Loans Receivable

The Company originates loans in the ordinary course of business. These loans are identified as “originated” loans. Disclosures related to the Company’s recorded investment in originated loans receivable generally exclude accrued interest receivable and net deferred loan origination fees and costs because they are insignificant. The Company has also acquired loans through FDIC-assisted and open bank transactions. Loans acquired in a business acquisition are designated as “purchased” loans. The Company refers to the purchased loans subject to the FDIC shared-loss agreements as “covered” loans, and those loans without shared-loss agreements are referred to as “non-covered” loans. Loans purchased with evidence of credit deterioration since origination for which it is probable that not all contractually required payments will be collected are accounted for under FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. These loans are identified as “purchased impaired” loans. Loans purchased that are not accounted for under FASB ASC 310-30 are accounted for under FASB ASC 310-20, Receivables—Nonrefundable Fees and Other Costs. These loans are identified as “purchased other” loans.

(a) Loan Origination/Risk Management

The Company originates loans in one of the four segments of the total loan portfolio: commercial business, real estate construction and land development, one-to-four family residential and consumer. Within these segments are classes of loans to 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 potential problem loans. The Company also conducts external 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 portfolio segment, including commercial and industrial loans, owner-occupied commercial real estate and non-owner occupied commercial real estate. The owner and non-owner occupied commercial real estate 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 real estate. The Company originates commercial real estate loans within its primary market areas. These loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate involves more risk than other classes of loans in that the lending typically involves higher loan principal amounts, and payments on loans secured by real estate properties are dependent on successful operation and management of the properties. Repayment of these loans may be more adversely affected by conditions in the real estate market or the economy.

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. Historically, the Company sold most single-family loans in the secondary market and retained a smaller portion in its loan portfolio. The process for originating and selling single-family loans wound down in early 2013.

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 regards 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 sensitive to interest rate changes, governmental 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 this segment of 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.

Originated loans receivable at September 30, 2013 and December 31, 2012 consisted of the following portfolio segments and classes:



	September 30, 2013			December 31, 2012
	(In thousands)
Commercial business:
Commercial and industrial	$	292,906		$	277,240
Owner-occupied commercial real estate	197,421			188,494
Non-owner occupied commercial real estate	347,391			265,835
Total commercial business	837,718			731,569
One-to-four family residential	39,902			38,848
Real estate construction and land development:
One-to-four family residential	20,054			25,175
Five or more family residential and commercial properties	38,704			52,075
Total real estate construction and land development	58,758			77,250
Consumer	28,029			28,914
Gross originated loans receivable	964,407			876,581
Net deferred loan fees	(2,515		)	(2,096		)
Originated loans receivable, net	961,892			874,485
Allowance for loan losses	(17,357		)	(19,125		)
Originated loans receivable, net of allowance for loan losses	$	944,535		$	855,360

The recorded investment of purchased covered loans receivable at September 30, 2013 and December 31, 2012 consisted of the following portfolio segments and classes:



	September 30, 2013			December 31, 2012
	(In thousands)
Commercial business:
Commercial and industrial	$	18,005		$	25,781
Owner-occupied commercial real estate	25,724			34,796
Non-owner occupied commercial real estate	14,901			13,028
Total commercial business	58,630			73,605
One-to-four family residential	4,797			5,027
Real estate construction and land development:
One-to-four family residential	1,895			4,433
Five or more family residential and commercial properties	—			—
Total real estate construction and land development	1,895			4,433
Consumer	4,134			5,265
Gross purchased covered loans receivable	69,456			88,330
Allowance for loan losses	(5,972		)	(4,352		)
Purchased covered loans receivable, net	$	63,484		$	83,978

The September 30, 2013 and December 31, 2012 gross recorded investment balance of purchased impaired covered loans accounted for under FASB ASC 310-30 was $44.0 million and $59.0 million, respectively. The gross recorded investment balance of purchased other covered loans was $25.5 million and $29.3 million at September 30, 2013 and December 31, 2012, respectively. At September 30, 2013 and December 31, 2012, the recorded investment balance of purchased covered loans which are no longer covered under the FDIC shared-loss agreements was $3.3 million and $3.5 million, respectively.

Funds advanced on the purchased covered loans subsequent to acquisition, referred to as “subsequent advances,” are included in the purchased covered loan balances as these subsequent advances are covered under the shared-loss agreements. These subsequent advances are not accounted for under FASB ASC 310-30. The total balance of subsequent advances on the purchased covered loans was $7.5 million and $6.9 million as of September 30, 2013 and December 31, 2012, respectively.

The recorded investment of purchased non-covered loans receivable at September 30, 2013 and December 31, 2012 consisted of the following portfolio segments and classes:



	September 30, 2013			December 31, 2012
	(In thousands)
Commercial business:
Commercial and industrial	$	57,205		$	24,763
Owner-occupied commercial real estate	68,292			13,211
Non-owner occupied commercial real estate	51,427			11,019
Total commercial business	176,924			48,993
One-to-four family residential	11,798			3,040
Real estate construction and land development:
One-to-four family residential	339			513
Five or more family residential and commercial properties	3,837			864
Total real estate construction and land development	4,176			1,377
Consumer	12,591			10,713
Gross purchased non-covered loans receivable	205,489			64,123
Allowance for loan losses	(5,426		)	(5,117		)
Purchased non-covered loans receivable, net	$	200,063		$	59,006

The September 30, 2013 and December 31, 2012 gross recorded investment balance of purchased impaired non-covered loans accounted for under FASB ASC 310-30 was $39.5 million and $42.0 million, respectively. The recorded investment balance of purchased other non-covered loans was $166.0 million and $22.1 million at September 30, 2013 and December 31, 2012, respectively.

The loans purchased in the NCB and Valley Acquisitions on January 9, 2013 and July 15, 2013, respectively, are included in the purchased non-covered loans receivable balances shown above as of September 30, 2013. The estimated fair value of the purchased non-covered loans at the acquisition dates totaled $51.5 million and $117.1 million for NCB and Valley, respectively. The gross recorded investment balance of the NCB purchased impaired loans and the NCB purchased other loans was $4.5 million and $37.8 million at September 30, 2013, respectively. The gross recorded investment balance of the Valley purchased impaired loans and the Valley purchased other loans was $3.0 million and $110.6 million at September 30, 2013, respectively.

(b) Concentrations of Credit

Most of the Company’s lending activity occurs within Washington State, and to a lesser extent Oregon State. The Company’s primary market areas include Thurston, Pierce, King, Mason, Cowlitz and Clark counties in Washington and Multnomah County in Oregon, as well as other contiguous markets. The majority of the Company’s loan portfolio consists of (in order of balances at September 30, 2013) non-owner occupied commercial real estate, commercial and industrial and owner occupied commercial real estate. As of September 30, 2013 and December 31, 2012, 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 0 to 9, and a “W”. A description of the general characteristics of the risk grades is as follows:

•

Grades 0 to 5: These grades are considered “pass grade” and includes 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 financials and/or collateral may be appropriate. Loans with this grade show no immediate loss exposure.


•	Grade “W”: This grade is considered “pass grade” and includes loans on management’s “watch list” and 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 6: 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 7: This grade includes “Substandard” loans in accordance with regulatory guidelines, for 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 8: 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.

•

Grade 9: 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.

Loan grades for all commercial business loans and real estate construction and land development loans are established at the origination of the loan. One-to-four family residential loans and consumer loans (“non-commercial loans”) are not graded with a 0 to 9 at origination date as these loans are determined to be “pass graded” loans. These non-commercial loans may subsequently require a 0-9 risk grade if the credit department has evaluated the credit and determined it necessary to classify the loan. Loan grades are reviewed on a quarterly basis, or more frequently if necessary, by the credit department. 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 inherent losses in the portfolios, but to a lesser extent than the other loan grades. These pass graded loans may also have a zero percent loss based on historical experience and current market trends. 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 unpaid principal balances are generally charged-off to the realizable value.

The following tables present the balance of the originated loans receivable by credit quality indicator as of September 30, 2013 and December 31, 2012.



	September 30, 2013
	Pass		OAEM		Substandard		Doubtful		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	271,774	$	2,533	$	17,327	$	1,272	$	292,906
Owner-occupied commercial real estate	189,060		2,889		5,472		—		197,421
Non-owner occupied commercial real estate	336,533		4,510		6,348		—		347,391
Total commercial business	797,367		9,932		29,147		1,272		837,718
One-to-four family residential	38,746		270		886		—		39,902
Real estate construction and land development:
One-to-four family residential	11,420		4,534		4,100		—		20,054
Five or more family residential and commercial properties	36,319		—		2,385		—		38,704
Total real estate construction and land development	47,739		4,534		6,485		—		58,758
Consumer	27,560		—		467		2		28,029
Gross originated loans	$	911,412	$	14,736	$	36,985	$	1,274	$	964,407



	December 31, 2012
	Pass		OAEM		Substandard		Doubtful		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	254,593	$	3,908	$	18,157	$	582	$	277,240
Owner-occupied commercial real estate	181,630		2,658		4,206		—		188,494
Non-owner occupied commercial real estate	256,077		4,132		5,257		369		265,835
Total commercial business	692,300		10,698		27,620		951		731,569
One-to-four family residential	37,239		920		689		—		38,848
Real estate construction and land development:
One-to-four family residential	16,446		1,795		6,934		—		25,175
Five or more family residential and commercial properties	48,718		—		3,357		—		52,075
Total real estate construction and land development	65,164		1,795		10,291		—		77,250
Consumer	28,748		—		156		10		28,914
Gross originated loans	$	823,451	$	13,413	$	38,756	$	961	$	876,581

The tables above include $29.3 million and $27.5 million of originated impaired loans as of September 30, 2013 and December 31, 2012, respectively, as detailed in the impaired loans section below. These impaired loans have been individually reviewed for probable incurred losses and have a specific valuation allowance, as necessary. The tables above also include potential problem loans. Potential problem loans are those loans that are currently accruing interest and are not considered impaired, but which management is monitoring because the financial information of the borrower causes concern as to their ability to meet their loan repayment terms. Potential problem originated loans as of September 30, 2013 and December 31, 2012 were $26.6 million and $28.3 million, respectively. The balance of potential problem originated loans guaranteed by a governmental agency, which reduces the Company's credit exposure, was $1.7 million and $3.2 million as of September 30, 2013 and December 31, 2012, respectively.

The following tables present the recorded invested balance of the purchased covered and purchased noncovered loans receivable by credit quality indicator as of September 30, 2013 and December 31, 2012.



	September 30, 2013
	Pass		OAEM		Substandard		Doubtful		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	60,909	$	4,572	$	8,369	$	1,360	$	75,210
Owner-occupied commercial real estate	84,723		3,112		5,544		637		94,016
Non-owner occupied commercial real estate	53,139		1,176		8,632		3,381		66,328
Total commercial business	198,771		8,860		22,545		5,378		235,554
One-to-four family residential	12,735		889		2,971		—		16,595
Real estate construction and land development:
One-to-four family residential	495		—		1,739		—		2,234
Five or more family residential and commercial properties	2,593		—		1,097		147		3,837
Total real estate construction and land development	3,088		—		2,836		147		6,071
Consumer	14,079		342		1,383		921		16,725
Gross purchased covered and noncovered loans	$	228,673	$	10,091	$	29,735	$	6,446	$	274,945



	December 31, 2012
	Pass		OAEM		Substandard		Doubtful		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	40,577	$	1,753	$	6,809	$	1,405	$	50,544
Owner-occupied commercial real estate	40,676		2,390		4,676		265		48,007
Non-owner occupied commercial real estate	11,419		2,404		4,806		5,418		24,047
Total commercial business	92,672		6,547		16,291		7,088		122,598
One-to-four family residential	6,059		903		1,105		—		8,067
Real estate construction and land development:
One-to-four family residential	136		—		1,051		3,759		4,946
Five or more family residential and commercial properties	420		—		444		—		864
Total real estate construction and land development	556		—		1,495		3,759		5,810
Consumer	11,785		157		4,004		32		15,978
Gross purchased covered and noncovered loans	$	111,072	$	7,607	$	22,895	$	10,879	$	152,453

The tables above include $7.7 million and $2.2 million of purchased other impaired loans as of September 30, 2013 and December 31, 2012, respectively, as detailed in the impaired loans section below. These purchased other impaired loans have been individually reviewed for potential losses and have a specific valuation allowance, as necessary.

(d) Nonaccrual loans

Originated nonaccrual loans, segregated by segments and classes of loans, were as follows as of September 30, 2013 and December 31, 2012:



	September 30, 2013 (1)		December 31, 2012 (1)
	(In thousands)
Commercial business:
Commercial and industrial	$	4,441	$	4,560
Owner-occupied commercial real estate	844		563
Non-owner occupied commercial real estate	—		369
Total commercial business	5,285		5,492
One-to-four family residential	583		389
Real estate construction and land development:
One-to-four family residential	1,467		3,063
Five or more family residential and commercial properties	2,385		3,357
Total real estate construction and land development	3,852		6,420
Consumer	39		157
Gross originated nonaccrual loans	$	9,759	$	12,458


(1)	$1.9 million and $1.2 million of nonaccrual originated loans were guaranteed by governmental agencies at September 30, 2013 and December 31, 2012, respectively.

The recorded investment balance of purchased other nonaccrual loans, segregated by segments and classes of loans, were as follows as of September 30, 2013 and December 31, 2012:



	September 30, 2013 (1)		December 31, 2012 (1)
	(In thousands)
Commercial business:
Commercial and industrial	$	978	$	—
Owner-occupied commercial real estate	130		139
Non-owner occupied commercial real estate	883		437
Total commercial business	1,991		576
One-to-four family residential	—		61
Consumer	10		163
Gross purchased other nonaccrual loans	$	2,001	$	800


(1)	$7,000 and $39,000 of purchased other nonaccrual loans were covered by the FDIC shared-loss agreements at September 30, 2013 and December 31, 2012, respectively.

(e) Past due loans

The Company performs an aging analysis of past due loans using the categories of 30-89 days past due and 90 or more days past due. This policy is consistent with regulatory reporting requirements.

The balances of originated past due loans, segregated by segments and classes of loans, as of September 30, 2013 and December 31, 2012 were as follows:



	September 30, 2013
	30-89 Days		90 Days or Greater		Total Past Due		Current		Total		90 Days or More and Still Accruing
	(In thousands)
Commercial business:
Commercial and industrial	$	771	$	3,665	$	4,436	$	288,470	$	292,906	$	—
Owner-occupied commercial real estate	486		758		1,244		196,177		197,421		—
Non-owner occupied commercial real estate	516		—		516		346,875		347,391		—
Total commercial business	1,773		4,423		6,196		831,522		837,718		—
One-to-four family residential	—		583		583		39,319		39,902		—
Real estate construction and land development:
One-to-four family residential	—		1,467		1,467		18,587		20,054		—
Five or more family residential and commercial properties	—		—		—		38,704		38,704		—
Total real estate construction and land development	—		1,467		1,467		57,291		58,758		—
Consumer	645		—		645		27,384		28,029		—
Gross originated loans	$	2,418	$	6,473	$	8,891	$	955,516	$	964,407	$	—



	December 31, 2012
	30-89 Days		90 Days or Greater		Total Past Due		Current		Total		90 Days or More and Still Accruing
	(In thousands)
Commercial business:
Commercial and industrial	$	2,768	$	2,014	$	4,782	$	272,458	$	277,240	$	25
Owner-occupied commercial real estate	920		112		1,032		187,462		188,494		—
Non-owner occupied commercial real estate	92		369		461		265,374		265,835		—
Total commercial business	3,780		2,495		6,275		725,294		731,569		25
One-to-four family residential	239		375		614		38,234		38,848		—
Real estate construction and land development:
One-to-four family residential	847		3,242		4,089		21,086		25,175		179
Five or more family residential and commercial properties	—		3,018		3,018		49,057		52,075		—
Total real estate construction and land development	847		6,260		7,107		70,143		77,250		179
Consumer	68		146		214		28,700		28,914		10
Gross originated loans	$	4,934	$	9,276	$	14,210	$	862,371	$	876,581	$	214

The balances of purchased other past due loans, segregated by segments and classes of loans, as of September 30, 2013 and December 31, 2012 are as follows:



	September 30, 2013
	30-89 Days		90 Days or Greater		Total Past Due		Current		Total		90 Days or More and Still Accruing
	(In thousands)
Commercial business:
Commercial and industrial	$	29	$	223	$	252	$	46,197	$	46,449	$	—
Owner-occupied commercial real estate	333		—		333		74,888		75,221		—
Non-owner occupied commercial real estate	213		883		1,096		46,854		47,950		—
Total commercial business	575		1,106		1,681		167,939		169,620		—
One-to-four family residential	—		—		—		8,936		8,936		—
Real estate construction and land development:
One-to-four family residential	—		—		—		—		—		—
Five or more family residential and commercial properties	—		—		—		2,155		2,155		—
Total real estate construction and land development	—		—		—		2,155		2,155		—
Consumer	—		—		—		10,765		10,765		—
Gross purchased other loans	$	575	$	1,106	$	1,681	$	189,795	$	191,476	$	—



	December 31, 2012
	30-89 Days		90 Days or Greater		Total Past Due		Current		Total		90 Days or More and Still Accruing
	(In thousands)
Commercial business:
Commercial and industrial	$	—	$	—	$	—	$	11,981	$	11,981	$	—
Owner-occupied commercial real estate	662		—		662		25,748		26,410		—
Non-owner occupied commercial real estate	—		437		437		4,376		4,813		—
Total commercial business	662		437		1,099		42,105		43,204		—
One-to-four family residential	—		61		61		1,323		1,384		—
Real estate construction and land development:
One-to-four family residential	—		—		—		—		—		—
Five or more family residential and commercial properties	—		—		—		—		—		—
Total real estate construction and land development	—		—		—		—		—		—
Consumer	75		216		291		6,474		6,765		135
Gross purchased other loans	$	737	$	714	$	1,451	$	49,902	$	51,353	$	135

(f) Impaired loans

Originated impaired loans (including troubled debt restructured loans) at September 30, 2013 and December 31, 2012 are set forth in the following tables.



	September 30, 2013
	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	$	6,757	$	5,269	$	12,026	$	13,889	$	2,345
Owner-occupied commercial real estate	1,096		1,400		2,496		3,686		501
Non-owner occupied commercial real estate	2,610		4,147		6,757		6,757		1,307
Total commercial business	10,463		10,816		21,279		24,332		4,153
One-to-four family residential	837		—		837		849		—
Real estate construction and land development:
One-to-four family residential	4,810		—		4,810		6,402		—
Five or more family residential and commercial properties	2,385		—		2,385		2,385		—
Total real estate construction and land development	7,195		—		7,195		8,787		—
Consumer	—		39		39		40		39
Gross originated loans	$	18,495	$	10,855	$	29,350	$	34,008	$	4,192



	December 31, 2012
	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	$	7,797	$	2,643	$	10,440	$	10,741	$	858
Owner-occupied commercial real estate	633		1,418		2,051		2,134		509
Non-owner occupied commercial real estate	3,031		4,226		7,257		7,257		1,386
Total commercial business	11,461		8,287		19,748		20,132		2,753
One-to-four family residential	422		389		811		811		46
Real estate construction and land development:
One-to-four family residential	700		2,724		3,424		4,597		792
Five or more family residential and commercial properties	—		3,357		3,357		3,397		658
Total real estate construction and land development	700		6,081		6,781		7,994		1,450
Consumer	47		110		157		157		110
Gross originated loans	$	12,630	$	14,867	$	27,497	$	29,094	$	4,359

The Company had governmental guarantees of $3.0 million and $1.9 million related to the impaired originated loan balances at September 30, 2013 and December 31, 2012, respectively.

The average recorded investment of originated impaired loans (including troubled debt restructured loans) for the three and nine months ended September 30, 2013 and 2012 are set forth in the following table.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(In thousands)
Commercial business:
Commercial and industrial	$	12,407	$	12,162	$	12,132	$	11,628
Owner-occupied commercial real estate	2,546		1,675		2,399		2,057
Non-owner occupied commercial real estate	6,779		7,222		6,937		7,561
Total commercial business	21,732		21,059		21,468		21,246
One-to-four family residential	838		1,014		937		1,004
Real estate construction and land development:
One-to-four family residential	5,038		4,080		4,125		4,620
Five or more family residential and commercial properties	2,585		4,629		2,948		5,929
Total real estate construction and land development	7,623		8,709		7,073		10,549
Consumer	79		118		90		148
Gross impaired originated loans	$	30,272	$	30,900	$	29,568	$	32,947

Purchased other loans generally become impaired when classified as nonaccrual or when its modification results in a troubled debt restructure. Purchased other impaired loans (including troubled debt restructured loans) at September 30, 2013 and December 31, 2012 are set forth in the following tables.



	September 30, 2013
	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	$	432	$	5,234	$	5,666	$	5,564	$	1,329
Owner-occupied commercial real estate	158		—		158		153		—
Non-owner occupied commercial real estate	1,405		—		1,405		1,401		—
Total commercial business	1,995		5,234		7,229		7,118		1,329
One-to-four family residential	—		455		455		428		35
Consumer	7		3		10		11		3
Gross purchased other impaired loans	$	2,002	$	5,692	$	7,694	$	7,557	$	1,367



	December 31, 2012
	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	$	330	$	106	$	436	$	434	$	14
Owner-occupied commercial real estate	—		139		139		135		7
Non-owner occupied commercial real estate	437		536		973		926		18
Total commercial business	767		781		1,548		1,495		39
One-to-four family residential	—		527		527		489		105
Consumer	—		163		163		173		157
Gross purchased other impaired loans	$	767	$	1,471	$	2,238	$	2,157	$	301

The average recorded investment of purchased other impaired loans (including troubled debt restructured loans) for three and nine months ended September 30, 2013 and 2012 are set forth in the following table.



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(In thousands)
Commercial business:
Commercial and industrial	$	3,193	$	17	$	1,815	$	13
Owner-occupied commercial real estate	161		143		149		72
Non-owner occupied commercial real estate	1,186		978		1,079		598
Total commercial business	4,540		1,138		3,043		683
One-to-four family residential	457		234		476		117
Consumer	10		231		55		338
Gross impaired purchased other loans	$	5,007	$	1,603	$	3,574	$	1,138

For the three and nine months ended September 30, 2013 and 2012 no interest income was recognized subsequent to a loan’s classification as impaired.

(g) Troubled Debt Restructured Loans

A troubled debt restructured loan (“TDR”) is a restructuring in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. TDRs are considered impaired and are separately measured for impairment under FASB ASC 310-10-35, whether on accrual or nonaccrual status.

The recorded investment balance and related allowance for loan losses of accruing and non-accruing TDRs as of September 30, 2013 and December 31, 2012 were as follows:



	September 30, 2013				December 31, 2012
	Accruing TDRs		Non-Accruing TDRs		Accruing TDRs		Non-Accruing TDRs
	(In thousands)
Originated TDRs	$	19,590	$	3,983	$	15,039	$	9,311
Allowance for loan losses on originated TDRs	3,513		141		2,131		1,994
Purchased other TDRs	5,693		10		1,437		7
Allowance for loan losses on purchased other TDRs	958		3		76		2

The unfunded commitment to borrowers related to originated TDRs was $4.5 million and $1.5 million as of September 30, 2013 and December 31, 2012, respectively. There were $243,000 and $0 unfunded commitments to borrowers related to the purchased other TDRs as of September 30, 2013 and December 31, 2012, respectively. The increase in unfunded commitments related to TDRs was primarily due to the addition of one borrower relationship during the second quarter of 2013 with advancing availability on his construction loans.

Originated loans that were modified as TDRs during the three and nine months ended September 30, 2013 and 2012 are set forth in the following tables:



	Three Months Ended September 30,
	2013			2012
	Number of Contracts	Outstanding Principal Balance (1)(2)		Number of Contracts	Outstanding Principal Balance (1)(2)
	(Dollars in thousands)
Commercial business:
Commercial and industrial	10	$	1,582	7	$	1,315
Owner-occupied commercial real estate	1	198		2	1,052
Total commercial business	11	1,780		9	2,367
Real estate construction and land development:
One-to-four family residential	8	541		—	—
Total real estate construction and land development	8	541		—	—
Consumer	—	—		—	—
Total originated TDRs	19	$	2,321	9	$	2,367



	Nine Months Ended September 30,
	2013			2012
	Number of Contracts (1)	Outstanding Principal Balance (1)(2)		Number of Contracts (1)	Outstanding Principal Balance (1)(2)
	(Dollars in thousands)
Commercial business:
Commercial and industrial	25	$	5,287	23	$	4,524
Owner-occupied commercial real estate	1	198		3	1,247
Total commercial business	26	5,485		26	5,771
One-to-four family residential	1	254		—	—
Real estate construction and land development:
One-to-four family residential	23	3,343		1	180
Five or more family residential and commercial properties	1	2,385		—	—
Total real estate construction and land development	24	5,728		1	180
Consumer	1	39		—	—
Total originated TDRs	52	$	11,506	27	$	5,951


(1)	Number of contracts and outstanding principal balance represent loans which have balances as of period end dates as certain loans may have been paid-down or charged-off during the three and nine months ended September 30, 2013 and 2012.


(2)	Includes subsequent payments after modifications and reflects the balance as of the end of the period. The Bank’s recorded investment in each loan at the date of modification did not change as a result of the modification as the Bank did not forgive any principal or interest balance as part of the modification.

Of the 52 loans modified during the nine months ended September 30, 2013, twelve loans with a total outstanding principal balance of $4.8 million were previously reported as TDRs as of December 31, 2012. Of the 27 loans modified during the nine months ended September 30, 2012, nine loans with a total outstanding principal balance of $2.4 million were previously reported as TDRs as of December 31, 2011. The Bank typically grants shorter extension periods to continually monitor the troubled credits despite the fact that the extended date might not be the date the Bank expects the cash flow. The Company does not consider these modifications a subsequent default of a TDR as new loan terms, specifically 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 and adjusted, as necessary, in the current periods based on more recent information. The specific valuation allowance for TDRs that were modified during the nine months ended September 30, 2013 was $1.5 million at September 30, 2013. The specific valuation allowance for those TDRs that were previously reported as TDRs as of December 31, 2012 was $501,000 and the general allowance for loan losses for TDRs that were modified during the nine months ended September 30, 2013 that were not previously reported as TDRs was $240,000 as of December 31, 2012.

Purchased other loans that were modified as TDRs during the three and nine months ended September 30, 2013 and 2012 are set forth in the following tables:



	Three Months Ended September 30,
	2013			2012
	Number of Contracts	Outstanding Principal Balance (1)(2)		Number of Contracts	Outstanding Principal Balance (1)(2)
	(Dollars in thousands)
Commercial business:
Commercial and industrial	4	$	4,176	—	$	—
Total commercial business	4	4,176		—	—
One-to-four family residential	—	—		1	468
Total purchased other TDRs	4	$	4,176	1	$	468



	Nine Months Ended September 30,
	2013			2012
	Number of Contracts (1)	Outstanding Principal Balance (1)(2)		Number of Contracts (1)	Outstanding Principal Balance (1)(2)
	(Dollars in thousands)
Commercial business:
Commercial and industrial	5	$	4,300	1	$	17
Owner occupied commercial real estate	1	28		—	—
Non-owner occupied commercial real estate	—	—		1	540
Total commercial business	6	4,328		2	557
One-to-four family residential	—	—		1	468
Consumer	1	3		—	—
Total purchased other TDRs	7	$	4,331	3	$	1,025


(1)	Number of contracts and outstanding principal balance represent loans which have balances as of period end dates as certain loans may have been paid-down or charged-off during the three and nine months ended September 30, 2013 and 2012.


(2)	Includes subsequent payments after modifications and reflects the balance as of the end of the period. The Bank’s initial recorded investment in the loans did not change as a result of the modifications as the Bank did not forgive any principal or interest balance as part of the modifications.

The majority of the Bank’s TDRs are a result of granting extensions to troubled credits which have already been adversely classified. We grant such extensions to reassess the borrower’s financial status and to develop a plan for repayment. Certain modifications with extensions also include interest rate reductions, which is the second most prevalent concession. Certain TDRs 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 TDRs, 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 TDRs using the same guidance as used for other impaired loans.

There were two originated commercial and industrial TDRs with a principal balance totaling $702,000 that had been modified during the previous twelve months ended that subsequently defaulted during the three and nine months ended September 30, 2013. Both of these loans defaulted because they were past their modified maturity date. The Bank recorded a $52,000 specific reserve for these defaulted TDRs as of September 30, 2013.

There were no originated TDRs that had been modified during the previous twelve months ended that subsequently defaulted during the three and nine months ended September 30, 2012.

There were no purchased other TDRs that had been modified during the previous twelve months ended that subsequently defaulted during the three and nine months ended September 30, 2013 and 2012.

(h) Purchased Impaired Loans

As indicated above, the Company purchased impaired loans from the Cowlitz, Pierce, NCB and Valley Acquisitions which are accounted for under FASB ASC 310-30.

The following tables reflect the outstanding balance at September 30, 2013 and December 31, 2012 of the purchased impaired loans by acquisition:



	Cowlitz Bank
	September 30, 2013		December 31, 2012
	(In thousands)
Commercial business:
Commercial and industrial	$	14,267	$	21,624
Owner-occupied commercial real estate	12,668		17,157
Non-owner occupied commercial real estate	11,693		12,908
Total commercial business	38,628		51,689
One-to-four family residential	3,997		4,262
Real estate construction and land development:
One-to-four family residential	1,664		6,122
Five or more family residential and commercial properties	—		—
Total real estate construction and land development	1,664		6,122
Consumer	2,332		3,533
Gross purchased impaired covered loans	$	46,621	$	65,606

The total balance of subsequent advances on the purchased impaired covered loans was $5.1 million and $3.8 million as of September 30, 2013 and December 31, 2012, respectively. The Bank has the option to modify certain purchased covered loans which may terminate the FDIC shared-loss coverage on those modified loans. At both September 30, 2013 and December 31, 2012, the recorded investment balance of purchased impaired covered loans which are no longer covered under the FDIC shared-loss agreements was $1.7 million. The Bank continues to report these loans in the covered portfolio as they are in a pool and they continue to be accounted for under FASB ASC 310-30. The FDIC indemnification asset has been properly adjusted to reflect the change in the loan status.



	Pierce Commercial Bank
	September 30, 2013		December 31, 2012
	(In thousands)
Commercial business:
Commercial and industrial	$	16,876	$	21,953
Owner-occupied commercial real estate	5,252		5,748
Non-owner occupied commercial real estate	4,924		7,802
Total commercial business	27,052		35,503
One-to-four family residential	4,081		3,303
Real estate construction and land development:
One-to-four family residential	2,403		3,375
Five or more family residential and commercial properties	470		820
Total real estate construction and land development	2,873		4,195
Consumer	1,174		4,393
Gross purchased impaired non-covered loans	$	35,180	$	47,394



	NCB		Valley
	September 30, 2013 (1)
	(In thousands)
Commercial business:
Commercial and industrial	$	1,594	$	883
Owner-occupied commercial real estate	1,862		512
Non-owner occupied commercial real estate	2,036		—
Total commercial business	5,492		1,395
One-to-four family residential	—		366
Real estate construction and land development:
Five or more family residential and commercial properties	609		432
Total real estate construction and land development	609		432
Consumer	83		1,449
Gross purchased impaired non-covered loans	$	6,184	$	3,642


(1)	The NCB Acquisition was completed on January 9, 2013 and the Valley Acquisition was completed on July 15, 2013.

On the acquisition dates, the amount by which the undiscounted expected cash flows of the purchased impaired loans exceeded the estimate 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 purchased impaired loan.

The following tables summarize the accretable yield on the purchased impaired loans resulting from the Cowlitz, Pierce, NCB and Valley Acquisitions for the three and nine months ended September 30, 2013 and 2012. As the NCB and Valley Acquisitions were completed in 2013, there are no balances for the three or nine months ended September 30, 2012.



	Three Months Ended September 30, 2013
	Cowlitz Bank			Pierce Commercial Bank			NCB (1)			Valley (1)			Total
	(In thousands)
Balance at the beginning of period	$	13,269		$	7,724		$	639		$	—		$	21,632
Accretion	(931		)	(944		)	(110		)	(13		)	(1,998		)
Disposal and other	(3,270		)	(203		)	47			(58		)	(3,484		)
Change in accretable yield	1,873			880			289			271			3,313
Balance at the end of period	$	10,941		$	7,457		$	865		$	200		$	19,463



	Nine Months Ended September 30, 2013
	Cowlitz Bank			Pierce Commercial Bank			NCB (1)			Valley (1)			Total
	(In thousands)
Balance at the beginning of period	$	14,286		$	7,352		$	—		$	—		$	21,638
Accretion	(3,394		)	(3,277		)	(200		)	(13		)	(6,884		)
Disposal and other	(2,768		)	1,859			31			(58		)	(936		)
Change in accretable yield	2,817			1,523			1,034			271			5,645
Balance at the end of period	$	10,941		$	7,457		$	865		$	200		$	19,463



	Three Months Ended September 30, 2012						Nine Months Ended September 30, 2012
	Cowlitz Bank			Pierce Commercial Bank			Cowlitz Bank			Pierce Commercial Bank
	(In thousands)
Balance at the beginning of period	$	16,564		$	11,815		$	19,912		$	14,638
Accretion	(1,514		)	(1,578		)	(5,173		)	(4,734		)
Disposals and other	(535		)	(1,175		)	(921		)	(1,919		)
Change in accretable yield	882			873			1,579			1,950
Balance at the end of period	$	15,397		$	9,935		$	15,397		$	9,935

(1)

For the NCB Acquisition, the contractual cash flows were $8.5 million and the expected cash flows were $5.6 million, resulting in a non-accretable difference of $2.9 million. As the fair value of these purchased impaired loans at the January 9, 2013 NCB Acquisition date was $4.9 million, this provides an accretable yield of $745,000, which the Company included in the change in accretable yield in the quarter of acquisition.

For the Valley Acquisition, the contractual cash flows were $5.1 million and the expected cash flows were $4.4 million, resulting in a non-accretable difference of $692,000. As the fair value of these purchased impaired loans at the July 15, 2013 Valley Acquisition date was $4.1 million, this provides an accretable yield of $271,000, which the Company included in the change in accretable yield in the quarter of acquisition.