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
June 30, 2017
AQR Pass		$276,298		$24,714		$73,999		$133,036		$347,489		$41,555		$22,143		$22,526		$941,760
AQR Special Mention	5,567		—		—		348		11,291		—		938		45		18,189
AQR Substandard	27,628		—		—		6,091		683		644		332		26		35,404
Subtotal		$309,493		$24,714		$73,999		$139,475		$359,463		$42,199		$23,413		$22,597		$995,353
Less: Unearned origination fees, net of origination costs																	(4,144		)
Total loans																		$991,209
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 $21.1 million and $12.5 million at June 30, 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
June 30, 2017
Commercial		$—		$6,986		$3,635			$12,157			$22,778
Real estate term non-owner occupied	—		—		—			95			95
Consumer other	—		—		26			—			26
Total nonperforming loans	—		6,986		3,661			12,252			22,899
Government guarantees on nonaccrual loans	—		—		(1,413		)	(436		)	(1,849		)
Net nonaccrual loans		$—		$6,986		$2,248			$11,816			$21,050
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
June 30, 2017
Commercial		$540		$103		$104		$747		$22,778		$285,968		$309,493
Real estate construction one-to-four family	—		—		—		—		—		24,714		24,714
Real estate construction other	—		—		—		—		—		73,999		73,999
Real estate term owner occupied	1,331		—		—		1,331		—		138,144		139,475
Real estate term non-owner occupied	—		—		—		—		95		359,368		359,463
Real estate term other	613		—		—		613		—		41,586		42,199
Consumer secured by 1st deed of trust	—		119		342		461		—		22,952		23,413
Consumer other	46		—		22		68		26		22,503		22,597
Subtotal		$2,530		$222		$468		$3,220		$22,899		$969,234		$995,353
													(4,144		)
Total														$991,209
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 June 30, 2017 and December 31, 2016, the recorded investment in loans that are considered to be impaired was $36.3 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
June 30, 2017
With no related allowance recorded
Commercial - AQR substandard		$24,983		$25,421		$—
Real estate term owner occupied- AQR substandard	6,058		6,058		—
Real estate term non-owner occupied- AQR pass	366		366		—
Real estate term non-owner occupied- AQR substandard	678		678		—
Real estate term other - AQR pass	595		595		—
Real estate term other - AQR substandard	644		644		—
Consumer secured by 1st deeds of trust - AQR special mention	140		140		—
Consumer secured by 1st deeds of trust - AQR substandard	285		285		—
Subtotal		$33,749		$34,187		$—



With an allowance recorded
Commercial - AQR substandard	$2,562	$2,562	$394
Subtotal	$2,562	$2,562	$394



Total
Commercial - AQR substandard		$27,545		$27,983		$394
Real estate term owner-occupied - AQR substandard	6,058		6,058		—
Real estate term non-owner occupied - AQR pass	366		366		—
Real estate term non-owner occupied - AQR substandard	678		678		—
Real estate term other - AQR pass	595		595		—
Real estate term other - AQR substandard	644		644		—
Consumer secured by 1st deeds of trust - AQR special mention	140		140		—
Consumer secured by 1st deeds of trust - AQR substandard	285		285		—
Total		$36,311		$36,749		$394



(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 and six month periods ended June 30, 2017 and 2016, respectively:



Three Months Ended June 30,	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		$—			$—			$152			$3
Commercial - AQR substandard	25,412			258			19,699			176
Real estate construction other - AQR substandard	—			—			1,912			—
Real estate term owner occupied- AQR pass	—			—			258			5
Real estate term owner occupied- AQR substandard	6,079			63			16,283			232
Real estate term non-owner occupied- AQR pass	371			18			462			18
Real estate term non-owner occupied- AQR substandard	688			9			222			—
Real estate term other - AQR pass	604			11			674			12
Real estate term other - AQR special mention	—			—			83			2
Real estate term other - AQR substandard	651			11			—			—
Consumer secured by 1st deeds of trust - AQR pass	—			—			75			1
Consumer secured by 1st deeds of trust - AQR special mention	141			3			—			—
Consumer secured by 1st deeds of trust - AQR substandard	287			5			486			5
Subtotal		$34,233			$378			$40,306			$454



With an allowance recorded
Commercial - AQR substandard		$2,611		$—		$—		$—
Real estate construction one-to-four family - AQR substandard	—		—		3,972		—
Consumer secured by 1st deeds of trust - AQR substandard	—		—		292		—
Subtotal		$2,611		$—		$4,264		$—



Total
Commercial - AQR special mention		$—		$—		$152		$3
Commercial - AQR substandard	28,023		258		19,699		176
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	—		—		258		5
Real estate term owner-occupied - AQR substandard	6,079		63		16,283		232
Real estate term non-owner occupied - AQR pass	371		18		462		18
Real estate term non-owner occupied - AQR substandard	688		9		222		—
Real estate term other - AQR pass	604		11		674		12
Real estate term other - AQR special mention	—		—		83		2
Real estate term other - AQR substandard	651		11		—		—
Consumer secured by 1st deeds of trust - AQR pass	—		—		75		1
Consumer secured by 1st deeds of trust - AQR special mention	141		3		—		—
Consumer secured by 1st deeds of trust - AQR substandard	287		5		778		5
Total Impaired Loans		$36,844		$378		$44,570		$454



Six Months Ended June 30,	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		$26			$1			$154			$6
Commercial - AQR substandard	21,500			333			18,143			374
Real estate construction one-to-four family - AQR substandard	—			—			1,986			—
Real estate construction other - AQR substandard	—			—			1,912			—
Real estate term owner occupied- AQR pass	125			5			504			19
Real estate term owner occupied- AQR substandard	5,704			147			16,342			467
Real estate term non-owner occupied- AQR pass	378			32			466			37
Real estate term non-owner occupied- AQR substandard	692			29			230			—
Real estate term other - AQR pass	614			22			608			24
Real estate term other - AQR special mention	—			—			87			4
Real estate term other - AQR substandard	657			23			—			—
Consumer secured by 1st deeds of trust - AQR pass	—			—			75			2
Consumer secured by 1st deeds of trust - AQR special mention	142			7			—			—
Consumer secured by 1st deeds of trust - AQR substandard	371			7			476			8
Consumer other - AQR substandard	26			1			—			—
Subtotal		$30,235			$607			$40,983			$941



With an allowance recorded
Commercial - AQR substandard		$6,924		$—		$297		$—
Real estate construction one-to-four family - AQR substandard	—		—		1,986		—
Consumer secured by 1st deeds of trust - AQR substandard	—		—		146		—
Subtotal		$6,924		$—		$2,429		$—



Total
Commercial - AQR special mention		$26		$1		$154		$6
Commercial - AQR substandard	28,424		333		18,440		374
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	125		5		504		19
Real estate term owner-occupied - AQR substandard	5,704		147		16,342		467
Real estate term non-owner occupied - AQR pass	378		32		466		37
Real estate term non-owner occupied - AQR substandard	692		29		230		—
Real estate term other - AQR pass	614		22		608		24
Real estate term other - AQR special mention	—		—		87		4
Real estate term other - AQR substandard	657		23		—		—
Consumer secured by 1st deeds of trust - AQR pass	—		—		75		2
Consumer secured by 1st deeds of trust - AQR special mention	142		7		—		—
Consumer secured by 1st deeds of trust - AQR substandard	371		7		622		8
Consumer other - AQR substandard	26		1		—		—
Total Impaired Loans		$37,159		$607		$43,412		$941

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 June 30, 2017 is $1.1 million.

Troubled Debt Restructurings: Loans classified as troubled debt restructurings (“TDR”) totaled $25.4 million and $16.2 million at June 30, 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 six months ended June 30, 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		$10,165		$10,375
Subtotal		$210		$10,165		$10,375
Existing Troubled Debt Restructurings		$5,468		$9,562		$15,030
Total		$5,678		$19,727		$25,405

The following table presents newly restructured loans that occurred during the six months ended June 30, 2017, by concession (terms modified):



		June 30, 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	2		$—		$10,665		$210		$—		$10,875
Total	2		$—		$10,665		$210		$—		$10,875
Post-Modification Outstanding Recorded Investment:
Commercial - AQR substandard	2		$—		$10,165		$210		$—		$10,375
Total	2		$—		$10,165		$210		$—		$10,375

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 six months ended June 30, 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 no TDRs with specific impairment at June 30, 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 June 30, 2017 and December 31, 2016, respectively.