. In prior years, due to the estimated losses from the covered portfolio and the corresponding expected payments from the FDIC, the Company recorded an FDIC indemnification asset. As of June 30, 2015 and 2014, a net payable to the FDIC of $105.1 million and $24.3 million were included in accrued expenses and other liabilities on the consolidated balance sheet.

The following table presents a summary of the FDIC indemnification asset/net payable to the FDIC for the three and six months ended June 30, 2015 and 2014:




	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2015			2014			2015			2014
Beginning balance	$	(101,411	)	$	27,552		$	(96,106	)	$	74,708
Amortization	(1,257		)	(29,303		)	(2,799		)	(57,793		)
Reductions ⁽¹⁾	(504		)	(14,111		)	(1,153		)	(25,953		)
Estimate of FDIC repayment ⁽²⁾	(1,882		)	(8,475		)	(4,996		)	(15,299		)
Ending balance	$	(105,054	)	$	(24,337	)	$	(105,054	)	$	(24,337	)


(1)	Reductions relate to charge-offs, partial prepayments, loan payoffs and loan sales which result in a corresponding reduction of the indemnification asset.


(2)	This represents the change in the calculated estimate the Company will be required to pay the FDIC at the end of the FDIC shared-loss agreements, due to lower thresholds of losses.

Loans Held for Sale

Loans held for sale are carried at the LOCOM. When a determination is made at the time of commitment to originate loans as held-for-investment, it is the Company’s intent to hold these loans to maturity or for the “foreseeable future,” subject to periodic review under the Company’s management evaluation processes, including asset/liability management. When the Company subsequently changes its intent to hold certain loans, the loans would be transferred from the loans held-for-investment portfolio to loans held for sale portfolio at LOCOM.

Loans held for sale were $195.4 million and $46.0 million as of June 30, 2015 and December 31, 2014, respectively. $329.4 million and $1.15 billion of loans held-for-investment transferred to loans held for sale during the three and six months ended June 30 2015, respectively. These loans were primarily comprised of single-family residential and C&I loans. In comparison, loans held-for-investment transferred to loans held for sale of $126.7 million and $605.7 million. respectively, during the three and six months ended June 30 2014, were primarily comprised of student and C&I loans.

The Company recorded $441 thousand and $2.1 million in write-downs related to loans transferred from loans held-for-investment to loans held for sale to allowance for loan losses for the three and six months ended June 30, 2015, respectively. There were no write-downs recorded on loans transferred from loans held-for-investment to loans held for sale for the three and six months ended June 30, 2014. In addition, the Company recorded a $517 thousand LOCOM adjustment related to the student loans in the loans held for sale portfolio during the three months ended June 30, 2015.

Approximately $328.8 million of loans were sold, resulting in net gains of $5.8 million during the three months ended June 30, 2015. During the six months ended June 30, 2015, approximately $998.6 million of loans were sold resulting in net gains of $15.3 million. Loans sold during the three and six months ended June 30, 2015 were primarily comprised of single-family residential and C&I loans. Approximately $280.8 million and $456.6 million of loans, mainly comprising of student and C&I loans were sold during the three and six months ended June 30, 2014, respectively. $6.8 million and $13.0 million of net gains were recorded during the three and six months ended June 30, 2014, respectively.