Allowance for Loan and Lease Losses and Unfunded Commitments and Letters of Credit

We record an allowance to recognize management’s estimate of credit losses incurred in the loan portfolio at each balance sheet date. We have used the same methodology for allowance calculations during the twelve month periods ended December 31, 2016 and December 31, 2015.

The following tables show a detailed analysis of the allowance for loans for the years ended December 31, 2016, 2015 and 2014:



	Beginning Balance		Charge-offs			Recoveries		Provision (Recovery)			Ending Balance		Specific Reserve		General Allocation
Year Ended December 31, 2016	(in thousands)
Commercial business:
Secured	$	32,321	$	(9,993	)	$	2,483	$	11,239		$	36,050	$	664	$	35,386
Unsecured	1,299		(75		)	162		(426		)	960		—		960
Real estate:
One-to-four family residential	916		(35		)	171		(453		)	599		12		587
Commercial and multifamily residential:
Commercial land	1,178		(26		)	2		643			1,797		—		1,797
Income property	6,616		—			966		(240		)	7,342		27		7,315
Owner occupied	5,550		(63		)	434		518			6,439		—		6,439
Real estate construction:
One-to-four family residential:
Land and acquisition	339		(88		)	57		8			316		1		315
Residential construction	733		—			234		(298		)	669		—		669
Commercial and multifamily residential:
Income property	388		—			109		(93		)	404		—		404
Owner occupied	1,006		—			—		186			1,192		—		1,192
Consumer	3,531		(1,238		)	933		308			3,534		57		3,477
Purchased credit impaired	13,726		(9,944		)	7,004		(271		)	10,515		—		10,515
Unallocated	569		—			—		(343		)	226		—		226
Total	$	68,172	$	(21,462	)	$	12,555	$	10,778		$	70,043	$	761	$	69,282



	Beginning Balance		Charge-offs			Recoveries		Provision (Recovery)			Ending Balance		Specific Reserve		General Allocation
Year Ended December 31, 2015	(in thousands)
Commercial business:
Secured	$	25,923	$	(7,486	)	$	2,069	$	11,815		$	32,321	$	321	$	32,000
Unsecured	927		(780		)	267		885			1,299		—		1,299
Real estate:
One-to-four family residential	2,281		(376		)	307		(1,296		)	916		314		602
Commercial and multifamily residential:
Commercial land	799		—			291		88			1,178		—		1,178
Income property	9,159		(390		)	3,568		(5,721		)	6,616		—		6,616
Owner occupied	5,007		(115		)	116		542			5,550		—		5,550
Real estate construction:
One-to-four family residential:
Land and acquisition	1,197		—			103		(961		)	339		—		339
Residential construction	1,860		—			90		(1,217		)	733		3		730
Commercial and multifamily residential:
Income property	622		—			8		(242		)	388		—		388
Owner occupied	434		—			—		572			1,006		—		1,006
Consumer	3,180		(2,066		)	931		1,486			3,531		15		3,516
Purchased credit impaired	16,336		(13,854		)	7,329		3,915			13,726		—		13,726
Unallocated	1,844		—			—		(1,275		)	569		—		569
Total	$	69,569	$	(25,067	)	$	15,079	$	8,591		$	68,172	$	653	$	67,519



	Beginning Balance		Charge-offs			Recoveries		Provision (Recovery)			Ending Balance		Specific Reserve		General Allocation
Year ended December 31, 2014	(in thousands)
Commercial business:
Secured	$	31,027	$	(4,159	)	$	2,637	$	(3,582	)	$	25,923	$	25	$	25,898
Unsecured	696		(130		)	370		(9		)	927		2		925
Real estate:
One-to-four family residential	1,252		(230		)	159		1,100			2,281		120		2,161
Commercial and multifamily residential:
Commercial land	489		(29		)	70		269			799		—		799
Income property	9,234		(1,934		)	819		1,040			9,159		—		9,159
Owner occupied	3,605		(1,030		)	51		2,381			5,007		27		4,980
Real estate construction:
One-to-four family residential:
Land and acquisition	610		—			740		(153		)	1,197		67		1,130
Residential construction	822		—			1,190		(152		)	1,860		—		1,860
Commercial and multifamily residential:
Income property	285		—			—		337			622		—		622
Owner occupied	58		—			—		376			434		—		434
Consumer	2,547		(2,774		)	1,353		2,054			3,180		—		3,180
Purchased credit impaired	20,174		(14,436		)	7,721		2,877			16,336		—		16,336
Unallocated	1,655		—			—		189			1,844		—		1,844
Total	$	72,454	$	(24,722	)	$	15,110	$	6,727		$	69,569	$	241	$	69,328

Changes in the allowance for unfunded commitments and letters of credit, a component of “Other liabilities” in the Consolidated Balance Sheets, are summarized as follows:



	Years Ended December 31,
	2016			2015		2014
	(in thousands)
Beginning balance	$	2,930		$	2,655	$	2,505
Net changes in the allowance for unfunded commitments and letters of credit	(225		)	275		150
Ending balance	$	2,705		$	2,930	$	2,655

Risk Elements

The extension of credit in the form of loans or other credit products to individuals and businesses is one of our principal business activities. Our policies and applicable laws and regulations require risk analysis as well as ongoing portfolio and credit management. We manage our credit risk through lending limit constraints, credit review, approval policies and extensive, ongoing internal monitoring. We also manage credit risk through diversification of the loan portfolio by type of loan, type of industry and type of borrower and by limiting the aggregation of debt to a single borrower.

Risk ratings are reviewed and updated whenever appropriate, with more periodic reviews as the risk and dollar value of loss on the loan increases. In the event full collection of principal and interest is not reasonably assured, the loan is appropriately downgraded and, if warranted, placed on nonaccrual status even though the loan may be current as to principal and interest payments. Additionally, we assess whether an impairment of a loan warrants specific reserves or a write-down of the loan.

Pass rated 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. Special Mention rated loans have potential weaknesses that, if left uncorrected, may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Loans with a risk rating of Substandard or worse are reported as classified loans in our allowance analysis. We review these loans to assess the ability of our borrowers to service all interest and principal obligations and, as a result, the risk rating may be adjusted accordingly. Loans risk rated as Substandard reflect loans where a loss is possible if loan weaknesses are not corrected. Doubtful loans have a high probability of loss, however, the amount of loss has not yet been determined. Loss rated loans are considered uncollectable and when identified, are charged off.

The following is an analysis of the credit quality of our loan portfolio, excluding PCI loans as of December 31, 2016 and 2015:



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
December 31, 2016	(in thousands)
Loans, excluding PCI loans
Commercial business:
Secured	$	2,289,307	$	65,846	$	96,437	$	—	$	—	$	2,451,590
Unsecured	93,721		800		216		—		—		94,737
Real estate:
One-to-four family residential	164,797		395		2,740		—		—		167,932
Commercial and multifamily residential:
Commercial land	263,195		3,228		4,391		—		—		270,814
Income property	1,341,978		17,902		9,866		—		—		1,369,746
Owner occupied	1,027,019		6,608		26,351		—		—		1,059,978
Real estate construction:
One-to-four family residential:
Land and acquisition	11,541		—		15		—		—		11,556
Residential construction	108,941		—		688		—		—		109,629
Commercial and multifamily residential:
Income property	103,779		—		—		—		—		103,779
Owner occupied	98,948		88		4,444		—		—		103,480
Consumer	317,728		—		6,794		—		—		324,522
Total	$	5,820,954	$	94,867	$	151,942	$	—	$	—	6,067,763
Less:
Allowance for loan losses											59,528
Loans, excluding PCI loans, net											$	6,008,235



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
December 31, 2015	(in thousands)
Loans, excluding PCI loans
Commercial business:
Secured	$	2,146,729	$	59,746	$	56,217	$	—	$	—	$	2,262,692
Unsecured	93,347		278		1,323		—		—		94,948
Real estate:
One-to-four family residential	171,945		52		1,439		—		—		173,436
Commercial and multifamily residential:
Commercial land	207,768		4,966		424		—		—		213,158
Income property	1,296,043		5,889		8,847		—		—		1,310,779
Owner occupied	918,986		9,668		17,662		—		—		946,316
Real estate construction:
One-to-four family residential:
Land and acquisition	14,388		—		362		—		—		14,750
Residential construction	119,243		—		1,132		—		—		120,375
Commercial and multifamily residential:
Income property	83,634		—		—		—		—		83,634
Owner occupied	81,270		—		401		—		—		81,671
Consumer	328,286		—		4,076		—		—		332,362
Total	$	5,461,639	$	80,599	$	91,883	$	—	$	—	5,634,121
Less:
Allowance for loan losses											54,446
Loans, excluding PCI loans, net											$	5,579,675

The following is an analysis of the credit quality of our PCI loan portfolio as of December 31, 2016 and 2015:



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
December 31, 2016	(in thousands)
PCI loans:
Commercial business:
Secured	$	18,824	$	92	$	1,954	$	—	$	—	$	20,870
Unsecured	736		—		—		—		—		736
Real estate:
One-to-four family residential	19,293		—		1,350		—		—		20,643
Commercial and multifamily residential:
Commercial land	7,333		—		213		—		—		7,546
Income property	31,042		—		1,678		—		—		32,720
Owner occupied	53,623		—		906		—		—		54,529
Real estate construction:
One-to-four family residential:
Land and acquisition	744		—		88		—		—		832
Residential construction	—		—		—		—		—		—
Commercial and multifamily residential:
Income property	1,217		—		—		—		—		1,217
Owner occupied	509		—		—		—		—		509
Consumer	17,202		—		447		—		—		17,649
Total	$	150,523	$	92	$	6,636	$	—	$	—	157,251
Less:
Valuation discount resulting from acquisition accounting											11,591
Allowance for loan losses											10,515
PCI loans, net											$	135,145



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
December 31, 2015	(in thousands)
PCI loans:
Commercial business:
Secured	$	31,468	$	101	$	5,995	$	—	$	—	$	37,564
Unsecured	1,218		—		2		—		—		1,220
Real estate:
One-to-four family residential	25,018		—		2,177		—		—		27,195
Commercial and multifamily residential:
Commercial land	8,234		—		664		—		—		8,898
Income property	36,426		—		5,916		—		—		42,342
Owner occupied	53,071		261		1,736		—		—		55,068
Real estate construction:
One-to-four family residential:
Land and acquisition	1,086		—		479		—		—		1,565
Residential construction	427		—		334		—		—		761
Commercial and multifamily residential:
Income property	1,303		—		—		—		—		1,303
Owner occupied	531		—		—		—		—		531
Consumer	20,122		—		781		—		—		20,903
Total	$	178,904	$	362	$	18,084	$	—	$	—	197,350
Less:
Valuation discount resulting from acquisition accounting											16,444
Allowance for loan losses											13,726
PCI loans, net											$	167,180