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, 2015									December 31, 2014
	Loans, excluding PCI loans			PCI Loans			Total			Loans, excluding PCI loans			PCI Loans			Total
	(in thousands)
Commercial business	$	2,362,575		$	34,848		$	2,397,423		$	2,119,565		$	44,505		$	2,164,070
Real estate:
One-to-four family residential	176,295			23,938			200,233			175,571			26,993			202,564
Commercial and multifamily residential	2,491,736			99,389			2,591,125			2,363,541			128,769			2,492,310
Total real estate	2,668,031			123,327			2,791,358			2,539,112			155,762			2,694,874
Real estate construction:
One-to-four family residential	135,874			2,278			138,152			116,866			4,021			120,887
Commercial and multifamily residential	167,413			1,630			169,043			134,443			2,321			136,764
Total real estate construction	303,287			3,908			307,195			251,309			6,342			257,651
Consumer	342,601			18,823			361,424			364,182			23,975			388,157
Less: Net unearned income	(42,373		)	—			(42,373		)	(59,374		)	—			(59,374		)
Total loans, net of unearned income	5,634,121			180,906			5,815,027			5,214,794			230,584			5,445,378
Less: Allowance for loan and lease losses	(54,446		)	(13,726		)	(68,172		)	(53,233		)	(16,336		)	(69,569		)
Total loans, net	$	5,579,675		$	167,180		$	5,746,855		$	5,161,561		$	214,248		$	5,375,809
Loans held for sale	$	4,509		$	—		$	4,509		$	1,116		$	—		$	1,116

At December 31, 2015 and 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 $10.0 million and $13.2 million at December 31, 2015 and 2014, respectively. During 2015, advances on related party loans totaled $6 thousand and repayments on related party loans totaled $3.2 million.

At December 31, 2015 and 2014, $2.22 billion and $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 $50.1 million and $46.0 million of commercial loans to the Federal Reserve Bank for additional borrowing capacity at December 31, 2015 and 2014, respectively.

Nonaccrual loans totaled $21.5 million and $31.4 million at December 31, 2015 and 2014, respectively. The amount of interest income foregone as a result of these loans being placed on nonaccrual status totaled $1.3 million for 2015, $2.2 million for 2014 and $2.9 million for 2013. There were no loans 90 days past due and still accruing interest as of December 31, 2015 and $1.4 million loans 90 days past due and still accruing interest as of December 31, 2014. At December 31, 2015 and 2014, there were $2.9 million and $349 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, 2015 and 2014:



	December 31, 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	$	9,395	$	15,688	$	16,552	$	21,453
Unsecured	42		256		247		269
Real estate:
One-to-four family residential	820		1,866		2,822		5,680
Commercial and multifamily residential:
Commercial land	349		332		821		1,113
Income property	2,843		3,124		3,200		5,521
Owner occupied	6,321		8,943		3,826		5,837
Real estate construction:
One-to-four family residential:
Land and acquisition	362		385		95		112
Residential construction	566		679		370		370
Commercial and multifamily residential:
Owner occupied	—		—		480		489
Consumer	766		990		2,939		3,930
Total	$	21,464	$	32,263	$	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 December 31, 2015 and 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
December 31, 2015	(in thousands)
Commercial business:
Secured	$	2,241,069	$	11,611	$	617	$	—	$	12,228	$	9,395	$	2,262,692
Unsecured	94,867		39		—		—		39		42		94,948
Real estate:
One-to-four family residential	170,913		1,637		66		—		1,703		820		173,436
Commercial and multifamily residential:
Commercial land	212,740		69		—		—		69		349		213,158
Income property	1,305,502		1,750		684		—		2,434		2,843		1,310,779
Owner occupied	939,396		599		—		—		599		6,321		946,316
Real estate construction:
One-to-four family residential:
Land and acquisition	14,388		—		—		—		—		362		14,750
Residential construction	119,809		—		—		—		—		566		120,375
Commercial and multifamily residential:
Income property	83,634		—		—		—		—		—		83,634
Owner occupied	81,671		—		—		—		—		—		81,671
Consumer	328,219		2,597		780		—		3,377		766		332,362
Total	$	5,592,208	$	18,302	$	2,147	$	—	$	20,449	$	21,464	$	5,634,121
	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

The following is an analysis of the impaired loans (see Note 1) as of December 31, 2015 and 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
December 31, 2015	(in thousands)
Commercial business:
Secured	$	2,257,168	$	5,524	$	690	$	718	$	321	$	4,834	$	6,455
Unsecured	94,948		—		—		—		—		—		—
Real estate:
One-to-four family residential	172,150		1,286		314		339		314		972		1,397
Commercial and multifamily residential:
Commercial land	213,158		—		—		—		—		—		—
Income property	1,308,673		2,106		—		—		—		2,106		2,311
Owner occupied	940,261		6,055		—		—		—		6,055		8,528
Real estate construction:
One-to-four family residential:
Land and acquisition	14,283		467		—		—		—		467		490
Residential construction	119,813		562		335		335		3		227		227
Commercial and multifamily residential:
Income property	83,634		—		—		—		—		—		—
Owner occupied	81,671		—		—		—		—		—		—
Consumer	332,282		80		15		15		15		65		139
Total	$	5,618,041	$	16,080	$	1,354	$	1,407	$	653	$	14,726	$	19,547



	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

The following table provides additional information on impaired loans for the years ended December 31, 2015, 2014 and 2013:



	Year Ended December 31, 2015				Year Ended December 31, 2014				Year Ended December 31, 2013
	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	$	7,987	$	84	$	7,345	$	36	$	5,636	$	19
Unsecured	—		—		19		1		61		3
Real estate:
One-to-four family residential	2,848		47		2,094		49		1,665		63
Commercial & multifamily residential
Commercial land	94		—		82		—		1,691		—
Income property	2,913		36		6,782		270		8,910		238
Owner occupied	7,052		26		9,472		956		10,779		971
Real estate construction:
One-to-four family residential
Land and acquisition	641		5		694		6		2,624		6
Residential construction	648		—		—		—		420		—
Consumer	189		4		147		9		253		6
Total	$	22,372	$	202	$	26,635	$	1,327	$	32,039	$	1,306

The following is an analysis of loans classified as troubled debt restructurings (“TDR”) for the years ended December 31, 2015, 2014 and 2013:



	Year Ended December 31, 2015					Year Ended December 31, 2014					Year Ended December 31, 2013
	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	5	$	3,724	$	3,706	4	$	759	$	759	2	$	190	$	190
Real estate:
One-to-four family residential	1	30		30		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
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	1	54		54		—	—		—		2	53		53
Total	7	$	3,808	$	3,790	8	$	2,892	$	2,875	12	$	1,968	$	1,968

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, 2015 and 2014. 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,
2015, 2014, and 2013.

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 December 31, 2015 and 2014:



	December 31, 2015		December 31, 2014
	(in thousands)
Commercial business	$	38,784	$	50,334
Real estate:
One-to-four family residential	27,195		31,981
Commercial and multifamily residential	106,308		140,398
Total real estate	133,503		172,379
Real estate construction:
One-to-four family residential	2,326		4,353
Commercial and multifamily residential	1,834		2,588
Total real estate construction	4,160		6,941
Consumer	20,903		26,814
Subtotal of purchased credit impaired loans	197,350		256,468
Less:
Valuation discount resulting from acquisition accounting	16,444		25,884
Allowance for loan losses	13,726		16,336
PCI loans, net of valuation discounts and allowance for loan losses	$	167,180	$	214,248

The following table shows the changes in accretable yield for acquired loans for the years ended December 31, 2015, 2014, and 2013:



	Years Ended December 31,
	2015			2014			2013
	(in thousands)
Balance at beginning of period	$	73,849		$	103,907		$	166,888
Accretion	(21,919		)	(36,066		)	(51,816		)
Disposals	(1,681		)	(3,386		)	(6,898		)
Reclassifications from (to) nonaccretable difference	8,732			9,394			(4,267		)
Balance at end of period	$	58,981		$	73,849		$	103,907

The Company did not acquire any loans accounted for under ASC 310-30 during 2015 or 2014.