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

We record an allowance for loan and lease losses (the “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 six months ended June 30, 2017 and 2016.

The following tables show a detailed analysis of the allowance for the three and six months ended June 30, 2017 and 2016:



	Beginning Balance		Charge-offs			Recoveries		Provision (Recovery)			Ending Balance		Specific Reserve		General Allocation
Three months ended June 30, 2017	(in thousands)
Commercial business:
Secured	$	35,672	$	(3,600	)	$	2,903	$	4,564		$	39,539	$	3,425	$	36,114
Unsecured	1,188		—			41		(82		)	1,147		—		1,147
Real estate:
One-to-four family residential	645		(153		)	223		(87		)	628		4		624
Commercial & multifamily residential:
Commercial land	2,288		—			—		68			2,356		—		2,356
Income property	6,803		—			60		(9		)	6,854		25		6,829
Owner occupied	6,534		—			67		(89		)	6,512		—		6,512
Real estate construction:
One-to-four family residential:
Land and acquisition	509		—			27		(175		)	361		—		361
Residential construction	1,109		—			31		237			1,377		—		1,377
Commercial & multifamily residential:
Income property	782		—			—		203			985		—		985
Owner occupied	1,768		—			—		(386		)	1,382		—		1,382
Consumer	3,360		(465		)	248		408			3,551		45		3,506
Purchased credit impaired	9,395		(1,800		)	1,204		(738		)	8,061		—		8,061
Unallocated	968		—			—		(737		)	231		—		231
Total	$	71,021	$	(6,018	)	$	4,804	$	3,177		$	72,984	$	3,499	$	69,485
	Beginning Balance		Charge-offs			Recoveries		Provision (Recovery)			Ending Balance		Specific Reserve		General Allocation
Six months ended June 30, 2017	(in thousands)
Commercial business:
Secured	$	36,050	$	(4,709	)	$	3,200	$	4,998		$	39,539	$	3,425	$	36,114
Unsecured	960		(18		)	109		96			1,147		—		1,147
Real estate:
One-to-four family residential	599		(460		)	340		149			628		4		624
Commercial & multifamily residential:
Commercial land	1,797		—			—		559			2,356		—		2,356
Income property	7,342		—			95		(583		)	6,854		25		6,829
Owner occupied	6,439		—			110		(37		)	6,512		—		6,512
Real estate construction:
One-to-four family residential:
Land and acquisition	316		(14		)	47		12			361		—		361
Residential construction	669		—			40		668			1,377		—		1,377
Commercial & multifamily residential:
Income property	404		—			—		581			985		—		985
Owner occupied	1,192		—			—		190			1,382		—		1,382
Consumer	3,534		(893		)	533		377			3,551		45		3,506
Purchased credit impaired	10,515		(3,739		)	2,348		(1,063		)	8,061		—		8,061
Unallocated	226		—			—		5			231		—		231
Total	$	70,043	$	(9,833	)	$	6,822	$	5,952		$	72,984	$	3,499	$	69,485



	Beginning Balance		Charge-offs			Recoveries		Provision (Recovery)			Ending Balance		Specific Reserve		General Allocation
Three months ended June 30, 2016	(in thousands)
Commercial business:
Secured	$	32,114	$	(2,900	)	$	728	$	1,866		$	31,808	$	2,486	$	29,322
Unsecured	1,300		(41		)	25		(19		)	1,265		—		1,265
Real estate:
One-to-four family residential	654		(35		)	20		35			674		1		673
Commercial & multifamily residential:
Commercial land	1,262		(26		)	2		184			1,422		—		1,422
Income property	7,402		—			120		524			8,046		100		7,946
Owner occupied	6,086		—			8		242			6,336		—		6,336
Real estate construction:
One-to-four family residential:
Land and acquisition	640		—			2		(55		)	587		—		587
Residential construction	1,449		—			3		(76		)	1,376		—		1,376
Commercial & multifamily residential:
Income property	715		—			1		188			904		—		904
Owner occupied	1,210		—			—		174			1,384		—		1,384
Consumer	3,368		(334		)	201		325			3,560		118		3,442
Purchased credit impaired	13,064		(2,898		)	1,524		91			11,781		—		11,781
Unallocated	—		—			—		161			161		—		161
Total	$	69,264	$	(6,234	)	$	2,634	$	3,640		$	69,304	$	2,705	$	66,599
	Beginning Balance		Charge-offs			Recoveries		Provision (Recovery)			Ending Balance		Specific Reserve		General Allocation
Six months ended June 30, 2016	(in thousands)
Commercial business:
Secured	$	32,321	$	(6,670	)	$	1,339	$	4,818		$	31,808	$	2,486	$	29,322
Unsecured	1,299		(44		)	76		(66		)	1,265		—		1,265
Real estate:
One-to-four family residential	916		(35		)	61		(268		)	674		1		673
Commercial & multifamily residential:
Commercial land	1,178		(26		)	2		268			1,422		—		1,422
Income property	6,616		—			181		1,249			8,046		100		7,946
Owner occupied	5,550		—			16		770			6,336		—		6,336
Real estate construction:
One-to-four family residential:
Land and acquisition	339		—			53		195			587		—		587
Residential construction	733		—			206		437			1,376		—		1,376
Commercial & multifamily residential:
Income property	388		—			2		514			904		—		904
Owner occupied	1,006		—			—		378			1,384		—		1,384
Consumer	3,531		(600		)	366		263			3,560		118		3,442
Purchased credit impaired	13,726		(5,764		)	3,075		744			11,781		—		11,781
Unallocated	569		—			—		(408		)	161		—		161
Total	$	68,172	$	(13,139	)	$	5,377	$	8,894		$	69,304	$	2,705	$	66,599

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:



	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2017		2016			2017		2016
	(in thousands)
Balance at beginning of period	$	3,555	$	2,930		$	2,705	$	2,930
Net changes in the allowance for unfunded commitments and letters of credit	—		(150		)	850		(150		)
Balance at end of period	$	3,555	$	2,780		$	3,555	$	2,780

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 rated 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 June 30, 2017 and December 31, 2016:



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
June 30, 2017	(in thousands)
Loans, excluding PCI loans:
Commercial business:
Secured	$	2,423,195	$	74,148	$	107,021	$	—	$	—	$	2,604,364
Unsecured	93,716		701		1,002		—		—		95,419
Real estate:
One-to-four family residential	168,062		1,204		1,788		—		—		171,054
Commercial and multifamily residential:
Commercial land	274,000		4,761		4,759		—		—		283,520
Income property	1,328,708		8,678		18,381		—		—		1,355,767
Owner occupied	1,098,775		8,269		23,723		—		—		1,130,767
Real estate construction:
One-to-four family residential:
Land and acquisition	6,022		—		27		—		—		6,049
Residential construction	132,555		399		213		—		—		133,167
Commercial and multifamily residential:
Income property	153,529		—		—		—		—		153,529
Owner occupied	35,416		—		4,050		—		—		39,466
Consumer	311,990		2		8,127		—		—		320,119
Total	$	6,025,968	$	98,162	$	169,091	$	—	$	—	6,293,221
Less:
Allowance for loan and lease losses											64,923
Loans, excluding PCI loans, net											$	6,228,298



	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 and lease losses											59,528
Loans, excluding PCI loans, net											$	6,008,235

The following is an analysis of the credit quality of our PCI loan portfolio as of June 30, 2017 and December 31, 2016:



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
June 30, 2017	(in thousands)
PCI loans:
Commercial business:
Secured	$	14,930	$	87	$	819	$	—	$	—	$	15,836
Unsecured	703		—		69		—		—		772
Real estate:
One-to-four family residential	16,379		—		863		—		—		17,242
Commercial and multifamily residential:
Commercial land	10,411		—		—		—		—		10,411
Income property	26,047		—		138		—		—		26,185
Owner occupied	50,999		—		803		—		—		51,802
Real estate construction:
One-to-four family residential:
Land and acquisition	382		—		71		—		—		453
Commercial and multifamily residential:
Income property	786		—		—		—		—		786
Owner occupied	288		—		—		—		—		288
Consumer	14,998		—		529		—		—		15,527
Total	$	135,923	$	87	$	3,292	$	—	$	—	139,302
Less:
Valuation discount resulting from acquisition accounting											9,449
Allowance for loan losses											8,061
PCI loans, net											$	121,792



	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
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