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, 2018 and 2017.

The following tables show a detailed analysis of the allowance for the three and six months ended June 30, 2018 and 2017:



	Beginning Balance		Charge-offs			Recoveries		Provision (Recapture)			Ending Balance		Specific Reserve		General Allocation
Three months ended June 30, 2018	(in thousands)
Commercial business:
Secured	$	37,331	$	(5,751	)	$	1,487	$	7,283		$	40,350	$	67	$	40,283
Unsecured	2,595		(24		)	56		(184		)	2,443		—		2,443
Real estate:
One-to-four family residential	558		—			196		(293		)	461		8		453
Commercial & multifamily residential:
Commercial land	3,745		—			78		(545		)	3,278		—		3,278
Income property	4,702		—			558		(1,158		)	4,102		—		4,102
Owner occupied	4,749		—			4		(397		)	4,356		86		4,270
Real estate construction:
One-to-four family residential:
Land and acquisition	912		—			12		(76		)	848		—		848
Residential construction	4,636		—			2		(66		)	4,572		—		4,572
Commercial & multifamily residential:
Income property	7,474		—			—		(107		)	7,367		—		7,367
Owner occupied	1,923		—			—		376			2,299		—		2,299
Consumer	5,216		(232		)	270		38			5,292		95		5,197
Purchased credit impaired	5,665		(1,235		)	927		(575		)	4,782		—		4,782
Unallocated	321		—			—		(321		)	—		—		—
Total	$	79,827	$	(7,242	)	$	3,590	$	3,975		$	80,150	$	256	$	79,894
	Beginning Balance		Charge-offs			Recoveries		Provision (Recapture)			Ending Balance		Specific Reserve		General Allocation
Six months ended June 30, 2018	(in thousands)
Commercial business:
Secured	$	29,341	$	(8,165	)	$	2,040	$	17,134		$	40,350	$	67	$	40,283
Unsecured	2,000		(87		)	305		225			2,443		—		2,443
Real estate:
One-to-four family residential	701		—			368		(608		)	461		8		453
Commercial & multifamily residential:
Commercial land	4,265		—			84		(1,071		)	3,278		—		3,278
Income property	5,672		(223		)	699		(2,046		)	4,102		—		4,102
Owner occupied	5,459		—			16		(1,119		)	4,356		86		4,270
Real estate construction:
One-to-four family residential:
Land and acquisition	963		—			28		(143		)	848		—		848
Residential construction	3,709		—			5		858			4,572		—		4,572
Commercial & multifamily residential:
Income property	7,053		—			—		314			7,367		—		7,367
Owner occupied	4,413		—			—		(2,114		)	2,299		—		2,299
Consumer	5,163		(496		)	530		95			5,292		95		5,197
Purchased credit impaired	6,907		(2,578		)	2,151		(1,698		)	4,782		—		4,782
Unallocated	—		—			—		—			—		—		—
Total	$	75,646	$	(11,549	)	$	6,226	$	9,827		$	80,150	$	256	$	79,894



	Beginning Balance		Charge-offs			Recoveries		Provision (Recapture)			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 (Recapture)			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

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,
	2018			2017		2018		2017
	(in thousands)
Balance at beginning of period	$	4,330		$	3,555	$	3,130	$	2,705
Net changes in the allowance for unfunded commitments and letters of credit	(650		)	—		550		850
Balance at end of period	$	3,680		$	3,555	$	3,680	$	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 reviewed 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, 2018 and December 31, 2017:



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
June 30, 2018	(in thousands)
Loans, excluding PCI loans:
Commercial business:
Secured	$	3,216,924	$	68,549	$	121,946	$	—	$	—	$	3,407,419
Unsecured	115,808		2		524		—		—		116,334
Real estate:
One-to-four family residential	176,717		28		2,069		—		—		178,814
Commercial and multifamily residential:
Commercial land	273,742		1,916		6,012		—		—		281,670
Income property	1,818,431		18,938		14,081		—		—		1,851,450
Owner occupied	1,569,877		4,715		29,150		—		—		1,603,742
Real estate construction:
One-to-four family residential:
Land and acquisition	6,252		—		318		—		—		6,570
Residential construction	198,602		—		71		—		—		198,673
Commercial and multifamily residential:
Income property	299,739		—		3,062		—		—		302,801
Owner occupied	75,644		—		4,050		—		—		79,694
Consumer	316,642		—		8,516		—		—		325,158
Total	$	8,068,378	$	94,148	$	189,799	$	—	$	—	8,352,325
Less:
Allowance for loan and lease losses											75,368
Loans, excluding PCI loans, net											$	8,276,957



	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 June 30, 2018 and December 31, 2017:



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
June 30, 2018	(in thousands)
PCI loans:
Commercial business:
Secured	$	11,024	$	—	$	1,101	$	—	$	—	$	12,125
Unsecured	796		—		—		—		—		796
Real estate:
One-to-four family residential	11,448		—		754		—		—		12,202
Commercial and multifamily residential:
Commercial land	10,901		—		—		—		—		10,901
Income property	20,816		—		129		—		—		20,945
Owner occupied	39,322		—		851		—		—		40,173
Real estate construction:
One-to-four family residential:
Land and acquisition	161		—		5		—		—		166
Residential construction	—		—		—		—		—		—
Commercial and multifamily residential:
Income property	557		—		—		—		—		557
Owner occupied	—		—		—		—		—		—
Consumer	10,909		—		401		—		—		11,310
Total	$	105,934	$	—	$	3,241	$	—	$	—	109,175
Less:
Valuation discount resulting from acquisition accounting											7,393
Allowance for loan losses											4,782
PCI loans, net											$	97,000



	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
Residential construction	—		—		—		—		—		—
Commercial and multifamily residential:
Income property	595		—		—		—		—		595
Owner occupied	—		—		—		—		—		—
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