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 segment (net of unearned income):



	September 30, 2016									December 31, 2015
	Loans, excluding PCI loans			PCI Loans			Total			Loans, excluding PCI loans			PCI Loans			Total
	(in thousands)
Commercial business	$	2,630,017		$	22,558		$	2,652,575		$	2,362,575		$	34,848		$	2,397,423
Real estate:
One-to-four family residential	168,511			19,378			187,889			176,295			23,938			200,233
Commercial and multifamily residential	2,686,783			92,617			2,779,400			2,491,736			99,389			2,591,125
Total real estate	2,855,294			111,995			2,967,289			2,668,031			123,327			2,791,358
Real estate construction:
One-to-four family residential	130,163			867			131,030			135,874			2,278			138,152
Commercial and multifamily residential	202,014			1,583			203,597			167,413			1,630			169,043
Total real estate construction	332,177			2,450			334,627			303,287			3,908			307,195
Consumer	325,741			15,761			341,502			342,601			18,823			361,424
Less: Net unearned income	(36,236		)	—			(36,236		)	(42,373		)	—			(42,373		)
Total loans, net of unearned income	6,106,993			152,764			6,259,757			5,634,121			180,906			5,815,027
Less: Allowance for loan and lease losses	(58,762		)	(11,502		)	(70,264		)	(54,446		)	(13,726		)	(68,172		)
Total loans, net	$	6,048,231		$	141,262		$	6,189,493		$	5,579,675		$	167,180		$	5,746,855
Loans held for sale	$	3,361		$	—		$	3,361		$	4,509		$	—		$	4,509

At September 30, 2016 and December 31, 2015, 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, 2016 and $10.0 million at December 31, 2015. During the first nine months of 2016, there were $759 thousand in advances and $652 thousand in repayments.

At September 30, 2016 and December 31, 2015, $2.30 billion and $2.22 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 $50.0 million and $50.1 million of commercial loans to the Federal Reserve Bank for additional borrowing capacity at September 30, 2016 and December 31, 2015, respectively.

The following is an analysis of nonaccrual loans as of September 30, 2016 and December 31, 2015:



	September 30, 2016				December 31, 2015
	Recorded Investment Nonaccrual Loans		Unpaid Principal Balance Nonaccrual Loans		Recorded Investment Nonaccrual Loans		Unpaid Principal Balance Nonaccrual Loans
	(in thousands)
Commercial business:
Secured	$	9,466	$	19,689	$	9,395	$	15,688
Unsecured	36		216		42		256
Real estate:
One-to-four family residential	579		1,303		820		1,866
Commercial & multifamily residential:
Commercial land	934		922		349		332
Income property	1,957		2,177		2,843		3,124
Owner occupied	4,161		6,842		6,321		8,943
Real estate construction:
One-to-four family residential:
Land and acquisition	—		—		362		385
Residential construction	461		461		566		679
Consumer	3,772		4,042		766		990
Total	$	21,366	$	35,652	$	21,464	$	32,263

Loans, excluding purchased credit impaired loans

The following is an aging of the recorded investment of the loan portfolio as of September 30, 2016 and December 31, 2015:



	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, 2016	(in thousands)
Commercial business:
Secured	$	2,515,042	$	2,542	$	609	$	—	$	3,151	$	9,466	$	2,527,659
Unsecured	97,496		5		—		—		5		36		97,537
Real estate:
One-to-four family residential	164,927		400		34		—		434		579		165,940
Commercial & multifamily residential:
Commercial land	238,887		—		200		—		200		934		240,021
Income property	1,376,735		90		—		—		90		1,957		1,378,782
Owner occupied	1,043,376		58		—		—		58		4,161		1,047,595
Real estate construction:
One-to-four family residential:
Land and acquisition	11,933		119		—		—		119		—		12,052
Residential construction	116,327		213		305		—		518		461		117,306
Commercial & multifamily residential:
Income property	89,373		—		—		—		—		—		89,373
Owner occupied	110,853		—		—		—		—		—		110,853
Consumer	314,581		649		873		—		1,522		3,772		319,875
Total	$	6,079,530	$	4,076	$	2,021	$	—	$	6,097	$	21,366	$	6,106,993

	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 & 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 & 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

The following is an analysis of impaired loans as of September 30, 2016 and December 31, 2015:



	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, 2016	(in thousands)
Commercial business:
Secured	$	2,520,876	$	6,783	$	1,208	$	1,277	$	873	$	5,575	$	11,840
Unsecured	97,537		—		—		—		—		—		—
Real estate:
One-to-four family residential	165,394		546		358		591		353		188		402
Commercial & multifamily residential:
Commercial land	239,313		708		—		—		—		708		687
Income property	1,376,349		2,433		546		551		28		1,887		2,124
Owner occupied	1,043,849		3,746		—		—		—		3,746		6,340
Real estate construction:
One-to-four family residential:
Land and acquisition	11,950		102		—		—		—		102		102
Residential construction	116,970		336		—		—		—		336		336
Commercial & multifamily residential:
Income property	89,373		—		—		—		—		—		—
Owner occupied	110,853		—		—		—		—		—		—
Consumer	316,281		3,594		2,976		3,010		46		618		700
Total	$	6,088,745	$	18,248	$	5,088	$	5,429	$	1,300	$	13,160	$	22,531

	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 & 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 & 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

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,
	2016				2015				2016				2015
	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	$	6,909	$	15	$	6,507	$	3	$	9,506	$	48	$	8,602	$	10
Unsecured	—		—		—		—		—		—		1		—
Real estate:
One-to-four family residential	617		5		3,315		11		796		8		3,238		35
Commercial & multifamily residential:
Commercial land	708		—		—		—		354		—		118		—
Income property	1,939		8		2,061		10		2,010		19		3,114		27
Owner occupied	4,486		—		6,665		65		5,001		—		7,302		533
Real estate construction:
One-to-four family residential:
Land and acquisition	103		1		825		1		245		4		685		4
Residential construction	449		—		893		—		506		—		670		—
Consumer	3,345		25		27		1		2,084		46		216		3
Total	$	18,556	$	54	$	20,293	$	91	$	20,502	$	125	$	23,946	$	612

The following is an analysis of loans classified as troubled debt restructurings (“TDR”) during the three and nine months ended September 30, 2016 and 2015:



	Three months ended September 30, 2016					Three months ended September 30, 2015
	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	$	90	$	90	4	$	2,903	$	2,903
Real estate:
One-to-four family residential	1	85		85		—	—		—
Consumer	10	731		731		—	—		—
Total	13	$	906	$	906	4	$	2,903	$	2,903



	Nine months ended September 30, 2016					Nine months ended September 30, 2015
	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	7	$	1,753	$	1,753	4	$	2,903	$	2,903
Real estate:
One-to-four family residential	2	115		115		1	30		30
Commercial and multifamily residential:
Owner occupied	1	250		250		—	—		—
Consumer	28	3,442		3,442		—	—		—
Total	38	$	5,560	$	5,560	5	$	2,933	$	2,933

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 summarized in the table above 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 commitments to lend $51 thousand of additional funds on loans classified as TDR as of September 30, 2016. The Company had no such commitments at December 31, 2015. 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, 2016 and 2015.

Purchased Credit Impaired Loans

Purchased credit impaired (“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, which utilizes probability values 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, 2016 and December 31, 2015:



	September 30, 2016		December 31, 2015
	(in thousands)
Commercial business	$	24,436	$	38,784
Real estate:
One-to-four family residential	22,227		27,195
Commercial and multifamily residential	98,178		106,308
Total real estate	120,405		133,503
Real estate construction:
One-to-four family residential	867		2,326
Commercial and multifamily residential	1,754		1,834
Total real estate construction	2,621		4,160
Consumer	17,632		20,903
Subtotal of PCI loans	165,094		197,350
Less:
Valuation discount resulting from acquisition accounting	12,330		16,444
Allowance for loan losses	11,502		13,726
PCI loans, net of allowance for loan losses	$	141,262	$	167,180

The following table shows the changes in accretable yield for PCI loans for the three and nine months ended September 30, 2016 and 2015:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(in thousands)
Balance at beginning of period	$	52,909		$	67,283		$	58,981		$	73,849
Accretion	(4,902		)	(5,049		)	(12,905		)	(17,105		)
Disposals	(178		)	256			(157		)	(1,796		)
Reclassifications from nonaccretable difference	1,034			350			2,944			7,892
Balance at end of period	$	48,863		$	62,840		$	48,863		$	62,840