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 three months ended March 31, 2018 and 2017.

The following tables show a detailed analysis of the allowance for the three months ended March 31, 2018 and 2017:



	Beginning Balance		Charge-offs			Recoveries		Provision (Recovery)			Ending Balance		Specific Reserve		General Allocation
Three months ended March 31, 2018	(in thousands)
Commercial business:
Secured	$	29,341	$	(2,414	)	$	553	$	9,851		$	37,331	$	5,657	$	31,674
Unsecured	2,000		(63		)	249		409			2,595		2		2,593
Real estate:
One-to-four family residential	701		—			172		(315		)	558		22		536
Commercial & multifamily residential:
Commercial land	4,265		—			6		(526		)	3,745		—		3,745
Income property	5,672		(223		)	141		(888		)	4,702		—		4,702
Owner occupied	5,459		—			12		(722		)	4,749		5		4,744
Real estate construction:
One-to-four family residential:
Land and acquisition	963		—			16		(67		)	912		—		912
Residential construction	3,709		—			3		924			4,636		—		4,636
Commercial & multifamily residential:
Income property	7,053		—			—		421			7,474		—		7,474
Owner occupied	4,413		—			—		(2,490		)	1,923		—		1,923
Consumer	5,163		(264		)	260		57			5,216		171		5,045
Purchased credit impaired	6,907		(1,343		)	1,224		(1,123		)	5,665		—		5,665
Unallocated	—		—			—		321			321		—		321
Total	$	75,646	$	(4,307	)	$	2,636	$	5,852		$	79,827	$	5,857	$	73,970



	Beginning Balance		Charge-offs			Recoveries		Provision (Recovery)			Ending Balance		Specific Reserve		General Allocation
Three months ended March 31, 2017	(in thousands)
Commercial business:
Secured	$	36,050	$	(1,109	)	$	297	$	434		$	35,672	$	—	$	35,672
Unsecured	960		(18		)	68		178			1,188		—		1,188
Real estate:
One-to-four family residential	599		(307		)	117		236			645		11		634
Commercial & multifamily residential:
Commercial land	1,797		—			—		491			2,288		—		2,288
Income property	7,342		—			35		(574		)	6,803		26		6,777
Owner occupied	6,439		—			43		52			6,534		—		6,534
Real estate construction:
One-to-four family residential:
Land and acquisition	316		(14		)	20		187			509		—		509
Residential construction	669		—			9		431			1,109		—		1,109
Commercial & multifamily residential:
Income property	404		—			—		378			782		—		782
Owner occupied	1,192		—			—		576			1,768		—		1,768
Consumer	3,534		(428		)	285		(31		)	3,360		57		3,303
Purchased credit impaired	10,515		(1,939		)	1,144		(325		)	9,395		—		9,395
Unallocated	226		—			—		742			968		—		968
Total	$	70,043	$	(3,815	)	$	2,018	$	2,775		$	71,021	$	94	$	70,927

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
	March 31,
	2018		2017
	(in thousands)
Balance at beginning of period	$	3,130	$	2,705
Net changes in the allowance for unfunded commitments and letters of credit	1,200		850
Balance at end of period	$	4,330	$	3,555

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 March 31, 2018 and December 31, 2017:



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
March 31, 2018	(in thousands)
Loans, excluding PCI loans:
Commercial business:
Secured	$	3,067,417	$	47,672	$	151,170	$	—	$	—	$	3,266,259
Unsecured	119,416		—		663		—		—		120,079
Real estate:
One-to-four family residential	177,122		1,208		2,238		—		—		180,568
Commercial and multifamily residential:
Commercial land	279,949		1,288		8,227		—		—		289,464
Income property	1,837,613		19,863		16,698		—		—		1,874,174
Owner occupied	1,542,605		8,986		39,350		—		—		1,590,941
Real estate construction:
One-to-four family residential:
Land and acquisition	6,540		—		—		—		—		6,540
Residential construction	199,868		—		1,210		—		—		201,078
Commercial and multifamily residential:
Income property	303,079		—		3,058		—		—		306,137
Owner occupied	67,672		—		5,344		—		—		73,016
Consumer	314,223		—		7,853		—		—		322,076
Total	$	7,915,504	$	79,017	$	235,811	$	—	$	—	8,230,332
Less:
Allowance for loan and lease losses											74,162
Loans, excluding PCI loans, net											$	8,156,170



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
December 31, 2017	(in thousands)
Loans, excluding PCI loans:
Commercial business:
Secured	$	3,049,031	$	64,600	$	122,030	$	—	$	—	$	3,235,661
Unsecured	123,621		—		554		—		—		124,175
Real estate:
One-to-four family residential	183,312		1,186		2,056		—		—		186,554
Commercial and multifamily residential:
Commercial land	283,673		5,204		7,104		—		—		295,981
Income property	1,857,832		17,181		31,323		—		—		1,906,336
Owner occupied	1,546,775		7,380		45,831		—		—		1,599,986
Real estate construction:
One-to-four family residential:
Land and acquisition	9,882		—		25		—		—		9,907
Residential construction	187,863		—		1,828		—		—		189,691
Commercial and multifamily residential:
Income property	293,028		—		—		—		—		293,028
Owner occupied	68,393		—		4,050		—		—		72,443
Consumer	323,129		—		9,096		—		—		332,225
Total	$	7,926,539	$	95,551	$	223,897	$	—	$	—	8,245,987
Less:
Allowance for loan and lease losses											68,739
Loans, excluding PCI loans, net											$	8,177,248

The following is an analysis of the credit quality of our PCI loan portfolio as of March 31, 2018 and December 31, 2017:



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
March 31, 2018	(in thousands)
PCI loans:
Commercial business:
Secured	$	12,582	$	—	$	728	$	—	$	—	$	13,310
Unsecured	891		—		—		—		—		891
Real estate:
One-to-four family residential	11,967		—		771		—		—		12,738
Commercial and multifamily residential:
Commercial land	12,223		—		—		—		—		12,223
Income property	22,384		—		—		—		—		22,384
Owner occupied	41,874		—		919		—		—		42,793
Real estate construction:
One-to-four family residential:
Land and acquisition	164		—		7		—		—		171
Commercial and multifamily residential:
Income property	589		—		—		—		—		589
Consumer	11,514		—		475		—		—		11,989
Total	$	114,188	$	—	$	2,900	$	—	$	—	117,088
Less:
Valuation discount resulting from acquisition accounting											7,789
Allowance for loan losses											5,665
PCI loans, net											$	103,634



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
December 31, 2017	(in thousands)
PCI loans:
Commercial business:
Secured	$	11,918	$	—	$	723	$	—	$	—	$	12,641
Unsecured	1,045		—		67		—		—		1,112
Real estate:
One-to-four family residential	13,817		—		793		—		—		14,610
Commercial and multifamily residential:
Commercial land	9,460		349		—		—		—		9,809
Income property	25,981		—		35		—		—		26,016
Owner occupied	42,617		—		769		—		—		43,386
Real estate construction:
One-to-four family residential:
Land and acquisition	169		—		8		—		—		177
Commercial and multifamily residential:
Income property	595		—		—		—		—		595
Consumer	11,705		—		707		—		—		12,412
Total	$	117,307	$	349	$	3,102	$	—	$	—	120,758
Less:
Valuation discount resulting from acquisition accounting											8,088
Allowance for loan losses											6,907
PCI loans, net											$	105,763