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, 2017									December 31, 2016
	Loans, excluding PCI loans			PCI Loans			Total			Loans, excluding PCI loans			PCI Loans			Total
	(in thousands)
Commercial business	$	2,735,206		$	13,662		$	2,748,868		$	2,551,054		$	20,185		$	2,571,239
Real estate:
One-to-four family residential	176,487			14,325			190,812			170,331			17,862			188,193
Commercial and multifamily residential	2,825,794			79,336			2,905,130			2,719,830			89,231			2,809,061
Total real estate	3,002,281			93,661			3,095,942			2,890,161			107,093			2,997,254
Real estate construction:
One-to-four family residential	145,419			377			145,796			121,887			832			122,719
Commercial and multifamily residential	213,939			958			214,897			209,118			1,565			210,683
Total real estate construction	359,358			1,335			360,693			331,005			2,397			333,402
Consumer	323,913			11,819			335,732			329,261			15,985			345,246
Less: Net unearned income	(29,229		)	—			(29,229		)	(33,718		)	—			(33,718		)
Total loans, net of unearned income	6,391,529			120,477			6,512,006			6,067,763			145,660			6,213,423
Less: Allowance for loan and lease losses	(64,272		)	(7,344		)	(71,616		)	(59,528		)	(10,515		)	(70,043		)
Total loans, net	$	6,327,257		$	113,133		$	6,440,390		$	6,008,235		$	135,145		$	6,143,380
Loans held for sale	$	7,802		$	—		$	7,802		$	5,846		$	—		$	5,846

At September 30, 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 both September 30, 2017 and December 31, 2016. During the first nine months of 2017, there were $203 thousand in advances and $253 thousand in repayments.

At September 30, 2017 and December 31, 2016, $2.26 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 $69.8 million and $54.2 million of commercial loans to the Federal Reserve Bank for additional borrowing capacity at September 30, 2017 and December 31, 2016, respectively.

The following is an analysis of nonaccrual loans as of September 30, 2017 and December 31, 2016:



	September 30, 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	$	25,187	$	35,843	$	11,524	$	21,503
Unsecured	26		1,342		31		303
Real estate:
One-to-four family residential	816		2,904		568		1,302
Commercial & multifamily residential:
Commercial land	2,333		2,629		934		922
Income property	3,586		4,702		4,005		4,247
Owner occupied	3,224		4,712		6,248		9,030
Real estate construction:
One-to-four family residential:
Land and acquisition	26		803		14		102
Residential construction	213		2,568		549		549
Consumer	4,906		5,418		3,883		4,331
Total	$	40,317	$	60,921	$	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 September 30, 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
September 30, 2017	(in thousands)
Commercial business:
Secured	$	2,607,265	$	2,292	$	1,302	$	—	$	3,594	$	25,187	$	2,636,046
Unsecured	93,879		1		18		—		19		26		93,924
Real estate:
One-to-four family residential	171,936		330		1,408		—		1,738		816		174,490
Commercial & multifamily residential:
Commercial land	283,321		—		—		—		—		2,333		285,654
Income property	1,375,163		1,493		2,656		—		4,149		3,586		1,382,898
Owner occupied	1,135,584		1,410		390		—		1,800		3,224		1,140,608
Real estate construction:
One-to-four family residential:
Land and acquisition	6,787		—		—		—		—		26		6,813
Residential construction	137,707		—		—		—		—		213		137,920
Commercial & multifamily residential:
Income property	172,112		—		—		—		—		—		172,112
Owner occupied	39,561		—		—		—		—		—		39,561
Consumer	315,688		552		357		—		909		4,906		321,503
Total	$	6,339,003	$	6,078	$	6,131	$	—	$	12,209	$	40,317	$	6,391,529

	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 September 30, 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
September 30, 2017	(in thousands)
Commercial business:
Secured	$	2,614,647	$	21,399	$	—	$	—	$	—	$	21,399	$	26,655
Unsecured	93,924		—		—		—		—		—		—
Real estate:
One-to-four family residential	173,562		928		459		736		26		469		1,030
Commercial & multifamily residential:
Commercial land	283,355		2,299		—		—		—		2,299		2,287
Income property	1,378,127		4,771		519		523		25		4,252		4,570
Owner occupied	1,134,945		5,663		—		—		—		5,663		8,573
Real estate construction:
One-to-four family residential:
Land and acquisition	6,813		—		—		—		—		—		—
Residential construction	137,920		—		—		—		—		—		—
Commercial & multifamily residential:
Income property	172,112		—		—		—		—		—		—
Owner occupied	35,511		4,050		—		—		—		4,050		4,050
Consumer	315,038		6,465		5,692		5,982		51		773		914
Total	$	6,345,954	$	45,575	$	6,670	$	7,241	$	102	$	38,905	$	48,079

	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 and nine month periods indicated:



	Three Months Ended September 30,								Nine Months Ended September 30,
	2017				2016				2017				2016
	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	$	22,395	$	2	$	6,909	$	15	$	15,349	$	25	$	9,506	$	48
Unsecured	—		—		—		—		—		—		—		—
Real estate:
One-to-four family residential	856		15		617		5		688		37		796		8
Commercial & multifamily residential:
Commercial land	2,549		—		708		—		2,026		—		354		—
Income property	4,214		21		1,939		8		4,137		27		2,010		19
Owner occupied	4,530		127		4,486		—		4,496		319		5,001		—
Real estate construction:
One-to-four family residential:
Land and acquisition	—		—		103		1		4		—		245		4
Residential construction	—		—		449		—		84		—		506		—
Commercial & multifamily residential:
Owner occupied	2,025		151		—		—		1,012		151		—		—
Consumer	6,054		58		3,345		25		5,712		105		2,084		46
Total	$	42,623	$	374	$	18,556	$	54	$	33,508	$	664	$	20,502	$	125

The following is an analysis of loans classified as troubled debt restructurings (“TDR”) during the three and nine months ended September 30, 2017 and 2016:



	Three months ended September 30, 2017					Three months ended September 30, 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	2	$	808	$	808	2	$	90	$	90
Real estate:
One-to-four family residential	2	201		201		1	85		85
Commercial and multifamily residential:
Income property	1	1,152		1,152		—	—		—
Owner occupied	1	78		78		—	—		—
Real estate construction:
Commercial and multifamily residential:
Owner occupied	1	4,050		4,050		—	—		—
Consumer	17	1,672		1,672		10	731		731
Total	24	$	7,961	$	7,961	13	$	906	$	906



	Nine months ended September 30, 2017					Nine months ended September 30, 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	7	$	2,586	$	2,586	7	$	1,753	$	1,753
Real estate:
One-to-four family residential	3	583		583		2	115		115
Commercial and multifamily residential:
Income property	1	1,152		1,152		—	—		—
Owner occupied	1	78		78		1	250		250
Real estate construction:
Commercial and multifamily residential:
Owner occupied	1	4,050		4,050		—	—		—
Consumer	35	4,033		4,033		28	3,442		3,442
Total	48	$	12,482	$	12,482	38	$	5,560	$	5,560

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 $529 thousand of additional funds on loans classified as TDR as of September 30, 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 or nine months ended September 30, 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 September 30, 2017 and December 31, 2016:



	September 30, 2017		December 31, 2016
	(in thousands)
Commercial business	$	14,895	$	21,606
Real estate:
One-to-four family residential	16,698		20,643
Commercial and multifamily residential	83,082		94,795
Total real estate	99,780		115,438
Real estate construction:
One-to-four family residential	377		832
Commercial and multifamily residential	1,059		1,726
Total real estate construction	1,436		2,558
Consumer	13,039		17,649
Subtotal of PCI loans	129,150		157,251
Less:
Valuation discount resulting from acquisition accounting	8,673		11,591
Allowance for loan losses	7,344		10,515
PCI loans, net of allowance for loan losses	$	113,133	$	135,145

The following table shows the changes in accretable yield for PCI loans for the three and nine months ended September 30, 2017 and 2016:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(in thousands)
Balance at beginning of period	$	35,706		$	52,909		$	45,191		$	58,981
Accretion	(2,766		)	(4,902		)	(9,830		)	(12,905		)
Disposals	—			(178		)	(158		)	(157		)
Reclassifications from (to) nonaccretable difference	(892		)	1,034			(3,155		)	2,944
Balance at end of period	$	32,048		$	48,863		$	32,048		$	48,863