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 major types of loans (net of unearned income):



	March 31, 2015									December 31, 2014
	Loans, excluding PCI loans			PCI Loans			Total			Loans, excluding PCI loans			PCI Loans			Total
	(in thousands)
Commercial business	$	2,139,873		$	46,335		$	2,186,208		$	2,119,565		$	44,505		$	2,164,070
Real estate:
One-to-four family residential	173,739			26,601			200,340			175,571			26,993			202,564
Commercial and multifamily residential	2,374,454			118,230			2,492,684			2,363,541			128,769			2,492,310
Total real estate	2,548,193			144,831			2,693,024			2,539,112			155,762			2,694,874
Real estate construction:
One-to-four family residential	124,017			3,797			127,814			116,866			4,021			120,887
Commercial and multifamily residential	119,880			2,238			122,118			134,443			2,321			136,764
Total real estate construction	243,897			6,035			249,932			251,309			6,342			257,651
Consumer	352,960			22,638			375,598			364,182			23,975			388,157
Less: Net unearned income	(53,867		)	—			(53,867		)	(59,374		)	—			(59,374		)
Total loans, net of unearned income	5,231,056			219,839			5,450,895			5,214,794			230,584			5,445,378
Less: Allowance for loan and lease losses	(53,703		)	(16,531		)	(70,234		)	(53,233		)	(16,336		)	(69,569		)
Total loans, net	$	5,177,353		$	203,308		$	5,380,661		$	5,161,561		$	214,248		$	5,375,809
Loans held for sale	$	3,545		$	—		$	3,545		$	1,116		$	—		$	1,116

At March 31, 2015 and December 31, 2014, 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 $12.7 million at March 31, 2015 and $13.2 million at December 31, 2014. During the first three months of 2015, there were no advances and repayments totaled $430 thousand.

At March 31, 2015 and December 31, 2014, $1.30 billion and $1.08 billion of commercial and residential real estate loans were pledged as collateral on Federal Home Loan Bank of Seattle (“FHLB”) borrowings and additional borrowing capacity. The Company has also pledged $47.0 million and $46.0 million of commercial loans to the Federal Reserve Bank for additional borrowing capacity at March 31, 2015 and December 31, 2014, respectively.

The following is an analysis of nonaccrual loans as of March 31, 2015 and December 31, 2014:



	March 31, 2015				December 31, 2014
	Recorded Investment Nonaccrual Loans		Unpaid Principal Balance Nonaccrual Loans		Recorded Investment Nonaccrual Loans		Unpaid Principal Balance Nonaccrual Loans
	(in thousands)
Commercial business:
Secured	$	17,240	$	20,573	$	16,552	$	21,453
Unsecured	189		211		247		269
Real estate:
One-to-four family residential	4,429		6,109		2,822		5,680
Commercial & multifamily residential:
Commercial land	1,616		1,560		821		1,113
Income property	887		887		3,200		5,521
Owner occupied	1,995		2,036		3,826		5,837
Real estate construction:
One-to-four family residential:
Land and acquisition	871		871		95		112
Residential construction	1,263		1,263		370		370
Commercial & multifamily residential:
Owner occupied	470		489		480		489
Consumer	2,868		3,799		2,939		3,930
Total	$	31,828	$	37,798	$	31,352	$	44,774

Loans, excluding purchased credit impaired loans

The following is an aging of the recorded investment of the loan portfolio as of March 31, 2015 and December 31, 2014:



	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, 2015	(in thousands)
Commercial business:
Secured	$	2,024,277	$	11,910	$	1,874	$	58	$	13,842	$	17,240	$	2,055,359
Unsecured	78,351		492		120		67		679		189		79,219
Real estate:
One-to-four family residential	164,962		771		124		21		916		4,429		170,307
Commercial & multifamily residential:
Commercial land	186,904		4,303		355		264		4,922		1,616		193,442
Income property	1,305,595		2,502		560		—		3,062		887		1,309,544
Owner occupied	841,551		2,206		435		—		2,641		1,995		846,187
Real estate construction:
One-to-four family residential:
Land and acquisition	15,860		67		—		—		67		871		16,798
Residential construction	104,378		—		—		4		4		1,263		105,645
Commercial & multifamily residential:
Income property	62,958		—		—		—		—		—		62,958
Owner occupied	54,969		—		—		—		—		470		55,439
Consumer	331,566		1,509		193		22		1,724		2,868		336,158
Total	$	5,171,371	$	23,760	$	3,661	$	436	$	27,857	$	31,828	$	5,231,056

	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, 2014	(in thousands)
Commercial business:
Secured	$	2,004,418	$	5,137	$	6,149	$	1,372	$	12,658	$	16,552	$	2,033,628
Unsecured	79,661		185		—		—		185		247		80,093
Real estate:
One-to-four family residential	167,197		1,700		45		—		1,745		2,822		171,764
Commercial & multifamily residential:
Commercial land	187,470		1,454		34		—		1,488		821		189,779
Income property	1,294,982		3,031		786		—		3,817		3,200		1,301,999
Owner occupied	839,689		937		289		—		1,226		3,826		844,741
Real estate construction:
One-to-four family residential:
Land and acquisition	15,462		953		—		—		953		95		16,510
Residential construction	97,821		326		—		4		330		370		98,521
Commercial & multifamily residential:
Income property	73,783		—		—		—		—		—		73,783
Owner occupied	57,470		—		994		—		994		480		58,944
Consumer	341,032		933		118		10		1,061		2,939		345,032
Total	$	5,158,985	$	14,656	$	8,415	$	1,386	$	24,457	$	31,352	$	5,214,794

The following is an analysis of impaired loans as of March 31, 2015 and December 31, 2014:



	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, 2015	(in thousands)
Commercial business:
Secured	$	2,044,486	$	10,873	$	96	$	96	$	24	$	10,777	$	12,986
Unsecured	79,219		—		—		—		—		—		—
Real estate:
One-to-four family residential	166,129		4,178		420		461		115		3,758		4,220
Commercial & multifamily residential:
Commercial land	192,972		470		—		—		—		470		470
Income property	1,307,556		1,988		—		—		—		1,988		2,355
Owner occupied	839,157		7,030		578		578		24		6,452		8,944
Real estate construction:
One-to-four family residential:
Land and acquisition	15,818		980		109		108		67		871		871
Residential construction	104,752		893		—		—		—		893		893
Commercial & multifamily residential:
Income property	62,958		—		—		—		—		—		—
Owner occupied	55,439		—		—		—		—		—		—
Consumer	335,474		684		—		—		—		684		895
Total	$	5,203,960	$	27,096	$	1,203	$	1,243	$	230	$	25,893	$	31,634

	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, 2014	(in thousands)
Commercial business:
Secured	$	2,023,104	$	10,524	$	99	$	99	$	25	$	10,425	$	12,410
Unsecured	80,091		2		2		2		2		—		—
Real estate:
One-to-four family residential	169,619		2,145		424		465		120		1,721		2,370
Commercial & multifamily residential:
Commercial land	189,779		—		—		—		—		—		—
Income property	1,295,650		6,349		—		—		—		6,349		10,720
Owner occupied	835,895		8,846		582		582		27		8,264		12,732
Real estate construction:
One-to-four family residential:
Land and acquisition	16,401		109		109		109		67		—		—
Residential construction	98,521		—		—		—		—		—		—
Commercial & multifamily residential:
Income property	73,783		—		—		—		—		—		—
Owner occupied	58,944		—		—		—		—		—		—
Consumer	344,908		124		—		—		—		124		201
Total	$	5,186,695	$	28,099	$	1,216	$	1,257	$	241	$	26,883	$	38,433

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



	Three Months Ended March 31,
	2015				2014
	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	$	10,698	$	7	$	6,232	$	17
Unsecured	1		—		31		—
Real estate:
One-to-four family residential	3,162		13		1,856		13
Commercial & multifamily residential:
Commercial land	235		—		111		—
Income property	4,168		10		6,436		62
Owner occupied	7,938		234		10,140		241
Real estate construction:
One-to-four family residential:
Land and acquisition	544		1		1,569		1
Residential construction	446		—		—		—
Consumer	404		2		163		2
Total	$	27,596	$	267	$	26,538	$	336

There were no troubled debt restructurings (“TDR”) during the three months ended March 31, 2015. The following is an analysis of loans classified as TDR during the three months ended March 31, 2014:



	Three months ended March 31, 2014
	Number of TDR Modifications	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(dollars in thousands)
Commercial business:
Secured	2	$	546	$	546
Real estate:
One-to-four family residential	2	494		494
Commercial and multifamily residential:
Income property	1	143		126
Total	5	$	1,183	$	1,166

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 completed in the three month period ending March 31, 2014 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 no commitments to lend additional funds on loans classified as TDR as of March 31, 2015 and December 31, 2014. 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, 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 March 31, 2015 and December 31, 2014:



	March 31, 2015		December 31, 2014
	(in thousands)
Commercial business	$	52,115	$	50,334
Real estate:
One-to-four family residential	31,127		31,981
Commercial and multifamily residential	127,952		140,398
Total real estate	159,079		172,379
Real estate construction:
One-to-four family residential	4,026		4,353
Commercial and multifamily residential	2,501		2,588
Total real estate construction	6,527		6,941
Consumer	25,390		26,814
Subtotal of PCI loans	243,111		256,468
Less:
Valuation discount resulting from acquisition accounting	23,272		25,884
Allowance for loan losses	16,531		16,336
PCI loans, net of allowance for loan losses	$	203,308	$	214,248

The following table shows the changes in accretable yield for PCI loans for the three months ended March 31, 2015 and 2014:



	Three Months Ended March 31,
	2015			2014
	(in thousands)
Balance at beginning of period	$	73,849		$	103,907
Accretion	(6,319		)	(10,569		)
Disposals	(1,093		)	(2,826		)
Reclassifications from nonaccretable difference	2,289			11,031
Balance at end of period	$	68,726		$	101,543