The Bank's methodology for assessing the appropriateness of the Allowance for Loan and Lease Loss ("ALLL") consists of three key elements: 1) the formula allowance; 2) the specific allowance; and 3) the unallocated allowance. By incorporating these factors into a single allowance requirement analysis, we believe all risk-based activities within the loan and lease portfolios are simultaneously considered.

When loans and leases are originated or acquired, they are assigned a risk rating that is reassessed periodically during the term of the loan or lease through the credit review process. The Bank's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The 10 risk rating categories are a primary factor in determining an appropriate amount for the formula allowance.

The formula allowance is calculated by applying risk factors that represent our estimate of incurred losses to various segments of pools of outstanding loans and leases. Risk factors are assigned to each portfolio segment based on management's evaluation of the losses inherent within each segment. Segments with greater risk of loss will therefore be assigned a higher risk factor.

Risk factors may be changed periodically based on management's evaluation of the following factors: loss experience; changes in the level of non-performing loans and leases; regulatory exam results; changes in the level of adversely classified loans and leases; improvement or deterioration in economic conditions; and any other factors deemed relevant. Additionally, Financial Pacific Leasing Inc. considers additional quantitative and qualitative factors: migration analysis; a static pool analysis of historic recoveries; and forecasting uncertainties. A migration analysis is a technique used to estimate the likelihood that an account will progress through the various delinquency states and ultimately be charged off.

Regular credit reviews of the portfolio identify loans that are considered potentially impaired. Potentially impaired loans are referred to the ALLL Committee which reviews and approves designated loans as impaired. A loan is considered impaired when, based on current information and events, we determine that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When we identify a loan as impaired, we measure the impairment using discounted cash flows or estimated note sale price, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we either recognize an impairment reserve as a specific allowance to be provided for in the allowance for loan and lease losses or charge-off the impaired balance on collateral-dependent loans if it is determined that such amount represents a confirmed loss. Loans determined to be impaired are excluded from the formula allowance so as not to double-count the loss exposure.

The reserve for unfunded commitments ("RUC") is established to absorb inherent losses associated with our commitment to lend funds, such as with a letter or line of credit. The adequacy of the ALLL and RUC are monitored on a regular basis and are based on management's evaluation of numerous factors. These factors include the quality of the current loan portfolio; the trend in the loan portfolio's risk ratings; current economic conditions; loan concentrations; loan growth rates; past-due and non-performing trends; evaluation of specific loss estimates for all significant problem loans; historical charge-off and recovery experience; and other pertinent information.



(in thousands)	Three Months Ended June 30, 2019
	Commercial Real Estate			Commercial			Residential			Consumer & Other			Total
Balance, beginning of period	$	47,841		$	64,370		$	22,173		$	10,488		$	144,872
Charge-offs	(387		)	(14,697		)	(67		)	(1,556		)	(16,707		)
Recoveries	219			2,611			150			572			3,552
Provision	1,324			16,069			1,398			561			19,352
Balance, end of period	$	48,997		$	68,353		$	23,654		$	10,065		$	151,069

(in thousands)	Three Months Ended June 30, 2018
	Commercial Real Estate			Commercial			Residential			Consumer & Other			Total
Balance, beginning of period	$	46,005		$	64,626		$	19,833		$	11,469		$	141,933
Charge-offs	(362		)	(12,869		)	(460		)	(1,124		)	(14,815		)
Recoveries	289			3,171			98			561			4,119
Provision	1,353			10,837			804			325			13,319
Balance, end of period	$	47,285		$	65,765		$	20,275		$	11,231		$	144,556



(in thousands)	Six Months Ended June 30, 2019
	Commercial Real Estate			Commercial			Residential			Consumer & Other			Total
Balance, beginning of period	$	47,904		$	63,957		$	22,034		$	10,976		$	144,871
Charge-offs	(2,538		)	(27,907		)	(202		)	(3,212		)	(33,859		)
Recoveries	556			4,965			305			1,195			7,021
Provision	3,075			27,338			1,517			1,106			33,036
Balance, end of period	$	48,997		$	68,353		$	23,654		$	10,065		$	151,069

(in thousands)	Six Months Ended June 30, 2018
	Commercial Real Estate			Commercial			Residential			Consumer & Other			Total
Balance, beginning of period	$	45,765		$	63,305		$	19,360		$	12,178		$	140,608
Charge-offs	(673		)	(26,344		)	(706		)	(2,904		)	(30,627		)
Recoveries	506			5,624			301			1,169			7,600
Provision	1,687			23,180			1,320			788			26,975
Balance, end of period	$	47,285		$	65,765		$	20,275		$	11,231		$	144,556



(in thousands)	June 30, 2019
	Commercial Real Estate		Commercial		Residential		Consumer & Other		Total
Allowance for loans and leases:
Collectively evaluated for impairment	$	47,337	$	68,156	$	23,331	$	10,057	$	148,881
Individually evaluated for impairment	167		3		—		—		170
Loans acquired with deteriorated credit quality	1,493		194		323		8		2,018
Total	$	48,997	$	68,353	$	23,654	$	10,065	$	151,069
Loans and leases:
Collectively evaluated for impairment	$	10,099,981	$	4,992,265	$	5,187,194	$	533,036	$	20,812,476
Individually evaluated for impairment	18,707		8,636		—		—		27,343
Loans acquired with deteriorated credit quality	88,970		611		23,664		307		113,552
Total	$	10,207,658	$	5,001,512	$	5,210,858	$	533,343	$	20,953,371



(in thousands)	June 30, 2018
	Commercial Real Estate		Commercial		Residential		Consumer & Other		Total
Allowance for loans and leases:
Collectively evaluated for impairment	$	44,668	$	65,378	$	19,902	$	11,190	$	141,138
Individually evaluated for impairment	814		7		—		—		821
Loans acquired with deteriorated credit quality	1,803		380		373		41		2,597
Total	$	47,285	$	65,765	$	20,275	$	11,231	$	144,556
Loans and leases:
Collectively evaluated for impairment	$	9,776,975	$	4,504,361	$	4,508,961	$	645,310	$	19,435,607
Individually evaluated for impairment	28,786		17,225		—		—		46,011
Loans acquired with deteriorated credit quality	124,554		3,768		29,143		411		157,876
Total	$	9,930,315	$	4,525,354	$	4,538,104	$	645,721	$	19,639,494

We manage asset quality and control credit risk through diversification of the loan and lease portfolio and the application of policies designed to promote sound underwriting and loan and lease monitoring practices. The Bank's Credit Quality Administration is charged with monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of non-performing, past due loans and leases and larger credits, designed to identify potential charges to the allowance for loan and lease losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers, the value of the applicable collateral, loan and lease loss experience, estimated loan and lease losses, growth in the loan and lease portfolio, prevailing economic conditions and other factors.



(in thousands)	June 30, 2019
	Greater than 30 to 59 Days Past Due		60 to 89 Days Past Due		90+ Days and Accruing		Total Past Due		Non-Accrual		Current & Other ⁽¹⁾		Total Loans and Leases
Commercial real estate
Non-owner occupied term, net	$	74	$	68	$	—	$	142	$	9,170	$	3,527,772	$	3,537,084
Owner occupied term, net	663		698		—		1,361		7,502		2,387,811		2,396,674
Multifamily, net	—		—		—		—		—		3,341,547		3,341,547
Construction & development, net	1,601		—		—		1,601		—		731,331		732,932
Residential development, net	—		—		—		—		—		199,421		199,421
Commercial
Term, net	486		457		—		943		3,348		2,267,055		2,271,346
Lines of credit & other, net	5,740		2,690		—		8,430		1,519		1,270,638		1,280,587
Leases & equipment finance, net	6,813		8,835		2,833		18,481		13,483		1,417,615		1,449,579
Residential
Mortgage, net⁽²⁾	25		7,414		35,684		43,123		—		3,952,520		3,995,643
Home equity loans & lines, net	1,150		582		2,206		3,938		—		1,211,277		1,215,215
Consumer & other, net	2,375		948		424		3,747		—		529,596		533,343
Total, net of deferred fees and costs	$	18,927	$	21,692	$	41,147	$	81,766	$	35,022	$	20,836,583	$	20,953,371



(in thousands)	December 31, 2018
	Greater than 30 to 59 Days Past Due		60 to 89 Days Past Due		90+ Days and Accruing		Total Past Due		Non-Accrual		Current & Other ⁽¹⁾		Total Loans and Leases
Commercial real estate
Non-owner occupied term, net	$	1,192	$	1,042	$	—	$	2,234	$	10,033	$	3,560,798	$	3,573,065
Owner occupied term, net	3,920		1,372		1		5,293		8,682		2,466,396		2,480,371
Multifamily, net	107		—		—		107		4,298		3,300,358		3,304,763
Construction & development, net	—		—		—		—		—		736,254		736,254
Residential development, net	—		—		—		—		—		196,890		196,890
Commercial
Term, net	992		117		—		1,109		11,772		2,220,042		2,232,923
Lines of credit & other, net	1,286		143		83		1,512		2,275		1,165,738		1,169,525
Leases & equipment finance, net	8,571		8,754		3,016		20,341		13,763		1,296,051		1,330,155
Residential
Mortgage, net⁽²⁾	—		4,900		39,218		44,118		—		3,590,955		3,635,073
Home equity loans & lines, net	987		368		2,492		3,847		—		1,172,630		1,176,477
Consumer & other, net	2,711		911		551		4,173		—		582,997		587,170
Total, net of deferred fees and costs	$	19,766	$	17,607	$	45,361	$	82,734	$	50,823	$	20,289,109	$	20,422,666

Loans with no related allowance reported generally represent non-accrual loans, which are also considered impaired loans. The Bank recognizes the charge-off on impaired loans in the period it arises for collateral-dependent loans. Therefore, the non-accrual loans as of June 30, 2019 have already been written down to their estimated net realizable value and are expected to be resolved with no additional material loss, absent further decline in net realizable value. The valuation allowance on impaired loans primarily represents the impairment reserves on performing restructured loans, and is measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan's carrying value.



(in thousands)	June 30, 2019
			Recorded Investment
	Unpaid Principal Balance		Without Allowance		With Allowance		Related Allowance
Commercial real estate
Non-owner occupied term, net	$	15,570	$	8,941	$	3,681	$	89
Owner occupied term, net	7,394		5,238		847		78
Commercial
Term, net	12,245		5,440		46		2
Lines of credit & other, net	1,057		923		—		—
Leases & equipment finance, net	2,227		385		1,842		1
Total, net of deferred fees and costs	$	38,493	$	20,927	$	6,416	$	170



(in thousands)	December 31, 2018
			Recorded Investment
	Unpaid Principal Balance		Without Allowance		With Allowance		Related Allowance
Commercial real estate
Non-owner occupied term, net	$	14,877	$	9,847	$	3,715	$	90
Owner occupied term, net	8,188		6,178		878		88
Multifamily, net	4,493		4,298		—		—
Commercial
Term, net	22,770		11,089		3,770		2
Lines of credit & other, net	7,145		2,065		—		—
Leases & equipment finance, net	417		417		—		—
Total, net of deferred fees and costs	$	57,890	$	33,894	$	8,363	$	180



(in thousands)	Three Months Ended
	June 30, 2019				June 30, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate
Non-owner occupied term, net	$	12,295	$	32	$	13,301	$	103
Owner occupied term, net	5,929		9		11,185		10
Multifamily, net	1,313		—		3,857		30
Commercial
Term, net	8,872		53		17,515		56
Lines of credit & other, net	1,204		—		2,609		—
Leases & equipment finance, net	2,597		28		509		—
Total, net of deferred fees and costs	$	32,210	$	122	$	48,976	$	199



(in thousands)	Six Months Ended
	June 30, 2019				June 30, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate
Non-owner occupied term, net	$	12,717	$	64	$	14,172	$	205
Owner occupied term, net	6,304		18		11,527		20
Multifamily, net	2,308		—		3,862		60
Commercial
Term, net	10,867		104		18,875		145
Lines of credit & other, net	1,491		—		3,867		—
Leases & equipment finance, net	1,871		29		339		—
Total, net of deferred fees and costs	$	35,558	$	215	$	52,642	$	430

As previously noted, the Bank's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The Bank differentiates its lending portfolios into homogeneous loans and leases and non-homogeneous loans and leases. Homogeneous loans and leases are not risk rated until they are greater than 30 days past due, and risk rating is based on the past due status of the loan or lease. The 10 risk rating categories can be generally described by the following groupings for loans and leases:

Low Risk—A low risk loan or lease, risk rated 2, is similar in characteristics to a minimal risk loan. Margins may be smaller or protective elements may be subject to greater fluctuation. The borrower will have a strong demonstrated ability to produce profits, provide ample debt service coverage and to absorb market disturbances.

Modest Risk—A modest risk loan or lease, risk rated 3, is a desirable loan or lease with excellent sources of repayment and no currently identifiable risk associated with collection. The borrower exhibits a very strong capacity to repay the credit in accordance with the repayment agreement. The borrower may be susceptible to economic cycles, but will have reserves to weather these cycles.

Average Risk—An average risk loan or lease, risk rated 4, is an attractive loan or lease with sound sources of repayment and no material collection or repayment weakness evident. The borrower has an acceptable capacity to pay in accordance with the agreement. The borrower is susceptible to economic cycles and more efficient competition, but should have modest reserves sufficient to survive all but the most severe downturns or major setbacks.

Acceptable Risk—An acceptable risk loan or lease, risk rated 5, is a loan or lease with lower than average, but still acceptable credit risk. These borrowers may have higher leverage, less certain but viable repayment sources, have limited financial reserves and may possess weaknesses that can be adequately mitigated through collateral, structural or credit enhancement. The borrower is susceptible to economic cycles and is less resilient to negative market forces or financial events. Reserves may be insufficient to survive a modest downturn.

Watch—A watch loan or lease, risk rated 6, is still pass-rated, but represents the lowest level of acceptable risk due to an emerging risk element or declining performance trend. Watch ratings are expected to be temporary, with issues resolved or manifested to the extent that a higher or lower rating would be appropriate. The borrower should have a plausible plan, with reasonable certainty of success, to correct the problems in a short period of time.

Special Mention—A special mention loan or lease, risk rated 7, has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or the institution's credit position at some future date. They contain unfavorable characteristics and are generally undesirable. Loans and leases in this category are currently protected but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of a substandard classification. A special mention loan or lease has potential weaknesses, which if not checked or corrected, weaken the asset or inadequately protect the Bank's position at some future date. For commercial and commercial real estate homogeneous loans and leases to be classified as special mention, risk rated 7, the loan or lease is greater than 30 to 59 days past due from the required payment date at month-end. Residential and consumer and other homogeneous loans are risk rated 7, when the loan is greater than 30 to 89 days past due from the required payment date at month-end.

Substandard—A substandard asset, risk rated 8, is inadequately protected by the current worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. Loans and leases are classified as substandard when they have unsatisfactory characteristics causing unacceptable levels of risk. A substandard loan or lease normally has one or more well-defined weaknesses that could jeopardize repayment of the debt. The likely need to liquidate assets to correct the problem, rather than repayment from successful operations is the key distinction between special mention and substandard. Commercial and commercial real estate homogeneous loans and leases are classified as a substandard loan or lease, risk rated 8, when the loan or lease is 60 to 89 days past due from the required payment date at month-end. Residential and consumer and other homogeneous loans are classified as a substandard loan, risk rated 8, when an open-end loan is 90 to 180 days past due from the required payment date at month-end or when a closed-end loan 90 to 120 days is past due from the required payment date at month-end.

Doubtful—Loans or leases classified as doubtful, risk rated 9, have all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work towards strengthening of the asset, classification as a loss (and immediate charge-off) is deferred until more exact status may be determined. Pending factors include proposed merger, acquisition, liquidation procedures, capital injection, and perfection of liens on additional collateral and refinancing plans. In certain circumstances, a doubtful rating will be temporary, while the Bank is awaiting an updated collateral valuation. In these cases, once the collateral is valued and appropriate margin applied, the remaining un-collateralized portion will be charged-off. The remaining balance, properly margined, may then be upgraded to substandard, however must remain on non-accrual. Commercial and commercial real estate homogeneous doubtful loans or leases, risk rated 9, are 90 to 179 days past due from the required payment date at month-end.

Loss—Loans or leases classified as loss, risk rated 10, are considered un-collectible and of such little value that the continuance as an active Bank asset is not warranted. This rating does not mean that the loan or lease has no recovery or salvage value, but rather that the loan or lease should be charged-off now, even though partial or full recovery may be possible in the future. For a commercial or commercial real estate homogeneous loss loan or lease to be risk rated 10, the loan or lease is 180 days and more past due from the required payment date. These loans are generally charged-off in the month in which the 180 day time period elapses. Residential, consumer and other homogeneous loans are risk rated 10, when a loan becomes past due 120 cumulative days from the contractual due date. Residential and consumer loans secured by real estate are generally charged down to net realizable value in the month in which the loan becomes 180 days past due. All other residential, consumer, and other homogeneous loans are generally charged-off in the month in which the 120 day period elapses.

Impaired—Loans are classified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due, in accordance with the terms of the original loan agreement, without unreasonable delay. This generally includes all loans classified as non-accrual and troubled debt restructurings. Impaired loans are risk rated for internal and regulatory rating purposes, but presented separately for clarification.



(in thousands)	June 30, 2019
	Pass/Watch		Special Mention		Substandard		Doubtful		Loss		Impaired ⁽¹⁾		Total
Commercial real estate
Non-owner occupied term, net	$	3,455,860	$	51,231	$	17,143	$	228	$	—	$	12,622	$	3,537,084
Owner occupied term, net	2,314,355		59,795		15,863		576		—		6,085		2,396,674
Multifamily, net	3,331,275		6,838		3,434		—		—		—		3,341,547
Construction & development, net	731,015		1,917		—		—		—		—		732,932
Residential development, net	199,421		—		—		—		—		—		199,421
Commercial
Term, net	2,222,485		34,191		7,926		1,090		168		5,486		2,271,346
Lines of credit & other, net	1,202,892		62,605		13,762		405		—		923		1,280,587
Leases & equipment finance, net	1,415,475		6,813		8,835		14,280		1,949		2,227		1,449,579
Residential
Mortgage, net ⁽²⁾	3,950,673		7,840		36,846		—		284		—		3,995,643
Home equity loans & lines, net	1,210,910		1,981		1,565		—		759		—		1,215,215
Consumer & other, net	529,561		3,324		424		—		34		—		533,343
Total, net of deferred fees and costs	$	20,563,922	$	236,535	$	105,798	$	16,579	$	3,194	$	27,343	$	20,953,371



(in thousands)	December 31, 2018
	Pass/Watch		Special Mention		Substandard		Doubtful		Loss		Impaired ⁽¹⁾		Total
Commercial real estate
Non-owner occupied term, net	$	3,497,801	$	38,346	$	23,234	$	—	$	122	$	13,562	$	3,573,065
Owner occupied term, net	2,422,351		28,447		22,136		54		327		7,056		2,480,371
Multifamily, net	3,284,445		11,481		4,539		—		—		4,298		3,304,763
Construction & development, net	734,318		—		1,936		—		—		—		736,254
Residential development, net	196,890		—		—		—		—		—		196,890
Commercial
Term, net	2,196,753		15,519		5,670		53		69		14,859		2,232,923
Lines of credit & other, net	1,103,677		42,831		20,639		313		—		2,065		1,169,525
Leases & equipment finance, net	1,296,235		8,571		8,754		14,247		1,931		417		1,330,155
Residential
Mortgage, net ⁽²⁾	3,588,976		5,169		38,766		—		2,162		—		3,635,073
Home equity loans & lines, net	1,172,040		1,878		1,418		—		1,141		—		1,176,477
Consumer & other, net	582,962		3,622		559		—		27		—		587,170
Total, net of deferred fees and costs	$	20,076,448	$	155,864	$	127,651	$	14,667	$	5,779	$	42,257	$	20,422,666

At June 30, 2019 and December 31, 2018, impaired loans of $15.3 million and $13.9 million, respectively, were classified as accruing restructured loans. The restructurings were granted in response to borrower financial difficulty, and generally provide for a temporary modification of loan repayment terms. In order for a newly restructured loan to be considered for accrual status, the loan's collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow. Impaired restructured loans carry a specific allowance and the allowance on impaired restructured loans is calculated consistently across the portfolios.

The Bank's policy is that loans placed on non-accrual will typically remain on non-accrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appears relatively certain. The Bank's policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status.



(in thousands)	Three Months Ended June 30, 2019
	Rate Modifications		Term Modifications		Interest Only Modifications		Payment Modifications		Combination Modifications		Total Modifications
Residential, net	$	—	$	—	$	—	$	—	$	7	$	7
Total, net of deferred fees and costs	$	—	$	—	$	—	$	—	$	7	$	7



(in thousands)	Six Months Ended June 30, 2019
	Rate Modifications		Term Modifications		Interest Only Modifications		Payment Modifications		Combination Modifications		Total Modifications
Commercial real estate, net	$	—	$	—	$	—	$	—	$	118	$	118
Commercial, net	—		—		—		—		1,842		1,842
Residential, net	—		—		—		—		7		7
Total, net of deferred fees and costs	$	—	$	—	$	—	$	—	$	1,967	$	1,967

(in thousands)	Six Months Ended June 30, 2018
	Rate Modifications		Term Modifications		Interest Only Modifications		Payment Modifications		Combination Modifications		Total Modifications
Residential, net	$	—	$	—	$	—	$	—	$	106	$	106
Total, net of deferred fees and costs	$	—	$	—	$	—	$	—	$	106	$	106