Loans Receivable

The Company originates loans in the ordinary course of business and has also acquired loans through FDIC-assisted and open bank transactions. Disclosures related to the Company's recorded investment in loans receivable generally exclude accrued interest receivable and net deferred costs because they are insignificant.

Loans acquired in a business combination are further classified as “purchased” 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 "PCI" 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, and are referred to as "non-PCI" loans.

(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 potential problem 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 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, loss given default is potentially greater because the value of the collateral securing these loans is more difficult to quantify.

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 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 June 30, 2017 and December 31, 2016 consisted of the following portfolio segments and classes:



	June 30, 2017			December 31, 2016
	(In thousands)
Commercial business:
Commercial and industrial	$	659,621		$	637,773
Owner-occupied commercial real estate	586,236			558,035
Non-owner occupied commercial real estate	904,195			880,880
Total commercial business	2,150,052			2,076,688
One-to-four family residential	80,941			77,391
Real estate construction and land development:
One-to-four family residential	49,479			50,414
Five or more family residential and commercial properties	135,959			108,764
Total real estate construction and land development	185,438			159,178
Consumer	330,215			325,140
Gross loans receivable	2,746,646			2,638,397
Net deferred loan costs	2,861			2,352
Loans receivable, net	2,749,507			2,640,749
Allowance for loan losses	(32,751		)	(31,083		)
Total loans receivable, net	$	2,716,756		$	2,609,666

(b) Concentrations of Credit

Most of the Company’s lending activity occurs within Washington State and to a lesser extent Oregon. The Company’s primary market areas are concentrated along the I-5 corridor from Whatcom County to Clark County in Washington State 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 June 30, 2017) non-owner occupied commercial real estate, commercial and industrial and owner-occupied commercial real estate. As of June 30, 2017 and December 31, 2016, 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. 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 June 30, 2017 and December 31, 2016.



	June 30, 2017
	Pass		OAEM		Substandard		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	619,060	$	9,349	$	31,212	$	659,621
Owner-occupied commercial real estate	561,816		6,198		18,222		586,236
Non-owner occupied commercial real estate	872,877		14,157		17,161		904,195
Total commercial business	2,053,753		29,704		66,595		2,150,052
One-to-four family residential	79,602		—		1,339		80,941
Real estate construction and land development:
One-to-four family residential	44,510		493		4,476		49,479
Five or more family residential and commercial properties	133,102		1,128		1,729		135,959
Total real estate construction and land development	177,612		1,621		6,205		185,438
Consumer	325,000		—		5,215		330,215
Gross loans receivable	$	2,635,967	$	31,325	$	79,354	$	2,746,646



	December 31, 2016
	Pass		OAEM		Substandard		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	601,273	$	5,048	$	31,452	$	637,773
Owner-occupied commercial real estate	532,585		4,437		21,013		558,035
Non-owner occupied commercial real estate	841,383		14,573		24,924		880,880
Total commercial business	1,975,241		24,058		77,389		2,076,688
One-to-four family residential	76,020		—		1,371		77,391
Real estate construction and land development:
One-to-four family residential	44,752		500		5,162		50,414
Five or more family residential and commercial properties	105,723		1,150		1,891		108,764
Total real estate construction and land development	150,475		1,650		7,053		159,178
Consumer	320,140		—		5,000		325,140
Gross loans receivable	$	2,521,876	$	25,708	$	90,813	$	2,638,397

Potential problem loans are loans classified as OAEM or worse 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 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 June 30, 2017 and December 31, 2016 were $84.1 million and $87.8 million, respectively. The balance of potential problem loans guaranteed by a governmental agency, which guarantee reduces the Company's credit exposure, was $3.5 million and $1.1 million as of June 30, 2017 and December 31, 2016, respectively.

(d) Nonaccrual Loans

Nonaccrual loans, segregated by segments and classes of loans, were as follows as of June 30, 2017 and December 31, 2016:



	June 30, 2017		December 31, 2016
	(In thousands)
Commercial business:
Commercial and industrial	$	3,613	$	3,531
Owner-occupied commercial real estate	3,795		3,728
Non-owner occupied commercial real estate	1,271		1,321
Total commercial business	8,679		8,580
One-to-four family residential	87		94
Real estate construction and land development:
One-to-four family residential	2,008		2,008
Five or more family residential and commercial properties	—		—
Total real estate construction and land development	2,008		2,008
Consumer	199		227
Nonaccrual loans	$	10,973	$	10,909

The Company had $1.6 million and $2.8 million of nonaccrual loans guaranteed by governmental agencies at June 30, 2017 and December 31, 2016, respectively.

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 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 past due loans, segregated by segments and classes of loans, as of June 30, 2017 and December 31, 2016 were as follows:



	June 30, 2017
	30-89 Days		90 Days or Greater		Total Past Due		Current		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	440	$	1,866	$	2,306	$	657,315	$	659,621
Owner-occupied commercial real estate	—		1,338		1,338		584,898		586,236
Non-owner occupied commercial real estate	—		3,052		3,052		901,143		904,195
Total commercial business	440		6,256		6,696		2,143,356		2,150,052
One-to-four family residential	—		—		—		80,941		80,941
Real estate construction and land development:
One-to-four family residential	100		865		965		48,514		49,479
Five or more family residential and commercial properties	366		—		366		135,593		135,959
Total real estate construction and land development	466		865		1,331		184,107		185,438
Consumer	1,442		673		2,115		328,100		330,215
Gross loans receivable	$	2,348	$	7,794	$	10,142	$	2,736,504	$	2,746,646



	December 31, 2016
	30-89 Days		90 Days or Greater		Total Past Due		Current		Total
	(In thousands)
Commercial business:
Commercial and industrial	$	2,687	$	1,733	$	4,420	$	633,353	$	637,773
Owner-occupied commercial real estate	1,807		2,915		4,722		553,313		558,035
Non-owner occupied commercial real estate	733		—		733		880,147		880,880
Total commercial business	5,227		4,648		9,875		2,066,813		2,076,688
One-to-four family residential	523		—		523		76,868		77,391
Real estate construction and land development:
One-to-four family residential	90		2,008		2,098		48,316		50,414
Five or more family residential and commercial properties	—		377		377		108,387		108,764
Total real estate construction and land development	90		2,385		2,475		156,703		159,178
Consumer	2,292		105		2,397		322,743		325,140
Gross loans receivable	$	8,132	$	7,138	$	15,270	$	2,623,127	$	2,638,397

There were no loans 90 days or more past due that were still accruing interest as of June 30, 2017 or December 31, 2016, excluding PCI loans.

(f) Impaired loans

Impaired loans include nonaccrual loans and performing troubled debt restructured ("TDR") loans. The balances of impaired loans as of June 30, 2017 and December 31, 2016 are set forth in the following tables.



	June 30, 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	$	1,912	$	8,930	$	10,842	$	11,311	$	1,338
Owner-occupied commercial real estate	1,094		3,726		4,820		5,083		696
Non-owner occupied commercial real estate	4,796		6,495		11,291		11,410		907
Total commercial business	7,802		19,151		26,953		27,804		2,941
One-to-four family residential	—		310		310		316		95
Real estate construction and land development:
One-to-four family residential	1,671		1,082		2,753		3,438		59
Five or more family residential and commercial properties	—		1,062		1,062		1,063		64
Total real estate construction and land development	1,671		2,144		3,815		4,501		123
Consumer	—		259		259		280		66
Total	$	9,473	$	21,864	$	31,337	$	32,901	$	3,225



	December 31, 2016
	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	$	1,739	$	10,636	$	12,375	$	13,249	$	1,199
Owner-occupied commercial real estate	1,150		3,574		4,724		5,107		511
Non-owner occupied commercial real estate	4,905		6,413		11,318		11,386		797
Total commercial business	7,794		20,623		28,417		29,742		2,507
One-to-four family residential	—		321		321		325		97
Real estate construction and land development:
One-to-four family residential	2,243		828		3,071		3,755		6
Five or more family residential and commercial properties	—		1,079		1,079		1,079		60
Total real estate construction and land development	2,243		1,907		4,150		4,834		66
Consumer	48		262		310		325		64
Total	$	10,085	$	23,113	$	33,198	$	35,226	$	2,734

The Company had governmental guarantees of $1.9 million and $3.5 million related to the impaired loan balances at June 30, 2017 and December 31, 2016, respectively.

The average recorded investment of impaired loans for the three and six months ended June 30, 2017 and 2016 are set forth in the following table.



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(In thousands)
Commercial business:
Commercial and industrial	$	6,925	$	10,192	$	8,742	$	9,933
Owner-occupied commercial real estate	3,278		5,209		3,760		4,904
Non-owner occupied commercial real estate	11,252		11,665		11,274		11,287
Total commercial business	21,455		27,066		23,776		26,124
One-to-four family residential	312		269		315		271
Real estate construction and land development:
One-to-four family residential	2,636		3,310		2,781		3,438
Five or more family residential and commercial properties	1,067		1,816		1,070		1,864
Total real estate construction and land development	3,703		5,126		3,851		5,302
Consumer	235		977		260		716
Total	$	25,705	$	33,438	$	28,202	$	32,413

For the three and six months ended June 30, 2017 and 2016, no interest income was recognized subsequent to a loan’s classification as nonaccrual. For the three and six months ended June 30, 2017, the Bank recorded $281,000 and $646,000, respectively, of interest income related to performing TDR loans. For the three and six months ended June 30, 2016, the Bank recorded $167,000 and $345,000, respectively, of interest income related to performing TDR loans.

(g) Troubled Debt Restructured Loans

A TDR loan 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 ("performing") or nonaccrual ("nonperforming") status. The Company has more stringent definitions of concessions and impairment measures for PCI loans as these loans have known credit deterioration and are generally accreting income at a lower discounted rate as compared to the contractual note rate based on the guidance of FASB ASC 310-30.

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 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 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 TDRs 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 June 30, 2017 and December 31, 2016 were as follows:



	June 30, 2017				December 31, 2016
	Performing TDRs		Nonaccrual TDRs		Performing TDRs		Nonaccrual TDRs
	(In thousands)
TDR loans	$	20,364	$	6,455	$	22,288	$	6,900
Allowance for loan losses on TDR loans	2,163		432		1,965		437

The unfunded commitment to borrowers related to TDRs was $129,000 and $249,000 at June 30, 2017 and December 31, 2016, respectively.

Loans that were modified as TDRs during the three and six months ended June 30, 2017 and 2016 are set forth in the following tables:



	Three Months Ended June 30,
	2017			2016
	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	$	3,439	5	$	325
Non-owner occupied commercial real estate	1	947		—	—
Total commercial business	6	4,386		5	325
Real estate construction and land development:
One-to-four family residential	2	745		0	—
Five or more family residential and commercial properties	—	—		1	1,633
Total real estate construction and land development	2	745		1	1,633
Consumer	1	10		2	28
Total TDR loans	9	$	5,141	8	$	1,986



	Six Months Ended June 30,
	2017			2016
	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	10	$	4,913	13	$	1,225
Owner-occupied commercial real estate	1	54		0	—
Non-owner occupied commercial real estate	1	948		1	834
Total commercial business	12	5,915		14	2,059
Real estate construction and land development:
One-to-four family residential	4	1,889		5	2,349
Five or more family residential and commercial properties	—	—		1	1,633
Total real estate construction and land development	4	1,889		6	3,982
Consumer	2	18		5	67
Total TDR loans	18	$	7,822	25	$	6,108


(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 three and six months ended June 30, 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).

Of the nine loans modified during the three months ended June 30, 2017, six loans with a total outstanding principal balance of $2.8 million had no prior modifications. Of the 18 loans modified during the six months ended June 30, 2017, 11 loans with a total outstanding principal balance of $4.0 million had no prior modifications. Of the eight loans modified during the three months ended June 30, 2016, three loans with a total outstanding principal balance of $61,000 had no prior modifications. Of the 25 loans modified during the six months ended June 30, 2016, ten loans with a total outstanding principal balance of $571,000 had no prior modifications. The remaining loans included in the table above for the three and six months ended June 30, 2017 and 2016 were previously reported as TDRs. The Bank typically grants shorter extension periods to continually monitor these TDRs despite the fact that the extended date might not be the date the Bank expects sufficient cash flow from these borrowers. The Company 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 and are adjusted, as necessary, in the current period based on more recent information. The related specific valuation allowance at June 30, 2017 was $776,000 for loans that were modified as TDRs during the six months ended June 30, 2017.

There was one commercial and industrial loan and three consumer loans of $234,000 and $36,000, respectively, at June 30, 2017 that were modified during the previous twelve months that subsequently defaulted during the three and six months ended June 30, 2017 because the borrowers were more than 90 days delinquent on their scheduled payments. There were no loans that were modified during the previous twelve months that subsequently defaulted during the three and six months ended June 30, 2016.

(h) Purchased Credit Impaired Loans

The Company acquired loans and designated them as PCI loans, which are accounted for under FASB ASC 310-30, in the Washington Banking Merger on May 1, 2014 and in previously completed acquisitions, including the FDIC-assisted acquisitions of Cowlitz Bank ("Cowlitz") and Pierce Commercial Bank ("Pierce") on July 30, 2010 and November 8, 2010, respectively, and the acquisitions of Northwest Commercial Bank ("NCB") on January 9, 2013 and Valley Community Bancshares, Inc. ("Valley") on July 15, 2013.

The following table reflects the outstanding principal balance and recorded investment of the PCI loans at June 30, 2017 and December 31, 2016:



	June 30, 2017				December 31, 2016
	Outstanding Principal		Recorded Investment		Outstanding Principal		Recorded Investment
	(In thousands)
Commercial business:
Commercial and industrial	$	11,263	$	7,425	$	13,067	$	9,317
Owner-occupied commercial real estate	14,201		13,035		17,639		15,973
Non-owner occupied commercial real estate	18,173		16,800		25,037		23,360
Total commercial business	43,637		37,260		55,743		48,650
One-to-four family residential	4,553		4,367		5,120		4,905
Real estate construction and land development:
One-to-four family residential	2,759		1,975		2,958		2,123
Five or more family residential and commercial properties	2,421		2,322		2,614		2,488
Total real estate construction and land development	5,180		4,297		5,572		4,611
Consumer	4,267		5,362		5,296		6,282
Gross PCI loans	$	57,637	$	51,286	$	71,731	$	64,448

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 three and six months ended June 30, 2017 and 2016.



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(In thousands)
Balance at the beginning of the period	$	13,132		$	16,276		$	13,860		$	17,592
Accretion	(935		)	(1,305		)	(1,929		)	(2,722		)
Disposal and other	(653		)	(821		)	(1,143		)	(2,430		)
Change in accretable yield	752			1,209			1,508			2,919
Balance at the end of the period	$	12,296		$	15,359		$	12,296		$	15,359