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 nine months ended September 30, 2018 and 2017.

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



	Beginning Balance		Charge-offs			Recoveries		Provision (Recapture)			Ending Balance		Specific Reserve		General Allocation
Three months ended September 30, 2018	(in thousands)
Commercial business:
Secured	$	40,350	$	(576	)	$	496	$	2,912		$	43,182	$	1,139	$	42,043
Unsecured	2,443		(30		)	51		(41		)	2,423		—		2,423
Real estate:
One-to-four family residential	461		—			21		(110		)	372		8		364
Commercial & multifamily residential:
Commercial land	3,278		—			8		(87		)	3,199		—		3,199
Income property	4,102		—			202		(292		)	4,012		1		4,011
Owner occupied	4,356		—			3		316			4,675		71		4,604
Real estate construction:
One-to-four family residential:
Land and acquisition	848		—			582		(742		)	688		—		688
Residential construction	4,572		—			1		660			5,233		—		5,233
Commercial & multifamily residential:
Income property	7,367		—			—		573			7,940		—		7,940
Owner occupied	2,299		—			—		138			2,437		—		2,437
Consumer	5,292		(277		)	266		(258		)	5,023		36		4,987
Purchased credit impaired	4,782		(1,208		)	945		(502		)	4,017		—		4,017
Unallocated	—		—			—		586			586		—		586
Total	$	80,150	$	(2,091	)	$	2,575	$	3,153		$	83,787	$	1,255	$	82,532
	Beginning Balance		Charge-offs			Recoveries		Provision (Recapture)			Ending Balance		Specific Reserve		General Allocation
Nine months ended September 30, 2018	(in thousands)
Commercial business:
Secured	$	29,341	$	(8,741	)	$	2,536	$	20,046		$	43,182	$	1,139	$	42,043
Unsecured	2,000		(117		)	356		184			2,423		—		2,423
Real estate:
One-to-four family residential	701		—			389		(718		)	372		8		364
Commercial & multifamily residential:
Commercial land	4,265		—			92		(1,158		)	3,199		—		3,199
Income property	5,672		(223		)	901		(2,338		)	4,012		1		4,011
Owner occupied	5,459		—			19		(803		)	4,675		71		4,604
Real estate construction:
One-to-four family residential:
Land and acquisition	963		—			610		(885		)	688		—		688
Residential construction	3,709		—			6		1,518			5,233		—		5,233
Commercial & multifamily residential:
Income property	7,053		—			—		887			7,940		—		7,940
Owner occupied	4,413		—			—		(1,976		)	2,437		—		2,437
Consumer	5,163		(773		)	796		(163		)	5,023		36		4,987
Purchased credit impaired	6,907		(3,786		)	3,096		(2,200		)	4,017		—		4,017
Unallocated	—		—			—		586			586		—		586
Total	$	75,646	$	(13,640	)	$	8,801	$	12,980		$	83,787	$	1,255	$	82,532



	Beginning Balance		Charge-offs			Recoveries		Provision (Recapture)			Ending Balance		Specific Reserve		General Allocation
Three months ended September 30, 2017	(in thousands)
Commercial business:
Secured	$	39,539	$	(1,362	)	$	550	$	(969	)	$	37,758	$	—	$	37,758
Unsecured	1,147		—			138		(298		)	987		—		987
Real estate:
One-to-four family residential	628		—			40		3			671		26		645
Commercial & multifamily residential:
Commercial land	2,356		—			45		(97		)	2,304		—		2,304
Income property	6,854		—			9		241			7,104		25		7,079
Owner occupied	6,512		—			4		306			6,822		—		6,822
Real estate construction:
One-to-four family residential:
Land and acquisition	361		—			14		(83		)	292		—		292
Residential construction	1,377		—			6		(272		)	1,111		—		1,111
Commercial & multifamily residential:
Income property	985		—			—		279			1,264		—		1,264
Owner occupied	1,382		—			—		(87		)	1,295		—		1,295
Consumer	3,551		(263		)	343		42			3,673		51		3,622
Purchased credit impaired	8,061		(1,633		)	1,389		(473		)	7,344		—		7,344
Unallocated	231		—			—		760			991		—		991
Total	$	72,984	$	(3,258	)	$	2,538	$	(648	)	$	71,616	$	102	$	71,514
	Beginning Balance		Charge-offs			Recoveries		Provision (Recapture)			Ending Balance		Specific Reserve		General Allocation
Nine months ended September 30, 2017	(in thousands)
Commercial business:
Secured	$	36,050	$	(6,071	)	$	3,750	$	4,029		$	37,758	$	—	$	37,758
Unsecured	960		(18		)	247		(202		)	987		—		987
Real estate:
One-to-four family residential	599		(460		)	380		152			671		26		645
Commercial & multifamily residential:
Commercial land	1,797		—			45		462			2,304		—		2,304
Income property	7,342		—			104		(342		)	7,104		25		7,079
Owner occupied	6,439		—			114		269			6,822		—		6,822
Real estate construction:
One-to-four family residential:
Land and acquisition	316		(14		)	61		(71		)	292		—		292
Residential construction	669		—			46		396			1,111		—		1,111
Commercial & multifamily residential:
Income property	404		—			—		860			1,264		—		1,264
Owner occupied	1,192		—			—		103			1,295		—		1,295
Consumer	3,534		(1,156		)	876		419			3,673		51		3,622
Purchased credit impaired	10,515		(5,372		)	3,737		(1,536		)	7,344		—		7,344
Unallocated	226		—			—		765			991		—		991
Total	$	70,043	$	(13,091	)	$	9,360	$	5,304		$	71,616	$	102	$	71,514

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					Nine Months Ended
	September 30,					September 30,
	2018		2017			2018		2017
	(in thousands)
Balance at beginning of period	$	3,680	$	3,555		$	3,130	$	2,705
Net changes in the allowance for unfunded commitments and letters of credit	275		(75		)	825		775
Balance at end of period	$	3,955	$	3,480		$	3,955	$	3,480

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 September 30, 2018 and December 31, 2017:



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
September 30, 2018	(in thousands)
Loans, excluding PCI loans:
Commercial business:
Secured	$	3,202,147	$	83,986	$	134,178	$	—	$	—	$	3,420,311
Unsecured	118,885		33		1		—		—		118,919
Real estate:
One-to-four family residential	229,704		—		1,607		—		—		231,311
Commercial and multifamily residential:
Commercial land	272,838		3,423		4,977		—		—		281,238
Income property	1,857,338		19,474		10,878		—		—		1,887,690
Owner occupied	1,532,093		27,182		37,994		—		—		1,597,269
Real estate construction:
One-to-four family residential:
Land and acquisition	5,645		—		318		—		—		5,963
Residential construction	204,628		—		—		—		—		204,628
Commercial and multifamily residential:
Income property	253,636		—		—		—		—		253,636
Owner occupied	86,461		—		4,050		—		—		90,511
Consumer	322,595		—		4,310		—		—		326,905
Total	$	8,085,970	$	134,098	$	198,313	$	—	$	—	8,418,381
Less:
Allowance for loan and lease losses											79,770
Loans, excluding PCI loans, net											$	8,338,611



	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 September 30, 2018 and December 31, 2017:



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
September 30, 2018	(in thousands)
PCI loans:
Commercial business:
Secured	$	9,732	$	—	$	947	$	—	$	—	$	10,679
Unsecured	824		—		100		—		—		924
Real estate:
One-to-four family residential	10,021		—		222		—		—		10,243
Commercial and multifamily residential:
Commercial land	10,583		—		—		—		—		10,583
Income property	20,444		—		1,898		—		—		22,342
Owner occupied	37,042		—		377		—		—		37,419
Real estate construction:
One-to-four family residential:
Land and acquisition	155		—		4		—		—		159
Residential construction	—		—		—		—		—		—
Commercial and multifamily residential:
Income property	552		—		—		—		—		552
Owner occupied	—		—		—		—		—		—
Consumer	9,638		—		242		—		—		9,880
Total	$	98,991	$	—	$	3,790	$	—	$	—	102,781
Less:
Valuation discount resulting from acquisition accounting											6,845
Allowance for loan losses											4,017
PCI loans, net											$	91,919



	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