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):



	September 30, 2015									December 31, 2014
	Loans, excluding PCI loans			PCI Loans			Total			Loans, excluding PCI loans			PCI Loans			Total
	(in thousands)
Commercial business	$	2,354,731		$	39,919		$	2,394,650		$	2,119,565		$	44,505		$	2,164,070
Real estate:
One-to-four family residential	177,108			25,122			202,230			175,571			26,993			202,564
Commercial and multifamily residential	2,449,847			101,382			2,551,229			2,363,541			128,769			2,492,310
Total real estate	2,626,955			126,504			2,753,459			2,539,112			155,762			2,694,874
Real estate construction:
One-to-four family residential	136,783			2,401			139,184			116,866			4,021			120,887
Commercial and multifamily residential	134,097			2,007			136,104			134,443			2,321			136,764
Total real estate construction	270,880			4,408			275,288			251,309			6,342			257,651
Consumer	348,315			20,235			368,550			364,182			23,975			388,157
Less: Net unearned income	(45,436		)	—			(45,436		)	(59,374		)	—			(59,374		)
Total loans, net of unearned income	5,555,445			191,066			5,746,511			5,214,794			230,584			5,445,378
Less: Allowance for loan and lease losses	(55,059		)	(13,990		)	(69,049		)	(53,233		)	(16,336		)	(69,569		)
Total loans, net	$	5,500,386		$	177,076		$	5,677,462		$	5,161,561		$	214,248		$	5,375,809
Loans held for sale	$	6,637		$	—		$	6,637		$	1,116		$	—		$	1,116

At September 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 September 30, 2015 and $13.2 million at December 31, 2014. During the first nine months of 2015, there were $6 thousand in advances and $3.1 million in repayments.

At September 30, 2015 and December 31, 2014, $2.17 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 $52.1 million and $46.0 million of commercial loans to the Federal Reserve Bank for additional borrowing capacity at September 30, 2015 and December 31, 2014, respectively.

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



	September 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	$	9,512	$	15,560	$	16,552	$	21,453
Unsecured	638		732		247		269
Real estate:
One-to-four family residential	2,012		3,430		2,822		5,680
Commercial & multifamily residential:
Commercial land	700		786		821		1,113
Income property	1,923		1,997		3,200		5,521
Owner occupied	1,694		1,840		3,826		5,837
Real estate construction:
One-to-four family residential:
Land and acquisition	575		591		95		112
Residential construction	897		1,040		370		370
Commercial & multifamily residential:
Owner occupied	470		489		480		489
Consumer	659		902		2,939		3,930
Total	$	19,080	$	27,367	$	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 September 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
September 30, 2015	(in thousands)
Commercial business:
Secured	$	2,251,545	$	3,734	$	1,177	$	—	$	4,911	$	9,512	$	2,265,968
Unsecured	82,826		247		28		—		275		638		83,739
Real estate:
One-to-four family residential	170,390		1,053		662		—		1,715		2,012		174,117
Commercial & multifamily residential:
Commercial land	206,597		735		380		—		1,115		700		208,412
Income property	1,318,021		1,492		1,028		—		2,520		1,923		1,322,464
Owner occupied	894,172		204		244		—		448		1,694		896,314
Real estate construction:
One-to-four family residential:
Land and acquisition	13,960		—		—		—		—		575		14,535
Residential construction	120,410		—		—		—		—		897		121,307
Commercial & multifamily residential:
Income property	63,182		—		—		—		—		—		63,182
Owner occupied	67,793		980		—		—		980		470		69,243
Consumer	333,275		2,167		63		—		2,230		659		336,164
Total	$	5,522,171	$	10,612	$	3,582	$	—	$	14,194	$	19,080	$	5,555,445

	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 September 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
September 30, 2015	(in thousands)
Commercial business:
Secured	$	2,260,544	$	5,424	$	1,402	$	1,412	$	1,020	$	4,022	$	5,312
Unsecured	83,739		—		—		—		—		—		—
Real estate:
One-to-four family residential	171,669		2,448		317		341		84		2,131		2,903
Commercial & multifamily residential:
Commercial land	208,412		—		—		—		—		—		—
Income property	1,320,287		2,177		—		—		—		2,177		2,336
Owner occupied	889,085		7,229		571		571		17		6,658		9,137
Real estate construction:
One-to-four family residential:
Land and acquisition	13,854		681		106		106		64		575		591
Residential construction	120,414		893		—		—		—		893		893
Commercial & multifamily residential:
Income property	63,182		—		—		—		—		—		—
Owner occupied	69,243		—		—		—		—		—		—
Consumer	336,136		28		14		15		14		14		85
Total	$	5,536,565	$	18,880	$	2,410	$	2,445	$	1,199	$	16,470	$	21,257

	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 nine month periods indicated:



	Three Months Ended September 30,								Nine Months Ended September 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	$	6,507	$	3	$	6,869	$	17	$	8,602	$	10	$	6,550	$	50
Unsecured	—		—		15		—		1		—		23		1
Real estate:
One-to-four family residential	3,315		11		2,307		14		3,238		35		2,082		37
Commercial & multifamily residential:
Commercial land	—		—		94		—		118		—		102		—
Income property	2,061		10		7,345		69		3,114		27		6,891		205
Owner occupied	6,665		65		9,117		239		7,302		533		9,629		715
Real estate construction:
One-to-four family residential:
Land and acquisition	825		1		111		1		685		4		840		4
Residential construction	893		—		—		—		670		—		—		—
Consumer	27		1		142		2		216		3		152		7
Total	$	20,293	$	91	$	26,000	$	342	$	23,946	$	612	$	26,269	$	1,019

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



	Three months ended September 30, 2015					Three months ended September 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	$	2,903	$	2,903	—	$	—	$	—
Real estate:
Commercial and multifamily residential:
Owner occupied	—	—		—		1	1,496		1,496
Total	4	$	2,903	$	2,903	1	$	1,496	$	1,496



	Nine months ended September 30, 2015					Nine months ended September 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	$	2,903	$	2,903	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
Owner occupied	—	—		—		1	1,496		1,496
Total	5	$	2,933	$	2,933	8	$	2,892	$	2,875

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 nine month periods ending September 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 September 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 nine month periods ended September 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 September 30, 2015 and December 31, 2014:



	September 30, 2015		December 31, 2014
	(in thousands)
Commercial business	$	44,234	$	50,334
Real estate:
One-to-four family residential	28,575		31,981
Commercial and multifamily residential	108,895		140,398
Total real estate	137,470		172,379
Real estate construction:
One-to-four family residential	2,447		4,353
Commercial and multifamily residential	2,225		2,588
Total real estate construction	4,672		6,941
Consumer	22,477		26,814
Subtotal of PCI loans	208,853		256,468
Less:
Valuation discount resulting from acquisition accounting	17,787		25,884
Allowance for loan losses	13,990		16,336
PCI loans, net of allowance for loan losses	$	177,076	$	214,248

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(in thousands)
Balance at beginning of period	$	67,283		$	92,511		$	73,849		$	103,907
Accretion	(5,049		)	(8,034		)	(17,105		)	(28,658		)
Disposals	256			(357		)	(1,796		)	(3,183		)
Reclassifications from nonaccretable difference	350			(3,589		)	7,892			8,465
Balance at end of period	$	62,840		$	80,531		$	62,840		$	80,531