Loans Receivable | Loans Receivable (a) Loan Origination/Risk Management The Bank originates loans in the ordinary course of business and has also acquired loans through mergers and acquisitions. Accrued interest receivable was excluded from disclosures presenting the Bank's amortized cost of loans receivable as it was deemed insignificant. The Bank categorizes the individual loans in the total loan portfolio into four segments: commercial business; residential real estate; real estate construction and land development; and consumer. Within these segments are classes of loans for which management monitors and assesses credit risk in the loan portfolios. A detailed description of the portfolio segments and classes is contained in the 2020 Annual Form 10-K. The amortized cost of loans receivable, net of ACL on loans at March 31, 2021 and December 31, 2020 consisted of the following portfolio segments and classes: March 31, December 31, (In thousands) Commercial business: Commercial and industrial $ 693,539 $ 733,098 SBA PPP 886,761 715,121 Owner-occupied CRE 881,168 856,684 Non-owner occupied CRE 1,427,953 1,410,303 Total commercial business 3,889,421 3,715,206 Residential real estate 114,856 122,756 Real estate construction and land development: Residential 79,878 78,259 Commercial and multifamily 217,815 227,454 Total real estate construction and land development 297,693 305,713 Consumer 293,899 324,972 Loans receivable 4,595,869 4,468,647 Allowance for credit losses on loans (64,225) (70,185) Loans receivable, net $ 4,531,644 $ 4,398,462 Balances included in the amortized cost of Loans receivable: Unamortized net discount on acquired loans $ (5,501) $ (6,575) Unamortized net deferred fee $ (24,017) $ (15,458) (b) Concentrations of Credit Most of the Bank’s lending activity occurs within its primary market areas which are concentrated along the I-5 corridor from Whatcom County to Clark County in Washington State and Multnomah County and Washington County in Oregon, as well as other contiguous markets and represents a geographic concentration. Additionally, our loan portfolio is concentrated in commercial-type loans, including commercial business loans and commercial and multifamily real estate construction and land development loans. (c) Credit Quality Indicators As part of the on-going monitoring of the credit quality of the Bank’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the risk grade of the loans, (ii) the level of classified loans, (iii) net charge-offs, (iv) nonperforming loans, (v) past due status and (vi) the general economic conditions of the United States of America, and specifically the states of Washington and Oregon. The Bank utilizes a risk grading matrix to assign a risk grade to each of its loans. Loans are graded on a scale of 1 to 10. Risk grades are aggregated to create the risk categories of Pass for grades 1 to 6, Special Mention or "SM" for grade 7, Substandard or "SS" for grade 8, Doubtful for grade 9 and Loss for grade 10. Descriptions of the general characteristics of the risk grades, including qualitative information on how the risk grades relate to the risk of loss, are contained in the 2020 Annual Form 10-K. Numerical loan grades for loans are established at the origination of the loan. Changes to loan grades are considered at the time new information about the performance of a loan becomes available, including the receipt of updated financial information from the borrower, results of annual term loan reviews performed by the Bank's Credit department and scheduled loan reviews performed by the Bank’s Loan Review department. For consumer loans, the Bank follows the FDIC’s Uniform Retail Credit Classification and Account Management Policy for subsequent classification in the event of payment delinquencies or default. Typically, an individual loan grade will not be changed from the prior period unless there is a specific indication of credit deterioration or improvement. Credit deterioration is evidenced by delinquency, direct communications with the borrower, or other borrower information that becomes known to management. Credit improvements are evidenced by known facts regarding the borrower or the collateral property. Loan grades relate to the likelihood of losses in that the higher the grade, the greater the loss potential. Loans with a pass grade may have some estimated inherent losses, but to a lesser extent than the other loan grades. The SM loan grade is transitory in that the Bank is waiting on additional information to determine the likelihood and extent of the potential loss. The likelihood of loss for SM graded loans, however, is greater than Watch graded loans because there has been measurable credit deterioration. Loans with a SS grade are generally loans with higher risk of loss if the deficiencies are not corrected. For Doubtful and Loss graded loans, the Bank is almost certain of the losses and the outstanding principal balances are generally charged off to the realizable value. Regulatory agencies provided guidance regarding credit risk ratings, delinquency reporting and nonaccrual status for loans adversely impacted by COVID-19. The Bank has and will continue to exercise judgment in determining the risk rating for impacted borrowers and will not automatically adversely classify credits that are affected by COVID-19. The Bank also will not designate loans with payment deferrals granted due to COVID-19 as past due because of the deferral. Due to the short-term nature of the forbearance and other relief programs we are offering as a result of the COVID-19 pandemic, we expect that borrowers granted relief under these programs will generally not be reported as nonaccrual during the deferral period. The following table presents the amortized cost of loans receivable by risk grade as of March 31, 2021 and December 31, 2020: March 31, 2021 Term Loans Revolving Loans Revolving Loans Converted to Term Loans (1) Loans Receivable 2021 2020 2019 2018 2017 Prior (In thousands) Commercial business: Commercial and industrial Pass $ 24,439 $ 120,602 $ 122,697 $ 64,991 $ 39,950 $ 124,627 $ 98,202 $ 1,473 $ 596,981 SM 1,287 2,714 7,917 9,504 3,704 9,272 7,334 35 41,767 SS 463 2,255 12,178 3,982 8,941 6,816 16,478 3,678 54,791 Total 26,189 125,571 142,792 78,477 52,595 140,715 122,014 5,186 693,539 SBA PPP Pass 339,326 547,435 — — — — — — 886,761 Total 339,326 547,435 — — — — — — 886,761 Owner-occupied CRE Pass 41,278 88,959 170,718 93,917 76,142 312,775 — — 783,789 SM — 5,336 5,269 12,453 10,406 18,755 — — 52,219 SS — 695 — 3,942 7,234 33,289 — — 45,160 Total 41,278 94,990 175,987 110,312 93,782 364,819 — — 881,168 Non-owner occupied CRE Pass 34,753 194,272 186,003 140,023 171,127 631,974 — — 1,358,152 SM — — 1,979 357 2,371 10,282 — — 14,989 SS — — — 3,623 — 51,189 — — 54,812 Total 34,753 194,272 187,982 144,003 173,498 693,445 — — 1,427,953 Total commercial business Pass 439,796 951,268 479,418 298,931 287,219 1,069,376 98,202 1,473 3,625,683 SM 1,287 8,050 15,165 22,314 16,481 38,309 7,334 35 108,975 SS 463 2,950 12,178 11,547 16,175 91,294 16,478 3,678 154,763 Total 441,546 962,268 506,761 332,792 319,875 1,198,979 122,014 5,186 3,889,421 Residential real estate Pass 5,373 28,990 35,889 12,518 9,606 21,699 — — 114,075 SS — — — — 58 723 — — 781 Total 5,373 28,990 35,889 12,518 9,664 22,422 — — 114,856 March 31, 2021 Term Loans Revolving Loans Revolving Loans Converted to Term Loans (1) Loans Receivable 2021 2020 2019 2018 2017 Prior Real estate construction and land development: Residential Pass 11,483 39,217 24,441 2,515 408 1,814 — — 79,878 Commercial and multifamily Pass 1,023 34,068 148,787 28,018 1,961 2,432 — — 216,289 SS — 637 450 — — 439 — — 1,526 Total 1,023 34,705 149,237 28,018 1,961 2,871 — — 217,815 Total real estate construction and land development Pass 12,506 73,285 173,228 30,533 2,369 4,246 — — 296,167 SS — 637 450 — — 439 — — 1,526 Total 12,506 73,922 173,678 30,533 2,369 4,685 — — 297,693 Consumer Pass 3,984 41,029 68,276 46,869 25,950 23,893 80,090 417 290,508 SS — 95 594 611 681 1,271 78 61 3,391 Total 3,984 41,124 68,870 47,480 26,631 25,164 80,168 478 293,899 Loans receivable Pass 461,659 1,094,572 756,811 388,851 325,144 1,119,214 178,292 1,890 4,326,433 SM 1,287 8,050 15,165 22,314 16,481 38,309 7,334 35 108,975 SS 463 3,682 13,222 12,158 16,914 93,727 16,556 3,739 160,461 Total $ 463,409 $ 1,106,304 $ 785,198 $ 423,323 $ 358,539 $ 1,251,250 $ 202,182 $ 5,664 $ 4,595,869 (1) Represents loans receivable balance at March 31, 2021 which was converted from a revolving loan to an amortizing loan during the three months ended March 31, 2021. December 31, 2020 Term Loans Revolving Loans Revolving Loans Converted to Term Loans (1) Loans Receivable 2020 2019 2018 2017 2016 Prior (In thousands) Commercial business: Commercial and industrial Pass 118,971 127,919 70,766 44,231 37,658 95,958 121,440 819 617,762 SM 14,430 9,162 10,878 4,171 5,700 3,579 11,790 814 60,524 SS 2,199 11,835 3,416 9,348 1,052 7,651 15,484 3,827 54,812 Total 135,600 148,916 85,060 57,750 44,410 107,188 148,714 5,460 733,098 SBA PPP Pass 715,121 — — — — — — — 715,121 Owner-occupied CRE Pass 89,224 167,095 94,830 80,138 74,902 254,864 — — 761,053 SM 6,146 4,540 16,386 11,231 5,464 12,105 — — 55,872 SS — — 114 7,320 3,313 29,012 — — 39,759 Total 95,370 171,635 111,330 98,689 83,679 295,981 — — 856,684 Non-owner-occupied CRE Pass 197,548 173,153 148,830 172,438 240,614 406,817 — — 1,339,400 SM — 1,979 357 2,448 6,210 3,539 — — 14,533 SS — — 3,623 — 35,455 17,292 — — 56,370 Total 197,548 175,132 152,810 174,886 282,279 427,648 — — 1,410,303 Total commercial business Pass 1,120,864 468,167 314,426 296,807 353,174 757,639 121,440 819 3,433,336 SM 20,576 15,681 27,621 17,850 17,374 19,223 11,790 814 130,929 SS 2,199 11,835 7,153 16,668 39,820 53,955 15,484 3,827 150,941 Total 1,143,639 495,683 349,200 331,325 410,368 830,817 148,714 5,460 3,715,206 Residential real estate Pass 30,141 41,829 15,730 10,362 7,322 16,825 — — 122,209 SS — — — 59 — 488 — — 547 Total 30,141 41,829 15,730 10,421 7,322 17,313 — — 122,756 Real estate construction and land development: Residential Pass 33,801 36,697 2,725 1,097 971 1,042 — — 76,333 SS — — — 1,926 — — — — 1,926 Total 33,801 36,697 2,725 3,023 971 1,042 — — 78,259 Commercial and multifamily Pass 27,423 151,020 38,682 5,660 689 1,407 — — 224,881 SM 67 1,011 — — — 29 — — 1,107 SS 572 450 — — — 444 — — 1,466 Total 28,062 152,481 38,682 5,660 689 1,880 — — 227,454 Total real estate construction and land development Pass 61,224 187,717 41,407 6,757 1,660 2,449 — — 301,214 SM 67 1,011 — — — 29 — — 1,107 SS 572 450 — 1,926 — 444 — — 3,392 Total 61,863 189,178 41,407 8,683 1,660 2,922 — — 305,713 Consumer Pass 43,742 77,083 53,195 30,559 13,443 15,453 87,547 315 321,337 SS 34 404 684 648 420 1,319 78 48 3,635 Total 43,776 77,487 53,879 31,207 13,863 16,772 87,625 363 324,972 Loans receivable Pass 1,255,971 774,796 424,758 344,485 375,599 792,366 208,987 1,134 4,178,096 SM 20,643 16,692 27,621 17,850 17,374 19,252 11,790 814 132,036 SS 2,805 12,689 7,837 19,301 40,240 56,206 15,562 3,875 158,515 Total $ 1,279,419 $ 804,177 $ 460,216 $ 381,636 $ 433,213 $ 867,824 $ 236,339 $ 5,823 $ 4,468,647 (1) Represents loans receivable balance at December 31, 2020 which was converted from a revolving loan to an amortizing loan during the year ended December 31, 2020. Potential problem loans are risk rated SM or worse that are not classified as a performing TDR or nonaccrual loan and are not individually evaluated for credit loss, but which management is closely monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms. Potential problem loans as of March 31, 2021 and December 31, 2020 were $163.8 million and $182.3 million, respectively. (d) Nonaccrual Loans The following table presents the amortized cost of nonaccrual loans for the dates indicated: March 31, 2021 Nonaccrual without ACL Nonaccrual with ACL Total Nonaccrual (In thousands) Commercial business: Commercial and industrial $ 17,400 $ 12,872 $ 30,272 Owner-occupied CRE 4,518 11,918 16,436 Non-owner occupied CRE 1,424 3,623 5,047 Total commercial business 23,342 28,413 51,755 Residential real estate 66 — 66 Real estate construction and land development: Commercial and multifamily — 1,021 1,021 Consumer 26 — 26 Total $ 23,434 $ 29,434 $ 52,868 December 31, 2020 Nonaccrual without ACL Nonaccrual with ACL Total Nonaccrual (In thousands) Commercial business: Commercial and industrial $ 22,039 $ 9,208 $ 31,247 Owner-occupied CRE 4,693 13,700 18,393 Non-owner occupied CRE 3,424 3,722 7,146 Total commercial business 30,156 26,630 56,786 Residential real estate 67 117 184 Real estate construction and land development: Commercial and multifamily 572 450 1,022 Consumer 31 69 100 Total $ 30,826 $ 27,266 $ 58,092 The following table presents the reversal of interest income on loans due to the write-off of accrued interest receivable upon the initial classification of loans as nonaccrual loans and the interest income recognized due to payment in full of previously classified nonaccrual loans during the following periods: Three Months Ended Three Months Ended Interest Income Reversed Interest Income Recognized Interest Income Reversed Interest Income Recognized (In thousands) Commercial business: Commercial and industrial $ (2) $ 63 $ (16) $ 219 Owner-occupied CRE — 114 — 46 Non-owner occupied CRE — 313 — 45 Total commercial business (2) 490 (16) 310 Real estate construction and land development: Residential — 73 — — Consumer — — — 10 Total $ (2) $ 563 $ (16) $ 320 For the three months ended March 31, 2021 and 2020, no interest income was recognized subsequent to a loan’s classification as nonaccrual, except as indicated in the tables above due to payment in full. (e) Past due loans The Bank performs an aging analysis of past due loans using policies consistent with regulatory reporting requirements with categories of 30-89 days past due and 90 or more days past due. The amortized cost of past due loans as of March 31, 2021 and December 31, 2020 were as follows: March 31, 2021 30-89 Days 90 Days or Total Past Current Loans Receivable (In thousands) Commercial business: Commercial and industrial $ 4,393 $ 8,178 $ 12,571 $ 680,968 $ 693,539 SBA PPP — — — 886,761 886,761 Owner-occupied CRE — — — 881,168 881,168 Non-owner occupied CRE 482 — 482 1,427,471 1,427,953 Total commercial business 4,875 8,178 13,053 3,876,368 3,889,421 Residential real estate — 46 46 114,810 114,856 Real estate construction and land development: Residential — — — 79,878 79,878 Commercial and multifamily — 571 571 217,244 217,815 Total real estate construction and land development — 571 571 297,122 297,693 Consumer 739 — 739 293,160 293,899 Total $ 5,614 $ 8,795 $ 14,409 $ 4,581,460 $ 4,595,869 December 31, 2020 30-89 Days 90 Days or Total Past Current Loans Receivable (In thousands) Commercial business: Commercial and industrial $ 4,621 $ 8,082 $ 12,703 $ 720,395 $ 733,098 SBA PPP — — — 715,121 715,121 Owner-occupied CRE 991 403 1,394 855,290 856,684 Non-owner occupied CRE 412 1,970 2,382 1,407,921 1,410,303 Total commercial business 6,024 10,455 16,479 3,698,727 3,715,206 Residential real estate 765 16 781 121,975 122,756 Real estate construction and land development: Residential — — — 78,259 78,259 Commercial and multifamily 2,225 — 2,225 225,229 227,454 Total real estate construction and land development 2,225 — 2,225 303,488 305,713 Consumer 1,407 30 1,437 323,535 324,972 Total $ 10,421 $ 10,501 $ 20,922 $ 4,447,725 $ 4,468,647 There were no loans 90 days or more past due that were still accruing interest as of March 31, 2021 or December 31, 2020. (f) Collateral-dependent Loans The type of collateral securing loans individually evaluated for credit losses and for which the repayment was expected to be provided substantially through the operation or sale of the collateral as of March 31, 2021 and December 31, 2020 were as follows: March 31, 2021 CRE (1) Farmland (1) Residential Real Estate (1) Non-real property business assets (1) Total (1) (In thousands) Commercial business: Commercial and industrial $ 1,967 $ 13,760 $ 825 $ 592 $ 17,144 Owner-occupied CRE 4,517 — — — 4,517 Non-owner occupied CRE 1,424 — — — 1,424 Total commercial business 7,908 13,760 825 592 23,085 Residential real estate — — 66 — 66 Real estate construction and land development: Commercial and multifamily 571 — — — 571 Consumer — — 30 — 30 Total $ 8,479 $ 13,760 $ 921 $ 592 $ 23,752 (1) Balances represent the amortized cost of the loan. If multiple collateral sources secure the loan, the entire balance is presented in the primary collateral category. December 31, 2020 CRE (1) Farmland (1) Residential Real Estate (1) Non-real property business assets (1) Other (1) Total (1) (In thousands) Commercial business: Commercial and industrial $ 1,893 $ 18,738 $ 584 $ 774 $ 631 $ 22,620 Owner-occupied CRE 4,693 — — — — 4,693 Non-owner occupied CRE 3,424 — — — — 3,424 Total commercial business 10,010 18,738 584 774 631 30,737 Residential real estate — — 67 — — 67 Real estate construction and land development: Commercial and multifamily 572 — — — — 572 Consumer — — 30 — — 30 Total $ 10,582 $ 18,738 $ 681 $ 774 $ 631 $ 31,406 (1) Balances represent the amortized cost of the loan. If multiple collateral sources secure the loan, the entire balance is presented in the primary collateral category. There have been no significant changes to the collateral securing individually evaluated loans for credit losses and for which repayment was expected to be provided substantially through the operation or sale of the collateral during the three months ended March 31, 2021, except changes due to payoffs and additions of loans to this classification. (g) Troubled Debt Restructured Loans The majority of the Bank’s TDR loans are a result of granting extensions of maturity on troubled credits which have already been adversely classified. The Bank grants such extensions to reassess the borrower’s financial status and to develop a plan for repayment. The second most prevalent concession was the result of COVID Modifications, including payment deferrals and maturity extensions. The Bank has also accommodated re-amortizing loans over a longer period of time. Each of these modifications were a concession for a borrower that could not obtain similar financing terms from another source other than from the Bank. The financial effects of each modification will vary based on the specific restructure. The Bank has a policy that it does not forgive principal or accrued interest as modified terms. The Bank’s TDR loans are primarily fully amortizing term loans. If the interest rate is not adjusted and the modified terms are consistent with other similar credits being offered, the Bank may not experience any loss associated with the restructure. If, however, the restructure involves interest rate modifications, the Bank may not collect all interest based on the original contractual terms. The CARES Act, CA Act and regulatory agencies provided guidance around the modification of loans as a result of the COVID-19 pandemic, and outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined by the guidance are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers were considered current if they were less than 30 days past due on the contractual payments as of December 31, 2019 under the CARES Act and at the time a modification program is implemented under related regulatory guidance. The CA Act extended relief offered under the CARES Act through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier. The Bank elected to apply the temporary relief under the applicable guidance to certain eligible short-term modifications and did not classify the modifications as TDRs for accounting or disclosure purposes. However, COVID Modifications whose payment deferral exceeded 180 days following the loans' initial modification were classified as TDRs based on the Bank's internal policy. The unfunded commitment to borrowers related to TDR loans was $5.0 million and $2.6 million at March 31, 2021 and December 31, 2020, respectively. For the three months ended March 31, 2021 and March 31, 2020 , the Bank recorded $1.8 million and $608,000 , respectively, of interest income related to performing TDR loans. Loans that were modified as TDR loans are set forth in the following table for the periods indicated: Three Months Ended March 31, 2021 2020 Number of Amortized Cost (1) (2) Number of Amortized Cost (1) (2) (Dollars in thousands) Commercial business: Commercial and industrial 24 $ 12,102 13 $ 3,688 Owner-occupied CRE 2 4,660 4 2,183 Non-owner occupied CRE 1 1,979 3 2,210 Total commercial business 27 18,741 20 8,081 Residential real estate 1 180 — — Real estate construction and land development: Residential — — 4 1,516 Commercial and multifamily 1 450 — — Total real estate construction and land development 1 450 4 1,516 Consumer 15 379 5 93 Total 44 $ 19,750 29 $ 9,690 (1) Number of contracts and amortized cost represent loans which have balances as of period end, net of subsequent payments after modifications. Certain modified loans may have been paid-down or charged-off during the three months ended March 31, 2021 and March 31, 2020. (2) As the Bank did not forgive any principal or interest balance as part of the loan modifications, the Bank’s amortized cost in each loan at the date of modification (pre-modification) did not change as a result of the modification (post-modification). The table above includes 19 and 11 loans for th e three months ended March 31, 2021 and 2020, respectively, that were previously reported as TDR loans. The Bank typically grants shorter extension periods to continually monitor these TDR loans despite the fact that the extended date might not be the date the Bank expects sufficient cash flow from these borrowers. The Bank does not consider these modifications a subsequent default of a TDR as new loan terms, specifically new maturity dates, were granted. Of the remaining, first-reported TDR loans, the concessions granted largely consisted of maturity extensions. The Bank had a related ACL on loans that were modified as TDR lo ans of $2.4 million an d $644,000 at March 31, 2021 and March 31, 2020, respectively. The following table presents loans that were modified in a troubled debt restructure and subsequently defaulted within twelve months from the modification date during the periods indicated: Three Months Ended March 31, 2021 2020 Number of Contracts (1) Amortized Cost (1) Number of Contracts (1) Amortized Cost (1) (Dollars in thousands) Commercial business: Commercial and industrial 2 $ 2,792 2 $ 1,873 Non-owner occupied CRE — — 3 590 Total commercial business 2 2,792 5 2,463 Total 2 $ 2,792 5 $ 2,463 (1) Number of contracts and amortized cost represent loans which have balances as of period end, net of subsequent payments after modifications. Certain modified loans may have been paid-down or charged-off during the three months ended March 31, 2021 and March 31, 2020. During the three months ended March 31, 2021 and March 31, 2020 these TDR loans defaulted because each was past its modified maturity date and the borrower had not subsequently repaid the credits. The Bank chose not to extend further the maturity date on these loans. The Bank had an ACL on loans of $94,000 and $334,000 at March 31, 2021 and March 31, 2020, respectively, related to these TDR loans which defaulted during the three months ended March 31, 2021. (h) Accrued interest receivable on loans receivable Accrued interest receivable on loans receivable totaled $16.0 million and $15.8 million at March 31, 2021 and December 31, 2020, respectively. It is excluded from the calculation of the ACL on loans as interest accrued, but not received, is reversed timely. However, management completed an analysis for an ACL on accrued interest receivable on loans receivable based on the significance of loan modifications in accordance with the CARES Act, CA Act and regulatory guidance and concluded no ACL on accrued interest receivable on loans should be recorded at March 31, 2021 and December 31, 2020. |