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
September 30, 2017
AQR Pass		$285,057		$27,543		$83,884		$125,600		$333,382		$40,688		$22,181		$21,349		$939,684
AQR Special Mention	3,141		—		—		2,124		11,004		—		380		231		16,880
AQR Substandard	27,314		—		—		7,329		582		638		772		29		36,664
Subtotal		$315,512		$27,543		$83,884		$135,053		$344,968		$41,326		$23,333		$21,609		$993,228
Less: Unearned origination fees, net of origination costs																	(3,975		)
Total loans																		$989,253
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 $22.5 million and $12.5 million at September 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
September 30, 2017
Commercial		$—		$—		$4,853			$17,727			$22,580
Real estate term owner occupied	—		—		1,331			—			1,331
Consumer secured by 1st deeds of trust	—		—		380			—			380
Consumer other	—		—		26			—			26
Total nonperforming loans	—		—		6,590			17,727			24,317
Government guarantees on nonaccrual loans	—		—		(1,477		)	(346		)	(1,823		)
Net nonaccrual loans		$—		$—		$5,113			$17,381			$22,494
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
September 30, 2017
Commercial		$1,640		$258		$214		$2,112		$22,580		$290,820		$315,512
Real estate construction one-to-four family	—		—		—		—		—		27,543		27,543
Real estate construction other	367		—		—		367		—		83,517		83,884
Real estate term owner occupied	4,426		—		—		4,426		1,331		129,296		135,053
Real estate term non-owner occupied	—		—		—		—		—		344,968		344,968
Real estate term other	—		—		—		—		—		41,326		41,326
Consumer secured by 1st deed of trust	4		—		—		4		380		22,949		23,333
Consumer other	345		—		—		345		26		21,238		21,609
Subtotal		$6,782		$258		$214		$7,254		$24,317		$961,657		$993,228
													(3,975		)
Total														$989,253
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 with an outstanding balance of $50,000 or greater 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 September 30, 2017 and December 31, 2016, the recorded investment in loans that are considered to be impaired was $39.7 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
September 30, 2017
With no related allowance recorded
Commercial - AQR special mention		$96		$96		$—
Commercial - AQR substandard	17,380		18,889		—
Real estate term owner occupied- AQR substandard	7,300		7,300		—
Real estate term non-owner occupied- AQR pass	325		325		—
Real estate term non-owner occupied- AQR substandard	577		577		—
Real estate term other - AQR pass	576		576		—
Real estate term other - AQR substandard	638		638		—
Consumer secured by 1st deeds of trust - AQR special mention	138		138		—
Consumer secured by 1st deeds of trust - AQR substandard	726		811		—
Subtotal		$27,756		$29,350		$—



With an allowance recorded
Commercial - AQR special mention		$2,078		$2,078		$10
Commercial - AQR substandard	9,888		9,888		1,504
Subtotal		$11,966		$11,966		$1,514



Total
Commercial - AQR special mention		$2,174		$2,174		$10
Commercial - AQR substandard	27,268		28,777		1,504
Real estate term owner-occupied - AQR substandard	7,300		7,300		—
Real estate term non-owner occupied - AQR pass	325		325		—
Real estate term non-owner occupied - AQR substandard	577		577		—
Real estate term other - AQR pass	576		576		—
Real estate term other - AQR substandard	638		638		—
Consumer secured by 1st deeds of trust - AQR special mention	138		138		—
Consumer secured by 1st deeds of trust - AQR substandard	726		811		—
Total		$39,722		$41,316		$1,514



(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 nine month periods ended September 30, 2017 and 2016, respectively:



Three Months Ended September 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		$97			$—			$150			$6
Commercial - AQR substandard	18,125			72			19,681			428
Real estate construction other - AQR substandard	—			—			1,912			—
Real estate term owner occupied- AQR pass	—			—			256			10
Real estate term owner occupied- AQR substandard	7,345			114			16,787			466
Real estate term non-owner occupied- AQR pass	346			6			434			36
Real estate term non-owner occupied- AQR substandard	580			9			210			—
Real estate term other - AQR pass	585			10			653			23
Real estate term other - AQR substandard	641			11			—			—
Consumer secured by 1st deeds of trust - AQR special mention	139			3			—			—
Consumer secured by 1st deeds of trust - AQR substandard	771			5			844			12
Subtotal		$28,629			$230			$40,927			$981



With an allowance recorded
Commercial - AQR special mention		$2,083		$3		$—		$—
Commercial - AQR substandard	10,056		4			$—		$—
Real estate construction one-to-four family - AQR substandard	—		—		3,972		—
Subtotal		$12,139		$7		$3,972		$—



Total
Commercial - AQR special mention		$2,180		$3		$150		$6
Commercial - AQR substandard	28,181		76		19,681		428
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	—		—		256		10
Real estate term owner-occupied - AQR substandard	7,345		114		16,787		466
Real estate term non-owner occupied - AQR pass	346		6		434		36
Real estate term non-owner occupied - AQR substandard	580		9		210		—
Real estate term other - AQR pass	585		10		653		23
Real estate term other - AQR substandard	641		11		—		—
Consumer secured by 1st deeds of trust - AQR special mention	139		3		—		—
Consumer secured by 1st deeds of trust - AQR substandard	771		5		844		12
Total Impaired Loans		$40,768		$237		$44,899		$981



Nine Months Ended September 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		$49			$1			$153			$12
Commercial - AQR substandard	20,363			405			18,660			801
Real estate construction one-to-four family - AQR substandard	—			—			1,319			—
Real estate construction other - AQR substandard	—			—			1,912			—
Real estate term owner occupied- AQR pass	82			5			420			29
Real estate term owner occupied- AQR substandard	6,257			260			16,491			934
Real estate term non-owner occupied- AQR pass	367			38			455			73
Real estate term non-owner occupied- AQR substandard	654			38			223			—
Real estate term other - AQR pass	604			32			623			47
Real estate term other - AQR special mention	—			—			58			4
Real estate term other - AQR substandard	652			34			—			—
Consumer secured by 1st deeds of trust - AQR pass	—			—			50			2
Consumer secured by 1st deeds of trust - AQR special mention	141			10			—			—
Consumer secured by 1st deeds of trust - AQR substandard	506			13			600			20
Consumer other - AQR substandard	17			1			—			—
Subtotal		$29,692			$837			$40,964			$1,922



With an allowance recorded
Commercial - AQR special mention		$702		$3		$—		$—
Commercial - AQR substandard	7,979		4		197			$—
Real estate construction one-to-four family - AQR substandard	—		—		2,653		—
Consumer secured by 1st deeds of trust - AQR substandard	—		—		97		—
Subtotal		$8,681		$7		$2,947		$—



Total
Commercial - AQR special mention		$751		$4		$153		$12
Commercial - AQR substandard	28,342		409		18,857		801
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	82		5		420		29
Real estate term owner-occupied - AQR substandard	6,257		260		16,491		934
Real estate term non-owner occupied - AQR pass	367		38		455		73
Real estate term non-owner occupied - AQR substandard	654		38		223		—
Real estate term other - AQR pass	604		32		623		47
Real estate term other - AQR special mention	—		—		58		4
Real estate term other - AQR substandard	652		34		—		—
Consumer secured by 1st deeds of trust - AQR pass	—		—		50		2
Consumer secured by 1st deeds of trust - AQR special mention	141		10		—		—
Consumer secured by 1st deeds of trust - AQR substandard	506		13		697		20
Consumer other - AQR substandard	17		1		—		—
Total Impaired Loans		$38,373		$844		$43,911		$1,922

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 September 30, 2017 is $942,000.

Troubled Debt Restructurings: Loans classified as troubled debt restructurings (“TDR”) totaled $26.0 million and $16.2 million at September 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 nine months ended September 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 special mention		$2,078		$—		$2,078
Commercial - AQR substandard	205		9,099		9,304
Subtotal		$2,283		$9,099		$11,382
Existing Troubled Debt Restructurings		$5,404		$9,182		$14,586
Total		$7,687		$18,281		$25,968

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



		September 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 special mention	1		$—		$2,078		$—		$—		$2,078
Commercial - AQR substandard	2	—		10,665		210		—		10,875
Total	3		$—		$12,743		$210		$—		$12,953
Post-Modification Outstanding Recorded Investment:
Commercial - AQR special mention	1		$—		$2,078		$—		$—		$2,078
Commercial - AQR substandard	2	—		9,099		205		—		9,304
Total	3		$—		$11,177		$205		$—		$11,382

The Company had no commitments to extend additional credit to borrowers whose terms have been modified in TDRs. There were $731,000 charge offs in the nine months ended September 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 four TDRs with specific impairment at September 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 September 30, 2017 and December 31, 2016, respectively.