Loans

The Company’s loan portfolio includes originated and purchased loans. Originated loans and purchased loans for which there was no evidence of credit deterioration at their acquisition date and it was probable that we would be able to collect all contractually required payments are referred to collectively as loans, excluding purchased credit impaired loans. Purchased loans for which there was, at acquisition date, evidence of credit deterioration since their origination and it was probable that we would be unable to collect all contractually required payments are referred to as purchased credit impaired loans, or “PCI loans.”

The following is an analysis of the loan portfolio by major types of loans (net of unearned income):



	December 31, 2014									December 31, 2013
	Loans, excluding PCI loans			PCI Loans			Total			Loans, excluding PCI loans			PCI Loans			Total
	(in thousands)
Commercial business	$	2,119,565		$	44,505		$	2,164,070		$	1,561,782		$	60,942		$	1,622,724
Real estate:
One-to-four family residential	175,571			26,993			202,564			108,317			33,943			142,260
Commercial and multifamily residential	2,363,541			128,769			2,492,310			2,080,075			154,191			2,234,266
Total real estate	2,539,112			155,762			2,694,874			2,188,392			188,134			2,376,526
Real estate construction:
One-to-four family residential	116,866			4,021			120,887			54,155			13,313			67,468
Commercial and multifamily residential	134,443			2,321			136,764			126,390			5,373			131,763
Total real estate construction	251,309			6,342			257,651			180,545			18,686			199,231
Consumer	364,182			23,975			388,157			357,014			30,083			387,097
Less: Net unearned income	(59,374		)	—			(59,374		)	(68,282		)	—			(68,282		)
Total loans, net of unearned income	5,214,794			230,584			5,445,378			4,219,451			297,845			4,517,296
Less: Allowance for loan and lease losses	(53,233		)	(16,336		)	(69,569		)	(52,280		)	(20,174		)	(72,454		)
Total loans, net	$	5,161,561		$	214,248		$	5,375,809		$	4,167,171		$	277,671		$	4,444,842
Loans held for sale	$	1,116		$	—		$	1,116		$	735		$	—		$	735

At December 31, 2014 and 2013, the Company had no material foreign activities. Substantially all of the Company’s loans and unfunded commitments are geographically concentrated in its service areas within the states of Washington, Oregon, and Idaho.

The Company has granted loans to officers and directors of the Company and related interests. These loans are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectability. The aggregate dollar amount of these loans was $13.2 million and $14.2 million at December 31, 2014 and 2013, respectively. During 2014, advances on related party loans totaled $5.7 million and repayments on related party loans totaled $6.7 million.

At December 31, 2014 and 2013, $1.08 billion of commercial and residential real estate loans were pledged as collateral on Federal Home Loan Bank advances. The Company has also pledged $46.0 million and $45.2 million of commercial loans to the Federal Reserve Bank for additional borrowing capacity at December 31, 2014 and 2013, respectively.

Nonaccrual loans totaled $31.4 million and $34.0 million at December 31, 2014 and 2013, respectively. The amount of interest income foregone as a result of these loans being placed on nonaccrual status totaled $2.2 million for 2014, $2.9 million for 2013 and $3.4 million for 2012. There were $1.4 million in loans 90 days past due and still accruing interest as of December 31, 2014 and no loans 90 days past due and still accruing interest as of December 31, 2013. At December 31, 2014 and 2013, there were $349 thousand and $28 thousand, respectively, of commitments of additional funds for loans accounted for on a nonaccrual basis.

The following is an analysis of nonaccrual loans as of December 31, 2014 and 2013:



	December 31, 2014				December 31, 2013
	Recorded Investment Nonaccrual Loans		Unpaid Principal Balance Nonaccrual Loans		Recorded Investment Nonaccrual Loans		Unpaid Principal Balance Nonaccrual Loans
	(in thousands)
Commercial business:
Secured	$	16,552	$	21,453	$	12,433	$	19,186
Unsecured	247		269		176		202
Real estate:
One-to-four family residential	2,822		5,680		2,667		4,678
Commercial and multifamily residential:
Commercial land	821		1,113		442		783
Income property	3,200		5,521		4,267		5,383
Owner occupied	3,826		5,837		6,334		7,486
Real estate construction:
One-to-four family residential:
Land and acquisition	95		112		3,246		6,601
Residential construction	370		370		459		1,928
Commercial and multifamily residential:
Owner occupied	480		489		—		—
Consumer	2,939		3,930		3,991		6,187
Total	$	31,352	$	44,774	$	34,015	$	52,434

Loans, excluding purchased credit impaired loans

The following is an aging of the recorded investment of the loan portfolio as of December 31, 2014 and 2013:



	Current Loans		30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Nonaccrual Loans		Total Loans
December 31, 2014	(in thousands)
Commercial business:
Secured	$	2,004,418	$	5,137	$	6,149	$	1,372	$	12,658	$	16,552	$	2,033,628
Unsecured	79,661		185		—		—		185		247		80,093
Real estate:
One-to-four family residential	167,197		1,700		45		—		1,745		2,822		171,764
Commercial and multifamily residential:
Commercial land	187,470		1,454		34		—		1,488		821		189,779
Income property	1,294,982		3,031		786		—		3,817		3,200		1,301,999
Owner occupied	839,689		937		289		—		1,226		3,826		844,741
Real estate construction:
One-to-four family residential:
Land and acquisition	15,462		953		—		—		953		95		16,510
Residential construction	97,821		326		—		4		330		370		98,521
Commercial and multifamily residential:
Income property	73,783		—		—		—		—		—		73,783
Owner occupied	57,470		—		994		—		994		480		58,944
Consumer	341,032		933		118		10		1,061		2,939		345,032
Total	$	5,158,985	$	14,656	$	8,415	$	1,386	$	24,457	$	31,352	$	5,214,794
	Current Loans		30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Nonaccrual Loans		Total Loans
December 31, 2013	(in thousands)
Commercial business:
Secured	$	1,457,820	$	12,713	$	681	$	—	$	13,394	$	12,433	$	1,483,647
Unsecured	72,255		156		17		—		173		176		72,604
Real estate:
One-to-four family residential	100,591		1,993		641		—		2,634		2,667		105,892
Commercial and multifamily residential:
Commercial land	142,034		—		358		—		358		442		142,834
Income property	1,138,732		144		3,289		—		3,433		4,267		1,146,432
Owner occupied	749,561		4,714		—		—		4,714		6,334		760,609
Real estate construction:
One-to-four family residential:
Land and acquisition	8,225		199		—		—		199		3,246		11,670
Residential construction	41,533		—		—		—		—		459		41,992
Commercial and multifamily residential:
Income property	86,521		—		—		—		—		—		86,521
Owner occupied	38,916		—		—		—		—		—		38,916
Consumer	322,685		835		823		—		1,658		3,991		328,334
Total	$	4,158,873	$	20,754	$	5,809	$	—	$	26,563	$	34,015	$	4,219,451

The following is an analysis of the impaired loans (see Note 1) as of December 31, 2014 and 2013:



	Recorded Investment of Loans Collectively Measured for Contingency Provision		Recorded Investment of Loans Individually Measured for Specific Impairment		Impaired Loans With Recorded Allowance						Impaired Loans Without Recorded Allowance
					Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance
December 31, 2014	(in thousands)
Commercial business:
Secured	$	2,023,104	$	10,524	$	99	$	99	$	25	$	10,425	$	12,410
Unsecured	80,091		2		2		2		2		—		—
Real estate:
One-to-four family residential	169,619		2,145		424		465		120		1,721		2,370
Commercial and multifamily residential:
Commercial land	189,779		—		—		—		—		—		—
Income property	1,295,650		6,349		—		—		—		6,349		10,720
Owner occupied	835,895		8,846		582		582		27		8,264		12,732
Real estate construction:
One-to-four family residential:
Land and acquisition	16,401		109		109		109		67		—		—
Residential construction	98,521		—		—		—		—		—		—
Commercial and multifamily residential:
Income property	73,783		—		—		—		—		—		—
Owner occupied	58,944		—		—		—		—		—		—
Consumer	344,908		124		—		—		—		124		201
Total	$	5,186,695	$	28,099	$	1,216	$	1,257	$	241	$	26,883	$	38,433



	Recorded Investment of Loans Collectively Measured for Contingency Provision		Recorded Investment of Loans Individually Measured for Specific Impairment		Impaired Loans With Recorded Allowance						Impaired Loans Without Recorded Allowance
					Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance
December 31, 2013	(in thousands)
Commercial business:
Secured	$	1,478,560	$	5,087	$	2,866	$	2,885	$	343	$	2,221	$	2,560
Unsecured	72,569		35		35		35		35		—		—
Real estate:
One-to-four family residential	104,272		1,620		442		479		138		1,178		2,119
Commercial and multifamily residential:
Commercial land	142,719		115		—		—		—		115		398
Income property	1,140,019		6,413		918		933		26		5,495		7,885
Owner occupied	749,601		11,008		3,802		3,817		1,073		7,206		10,464
Real estate construction:
One-to-four family residential
Land and acquisition	9,726		1,944		113		113		71		1,831		2,587
Residential construction	41,992		—		—		—		—		—		—
Commercial and multifamily residential:
Income property	86,521		—		—		—		—		—		—
Owner occupied	38,916		—		—		—		—		—		—
Consumer	328,167		167		23		27		4		144		210
Total	$	4,193,062	$	26,389	$	8,199	$	8,289	$	1,690	$	18,190	$	26,223

The following table provides additional information on impaired loans for the years ended December 31, 2014, 2013 and 2012:



	Year ended December 31, 2014				Year Ended December 31, 2013				Year ended December 31, 2012
	Average Recorded Investment Impaired Loans		Interest Recognized on Impaired Loans		Average Recorded Investment Impaired Loans		Interest Recognized on Impaired Loans		Average Recorded Investment Impaired Loans		Interest Recognized on Impaired Loans
	(in thousands)
Commercial business
Secured	$	7,345	$	36	$	5,636	$	19	$	8,978	$	9
Unsecured	19		1		61		3		113		6
Real estate:
One-to-four family residential	2,094		49		1,665		63		2,130		—
Commercial & multifamily residential
Commercial land	82		—		1,691		—		3,124		—
Income property	6,782		270		8,910		238		7,895		77
Owner occupied	9,472		956		10,779		971		13,315		1,004
Real estate construction:
One-to-four family residential
Land and acquisition	694		6		2,624		6		4,465		—
Residential construction	—		—		420		—		3,223		11
Commercial & multifamily residential
Income property	—		—		—		—		3,169		—
Consumer	147		9		253		6		1,112		7
Total	$	26,635	$	1,327	$	32,039	$	1,306	$	47,524	$	1,114

The following is an analysis of loans classified as troubled debt restructurings (“TDR”) for the years ended December 31, 2014, 2013 and 2012:



	Year ended December 31, 2014					Year Ended December 31, 2013					Year ended December 31, 2012
	Number of TDR Modifications	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of TDR Modifications	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of TDR Modifications	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)
Commercial business:
Secured	4	$	759	$	759	2	$	190	$	190	1	$	195	$	194
Real estate:
One-to-four family residential	2	494		494		1	113		113		—	—		—
Commercial and multifamily residential:
Commercial land	—	—		—		1	137		137		—	—		—
Income property	1	143		126		4	1,186		1,186		1	4,279		2,650
Owner occupied	1	1,496		1,496		1	172		172		—	—		—
Real estate construction:
One-to-four family residential:
Land and acquisition	—	—		—		1	117		117		—	—		—
Consumer	—	—		—		2	53		53		—	—		—
Total	8	$	2,892	$	2,875	12	$	1,968	$	1,968	2	$	4,474	$	2,844

The Company’s loans classified as TDR are loans that have been modified or the borrower has been granted special concessions due to financial difficulties, that if not for the challenges of the borrower, the Company would not otherwise consider. The Company had no commitments to lend additional funds on loans classified as TDR as of December 31, 2014 and 2013. The TDR modifications or concessions are made to increase the likelihood that these borrowers with financial difficulties will be able to satisfy their debt obligations as amended. Credit losses for loans classified as TDR are measured on the same basis as impaired loans. For impaired loans, an allowance is established when the collateral value less selling costs (or discounted cash flows or observable market price) of the impaired loan is lower than the recorded investment of that loan. The Company did not have any loans modified as TDR that defaulted within 12 months of being modified as TDR during the years ended December 31,
2014, 2013, and 2012.

Purchased Credit Impaired Loans (“PCI Loans”)

PCI loans are accounted for under ASC 310-30 and initially measured at fair value based on expected future cash flows over the life of the loans. Loans that have common risk characteristics are aggregated into pools. The Company remeasures contractual and expected cash flows, at the pool-level, on a quarterly basis.

Contractual cash flows are calculated based upon the loan pool terms after applying a prepayment factor. Calculation of the applied prepayment factor for contractual cash flows is the same as described below for expected cash flows.

Inputs to the determination of expected cash flows include cumulative default and prepayment data as well as loss severity and recovery lag information. Cumulative default and prepayment data are calculated via a transition matrix. The transition matrix is a matrix of probability values that specifies the probability of a loan pool transitioning into a particular delinquency state (e.g. 0-30 days past due, 31 to 60 days, etc.) given its delinquency state at the remeasurement date. Loss severity factors are based upon either actual charge-off data within the loan pools or industry averages and recovery lags are based upon the collateral within the loan pools.

The excess of cash flows expected to be collected over the initial fair value of acquired impaired loans is referred to as the accretable yield and is accreted into interest income over the estimated life of the acquired loans using the effective yield method. Other adjustments to the accretable yield include changes in the estimated remaining life of the acquired loans, changes in expected cash flows and changes of indices for acquired loans with variable interest rates.

The following is an analysis of our PCI loans, net of related allowance for losses as of December 31, 2014 and 2013:



	December 31, 2014		December 31, 2013
	(in thousands)
Commercial business	$	50,334	$	72,870
Real estate:
One-to-four family residential	31,981		41,642
Commercial and multifamily residential	140,398		170,879
Total real estate	172,379		212,521
Real estate construction:
One-to-four family residential	4,353		14,781
Commercial and multifamily residential	2,588		6,869
Total real estate construction	6,941		21,650
Consumer	26,814		34,101
Subtotal of purchased credit impaired loans	256,468		341,142
Less:
Valuation discount resulting from acquisition accounting	25,884		43,297
Allowance for loan losses	16,336		20,174
PCI loans, net of valuation discounts and allowance for loan losses	$	214,248	$	277,671

The following table shows the changes in accretable yield for acquired loans for the years ended December 31, 2014, 2013, and 2012:



	Years Ended December 31,
	2014			2013			2012
	(in thousands)
Balance at beginning of period	$	103,907		$	166,888		$	259,669
Accretion	(36,066		)	(51,816		)	(86,671		)
Disposals	(3,386		)	(6,898		)	(12,856		)
Reclassifications from nonaccretable difference	9,394			(4,267		)	6,746
Balance at end of period	$	73,849		$	103,907		$	166,888

The Company did not acquire any loans accounted for under ASC 310-30 during 2014 or 2013.