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):



	March 31, 2017									December 31, 2016
	Loans, excluding PCI loans			PCI Loans			Total			Loans, excluding PCI loans			PCI Loans			Total
	(in thousands)
Commercial business	$	2,559,247		$	19,047		$	2,578,294		$	2,551,054		$	20,185		$	2,571,239
Real estate:
One-to-four family residential	172,581			14,969			187,550			170,331			17,862			188,193
Commercial and multifamily residential	2,783,433			88,527			2,871,960			2,719,830			89,231			2,809,061
Total real estate	2,956,014			103,496			3,059,510			2,890,161			107,093			2,997,254
Real estate construction:
One-to-four family residential	115,219			479			115,698			121,887			832			122,719
Commercial and multifamily residential	172,895			989			173,884			209,118			1,565			210,683
Total real estate construction	288,114			1,468			289,582			331,005			2,397			333,402
Consumer	318,069			14,893			332,962			329,261			15,985			345,246
Less: Net unearned income	(32,212		)	—			(32,212		)	(33,718		)	—			(33,718		)
Total loans, net of unearned income	6,089,232			138,904			6,228,136			6,067,763			145,660			6,213,423
Less: Allowance for loan and lease losses	(61,626		)	(9,395		)	(71,021		)	(59,528		)	(10,515		)	(70,043		)
Total loans, net	$	6,027,606		$	129,509		$	6,157,115		$	6,008,235		$	135,145		$	6,143,380
Loans held for sale	$	3,245		$	—		$	3,245		$	5,846		$	—		$	5,846

At March 31, 2017 and December 31, 2016, 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 March 31, 2017 and December 31, 2016. During the first three months of 2017, there were $75 thousand in advances and $96 thousand in repayments.

At March 31, 2017 and December 31, 2016, $2.28 billion and $2.29 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 $54.2 million of commercial loans to the Federal Reserve Bank for additional borrowing capacity at March 31, 2017 and December 31, 2016, respectively.

The following is an analysis of nonaccrual loans as of March 31, 2017 and December 31, 2016:



	March 31, 2017				December 31, 2016
	Recorded Investment Nonaccrual Loans		Unpaid Principal Balance Nonaccrual Loans		Recorded Investment Nonaccrual Loans		Unpaid Principal Balance Nonaccrual Loans
	(in thousands)
Commercial business:
Secured	$	10,659	$	21,144	$	11,524	$	21,503
Unsecured	189		457		31		303
Real estate:
One-to-four family residential	450		1,703		568		1,302
Commercial & multifamily residential:
Commercial land	2,729		2,726		934		922
Income property	3,290		3,561		4,005		4,247
Owner occupied	4,218		8,544		6,248		9,030
Real estate construction:
One-to-four family residential:
Land and acquisition	—		—		14		102
Residential construction	213		213		549		549
Consumer	3,799		4,180		3,883		4,331
Total	$	25,547	$	42,528	$	27,756	$	42,289

Loans, excluding purchased credit impaired loans

The following is an aging of the recorded investment of the loan portfolio as of March 31, 2017 and December 31, 2016:



	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
March 31, 2017	(in thousands)
Commercial business:
Secured	$	2,447,180	$	6,417	$	204	$	—	$	6,621	$	10,659	$	2,464,460
Unsecured	90,245		34		5		—		39		189		90,473
Real estate:
One-to-four family residential	168,634		1,115		—		—		1,115		450		170,199
Commercial & multifamily residential:
Commercial land	280,562		—		—		—		—		2,729		283,291
Income property	1,366,062		583		140		—		723		3,290		1,370,075
Owner occupied	1,107,061		—		45		—		45		4,218		1,111,324
Real estate construction:
One-to-four family residential:
Land and acquisition	6,770		29		—		—		29		—		6,799
Residential construction	107,382		189		—		—		189		213		107,784
Commercial & multifamily residential:
Income property	106,227		—		—		—		—		—		106,227
Owner occupied	64,365		—		—		—		—		—		64,365
Consumer	308,902		907		627		—		1,534		3,799		314,235
Total	$	6,053,390	$	9,274	$	1,021	$	—	$	10,295	$	25,547	$	6,089,232

	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 & 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 & 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

The following is an analysis of impaired loans as of March 31, 2017 and December 31, 2016:



	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
March 31, 2017	(in thousands)
Commercial business:
Secured	$	2,456,672	$	7,788	$	—	$	—	$	—	$	7,788	$	14,806
Unsecured	90,473		—		—		—		—		—		—
Real estate:
One-to-four family residential	169,686		513		424		688		11		89		287
Commercial & multifamily residential:
Commercial land	280,992		2,299		—		—		—		2,299		2,288
Income property	1,366,381		3,694		533		537		26		3,161		3,656
Owner occupied	1,107,814		3,510		—		—		—		3,510		6,327
Real estate construction:
One-to-four family residential:
Land and acquisition	6,799		—		—		—		—		—		—
Residential construction	107,784		—		—		—		—		—		—
Commercial & multifamily residential:
Income property	106,227		—		—		—		—		—		—
Owner occupied	64,365		—		—		—		—		—		—
Consumer	308,710		5,525		4,923		5,013		57		602		682
Total	$	6,065,903	$	23,329	$	5,880	$	6,238	$	94	$	17,449	$	28,046

	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 & 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 & 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

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



	Three Months Ended March 31,
	2017				2016
	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	$	8,303	$	19	$	12,103	$	17
Real estate:
One-to-four family residential	521		2		975		6
Commercial & multifamily residential:
Commercial land	1,504		—		—		—
Income property	4,059		1		2,080		3
Owner occupied	4,462		—		5,516		7
Real estate construction:
One-to-four family residential:
Land and acquisition	7		—		388		1
Residential construction	168		—		562		—
Consumer	5,370		27		824		2
Total	$	24,394	$	49	$	22,448	$	36

The following is an analysis of loans classified as troubled debt restructurings (“TDR”) during the three months ended March 31, 2017 and 2016:



	Three months ended March 31, 2017					Three months ended March 31, 2016
	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	3	$	356	$	356	3	$	1,370	$	1,370
Real estate:
Commercial and multifamily residential:
Owner occupied	—	—		—		1	250		250
Consumer	10	1,546		1,546		4	497		497
Total	13	$	1,902	$	1,902	8	$	2,117	$	2,117

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 $451 thousand of additional funds on loans classified as TDR as of March 31, 2017. The Company had $508 thousand of such commitments at December 31, 2016. The Company did not have any loans modified as TDR that defaulted within twelve months of being modified as TDR during the three month periods ended March 31, 2017 and 2016.

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 March 31, 2017 and December 31, 2016:



	March 31, 2017		December 31, 2016
	(in thousands)
Commercial business	$	20,292	$	21,606
Real estate:
One-to-four family residential	17,608		20,643
Commercial and multifamily residential	92,930		94,795
Total real estate	110,538		115,438
Real estate construction:
One-to-four family residential	479		832
Commercial and multifamily residential	1,089		1,726
Total real estate construction	1,568		2,558
Consumer	16,485		17,649
Subtotal of PCI loans	148,883		157,251
Less:
Valuation discount resulting from acquisition accounting	9,979		11,591
Allowance for loan losses	9,395		10,515
PCI loans, net of allowance for loan losses	$	129,509	$	135,145

The following table shows the changes in accretable yield for PCI loans for the three months ended March 31, 2017 and 2016:



	Three Months Ended March 31,
	2017			2016
	(in thousands)
Balance at beginning of period	$	45,191		$	58,981
Accretion	(4,182		)	(4,229		)
Disposals	(158		)	94
Reclassifications from (to) nonaccretable difference	(2,407		)	1,761
Balance at end of period	$	38,444		$	56,607