Loans

3 Months Ended

Mar. 31, 2019

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 PCI 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 PCI loans.

The following is an analysis of the loan portfolio by segment (net of unearned income):



	March 31, 2019									December 31, 2018
	Loans, excluding PCI loans			PCI Loans			Total			Loans, excluding PCI loans			PCI Loans			Total
	(in thousands)
Commercial business	$	3,509,472		$	9,914		$	3,519,386		$	3,438,422		$	9,240		$	3,447,662
Real estate:
One-to-four family residential	282,673			7,494			290,167			238,367			8,017			246,384
Commercial and multifamily residential	3,917,833			61,661			3,979,494			3,846,027			62,910			3,908,937
Total real estate	4,200,506			69,155			4,269,661			4,084,394			70,927			4,155,321
Real estate construction:
One-to-four family residential	207,900			147			208,047			217,790			153			217,943
Commercial and multifamily residential	240,458			519			240,977			284,394			534			284,928
Total real estate construction	448,358			666			449,024			502,184			687			502,871
Consumer	312,886			8,522			321,408			318,945			8,906			327,851
Less: Net unearned income	(38,681		)	—			(38,681		)	(42,194		)	—			(42,194		)
Total loans, net of unearned income	8,432,541			88,257			8,520,798			8,301,751			89,760			8,391,511
Less: ALLL	(80,029		)	(3,245		)	(83,274		)	(79,758		)	(3,611		)	(83,369		)
Total loans, net	$	8,352,512		$	85,012		$	8,437,524		$	8,221,993		$	86,149		$	8,308,142
Loans held for sale	$	4,017		$	—		$	4,017		$	3,849		$	—		$	3,849

At March 31, 2019 and December 31, 2018, 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 $9.5 million and $9.6 million at March 31, 2019 and December 31, 2018, respectively. During the first three months of 2019, there were no advances and $99 thousand in repayments.

At March 31, 2019 and December 31, 2018, $3.24 billion and $3.22 billion of commercial and residential real estate loans were pledged as collateral on FHLB borrowings and additional borrowing capacity. The Company has also pledged $86.1 million and $82.0 million of commercial loans to the FRB for additional borrowing capacity at March 31, 2019 and December 31, 2018, respectively.

The following is an analysis of nonaccrual loans as of March 31, 2019 and December 31, 2018:



	March 31, 2019				December 31, 2018
	Recorded Investment Nonaccrual Loans		Unpaid Principal Balance Nonaccrual Loans		Recorded Investment Nonaccrual Loans		Unpaid Principal Balance Nonaccrual Loans
	(in thousands)
Commercial business:
Secured	$	35,577	$	46,496	$	35,504	$	45,072
Unsecured	—		—		9		9
Real estate:
One-to-four family residential	923		1,018		1,158		1,178
Commercial & multifamily residential:
Commercial land	2,570		2,577		2,261		2,270
Income property	1,108		1,118		2,721		3,062
Owner occupied	9,623		9,960		9,922		10,300
Real estate construction:
One-to-four family residential:
Land and acquisition	—		—		318		318
Consumer	2,814		3,062		2,949		3,149
Total	$	52,615	$	64,231	$	54,842	$	65,358

Loans, excluding PCI loans

The following is an aging of the recorded investment of the loan portfolio as of March 31, 2019 and December 31, 2018:



	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, 2019	(in thousands)
Commercial business:
Secured	$	3,337,206	$	6,848	$	1,603	$	—	$	8,451	$	35,577	$	3,381,234
Unsecured	114,087		32		1,098		—		1,130		—		115,217
Real estate:
One-to-four family residential	280,727		680		—		—		680		923		282,330
Commercial & multifamily residential:
Commercial land	292,125		225		—		—		225		2,570		294,920
Income property	1,959,361		2,140		—		—		2,140		1,108		1,962,609
Owner occupied	1,627,738		1,123		75		—		1,198		9,623		1,638,559
Real estate construction:
One-to-four family residential:
Land and acquisition	3,619		—		—		—		—		—		3,619
Residential construction	203,318		—		—		—		—		—		203,318
Commercial & multifamily residential:
Income property	163,674		—		—		—		—		—		163,674
Owner occupied	74,736		—		—		—		—		—		74,736
Consumer	308,069		1,234		208		—		1,442		2,814		312,325
Total	$	8,364,660	$	12,282	$	2,984	$	—	$	15,266	$	52,615	$	8,432,541

	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, 2018	(in thousands)
Commercial business:
Secured	$	3,267,709	$	5,864	$	3,624	$	—	$	9,488	$	35,504	$	3,312,701
Unsecured	111,868		240		—		—		240		9		112,117
Real estate:
One-to-four family residential	233,941		694		233		—		927		1,158		236,026
Commercial & multifamily residential:
Commercial land	283,416		—		—		—		—		2,261		285,677
Income property	1,910,505		5,009		2,241		—		7,250		2,721		1,920,476
Owner occupied	1,606,085		1,744		—		—		1,744		9,922		1,617,751
Real estate construction:
One-to-four family residential:
Land and acquisition	4,099		—		—		—		—		318		4,417
Residential construction	212,303		93		—		—		93		—		212,396
Commercial & multifamily residential:
Income property	194,912		—		—		—		—		—		194,912
Owner occupied	79,805		7,258		—		—		7,258		—		87,063
Consumer	314,008		1,057		201		—		1,258		2,949		318,215
Total	$	8,218,651	$	21,959	$	6,299	$	—	$	28,258	$	54,842	$	8,301,751

The following is an analysis of impaired loans as of March 31, 2019 and December 31, 2018:



	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, 2019	(in thousands)
Commercial business:
Secured	$	3,351,027	$	30,207	$	5,426	$	6,189	$	2,829	$	24,781	$	30,656
Unsecured	115,199		18		—		—		—		18		18
Real estate:
One-to-four family residential	281,466		864		313		793		8		551		568
Commercial & multifamily residential:
Commercial land	292,055		2,865		—		—		—		2,865		2,909
Income property	1,961,287		1,322		—		—		—		1,322		1,333
Owner occupied	1,622,007		16,552		3,181		4,640		52		13,371		13,617
Real estate construction:
One-to-four family residential:
Land and acquisition	3,619		—		—		—		—		—		—
Residential construction	203,318		—		—		—		—		—		—
Commercial & multifamily residential:
Income property	163,674		—		—		—		—		—		—
Owner occupied	74,736		—		—		—		—		—		—
Consumer	308,870		3,455		2,558		2,703		22		897		1,012
Total	$	8,377,258	$	55,283	$	11,478	$	14,325	$	2,911	$	43,805	$	50,113

	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, 2018	(in thousands)
Commercial business:
Secured	$	3,286,416	$	26,285	$	6,350	$	8,460	$	2,023	$	19,935	$	24,404
Unsecured	112,097		20		20		20		—		—		—
Real estate:
One-to-four family residential	235,138		888		325		798		8		563		575
Commercial & multifamily residential:
Commercial land	283,451		2,226		—		—		—		2,226		2,272
Income property	1,917,522		2,954		99		165		1		2,855		3,011
Owner occupied	1,605,042		12,709		3,231		4,666		69		9,478		9,750
Real estate construction:
One-to-four family residential:
Land and acquisition	4,417		—		—		—		—		—		—
Residential construction	212,396		—		—		—		—		—		—
Commercial & multifamily residential:
Income property	194,912		—		—		—		—		—		—
Owner occupied	87,063		—		—		—		—		—		—
Consumer	314,193		4,022		3,326		3,584		31		696		704
Total	$	8,252,647	$	49,104	$	13,351	$	17,693	$	2,132	$	35,753	$	40,716

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



	Three Months Ended March 31,
	2019				2018
	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	$	28,246	$	12	$	42,306	$	12
Unsecured	19		—		24		—
Real estate:
One-to-four family residential	876		6		881		7
Commercial & multifamily residential:
Commercial land	2,546		7		2,569		—
Income property	2,138		19		4,292		31
Owner occupied	14,630		118		8,622		84
Real estate construction:
One-to-four family residential:
Residential construction	—		—		1,210		—
Commercial & multifamily residential:
Owner occupied	—		—		4,050		51
Consumer	3,738		27		6,623		54
Total	$	52,193	$	189	$	70,577	$	239

The following is an analysis of loans classified as TDR during the three months ended March 31, 2019 and 2018:



	Three months ended March 31, 2019					Three months ended March 31, 2018
	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	$	616	$	616	1	$	450	$	450
Real estate:
Commercial and multifamily residential:
Income property	1	217		217		—	—		—
Commercial and multifamily residential:
Income property	—	—		—		1	891		891
Consumer	—	—		—		7	1,143		1,143
Total	3	$	833	$	833	9	$	2,484	$	2,484

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 $1.3 million of additional funds on loans classified as TDR as of March 31, 2019. The Company had $2.1 million of such commitments at December 31, 2018. During the three months ended March 31, 2019, the Company had one $26 thousand consumer loan that defaulted within 12 months of being modified as a TDR. The defaulted TDR loan is collateralized and was included with the loans individually measured for specific impairment. The Company did not experience any similar defaults during the three months ended March 31, 2018.

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, 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 PCI 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 ALLL and remaining valuation discounts as of March 31, 2019 and December 31, 2018:



	March 31, 2019		December 31, 2018
	(in thousands)
Commercial business	$	10,270	$	9,672
Real estate:
One-to-four family residential	9,258		9,848
Commercial and multifamily residential	64,958		66,340
Total real estate	74,216		76,188
Real estate construction:
One-to-four family residential	147		153
Commercial and multifamily residential	491		507
Total real estate construction	638		660
Consumer	9,294		9,765
Subtotal of PCI loans	94,418		96,285
Less:
Valuation discount resulting from acquisition accounting	6,161		6,525
ALLL	3,245		3,611
PCI loans, net of valuation discounts and allowance for loan losses	$	85,012	$	86,149

The following table shows the changes in accretable yield for PCI loans for the three months ended March 31, 2019 and 2018:



	Three Months Ended March 31,
	2019			2018
	(in thousands)
Balance at beginning of period	$	21,949		$	31,176
Accretion	(1,577		)	(2,265		)
Disposals	103			(159		)
Reclassifications from nonaccretable difference	1,374			603
Balance at end of period	$	21,849		$	29,355