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 the allowance calculation for the years ended December 31, 2018 and 2017.

The following tables show a detailed analysis of the allowance for loans for the years ended December 31, 2018, 2017 and 2016:



	Beginning Balance		Charge-offs			Recoveries		Provision (Recapture)			Ending Balance		Specific Reserve		General Allocation
Year Ended December 31, 2018	(in thousands)
Commercial business:
Secured	$	29,341	$	(11,560	)	$	3,024	$	22,383		$	43,188	$	2,023	$	41,165
Unsecured	2,000		(159		)	403		382			2,626		—		2,626
Real estate:
One-to-four family residential	701		—			408		(516		)	593		8		585
Commercial and multifamily residential:
Commercial land	4,265		—			99		(417		)	3,947		—		3,947
Income property	5,672		(780		)	912		(1,760		)	4,044		1		4,043
Owner occupied	5,459		—			20		(946		)	4,533		69		4,464
Real estate construction:
One-to-four family residential:
Land and acquisition	963		—			726		(1,140		)	549		—		549
Residential construction	3,709		—			890		937			5,536		—		5,536
Commercial and multifamily residential:
Income property	7,053		—			—		(1,269		)	5,784		—		5,784
Owner occupied	4,413		—			—		(1,809		)	2,604		—		2,604
Consumer	5,163		(1,194		)	1,180		152			5,301		31		5,270
Purchased credit impaired	6,907		(4,862		)	3,847		(2,281		)	3,611		—		3,611
Unallocated	—		—			—		1,053			1,053		—		1,053
Total	$	75,646	$	(18,555	)	$	11,509	$	14,769		$	83,369	$	2,132	$	81,237



	Beginning Balance		Charge-offs			Recoveries		Provision (Recapture)			Ending Balance		Specific Reserve		General Allocation
Year Ended December 31, 2017	(in thousands)
Commercial business:
Secured	$	36,050	$	(7,524	)	$	4,283	$	(3,468	)	$	29,341	$	1,867	$	27,474
Unsecured	960		(89		)	553		576			2,000		3		1,997
Real estate:
One-to-four family residential	599		(460		)	568		(6		)	701		103		598
Commercial and multifamily residential:
Commercial land	1,797		—			53		2,415			4,265		—		4,265
Income property	7,342		(287		)	498		(1,881		)	5,672		185		5,487
Owner occupied	6,439		—			124		(1,104		)	5,459		3		5,456
Real estate construction:
One-to-four family residential:
Land and acquisition	316		(14		)	72		589			963		—		963
Residential construction	669		—			106		2,934			3,709		—		3,709
Commercial and multifamily residential:
Income property	404		—			1		6,648			7,053		—		7,053
Owner occupied	1,192		—			—		3,221			4,413		—		4,413
Consumer	3,534		(1,474		)	1,187		1,916			5,163		199		4,964
Purchased credit impaired	10,515		(6,812		)	6,187		(2,983		)	6,907		—		6,907
Unallocated	226		—			—		(226		)	—		—		—
Total	$	70,043	$	(16,660	)	$	13,632	$	8,631		$	75,646	$	2,360	$	73,286



	Beginning Balance		Charge-offs			Recoveries		Provision (Recapture)			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

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,
	2018		2017		2016
	(in thousands)
Beginning balance	$	3,130	$	2,705	$	2,930
Net changes in the allowance for unfunded commitments and letters of credit	1,200		425		(225		)
Ending balance	$	4,330	$	3,130	$	2,705

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 December 31, 2018 and 2017:



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
December 31, 2018	(in thousands)
Loans, excluding PCI loans
Commercial business:
Secured	$	3,160,910	$	48,779	$	103,007	$	5	$	—	$	3,312,701
Unsecured	112,091		21		—		5		—		112,117
Real estate:
One-to-four family residential	234,416		—		1,610		—		—		236,026
Commercial and multifamily residential:
Commercial land	276,348		5,082		4,247		—		—		285,677
Income property	1,876,925		36,998		6,553		—		—		1,920,476
Owner occupied	1,556,852		14,964		45,935		—		—		1,617,751
Real estate construction:
One-to-four family residential:
Land and acquisition	4,099		—		318		—		—		4,417
Residential construction	212,225		—		171		—		—		212,396
Commercial and multifamily residential:
Income property	194,912		—		—		—		—		194,912
Owner occupied	87,063		—		—		—		—		87,063
Consumer	313,817		—		4,398		—		—		318,215
Total	$	8,029,658	$	105,844	$	166,239	$	10	$	—	8,301,751
Less:
Allowance for loan losses											79,758
Loans, excluding PCI loans, net											$	8,221,993



	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 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 December 31, 2018 and 2017:



	Pass		Special Mention		Substandard		Doubtful		Loss		Total
December 31, 2018	(in thousands)
PCI loans:
Commercial business:
Secured	$	8,041	$	—	$	840	$	—	$	—	$	8,881
Unsecured	692		—		99		—		—		791
Real estate:
One-to-four family residential	9,633		—		215		—		—		9,848
Commercial and multifamily residential:
Commercial land	10,363		—		—		—		—		10,363
Income property	19,680		—		—		—		—		19,680
Owner occupied	35,944		—		353		—		—		36,297
Real estate construction:
One-to-four family residential:
Land and acquisition	151		—		2		—		—		153
Residential construction	—		—		—		—		—		—
Commercial and multifamily residential:
Income property	507		—		—		—		—		507
Owner occupied	—		—		—		—		—		—
Consumer	9,326		—		439		—		—		9,765
Total	$	94,337	$	—	$	1,948	$	—	$	—	96,285
Less:
Valuation discount resulting from acquisition accounting											6,525
Allowance for loan losses											3,611
PCI loans, net											$	86,149



	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