Loans Receivable | Loans Receivable 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. (a) Loan Origination/Risk Management 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 2021 Annual Form 10-K. The Bank has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and criticized loans. The Bank also conducts internal loan reviews and validates the credit risk assessment on a periodic basis and presents the results of these reviews to management. The loan review process complements and reinforces the risk identification and assessment decisions made by loan officers and credit personnel. The amortized cost of loans receivable, net of ACL on loans, consisted of the following portfolio segments and classes at the dates indicated: June 30, December 31, (In thousands) Commercial business: Commercial and industrial $ 698,828 $ 621,567 SBA PPP 11,334 145,840 Owner-occupied CRE 950,699 931,150 Non-owner occupied CRE 1,515,796 1,493,099 Total commercial business 3,176,657 3,191,656 Residential real estate 265,382 164,582 Real estate construction and land development: Residential 90,546 85,547 Commercial and multifamily 128,060 141,336 Total real estate construction and land development 218,606 226,883 Consumer 213,419 232,541 Loans receivable 3,874,064 3,815,662 Allowance for credit losses on loans (39,696) (42,361) Loans receivable, net $ 3,834,368 $ 3,773,301 Balances included in the amortized cost of loans receivable: Unamortized net discount on acquired loans $ 3,084 $ 3,938 Unamortized net deferred fee $ 4,947 $ 7,954 (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, Multnomah County and Washington County in Oregon, as well as other contiguous markets and represents a geographic concentration. Additionally, the Bank's loan portfolio is concentrated in commercial loans, including commercial business loans and commercial and multifamily real estate construction and land development loans. Commercial loans are generally considered as having more inherent risk of default than residential real estate loans or other consumer loans. Also, the commercial loan balance per borrower is typically larger than that for residential real estate loans and consumer loans, implying higher potential losses on an individual loan basis. (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 2021 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 and scheduled loan reviews. 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 any 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 accrual loans at risk of being classified as nonaccrual loans and includes all of our loans classified as nonaccrual. 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. The following table presents the amortized cost of loans receivable by risk grade at the dates indicated: June 30, 2022 Term Loans Revolving Loans Revolving Loans Converted (2) Loans Receivable 2022 2021 (1) 2020 2019 2018 Prior (In thousands) Commercial business: Commercial and industrial Pass $ 96,128 $ 101,302 $ 93,475 $ 73,299 $ 38,742 $ 90,980 $ 168,030 $ 45 $ 662,001 SM 234 253 729 4,842 8,764 2,981 1,619 — 19,422 SS 882 169 696 4,581 1,163 6,866 2,171 877 17,405 Total 97,244 101,724 94,900 82,722 48,669 100,827 171,820 922 698,828 SBA PPP Pass — 11,175 159 — — — — — 11,334 Owner-occupied CRE Pass 78,387 171,470 91,633 180,596 73,797 316,424 — — 912,307 SM — — — 1,698 2,573 12,042 — — 16,313 SS — 261 679 — 3,755 17,384 — — 22,079 Total 78,387 171,731 92,312 182,294 80,125 345,850 — — 950,699 Non-owner occupied CRE Pass 125,451 185,105 166,150 240,396 139,626 578,421 — — 1,435,149 SM — 8,435 — 3,652 — 16,655 — — 28,742 SS — — — — 3,626 48,279 — — 51,905 Total 125,451 193,540 166,150 244,048 143,252 643,355 — — 1,515,796 Total commercial business Pass 299,966 469,052 351,417 494,291 252,165 985,825 168,030 45 3,020,791 SM 234 8,688 729 10,192 11,337 31,678 1,619 — 64,477 SS 882 430 1,375 4,581 8,544 72,529 2,171 877 91,389 Total 301,082 478,170 353,521 509,064 272,046 1,090,032 171,820 922 3,176,657 Residential real estate Pass (1) 60,870 140,448 24,564 17,699 4,716 16,907 — — 265,204 SS — — — — — 178 — — 178 Total 60,870 140,448 24,564 17,699 4,716 17,085 — — 265,382 Real estate construction and land development: Residential Pass 21,664 43,877 10,330 12,002 1,005 1,668 — — 90,546 Commercial and multifamily Pass 8,832 75,096 23,991 6,952 3,186 2,013 — — 120,070 SM — — 1,871 5,714 — — — — 7,585 SS — — — — — 405 — — 405 Total 8,832 75,096 25,862 12,666 3,186 2,418 — — 128,060 Total real estate construction and land development Pass 30,496 118,973 34,321 18,954 4,191 3,681 — — 210,616 SM — — 1,871 5,714 — — — — 7,585 SS — — — — — 405 — — 405 Total 30,496 118,973 36,192 24,668 4,191 4,086 — — 218,606 June 30, 2022 Term Loans Revolving Loans Revolving Loans Converted (2) Loans Receivable 2022 2021 (1) 2020 2019 2018 Prior Consumer Pass 2,475 770 12,451 35,722 21,337 19,062 118,826 329 210,972 SS — — 169 558 366 1,346 8 — 2,447 Total 2,475 770 12,620 36,280 21,703 20,408 118,834 329 213,419 Loans receivable Pass 393,807 729,243 422,753 566,666 282,409 1,025,475 286,856 374 3,707,583 SM 234 8,688 2,600 15,906 11,337 31,678 1,619 — 72,062 SS 882 430 1,544 5,139 8,910 74,458 2,179 877 94,419 Total $ 394,923 $ 738,361 $ 426,897 $ 587,711 $ 302,656 $ 1,131,611 $ 290,654 $ 1,251 $ 3,874,064 (1) The 2021 origination year includes $42.2 million of pass grade residential real estate loans purchased during the six months ended June 30, 2022 which were originated during the year ended December 31, 2021. (2) Represents the loans receivable balance at June 30, 2022 which was converted from a revolving loan to an amortizing loan during the six months ended June 30, 2022. December 31, 2021 Term Loans Revolving Loans Revolving Loans Converted (1) Loans Receivable 2021 2020 2019 2018 2017 Prior (In thousands) Commercial business: Commercial and industrial Pass $ 95,960 $ 100,193 $ 94,657 $ 54,707 $ 28,558 $ 77,294 $ 127,651 $ 1,035 $ 580,055 SM 326 884 5,998 1,425 2,223 2,401 2,048 353 15,658 SS 1,443 1,287 5,912 2,809 2,526 6,907 4,402 568 25,854 Total 97,729 102,364 106,567 58,941 33,307 86,602 134,101 1,956 621,567 SBA PPP Pass 139,253 6,587 — — — — — — 145,840 Owner-occupied CRE Pass 182,742 90,609 188,380 73,714 66,039 273,518 — 72 875,074 SM 264 — 3,079 7,521 3,937 16,724 — — 31,525 SS — 1,332 — 3,787 3,014 16,418 — — 24,551 Total 183,006 91,941 191,459 85,022 72,990 306,660 — 72 931,150 Non-owner-occupied CRE Pass 187,860 185,650 244,863 149,090 144,896 499,486 — — 1,411,845 SM — — 5,674 — 15,482 2,400 — — 23,556 SS — — — 3,379 — 54,319 — — 57,698 Total 187,860 185,650 250,537 152,469 160,378 556,205 — — 1,493,099 Total commercial business Pass 605,815 383,039 527,900 277,511 239,493 850,298 127,651 1,107 3,012,814 SM 590 884 14,751 8,946 21,642 21,525 2,048 353 70,739 SS 1,443 2,619 5,912 9,975 5,540 77,644 4,402 568 108,103 Total 607,848 386,542 548,563 296,432 266,675 949,467 134,101 2,028 3,191,656 Residential real estate Pass 85,089 27,090 23,295 5,672 6,141 16,891 — — 164,178 SS — — — — — 404 — — 404 Total 85,089 27,090 23,295 5,672 6,141 17,295 — — 164,582 December 31, 2021 Term Loans Revolving Loans Revolving Loans Converted (1) Loans Receivable 2021 2020 2019 2018 2017 Prior (In thousands) Real estate construction and land development: Residential Pass 44,892 23,728 12,266 2,921 389 1,351 — — 85,547 Commercial and multifamily Pass 56,448 41,616 34,117 5,794 710 1,379 — — 140,064 SM — — 68 — — 213 — — 281 SS — 571 — — — 420 — — 991 Total 56,448 42,187 34,185 5,794 710 2,012 — — 141,336 Total real estate construction and land development Pass 101,340 65,344 46,383 8,715 1,099 2,730 — — 225,611 SM — — 68 — — 213 — — 281 SS — 571 — — — 420 — — 991 Total 101,340 65,915 46,451 8,715 1,099 3,363 — — 226,883 Consumer Pass 1,286 15,737 46,041 29,819 15,068 13,026 108,492 120 229,589 SS — 181 657 476 542 1,043 36 17 2,952 Total 1,286 15,918 46,698 30,295 15,610 14,069 108,528 137 232,541 Loans receivable Pass 793,530 491,210 643,619 321,717 261,801 882,945 236,143 1,227 3,632,192 SM 590 884 14,819 8,946 21,642 21,738 2,048 353 71,020 SS 1,443 3,371 6,569 10,451 6,082 79,511 4,438 585 112,450 Total $ 795,563 $ 495,465 $ 665,007 $ 341,114 $ 289,525 $ 984,194 $ 242,629 $ 2,165 $ 3,815,662 (1) Represents the loans receivable balance at December 31, 2021 which was converted from a revolving loan to an amortizing loan during the year ended December 31, 2021. (d) Nonaccrual Loans The following tables present the amortized cost of nonaccrual loans for the dates indicated: June 30, 2022 Nonaccrual without ACL Nonaccrual with ACL Total Nonaccrual (In thousands) Commercial business: Commercial and industrial $ 5,604 $ 569 $ 6,173 Owner-occupied CRE — 4,302 4,302 Total $ 5,604 $ 4,871 $ 10,475 December 31, 2021 Nonaccrual without ACL Nonaccrual with ACL Total Nonaccrual (In thousands) Commercial business: Commercial and industrial $ 6,454 $ 3,827 $ 10,281 Owner-occupied CRE 3,036 5,138 8,174 Non-owner occupied CRE 1,273 3,379 4,652 Total commercial business 10,763 12,344 23,107 Residential real estate — 47 47 December 31, 2021 Nonaccrual without ACL Nonaccrual with ACL Total Nonaccrual (In thousands) Real estate construction and land development: Commercial and multifamily — 571 571 Consumer — 29 29 Total $ 10,763 $ 12,991 $ 23,754 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 or sale 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 $ (12) $ 90 $ (5) $ 1,981 Owner-occupied CRE — — — 3 Total $ (12) $ 90 $ (5) $ 1,984 Six Months Ended Six Months Ended Interest Income Reversed Interest Income Recognized Interest Income Reversed Interest Income Recognized (in thousands) Commercial business: Commercial and industrial $ (14) $ 229 $ (10) $ 2,044 Owner-occupied CRE — 53 — 117 Non-owner occupied CRE — 774 — 313 Total commercial business (14) 1,056 (10) 2,474 Residential real estate — 19 — — Real estate construction and land development: Residential — — — 73 Consumer — 68 — — Total $ (14) $ 1,143 $ (10) $ 2,547 For the three and six months ended June 30, 2022 and 2021, 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 or sale. (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 June 30, 2022 and December 31, 2021 were as follows: June 30, 2022 30-89 Days 90 Days or Total Past Current Loans Receivable (In thousands) Commercial business: Commercial and industrial $ 259 $ 7,190 $ 7,449 $ 691,379 $ 698,828 SBA PPP — — — 11,334 11,334 Owner-occupied CRE 1,056 189 1,245 949,454 950,699 Non-owner occupied CRE — — — 1,515,796 1,515,796 June 30, 2022 30-89 Days 90 Days or Total Past Current Loans Receivable (In thousands) Total commercial business 1,315 7,379 8,694 3,167,963 3,176,657 Residential real estate — — — 265,382 265,382 Real estate construction and land development: Residential — — — 90,546 90,546 Commercial and multifamily — — — 128,060 128,060 Total real estate construction and land development — — — 218,606 218,606 Consumer 651 199 850 212,569 213,419 Total $ 1,966 $ 7,578 $ 9,544 $ 3,864,520 $ 3,874,064 December 31, 2021 30-89 Days 90 Days or Total Past Current Loans Receivable (In thousands) Commercial business: Commercial and industrial $ 1,858 $ 6,821 $ 8,679 $ 612,888 $ 621,567 SBA PPP 223 293 516 145,324 145,840 Owner-occupied CRE 2,397 112 2,509 928,641 931,150 Non-owner occupied CRE — — — 1,493,099 1,493,099 Total commercial business 4,478 7,226 11,704 3,179,952 3,191,656 Residential real estate 420 10 430 164,152 164,582 Real estate construction and land development: Residential 792 — 792 84,755 85,547 Commercial and multifamily 3,474 571 4,045 137,291 141,336 Total real estate construction and land development 4,266 571 4,837 222,046 226,883 Consumer 1,026 — 1,026 231,515 232,541 Total $ 10,190 $ 7,807 $ 17,997 $ 3,797,665 $ 3,815,662 Loans 90 days or more past due and still accruing interest were $2.0 million and $293,000 as of June 30, 2022 and December 31, 2021, respectively. (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 June 30, 2022 and December 31, 2021 was as follows, with b alances representing the amortized cost of the loan classified by the primary collateral category of each loan if multiple collateral sources secure the loan : June 30, 2022 CRE Farmland Residential Real Estate Total (In thousands) Commercial business: Commercial and industrial $ 1,239 $ 2,492 $ 1,316 $ 5,047 Owner-occupied CRE 189 — — 189 Total $ 1,428 $ 2,492 $ 1,316 $ 5,236 December 31, 2021 CRE Farmland Residential Real Estate Other Total (In thousands) Commercial business: December 31, 2021 CRE Farmland Residential Real Estate Other Total (In thousands) Commercial and industrial $ 1,499 $ 4,362 $ 1,036 $ 245 $ 7,142 Owner-occupied CRE 3,035 — — — 3,035 Non-owner occupied CRE 1,273 — — — 1,273 Total commercial business 5,807 4,362 1,036 245 11,450 Real estate construction and land development: Commercial and multifamily 571 — — — 571 Total $ 6,378 $ 4,362 $ 1,036 $ 245 $ 12,021 There have been no significant changes to the collateral securing loans individually evaluated for credit losses and for which repayment was expected to be provided substantially through the operation or sale of the collateral during the six months ended June 30, 2022, except changes due to additions or removals of loans from this classification. (g) Troubled Debt Restructured Loans Loans that were modified as TDR loans are set forth in the following table for the periods indicated: Three Months Ended June 30, 2022 2021 Number of Amortized Cost (1) (2) Number of Amortized Cost (1) (2) (Dollars in thousands) Commercial business: Commercial and industrial 3 $ 1,727 18 $ 5,673 Owner-occupied CRE — — 1 2,200 Non-owner occupied CRE — — 1 251 Total commercial business 3 1,727 20 8,124 Real estate construction and land development: Commercial and multifamily — — 1 443 Consumer 3 44 6 146 Total 6 $ 1,771 27 $ 8,713 Six Months Ended June 30, 2022 2021 Number of Amortized Cost (1) (2) Number of Amortized Cost (1) (2) (Dollars in thousands) Commercial business: Commercial and industrial 4 $ 2,610 31 $ 8,713 Owner-occupied CRE — — 2 5,857 Non-owner occupied CRE — — 2 2,222 Total commercial business 4 2,610 35 16,792 Residential real estate — — 1 181 Real estate construction and land development: Commercial and multifamily — — 1 443 Consumer 8 95 21 511 Total 12 $ 2,705 58 $ 17,927 (1) Number of contracts and amortized cost represent loans which have balances as of period end, net of subsequent payments after modifications. Certain TDR loans may have been paid-down or charged-off during the six months ended June 30, 2022 and 2021. (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 Bank had an ACL on loa ns of $4,000 an d $1.7 million at June 30, 2022 and June 30, 2021, respectively, related to these TDR loans which were restructured during the six months ended June 30, 2022 and June 30, 2021, respectively. The unfunded commitment to borrowers related to TDR loans was $3.4 million and $5.7 million at June 30, 2022 and December 31, 2021, respectively. The following table presents loans that were modified in a TDR and subsequently defaulted within twelve months from the modification date during the periods indicated: Three Months Ended June 30, 2022 2021 Number of Contracts (1) Amortized Cost (1) Number of Contracts (1) Amortized Cost (1) (Dollars in thousands) Commercial business: Commercial and industrial — $ — 1 $ 46 Six Months Ended June 30, 2022 2021 Number of Contracts (1) Amortized Cost (1) Number of Contracts (1) Amortized Cost (1) (Dollars in thousands) Commercial business: Commercial and industrial — $ — 2 $ 789 Owner-occupied CRE 1 189 — — (1) Number of contracts and amortized cost represent TDR loans which have balances as of period end, net of subsequent payments after modifications. Certain TDR loans may have been paid-down or charged-off during the six months ended June 30, 2022 and 2021. The Bank had $3,000 ACL on loans at June 30, 2022 and $7,000 at June 30, 2021 related to these TDR loans which defaulted during the six months ended June 30, 2022 and 2021. (h) Accrued interest receivable on loans receivable Accrued interest receivable on loans receivable totaled $9.5 million and $10.1 million at June 30, 2022 and December 31, 2021, respectively. It is excluded from the calculation of the ACL on loans as interest accrued, but not received, is reversed timely. (i) Foreclosure proceedings in process At June 30, 2022, there were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process. |