Loans and Credit Quality

The following table presents total portfolio loans by portfolio segment and class of financing receivable, based on our asset quality rating ("AQR") criteria:



(In Thousands)	Commercial		Real estate construction one-to-four family		Real estate construction other		Real estate term owner occupied		Real estate term non-owner occupied		Real estate term other		Consumer secured by 1st deeds of trust		Consumer other		Total
March 31, 2017
AQR Pass		$243,330		$26,029		$67,975		$133,657		$354,217		$41,560		$21,292		$23,947		$912,007
AQR Special Mention	3,622		—		—		1,098		11,334		—		968		51		17,073
AQR Substandard	28,857		—		—		5,347		703		658		502		78		36,145
Subtotal		$275,809		$26,029		$67,975		$140,102		$366,254		$42,218		$22,762		$24,076		$965,225
Less: Unearned origination fees, net of origination costs																	(4,393		)
Total loans																		$960,832
December 31, 2016
AQR Pass		$257,639		$26,061		$72,159		$135,359		$355,903		$44,733		$22,568		$25,151		$939,573
AQR Special Mention	1,950		—		—		57		—		—		501		78		2,586
AQR Substandard	18,589		—		—		16,762		698		669		520		52		37,290
Subtotal		$278,178		$26,061		$72,159		$152,178		$356,601		$45,402		$23,589		$25,281		$979,449
Less: Unearned origination fees, net of origination costs																	(4,434		)
Total loans																		$975,015

Loans are carried at their principal amount outstanding, net of charge-offs, unamortized fees and direct loan origination costs. Loan balances are charged-off to the allowance for loan losses ("Allowance") when management believes that collection of principal is unlikely. Interest income on loans is accrued and recognized on the principal amount outstanding except for loans in a nonaccrual status. All classes of loans are placed on nonaccrual and considered impaired when management believes doubt exists as to the collectability of the interest or principal. Cash payments received on nonaccrual loans are directly applied to the principal balance. Generally, a loan may be returned to accrual status when the delinquent principal and interest is brought current in accordance with the terms of the loan agreement. Additionally, certain ongoing performance criteria, which generally includes a performance period of six months, must be met in order for a loan to be returned to accrual status. Loans are reported as past due when installment payments, interest payments, or maturity payments are past due based on contractual terms.

Nonaccrual loans: Nonaccrual loans net of government guarantees totaled $12.0 million and $12.5 million at March 31, 2017 and December 31, 2016, respectively. Nonaccrual loans at the periods indicated, by segment, are presented below:



(In Thousands)	30-59 Days Past Due		60-89 Days Past Due			Greater Than 90 Days Past Due			Current		Total
March 31, 2017
Commercial		$28		$427			$5,357			$7,393		$13,205
Real estate term non-owner occupied	—		—			109			—		109
Real estate term other	—		—			6			—		6
Consumer secured by 1st deeds of trust	—		—			167			—		167
Consumer other	—		—			26			—		26
Total nonperforming loans	28		427			5,665			7,393		13,513
Government guarantees on nonaccrual loans	—		(65		)	(1,413		)	—		(1,478		)
Net nonaccrual loans		$28		$362			$4,252			$7,393		$12,035
December 31, 2016
Commercial		$8,750		$—			$4,208			$542		$13,500
Real estate term owner occupied	—		—			—			29		29
Real estate term non-owner occupied	—		—			—			197		197
Consumer secured by 1st deeds of trust	—		—			167			—		167
Total nonperforming loans	8,750		—			4,375			768		13,893
Government guarantees on nonaccrual loans	—		—			(1,413		)	—		(1,413		)
Net nonaccrual loans		$8,750		$—			$2,962			$768		$12,480

Past Due Loans: Past due loans and nonaccrual loans at the periods indicated are presented below by segment:



(In Thousands)	30-59 Days Past Due Still Accruing		60-89 Days Past Due Still Accruing		Greater Than 90 Days Still Accruing		Total Past Due		Nonaccrual		Current		Total
March 31, 2017
Commercial		$442		$7		$393		$842		$13,205		$261,762		$275,809
Real estate construction one-to-four family	—		—		—		—		—		26,029		26,029
Real estate construction other	—		—		—		—		—		67,975		67,975
Real estate term owner occupied	249		—		—		249		—		139,853		140,102
Real estate term non-owner occupied	—		—		—		—		109		366,145		366,254
Real estate term other	—		—		—		—		6		42,212		42,218
Consumer secured by 1st deed of trust	1,136		113		142		1,391		167		21,204		22,762
Consumer other	91		—		52		143		26		23,907		24,076
Subtotal		$1,918		$120		$587		$2,625		$13,513		$949,087		$965,225
													(4,393		)
Total														$960,832
December 31, 2016
Commercial		$—		$141		$404		$545		$13,500		$264,133		$278,178
Real estate construction one-to-four family	—		—		—		—		—		26,061		26,061
Real estate construction other	—		—		—		—		—		72,159		72,159
Real estate term owner occupied	887		—		—		887		29		151,262		152,178
Real estate term non-owner occupied	—		—		—		—		197		356,404		356,601
Real estate term other	—		—		—		—		—		45,402		45,402
Consumer secured by 1st deed of trust	390		518		—		908		167		22,514		23,589
Consumer other	171		80		52		303		—		24,978		25,281
Subtotal		$1,448		$739		$456		$2,643		$13,893		$962,913		$979,449
													(4,434		)
Total														$975,015

Impaired Loans: The Company considers a loan to be impaired when it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement. Once a loan is determined to be impaired, the impairment is measured based on the present value of the expected future cash flows discounted at the loan’s effective interest rate, except that if the loan is collateral dependent, the impairment is measured by using the fair value of the loan’s collateral. Nonperforming loans greater than $50,000 are individually evaluated for impairment based upon the borrower’s overall financial condition, resources, and payment record, and the prospects for support from any financially responsible guarantors.

At March 31, 2017 and December 31, 2016, the recorded investment in loans that are considered to be impaired was $37.3 million and $38.7 million, respectively. The following table presents information about impaired loans by class as of the periods indicated:



(In Thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
March 31, 2017
With no related allowance recorded
Commercial - AQR special mention		$51		$51		$—
Commercial - AQR substandard	17,478		18,158		—
Real estate term owner occupied- AQR pass	249		249		—
Real estate term owner occupied- AQR substandard	5,311		5,311		—
Real estate term non-owner occupied- AQR pass	377		377		—
Real estate term non-owner occupied- AQR substandard	698		698		—
Real estate term other - AQR pass	614		614		—
Real estate term other - AQR substandard	658		658		—
Consumer secured by 1st deeds of trust - AQR special mention	141		141		—
Consumer secured by 1st deeds of trust - AQR substandard	455		471		—
Consumer other - AQR substandard	52		52		—
Subtotal		$26,084		$26,780		$—



With an allowance recorded
Commercial - AQR substandard	$11,234	$11,234	$994
Subtotal	$11,234	$11,234	$994



Total
Commercial - AQR special mention		$51		$51		$—
Commercial - AQR substandard	28,712		29,392		994
Real estate term owner-occupied - AQR pass	249		249		—
Real estate term owner-occupied - AQR substandard	5,311		5,311		—
Real estate term non-owner occupied - AQR pass	377		377		—
Real estate term non-owner occupied - AQR substandard	698		698		—
Real estate term other - AQR pass	614		614		—
Real estate term other - AQR substandard	658		658		—
Consumer secured by 1st deeds of trust - AQR special mention	141		141		—
Consumer secured by 1st deeds of trust - AQR substandard	455		471		—
Consumer other - AQR substandard	52		52		—
Total		$37,318		$38,014		$994



(In Thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
December 31, 2016
With no related allowance recorded
Commercial - AQR special mention		$223		$223		$—
Commercial - AQR substandard	9,213		9,893		—
Real estate term owner occupied - AQR pass	252		252		—
Real estate term owner occupied - AQR substandard	16,694		16,694		—
Real estate term non-owner occupied - AQR pass	391		391		—
Real estate term non-owner occupied - AQR substandard	693		693		—
Real estate term other - AQR pass	633		633		—
Real estate term other - AQR substandard	669		669		—
Consumer secured by 1st deeds of trust - AQR pass	143		143		—
Consumer secured by 1st deeds of trust - AQR substandard	472		488		—
Consumer other - AQR substandard	52		52		—
Subtotal		$29,435		$30,131		$—



With an allowance recorded
Commercial - AQR substandard	$9,221	$9,221	$614
Subtotal	$9,221	$9,221	$614



Total
Commercial - AQR special mention		$223		$223		$—
Commercial - AQR substandard	18,434		19,114		614
Real estate term owner occupied - AQR pass	252		252		—
Real estate term owner occupied - AQR substandard	16,694		16,694		—
Real estate term non-owner occupied - AQR pass	391		391		—
Real estate term non-owner occupied - AQR substandard	693		693		—
Real estate term other - AQR pass	633		633		—
Real estate term other - AQR special mention	669		669		—
Consumer secured by 1st deeds of trust - AQR pass	143		143		—
Consumer secured by 1st deeds of trust - AQR substandard	472		488		—
Consumer other - AQR substandard	52		52		—
Total		$38,656		$39,352		$614

The unpaid principal balance included in the tables above represents the recorded investment at the dates indicated, plus amounts charged off for book purposes.

The following tables summarize our average recorded investment and interest income recognized on impaired loans for the three month periods ended March 31, 2017 and 2016, respectively:



Three Months Ended March 31,	2017						2016
(In Thousands)	Average Recorded Investment		Interest Income Recognized			Average Recorded Investment			Interest Income Recognized
With no related allowance recorded
Commercial - AQR special mention		$52			$1			$155			$3
Commercial - AQR substandard	17,544			76			16,589			197
Real estate construction one-to-four family - AQR substandard	—			—			3,972			—
Real estate construction other - AQR substandard	—			—			1,912			—
Real estate term owner occupied- AQR pass	250			5			749			14
Real estate term owner occupied- AQR substandard	5,325			84			16,401			236
Real estate term non-owner occupied- AQR pass	384			14			470			19
Real estate term non-owner occupied- AQR substandard	696			20			237			—
Real estate term other - AQR pass	624			11			543			12
Real estate term other - AQR special mention	—			—			90			2
Real estate term other - AQR substandard	663			11			—			—
Consumer secured by 1st deeds of trust - AQR pass	—			—			76			1
Consumer secured by 1st deeds of trust - AQR special mention	142			3			—			—
Consumer secured by 1st deeds of trust - AQR substandard	455			3			467			3
Consumer other - AQR substandard	52			1			—			—
Subtotal		$26,187			$229			$41,661			$487



With an allowance recorded
Commercial - AQR substandard	$11,285	$—	$594	$—
Subtotal	$11,285	$—	$594	$—



Total
Commercial - AQR special mention		$52		$1		$155		$3
Commercial - AQR substandard	28,829		76		17,183		197
Real estate construction one-to-four family - AQR substandard	—		—		3,972		—
Real estate construction other - AQR substandard	—		—		1,912		—
Real estate term owner-occupied - AQR pass	250		5		749		14
Real estate term owner-occupied - AQR substandard	5,325		84		16,401		236
Real estate term non-owner occupied - AQR pass	384		14		470		19
Real estate term non-owner occupied - AQR substandard	696		20		237		—
Real estate term other - AQR pass	624		11		543		12
Real estate term other - AQR special mention	—		—		90		2
Real estate term other - AQR substandard	663		11		—		—
Consumer secured by 1st deeds of trust - AQR pass	—		—		76		1
Consumer secured by 1st deeds of trust - AQR special mention	142		3		—		—
Consumer secured by 1st deeds of trust - AQR substandard	455		3		467		3
Consumer other - AQR substandard	52		1		—		—
Total Impaired Loans		$37,472		$229		$42,255		$487

Purchased Credit Impaired Loans: The Company acquired 18 purchased credit impaired loans in connection with its acquisition of Alaska Pacific Bancshares, Inc. on April 1, 2014 subject to the requirements of FASB ASC 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality. This group of loans consists primarily of commercial and commercial real estate loans, and unlike a pool of consumer mortgages, it is not practicable for the Company to analyze the accretable yield of these loans. As such, the Company has elected the cost recovery method of income recognition for these loans, and thus no accretable yield has been identified for these loans. At the acquisition date, April 1, 2014, the fair value of this group of loans was $3.9 million. The carrying value of these loans as of March 31, 2017 is $1.1 million.

Troubled Debt Restructurings: Loans classified as troubled debt restructurings (“TDR”) totaled $16.2 million and $16.2 million at March 31, 2017 and December 31, 2016, respectively. A TDR is a loan to a borrower that is experiencing financial difficulty that has been modified from its original terms and conditions in such a way that the Company is granting the borrower a concession that it would not grant otherwise. The Company has granted a variety of concessions to borrowers in the form of loan modifications. The modifications granted can generally be described in the following categories:

Rate Modification: A modification in which the interest rate is changed.

Term Modification: A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Payment Modification: A modification in which the dollar amount of the payment is changed, or in which a loan is converted to interest only payments for a period of time is included in this category.

Combination Modification: Any other type of modification, including the use of multiple categories above.

AQR pass graded loans included above in the impaired loan data are loans classified as TDRs. By definition, TDRs are considered impaired loans. All of the Company's TDRs are included in impaired loans.

The following table presents the breakout between newly restructured loans that occurred during the three months ended March 31, 2017 and restructured loans that occurred prior to 2017 that are still included in portfolio loans:



	Accrual Status		Nonaccrual Status		Total Modifications
(In Thousands)	Accrual Status		Nonaccrual Status		Total Modifications
New Troubled Debt Restructurings
Commercial - AQR substandard		$210		$—		$210
Subtotal		$210		$—		$210
Existing Troubled Debt Restructurings		$6,080		$9,917		$15,997
Total		$6,290		$9,917		$16,207

The following table presents newly restructured loans that occurred during the three months ended March 31, 2017, by concession (terms modified):



		March 31, 2017
	Number of Contracts	Rate Modification		Term Modification		Payment Modification		Combination Modification		Total Modifications
(In Thousands)	Number of Contracts	Rate Modification		Term Modification		Payment Modification		Combination Modification		Total Modifications
Pre-Modification Outstanding Recorded Investment:
Commercial - AQR substandard	1		$—		$—		$210		$—		$210
Total	1		$—		$—		$210		$—		$210
Post-Modification Outstanding Recorded Investment:
Commercial - AQR substandard	1		$—		$—		$210		$—		$210
Total	1		$—		$—		$210		$—		$210

The Company had no commitments to extend additional credit to borrowers whose terms have been modified in TDRs. There were no charge offs in the three months ended March 31, 2017 on loans that were later classified as TDRs.

All TDRs are also classified as impaired loans and are included in the loans individually evaluated for impairment in the calculation of the Allowance. There were three TDRs with specific impairment at March 31, 2017 and four TDRs with specific impairment at December 31, 2016, respectively.

The Company had no TDRs that subsequently defaulted within the first twelve months of restructure, during the periods ending March 31, 2017 and December 31, 2016, respectively.