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):



	December 31, 2016									December 31, 2015
	Loans, excluding PCI loans			PCI Loans			Total			Loans, excluding PCI loans			PCI Loans			Total
	(in thousands)
Commercial business	$	2,551,054		$	20,185		$	2,571,239		$	2,362,575		$	34,848		$	2,397,423
Real estate:
One-to-four family residential	170,331			17,862			188,193			176,295			23,938			200,233
Commercial and multifamily residential	2,719,830			89,231			2,809,061			2,491,736			99,389			2,591,125
Total real estate	2,890,161			107,093			2,997,254			2,668,031			123,327			2,791,358
Real estate construction:
One-to-four family residential	121,887			832			122,719			135,874			2,278			138,152
Commercial and multifamily residential	209,118			1,565			210,683			167,413			1,630			169,043
Total real estate construction	331,005			2,397			333,402			303,287			3,908			307,195
Consumer	329,261			15,985			345,246			342,601			18,823			361,424
Less: Net unearned income	(33,718		)	—			(33,718		)	(42,373		)	—			(42,373		)
Total loans, net of unearned income	6,067,763			145,660			6,213,423			5,634,121			180,906			5,815,027
Less: Allowance for loan and lease losses	(59,528		)	(10,515		)	(70,043		)	(54,446		)	(13,726		)	(68,172		)
Total loans, net	$	6,008,235		$	135,145		$	6,143,380		$	5,579,675		$	167,180		$	5,746,855
Loans held for sale	$	5,846		$	—		$	5,846		$	4,509		$	—		$	4,509

At December 31, 2016 and 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 and $10.0 million at December 31, 2016 and 2015, respectively. During 2016, advances on related party loans totaled $1.2 million and repayments on related party loans totaled $1.1 million.

At December 31, 2016 and 2015, $2.29 billion and $2.22 billion of commercial and residential real estate loans were pledged as collateral on Federal Home Loan Bank advances. The Company has also pledged $54.2 million and $50.1 million of commercial loans to the Federal Reserve Bank for additional borrowing capacity at December 31, 2016 and 2015, respectively.

Nonaccrual loans totaled $27.8 million and $21.5 million at December 31, 2016 and 2015, respectively. The amount of interest income foregone as a result of these loans being placed on nonaccrual status totaled $1.9 million for 2016, $1.3 million for 2015 and $2.2 million for 2014. There were no loans 90 days past due and still accruing interest as of December 31, 2016 and December 31, 2015. At December 31, 2016 and 2015, there were $293 thousand and $2.9 million, 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, 2016 and 2015:



	December 31, 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	$	11,524	$	21,503	$	9,395	$	15,688
Unsecured	31		303		42		256
Real estate:
One-to-four family residential	568		1,302		820		1,866
Commercial and multifamily residential:
Commercial land	934		922		349		332
Income property	4,005		4,247		2,843		3,124
Owner occupied	6,248		9,030		6,321		8,943
Real estate construction:
One-to-four family residential:
Land and acquisition	14		102		362		385
Residential construction	549		549		566		679
Consumer	3,883		4,331		766		990
Total	$	27,756	$	42,289	$	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 December 31, 2016 and 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
December 31, 2016	(in thousands)
Commercial business:
Secured	$	2,439,250	$	806	$	10	$	—	$	816	$	11,524	$	2,451,590
Unsecured	94,118		287		301		—		588		31		94,737
Real estate:
One-to-four family residential	164,416		2,448		500		—		2,948		568		167,932
Commercial and multifamily residential:
Commercial land	269,816		64		—		—		64		934		270,814
Income property	1,365,150		480		111		—		591		4,005		1,369,746
Owner occupied	1,052,078		1,652		—		—		1,652		6,248		1,059,978
Real estate construction:
One-to-four family residential:
Land and acquisition	11,542		—		—		—		—		14		11,556
Residential construction	109,080		—		—		—		—		549		109,629
Commercial and multifamily residential:
Income property	103,779		—		—		—		—		—		103,779
Owner occupied	103,480		—		—		—		—		—		103,480
Consumer	318,369		2,035		235		—		2,270		3,883		324,522
Total	$	6,031,078	$	7,772	$	1,157	$	—	$	8,929	$	27,756	$	6,067,763
	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

The following is an analysis of the impaired loans (see Note 1) as of December 31, 2016 and 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
December 31, 2016	(in thousands)
Commercial business:
Secured	$	2,442,772	$	8,818	$	2,414	$	2,484	$	664	$	6,404	$	12,831
Unsecured	94,737		—		—		—		—		—		—
Real estate:
One-to-four family residential	167,403		529		435		693		12		94		291
Commercial and multifamily residential:
Commercial land	270,106		708		—		—		—		708		687
Income property	1,365,321		4,425		540		544		27		3,885		4,148
Owner occupied	1,054,564		5,414		—		—		—		5,414		8,102
Real estate construction:
One-to-four family residential:
Land and acquisition	11,542		14		14		102		1		—		—
Residential construction	109,293		336		—		—		—		336		336
Commercial and multifamily residential:
Income property	103,779		—		—		—		—		—		—
Owner occupied	103,480		—		—		—		—		—		—
Consumer	319,307		5,215		4,464		4,558		57		751		833
Total	$	6,042,304	$	25,459	$	7,867	$	8,381	$	761	$	17,592	$	27,228



	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

The following table provides additional information on impaired loans for the years ended December 31, 2016, 2015 and 2014:



	Year Ended December 31, 2016				Year Ended December 31, 2015				Year Ended December 31, 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
	(in thousands)
Commercial business
Secured	$	9,368	$	79	$	7,987	$	84	$	7,345	$	36
Unsecured	—		—		—		—		19		1
Real estate:
One-to-four family residential	743		10		2,848		47		2,094		49
Commercial & multifamily residential
Commercial land	425		—		94		—		82		—
Income property	2,492		26		2,913		36		6,782		270
Owner occupied	5,084		—		7,052		26		9,472		956
Real estate construction:
One-to-four family residential
Land and acquisition	199		—		641		5		694		6
Residential construction	472		—		648		—		—		—
Consumer	2,710		122		189		4		147		9
Total	$	21,493	$	237	$	22,372	$	202	$	26,635	$	1,327

The following is an analysis of loans classified as troubled debt restructurings (“TDR”) for the years ended December 31, 2016, 2015 and 2014:



	Year Ended December 31, 2016					Year Ended December 31, 2015					Year Ended December 31, 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		Number of TDR Modifications	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)
Commercial business:
Secured	9	$	2,131	$	2,131	5	$	3,724	$	3,706	4	$	759	$	759
Real estate:
One-to-four family residential	3	203		203		1	30		30		2	494		494
Commercial and multifamily residential:
Income property	—	—		—		—	—		—		1	143		126
Owner occupied	1	250		250		—	—		—		1	1,496		1,496
Consumer	41	5,095		5,093		1	54		54		—	—		—
Total	54	$	7,679	$	7,677	7	$	3,808	$	3,790	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 Company had $508 thousand of commitments to lend additional funds on loans classified as TDR as of December 31, 2016, but no similar commitments at 2015. 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 did not have any loans modified as TDR that defaulted within 12 months of being modified as TDR during the years ended December 31, 2016, 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 December 31, 2016 and 2015:



	December 31, 2016		December 31, 2015
	(in thousands)
Commercial business	$	21,606	$	38,784
Real estate:
One-to-four family residential	20,643		27,195
Commercial and multifamily residential	94,795		106,308
Total real estate	115,438		133,503
Real estate construction:
One-to-four family residential	832		2,326
Commercial and multifamily residential	1,726		1,834
Total real estate construction	2,558		4,160
Consumer	17,649		20,903
Subtotal of purchased credit impaired loans	157,251		197,350
Less:
Valuation discount resulting from acquisition accounting	11,591		16,444
Allowance for loan losses	10,515		13,726
PCI loans, net of valuation discounts and allowance for loan losses	$	135,145	$	167,180

The following table shows the changes in accretable yield for acquired loans for the years ended December 31, 2016, 2015, and 2014:



	Years Ended December 31,
	2016			2015			2014
	(in thousands)
Balance at beginning of period	$	58,981		$	73,849		$	103,907
Accretion	(16,266		)	(21,919		)	(36,066		)
Disposals	(148		)	(1,681		)	(3,386		)
Reclassifications from nonaccretable difference	2,624			8,732			9,394
Balance at end of period	$	45,191		$	58,981		$	73,849

The Company did not acquire any loans accounted for under ASC 310-30 during 2016 or 2015.