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):



	June 30, 2015									December 31, 2014
	Loans, excluding PCI loans			PCI Loans			Total			Loans, excluding PCI loans			PCI Loans			Total
	(in thousands)
Commercial business	$	2,255,468		$	41,221		$	2,296,689		$	2,119,565		$	44,505		$	2,164,070
Real estate:
One-to-four family residential	181,849			25,740			207,589			175,571			26,993			202,564
Commercial and multifamily residential	2,406,594			108,578			2,515,172			2,363,541			128,769			2,492,310
Total real estate	2,588,443			134,318			2,722,761			2,539,112			155,762			2,694,874
Real estate construction:
One-to-four family residential	127,311			2,882			130,193			116,866			4,021			120,887
Commercial and multifamily residential	129,302			2,020			131,322			134,443			2,321			136,764
Total real estate construction	256,613			4,902			261,515			251,309			6,342			257,651
Consumer	358,365			21,926			380,291			364,182			23,975			388,157
Less: Net unearned income	(49,359		)	—			(49,359		)	(59,374		)	—			(59,374		)
Total loans, net of unearned income	5,409,530			202,367			5,611,897			5,214,794			230,584			5,445,378
Less: Allowance for loan and lease losses	(53,083		)	(16,174		)	(69,257		)	(53,233		)	(16,336		)	(69,569		)
Total loans, net	$	5,356,447		$	186,193		$	5,542,640		$	5,161,561		$	214,248		$	5,375,809
Loans held for sale	$	4,220		$	—		$	4,220		$	1,116		$	—		$	1,116

At June 30, 2015 and December 31, 2014, 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 made loans to executive 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 $10.1 million at June 30, 2015 and $13.2 million at December 31, 2014. During the first six months of 2015, there were $7 thousand in advances and $3.1 million in repayments.

At June 30, 2015 and December 31, 2014, $1.22 billion and $1.08 billion of commercial and residential real estate loans were pledged as collateral on Federal Home Loan Bank of Des Moines (“FHLB”) borrowings and additional borrowing capacity. The Company has also pledged $47.5 million and $46.0 million of commercial loans to the Federal Reserve Bank for additional borrowing capacity at June 30, 2015 and December 31, 2014, respectively.

The following is an analysis of nonaccrual loans as of June 30, 2015 and December 31, 2014:



	June 30, 2015				December 31, 2014
	Recorded Investment Nonaccrual Loans		Unpaid Principal Balance Nonaccrual Loans		Recorded Investment Nonaccrual Loans		Unpaid Principal Balance Nonaccrual Loans
	(in thousands)
Commercial business:
Secured	$	13,018	$	17,139	$	16,552	$	21,453
Unsecured	521		673		247		269
Real estate:
One-to-four family residential	4,193		5,985		2,822		5,680
Commercial & multifamily residential:
Commercial land	1,561		1,704		821		1,113
Income property	1,276		1,331		3,200		5,521
Owner occupied	972		1,131		3,826		5,837
Real estate construction:
One-to-four family residential:
Land and acquisition	862		866		95		112
Residential construction	1,075		1,222		370		370
Commercial & multifamily residential:
Owner occupied	469		489		480		489
Consumer	1,799		2,176		2,939		3,930
Total	$	25,746	$	32,716	$	31,352	$	44,774

Loans, excluding purchased credit impaired loans

The following is an aging of the recorded investment of the loan portfolio as of June 30, 2015 and December 31, 2014:



	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
June 30, 2015	(in thousands)
Commercial business:
Secured	$	2,149,972	$	3,847	$	1,589	$	—	$	5,436	$	13,018	$	2,168,426
Unsecured	81,433		270		—		—		270		521		82,224
Real estate:
One-to-four family residential	172,268		2,024		128		—		2,152		4,193		178,613
Commercial & multifamily residential:
Commercial land	206,558		1,154		—		—		1,154		1,561		209,273
Income property	1,310,441		1,756		415		—		2,171		1,276		1,313,888
Owner occupied	857,764		589		276		—		865		972		859,601
Real estate construction:
One-to-four family residential:
Land and acquisition	15,955		—		—		—		—		862		16,817
Residential construction	107,279		758		—		—		758		1,075		109,112
Commercial & multifamily residential:
Income property	64,557		—		—		—		—		—		64,557
Owner occupied	61,572		981		—		—		981		469		63,022
Consumer	341,606		444		148		—		592		1,799		343,997
Total	$	5,369,405	$	11,823	$	2,556	$	—	$	14,379	$	25,746	$	5,409,530

	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 & 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 & 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

The following is an analysis of impaired loans as of June 30, 2015 and December 31, 2014:



	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
June 30, 2015	(in thousands)
Commercial business:
Secured	$	2,160,836	$	7,590	$	1,230	$	1,231	$	1,161	$	6,360	$	8,169
Unsecured	82,224		—		—		—		—		—		—
Real estate:
One-to-four family residential	174,430		4,183		416		458		111		3,767		4,428
Commercial & multifamily residential:
Commercial land	209,273		—		—		—		—		—		—
Income property	1,311,944		1,944		—		—		—		1,944		2,326
Owner occupied	853,498		6,103		575		574		20		5,528		8,008
Real estate construction:
One-to-four family residential:
Land and acquisition	15,849		968		107		107		66		861		866
Residential construction	108,219		893		—		—		—		893		893
Commercial & multifamily residential:
Income property	64,557		—		—		—		—		—		—
Owner occupied	63,022		—		—		—		—		—		—
Consumer	343,971		26		—		—		—		26		105
Total	$	5,387,823	$	21,707	$	2,328	$	2,370	$	1,358	$	19,379	$	24,795

	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 & 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 & 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

The following table provides additional information on impaired loans for the three and six month periods indicated:



	Three Months Ended June 30,								Six Months Ended June 30,
	2015				2014				2015				2014
	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		Average Recorded Investment Impaired Loans		Interest Recognized on Impaired Loans
	(in thousands)
Commercial business:
Secured	$	9,231	$	8	$	6,933	$	17	$	9,662	$	15	$	6,318	$	33
Unsecured	—		—		23		—		1		—		27		1
Real estate:
One-to-four family residential	4,180		11		2,069		11		3,502		24		1,920		23
Commercial & multifamily residential:
Commercial land	235		—		103		—		157		—		107		—
Income property	1,966		23		7,213		74		3,427		33		6,946		136
Owner occupied	6,567		235		9,222		235		7,326		468		9,817		476
Real estate construction:
One-to-four family residential:
Land and acquisition	974		2		653		1		686		3		1,083		3
Residential construction	893		—		—		—		595		—		—		—
Consumer	355		1		155		3		278		2		159		5
Total	$	24,401	$	280	$	26,371	$	341	$	25,634	$	545	$	26,377	$	677

The following is an analysis of loans classified as troubled debt restructurings (“TDR”) during the three and six months ended June 30, 2015 and 2014:



	Three months ended June 30, 2015					Three months ended June 30, 2014
	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	—	$	—	$	—	2	$	546	$	546
Real estate:
One-to-four family residential	1	30		30		—	—		—
Total	1	$	30	$	30	2	$	546	$	546



	Six months ended June 30, 2015					Six months ended June 30, 2014
	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
Real estate:
One-to-four family residential	1	30		30		2	494		494
Commercial and multifamily residential:
Income property	—	—		—		1	143		126
Total	1	$	30	$	30	7	$	1,396	$	1,379

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 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. The concessions granted in the restructurings completed in the three and six month periods ending June 30, 2015 and 2014 largely consisted of maturity extensions, interest rate modifications or a combination of both. In limited circumstances, a reduction in the principal balance of the loan could also be made as a concession. 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 had no commitments to lend additional funds on loans classified as TDR as of June 30, 2015 and December 31, 2014. The Company did not have any loans modified as TDR that defaulted within twelve months of being modified as TDR during the three and six month periods ended June 30, 2015 and 2014.

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 purchased credit 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 and remaining valuation discounts as of June 30, 2015 and December 31, 2014:



	June 30, 2015		December 31, 2014
	(in thousands)
Commercial business	$	45,934	$	50,334
Real estate:
One-to-four family residential	29,860		31,981
Commercial and multifamily residential	116,992		140,398
Total real estate	146,852		172,379
Real estate construction:
One-to-four family residential	3,040		4,353
Commercial and multifamily residential	2,249		2,588
Total real estate construction	5,289		6,941
Consumer	24,427		26,814
Subtotal of PCI loans	222,502		256,468
Less:
Valuation discount resulting from acquisition accounting	20,135		25,884
Allowance for loan losses	16,174		16,336
PCI loans, net of allowance for loan losses	$	186,193	$	214,248

The following table shows the changes in accretable yield for PCI loans for the three and six months ended June 30, 2015 and 2014:



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(in thousands)
Balance at beginning of period	$	68,726		$	101,543		$	73,849		$	103,907
Accretion	(5,737		)	(10,055		)	(12,056		)	(20,624		)
Disposals	(959		)	—			(2,052		)	(2,826		)
Reclassifications from nonaccretable difference	5,253			1,023			7,542			12,054
Balance at end of period	$	67,283		$	92,511		$	67,283		$	92,511