Loans Receivable

The Company originates loans in the ordinary course of business and has also acquired loans through mergers and acquisitions. Disclosures related to the Company's recorded investment in loans receivable generally exclude accrued interest receivable and net deferred fees or costs as they were deemed insignificant.

(a) Loan Origination/Risk Management

The Company categorizes loans in one of the four segments of the total loan portfolio: commercial business, one-to-four family residential, 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. The Company 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 Company 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, as well as the Company’s policies and procedures.

A discussion of the risk characteristics of each loan portfolio segment is as follows:

Commercial Business:

There are three significant classes of loans in the commercial business portfolio segment: commercial and industrial, owner-occupied commercial real estate and non-owner occupied commercial real estate. The owner and non-owner occupied commercial real estate classes are both considered commercial real estate loans. As the commercial and industrial loans carry different risk characteristics than the commercial real estate loans, they are discussed separately below.

Commercial and industrial. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may include a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Commercial and industrial loans carry more risk than other loans because the borrowers’ cash flow is less predictable, and in the event of a default, the amount of loss is potentially greater and more difficult to quantify because the value of the collateral securing these loans may fluctuate, may be uncollectible, or may be obsolete or of limited use, among other things.

Commercial real estate. The Company originates commercial real estate loans primarily within its primary market areas. These loans are subject to underwriting standards and processes similar to commercial and industrial loans in that these loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate properties. Commercial real estate lending typically involves higher loan principal amounts and payments on loans, and repayment is dependent on successful operation and management of the properties. The value of the real estate securing these loans can be adversely affected by conditions in the real estate market or the economy. There is little difference in risk between owner-occupied commercial real estate loans and non-owner occupied commercial real estate loans.

One-to-Four Family Residential:

The majority of the Company’s one-to-four family residential loans are secured by single-family residences located in its primary market areas. The Company’s underwriting standards require that single-family portfolio loans generally are owner-occupied and do not exceed 80% of the lower of appraised value at origination or cost of the underlying collateral. Terms of maturity typically range from 15 to 30 years. The Company sells most of its single-family loans in the secondary market and retains a smaller portion in its loan portfolio.

Real Estate Construction and Land Development:

The Company originates construction loans for one-to-four family residential and for five or more family residential and commercial properties. The one-to-four family residential construction loans generally include construction of custom homes whereby the home buyer is the borrower. The Company also provides financing to builders for the construction of pre-sold homes and, in selected cases, to builders for the construction of speculative residential property. Substantially all construction loans are short-term in nature and priced with variable rates of interest. Construction lending can involve a higher level of risk than other types of lending because funds are advanced partially based upon the value of the project, which is uncertain prior to the project’s completion. Because of the uncertainties inherent in estimating construction costs as well as the market value of a completed project and the effects of governmental regulation of real property, the Company’s estimates with regard to the total funds required to complete a project and the related loan-to-value ratio may vary from actual results. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property or refinance the indebtedness. If the Company’s estimate of the value of a project at completion proves to be overstated, it may have inadequate security for repayment of the loan and may incur a loss if the borrower does not repay the loan. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being dependent upon successful completion of the construction project, interest rate changes, government regulation of real property, general economic conditions and the availability of long-term financing.

Consumer:

The Company originates consumer loans and lines of credit that are both secured and unsecured. The underwriting process for these loans ensures a qualifying primary and secondary source of repayment. Underwriting standards for home equity loans are significantly influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed. The majority of consumer loans are for relatively small amounts disbursed among many individual borrowers which reduces the credit risk for this type of loan. To further reduce the risk, trend reports are reviewed by management on a regular basis.

The Company also originates indirect consumer loans. These loans are for new and used automobile and recreational vehicles that are originated indirectly by selected dealers located in the Company's market areas. The Company has limited its purchase of indirect loans primarily to dealerships that are established and well-known in their market areas and to applicants that are not classified as sub-prime.

Loans receivable at December 31, 2018 and December 31, 2017 consisted of the following portfolio segments and classes:



	December 31, 2018			December 31, 2017
	(In thousands)
Commercial business:
Commercial and industrial	$	853,606		$	645,396
Owner-occupied commercial real estate	779,814			622,150
Non-owner occupied commercial real estate	1,304,463			986,594
Total commercial business	2,937,883			2,254,140
One-to-four family residential	101,763			86,997
Real estate construction and land development:
One-to-four family residential	102,730			51,985
Five or more family residential and commercial properties	112,730			97,499
Total real estate construction and land development	215,460			149,484
Consumer	395,545			355,091
Gross loans receivable	3,650,651			2,845,712
Net deferred loan costs	3,509			3,359
Loans receivable, net	3,654,160			2,849,071
Allowance for loan losses	(35,042		)	(32,086		)
Total loans receivable, net	$	3,619,118		$	2,816,985

(b) Concentrations of Credit

Most of the Company’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. The majority of the Company’s loan portfolio consists of (in order of balances at December 31, 2018) non-owner occupied commercial real estate, commercial and industrial and owner-occupied commercial real estate. As of December 31, 2018 and December 31, 2017, there were no concentrations of loans related to any single industry in excess of 10% of the Company’s total loans.

As part of the on-going monitoring of the credit quality of the Company’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 and (v) the general economic conditions of the United States of America, and specifically the states of Washington and Oregon. The Company 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. A description of the general characteristics of the risk grades is as follows:

•

Grades 1 to 5: These grades are considered “pass grade” and include loans with negligible to above average but acceptable risk. These borrowers generally have strong to acceptable capital levels and consistent earnings and debt service capacity. Loans with the higher grades within the “pass” category may include borrowers who are experiencing unusual operating difficulties, but have acceptable payment performance to date. Increased monitoring of financial information and/or collateral may be appropriate. Loans with this grade show no immediate loss exposure.


•	Grade 6: This grade includes "Watch" loans and is considered a “pass grade”. The grade is intended to be utilized on a temporary basis for pass grade borrowers where a potentially significant risk-modifying action is anticipated in the near term.

•

Grade 7: This grade includes “Other Assets Especially Mentioned” (“OAEM”) loans in accordance with regulatory guidelines, and is intended to highlight loans with elevated risks. Loans with this grade show signs of deteriorating profits and capital, and the borrower might not be strong enough to sustain a major setback. The borrower is typically higher than normally leveraged, and outside support might be modest and likely illiquid. The loan is at risk of further decline unless active measures are taken to correct the situation.

•

Grade 8: This grade includes “Substandard” loans in accordance with regulatory guidelines, which the Company has determined have a high credit risk. These loans also have well-defined weaknesses which make payment default or principal exposure likely, but not yet certain. The borrower may have shown serious negative trends in financial ratios and performance. Such loans may be dependent upon collateral liquidation, a secondary source of repayment or an event outside of the normal course of business. Loans with this grade can be placed on accrual or nonaccrual status based on the Company’s accrual policy.

•

Grade 9: This grade includes “Doubtful” loans in accordance with regulatory guidelines, and the Company has determined these loans to have excessive credit risk. Such loans are placed on nonaccrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. Additionally, these loans generally have a specific valuation allowance or have been partially charged-off for the amount considered uncollectible.

•

Grade 10: This grade includes “Loss” loans in accordance with regulatory guidelines, and the Company has determined these loans have the highest risk of loss. Such loans are charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt.

Numerical loan grades for loans are established at the origination of the loan. Loan grades are reviewed on a quarterly basis, or more frequently if necessary, by the credit 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.

The 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 OAEM loan grade is transitory in that the Company is waiting on additional information to determine the likelihood and extent of the potential loss. The likelihood of loss for OAEM graded loans, however, is greater than Watch graded loans because there has been measurable credit deterioration. Loans with a Substandard grade are generally loans for which the Company has individually analyzed for potential impairment. For Doubtful and Loss graded loans, the Company is almost certain of the losses, and the outstanding principal balances are generally charged-off to the realizable value.

The following tables present the balance of the loans receivable by credit quality indicator as of December 31, 2018 and December 31, 2017.



	December 31, 2018
	Pass		OAEM		Substandard		Doubtful/Loss		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	788,395	$	16,168	$	49,043	$	—	$	853,606
Owner-occupied commercial real estate	741,227		27,724		10,863		—		779,814
Non-owner occupied commercial real estate	1,283,077		9,438		11,948		—		1,304,463
Total commercial business	2,812,699		53,330		71,854		—		2,937,883
One-to-four family residential	100,401		—		1,362		—		101,763
Real estate construction and land development:
One-to-four family residential	101,519		258		953		—		102,730
Five or more family residential and commercial properties	112,678		52		—		—		112,730
Total real estate construction and land development	214,197		310		953		—		215,460
Consumer	390,808		—		4,213		524		395,545
Gross loans receivable	$	3,518,105	$	53,640	$	78,382	$	524	$	3,650,651



	December 31, 2017
	Pass		OAEM		Substandard		Doubtful/Loss		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	597,697	$	19,536	$	28,163	$	—	$	645,396
Owner-occupied commercial real estate	595,455		12,668		14,027		—		622,150
Non-owner occupied commercial real estate	955,450		10,494		20,650		—		986,594
Total commercial business	2,148,602		42,698		62,840		—		2,254,140
One-to-four family residential	85,762		—		1,235		—		86,997
Real estate construction and land development:
One-to-four family residential	49,925		537		1,523		—		51,985
Five or more family residential and commercial properties	96,404		707		388		—		97,499
Total real estate construction and land development	146,329		1,244		1,911		—		149,484
Consumer	349,590		—		4,976		525		355,091
Gross loans receivable	$	2,730,283	$	43,942	$	70,962	$	525	$	2,845,712

Potential problem loans are loans classified as OAEM or worse that are currently accruing interest and are not considered impaired, 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 may include PCI loans as these loans continue to accrete loan discounts established at acquisition based on the guidance of FASB ASC 310-30. Potential problem loans as of December 31, 2018 and December 31, 2017 were $101.3 million and $83.5 million, respectively.

(d) Nonaccrual Loans

Nonaccrual loans, segregated by segments and classes of loans, were as follows as of December 31, 2018 and December 31, 2017:



	December 31, 2018		December 31, 2017
	(In thousands)
Commercial business:
Commercial and industrial	$	6,639	$	3,110
Owner-occupied commercial real estate	4,212		4,090
Non-owner occupied commercial real estate	1,713		1,898
Total commercial business	12,564		9,098
One-to-four family residential	71		81
Real estate construction and land development:
One-to-four family residential	899		1,247
Total real estate construction and land development	899		1,247
Consumer	169		277
Nonaccrual loans	$	13,703	$	10,703

PCI loans are not included in the nonaccrual loan table above because these loans are accounted for under FASB ASC 310-30, which provides that accretable yield is calculated based on a loan's expected cash flow even if the loan is not performing under its contractual terms.

(e) Past due loans

The Company 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 balances of past due loans, segregated by segments and classes of loans, as of December 31, 2018 and December 31, 2017 were as follows:



	December 31, 2018
	30-89 Days		90 Days or Greater		Total Past Due		Current		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	2,988	$	2,281	$	5,269	$	848,337	$	853,606
Owner-occupied commercial real estate	563		600		1,163		778,651		779,814
Non-owner occupied commercial real estate	5,347		1,461		6,808		1,297,655		1,304,463
Total commercial business	8,898		4,342		13,240		2,924,643		2,937,883
One-to-four family residential	227		—		227		101,536		101,763
Real estate construction and land development:
One-to-four family residential	665		234		899		101,831		102,730
Five or more family residential and commercial properties	—		—		—		112,730		112,730
Total real estate construction and land development	665		234		899		214,561		215,460
Consumer	2,568		—		2,568		392,977		395,545
Gross loans receivable	$	12,358	$	4,576	$	16,934	$	3,633,717	$	3,650,651



	December 31, 2017
	30-89 Days		90 Days or Greater		Total Past Due		Current		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	2,993	$	1,172	$	4,165	$	641,231	$	645,396
Owner-occupied commercial real estate	1,277		1,225		2,502		619,648		622,150
Non-owner occupied commercial real estate	870		3,314		4,184		982,410		986,594
Total commercial business	5,140		5,711		10,851		2,243,289		2,254,140
One-to-four family residential	513		—		513		86,484		86,997
Real estate construction and land development:
One-to-four family residential	84		1,331		1,415		50,570		51,985
Five or more family residential and commercial properties	40		—		40		97,459		97,499
Total real estate construction and land development	124		1,331		1,455		148,029		149,484
Consumer	1,939		687		2,626		352,465		355,091
Gross loans receivable	$	7,716	$	7,729	$	15,445	$	2,830,267	$	2,845,712

There were no loans 90 days or more past due that were still accruing interest as of December 31, 2018 or December 31, 2017, excluding PCI loans.

(f) Impaired loans

Impaired loans include nonaccrual loans and performing TDR loans. The balances of impaired loans as of December 31, 2018 and December 31, 2017 are set forth in the following tables:



	December 31, 2018
	Recorded Investment With No Specific Valuation Allowance		Recorded Investment With Specific Valuation Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Specific Valuation Allowance
	(In thousands)
Commercial business:
Commercial and industrial	$	2,523	$	20,119	$	22,642	$	24,176	$	2,607
Owner-occupied commercial real estate	816		5,000		5,816		6,150		1,142
Non-owner occupied commercial real estate	3,352		2,924		6,276		6,414		206
Total commercial business	6,691		28,043		34,734		36,740		3,955
One-to-four family residential	—		279		279		293		76
Real estate construction and land development:
One-to-four family residential	899		—		899		1,662		—
Total real estate construction and land development	899		—		899		1,662		—
Consumer	—		527		527		538		139
Total	$	7,590	$	28,849	$	36,439	$	39,233	$	4,170



	December 31, 2017
	Recorded Investment With No Specific Valuation Allowance		Recorded Investment With Specific Valuation Allowance		Total Recorded Investment		Unpaid Contractual Principal Balance		Related Specific Valuation Allowance
	(In thousands)
Commercial business:
Commercial and industrial	$	2,127	$	9,872	$	11,999	$	12,489	$	1,326
Owner-occupied commercial real estate	2,452		4,356		6,808		7,054		621
Non-owner occupied commercial real estate	4,722		11,297		16,019		16,172		1,222
Total commercial business	9,301		25,525		34,826		35,715		3,169
One-to-four family residential	—		299		299		308		93
Real estate construction and land development:
One-to-four family residential	938		309		1,247		2,200		2
Five or more family residential and commercial properties	—		645		645		645		37
Total real estate construction and land development	938		954		1,892		2,845		39
Consumer	160		282		442		466		54
Total	$	10,399	$	27,060	$	37,459	$	39,334	$	3,355

The average recorded investment of impaired loans for the year ended December 31, 2018, 2017 and 2016 are set forth in the following table:



	Year Ended December 31,
	2018		2017		2016
	(In thousands)
Commercial business:
Commercial and industrial	$	16,773	$	11,310	$	10,207
Owner-occupied commercial real estate	11,312		5,401		4,540
Non-owner occupied commercial real estate	9,465		12,162		11,709
Total commercial business	37,550		28,873		26,456
One-to-four family residential	290		309		279
Real estate construction and land development:
One-to-four family residential	1,091		2,315		3,305
Five or more family residential and commercial properties	129		903		1,656
Total real estate construction and land development	1,220		3,218		4,961
Consumer	428		351		645
Total	$	39,488	$	32,751	$	32,341

For the years ended December 31, 2018, 2017 and 2016, no interest income was recognized subsequent to a loan’s classification as nonaccrual. For the years ended December 31, 2018, 2017 and 2016, the Bank recorded $1.4 million, $1.2 million and $651,000, respectively, of interest income related to performing TDR loans.

(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 concessions are certain modifications with extensions that also include interest rate reductions. Certain TDR loans were additionally re-amortized over a longer period of time. These modifications would all be considered 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. For the majority of the Bank’s TDR loans, the loans were interest-only with a balloon payment at maturity. 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 forbearance agreements or interest rate modifications, the Bank may not collect all the principal and interest based on the original contractual terms. The Bank estimates the necessary allowance for loan losses on TDR loans using the same guidance as used for other impaired loans.

The recorded investment balance and related allowance for loan losses of performing and nonaccrual TDR loans as of December 31, 2018 and December 31, 2017 were as follows:



	December 31, 2018				December 31, 2017
	Performing TDRs		Nonaccrual TDRs		Performing TDRs		Nonaccrual TDRs
	(In thousands)
TDR loans	$	22,736	$	6,943	$	26,757	$	5,193
Allowance for loan losses on TDR loans	2,257		658		2,635		379

The unfunded commitment to borrowers related to TDR loans was $943,000 and $1.2 million at December 31, 2018 and December 31, 2017, respectively.

Loans that were modified as TDR loans during the years ended December 31, 2018, 2017 and 2016 are set forth in the following table:



	Year Ended December 31,
	2018			2017			2016
	Number of Contracts ⁽¹⁾	Recorded Investment ^{(1) (2)}		Number of Contracts ⁽¹⁾	Recorded Investment ^{(1) (2)}		Number of Contracts ⁽¹⁾	Recorded Investment ^{(1) (2)}
	(Dollars in thousands)
Commercial business:
Commercial and industrial	31	$	16,129	19	$	7,212	19	$	7,398
Owner-occupied commercial real estate	4	2,521		3	1,366		2	569
Non-owner occupied commercial real estate	3	2,944		4	9,574		2	2,121
Total commercial business	38	21,594		26	18,152		23	10,088
Real estate construction and land development:
One-to-four family residential	2	665		2	938		5	2,206
Five or more family residential and commercial properties	—	—		—	—		1	1,078
Total real estate construction and land development	2	665		2	938		6	3,284
Consumer	13	236		8	110		6	66
Total TDR loans	53	$	22,495	36	$	19,200	35	$	13,438


⁽¹⁾	Number of contracts and outstanding principal balance represent loans which have balances as of period end as certain loans may have been paid-down or charged-off during the years ended December 31, 2018, 2017 and 2016.

⁽²⁾

Includes subsequent payments after modifications and reflects the balance as of period end. As the Bank did not forgive any principal or interest balance as part of the loan modification, the Bank’s recorded investment in each loan at the date of modification (pre-modification) did not change as a result of the modification (post-modification), except when the modification was the initial advance on a one-to-four family residential real estate construction and land development loan under a master guidance line. There were no advances on these types of loans during the years ended December 31, 2018, 2017 and 2016.

The related specific valuation allowance at December 31, 2018 for loans that were modified as TDR loans during the year ended December 31, 2018 was $2.3 million. The related specific valuation allowance at December 31, 2017 for loans that were modified as TDR loans during the year ended December 31, 2017 was $1.8 million. Certain loans included in the tables above may have been 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. The potential losses related to these loans would have been considered in the period the loan was first reported as a TDR loan and are adjusted, as necessary, in the current period based on more recent information.

Loans that were modified during the previous twelve months that subsequently defaulted during the years ended December 31, 2018, 2017 and 2016 are included in the following table:



	Year Ended December 31,
	2018			2017			2016
	Number of Contracts	Recorded Investment ⁽¹⁾		Number of Contracts	Recorded Investment ⁽¹⁾		Number of Contracts	Recorded Investment ⁽¹⁾
	(Dollars in thousands)
Commercial business:
Commercial and industrial	5	$	1,890	1	$	283	—	$	—
Owner-occupied commercial real estate	1	65		1	80		1	488
Total commercial business	6	1,955		2	363		1	488
Real estate construction and land development:
One-to-four family residential	2	665		2	938		2	1,143
Total real estate construction and land development	2	665		2	938		2	1,143
Consumer	—	—		1	7		—	—
Total	8	$	2,620	5	$	1,308	3	$	1,631


⁽¹⁾	Number of contracts and outstanding principal balance represent loans which have balances as of period end as certain loans may have been paid-down or charged-off during the years ended December 31, 2018, 2017 and 2016.

During the year ended December 31, 2018, one commercial and industrial loan totaling $882,000 defaulted due to being greater than 90 days past due the modified terms during the year ended December 31, 2018. The remaining seven loans defaulted because they were past their modified maturity dates, and the borrowers have not subsequently repaid the credits. The Bank has chosen not to extend the maturities on these loans.The Bank had a specific valuation allowance of $260,000 at December 31, 2018 related to the credits which defaulted during the year ended December 31, 2018.

During the year ended December 31, 2017, one consumer loan defaulted due to being greater than 90 days past due the modified terms, but the loan became current as of December 31, 2017. The remaining four loans defaulted as they were past their modified maturity dates, and the borrowers had not repaid the credits. The Bank has chosen not to extend the maturities on these loans. During the year ended December 31, 2016, all three loans defaulted because they were past their modified maturity dates, and the borrowers had not repaid the credits. At December 31, 2016, the Bank was in the process of granting addition extensions on these loans. The Bank had a specific valuation allowance of $1,000 and $111,000 at December 31, 2017 and 2016, respectively, related to the credits which defaulted during the related year ends.

(h) Purchased Credit Impaired Loans

The Company acquired certain loans and designated them as PCI loans, which are accounted for under FASB ASC 310-30. No loans acquired in the Premier and Puget Mergers were considered PCI.

The following table reflects the outstanding principal balance and recorded investment of the PCI loans at December 31, 2018 and December 31, 2017:



	December 31, 2018				December 31, 2017
	Outstanding Principal		Recorded Investment		Outstanding Principal		Recorded Investment
	(In thousands)
Commercial business:
Commercial and industrial	$	6,319	$	3,433	$	8,818	$	2,912
Owner-occupied commercial real estate	7,830		7,215		12,230		11,515
Non-owner occupied commercial real estate	8,685		7,059		14,295		13,342
Total commercial business	22,834		17,707		35,343		27,769
One-to-four family residential	3,169		3,315		4,120		5,255
Real estate construction and land development:
One-to-four family residential	67		380		841		89
Five or more family residential and commercial properties	188		43		2,361		2,035
Total real estate construction and land development	255		423		3,202		2,124
Consumer	2,203		3,462		3,974		5,455
Gross PCI loans	$	28,461	$	24,907	$	46,639	$	40,603

On the acquisition dates, the amount by which the undiscounted expected cash flows of the PCI loans exceeded the estimated fair value of the loan is the “accretable yield.” The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the PCI loans.

The following table summarizes the accretable yield on the PCI loans for the years ended December 31, 2018, 2017 and 2016.



	Year Ended December 31,
	2018			2017			2016
	(In thousands)
Balance at the beginning of the year	$	11,224		$	13,860		$	17,592
Accretion	(2,674		)	(3,471		)	(4,962		)
Disposal and other	(2,871		)	(2,758		)	(3,329		)
Reclassification from (to) nonaccreatable difference	3,814			3,593			4,559
Balance at the end of the year	$	9,493		$	11,224		$	13,860

(i) Related Party Loans

In the ordinary course of business, the Company has granted loans to certain directors, executive officers and their affiliates (collectively referred to as “related parties”).

Activity in related party loans for the years ended December 31, 2018, 2017 and 2016 was as follows:



	Year Ended December 31,
	2018			2017			2016
	(in thousands)
Balance outstanding at the beginning of year	$	8,460		$	19,917		$	20,775
Elimination of outstanding loan balance due to change in related party status	—			(10,930		)	—
Principal additions	211			—			738
Principal reductions	(304		)	(527		)	(1,596		)
Balance outstanding at the end of year	$	8,367		$	8,460		$	19,917

The Company had $592,000 and $750,000 of unfunded commitments to related parties as of December 31, 2018 and 2017, respectively. The Company did not have any borrowings from related parties at December 31, 2018 or 2017.

(j) Mortgage Banking Activities

The Bank originates one-to-four family residential loans. A portion of these loans are sold on the secondary market. The Bank does not retain servicing on loans sold in the secondary market. At December 31, 2018 and 2017, the balance of loans held for sale was $1.6 million and $2.3 million, respectively.

The following table presents information concerning the origination and sale of the Bank's one-to-four family residential loans and the gains from the sale of loans as a result of the Bank's mortgage banking activities:



	Year Ended December 31,
	2018		2017		2016
	(In thousands)
One-to-four family residential loans:
Originated ⁽¹⁾	$	121,998	$	144,066	$	178,169
Sold	76,834		113,786		141,127
Gain on sale of loans, net ⁽²⁾	2,403		3,412		3,723


⁽¹⁾	Includes loans originated for sale in the secondary market or for the Bank's loan portfolio.


⁽²⁾	Excludes net gains on sales of SBA and other loans.

The Bank may additionally make commitments to fund one-to-four family residential loans (interest rate locks) to be sold into the secondary market. The contractual amounts of commitments to sell and fund with off-balance sheet risk at December 31, 2018 and 2017 were as follows:



	December 31, 2018		December 31, 2017
	(In thousands)
Commitments to sell mortgage loans	$	3,910	$	10,140

Commitments to fund mortgage loans (at interest rates approximating market rates) for portfolio or for sale:
Fixed rate	$	6,593	$	10,894
Variable or adjustable rate	1,008		56
Total commitments to fund mortgage loans	$	7,601	$	10,950

The fair values of freestanding derivatives related to the commitments to fund mortgage loans and sell at locked interest rates were not significant at December 31, 2018 or 2017.

(k) SBA Loan Sales

The Company may choose to sell the conditionally guaranteed portion of certain loans guaranteed by the Small Business Administration or the U.S. Department of Agriculture (collectively referred to as "SBA loans") and retain a participating interest in the unguaranteed portion of the loans and the servicing of the loans. The retained unguaranteed portions of these loans are carried at cost net of discounts related to accounting for the sold and retained portions of the loans using the allocation of their carrying amounts based on their relative fair values. The Company does not sell SBA loans with servicing retained unless it retains a participating interest. Details of certain SBA loans serviced are as follows:



	December 31, 2018		December 31, 2017
	(In thousands)
SBA loans serviced for others with participating interest, gross loan balance	$	54,335	$	53,809
SBA loans serviced for others with participating interest, participation balance owned by Bank⁽¹⁾	12,715		12,394

⁽¹⁾ Included in the balances of total loans receivable, net on the Company's Consolidated Statements of Financial Condition.

The Company recognized $506,000, $467,000 and $460,000 of servicing fee income and fees from SBA loans serviced for others for the years ended December 31, 2018, 2017 and 2016, respectively. Servicing fee income is reported in other income on the Company's Consolidated Statements of Income.