Loans and reserve for credit losses

The composition of the loan portfolio at March 31, 2014 and December 31, 2013 was as follows (dollars in thousands):



	March 31, 2014					December 31, 2013
	Amount			Percent		Amount			Percent
Commercial real estate:
Owner occupied	$	195,111		19.4	%	$	204,998		20.6	%
Non-owner occupied	348,597			34.6	%	347,014			34.8	%
Total commercial real estate loans	543,708			54.0	%	552,012			55.4	%
Construction	55,436			5.5	%	52,503			5.3	%
Residential real estate	100,550			10.0	%	101,557			10.2	%
Commercial and industrial	273,444			27.1	%	254,170			25.5	%
Consumer	34,216			3.4	%	35,990			3.6	%
Total loans	1,007,354			100.0	%	996,232			100.0	%

Less:
Deferred loan fees	(1,707		)			(1,757		)
Reserve for loan losses	(21,722		)			(20,857		)
Loans, net	$	983,925				$	973,618

For the three months ended March 31, 2014, total loan balances increased by $11.1 million mainly due to an increased commercial and industrial portfolio, primarily related to the Company's syndicated national credit portfolio.

Approximately 69.5% of the Bank’s loan portfolio at March 31, 2014 consisted of real estate-related loans, including construction and development loans, residential mortgage loans, and commercial loans secured by commercial real estate. The Bank's results of operations and financial condition are affected by general economic trends and in particular, the strength of the local residential and commercial real estate markets in Central, Southern and Northwest Oregon and the greater Boise/Treasure Valley, Idaho area. Economic trends can significantly affect the strength of the local real estate market. Real estate values could be affected by, among other things, a worsening of economic conditions, an increase in foreclosures, a decline in home sale volumes, and an increase in interest rates. Furthermore, the Bank may experience an increase in the number of borrowers who become delinquent, file for protection under bankruptcy laws, or default on their loans or other obligations to the Bank given a sustained weakness or a weakening in business and economic conditions generally or specifically in the principal markets in which the Bank does business. An increase in the number of delinquencies, bankruptcies, or defaults could result in a higher level of non-performing assets, net charge-offs, and loan loss provision. Management is targeting to reduce CRE concentration over the long term, but real estate-related loans will remain a significant portfolio component due to the nature of the economies, businesses, and markets we serve.

In the normal course of business, the Bank may participate portions of loans to third parties in order to extend the Bank’s lending capability or to mitigate risk. At both March 31, 2014 and December 31, 2013, the portion of loans participated to third-parties (which are not included in the accompanying condensed consolidated financial statements) totaled $11.3 million.

The reserve for loan losses represents management’s estimate of known and inherent losses in the loan portfolio as of the condensed consolidated balance sheet date and is recorded as a reduction to loans. The reserve for loan losses is increased by charges to operating expense through the loan loss provision, and decreased by loans charged-off, net of recoveries. The reserve for loan losses requires complex subjective judgments as a result of the need to make estimates about matters that are uncertain. The reserve for loan losses is maintained at a level currently considered adequate to provide for potential loan losses based on management’s assessment of various factors affecting the loan portfolio.

At March 31, 2014 and December 31, 2013, management believes that the Company’s reserve for loan losses is at an appropriate level under current circumstances and prevailing economic conditions. However the reserve for loan losses is based on estimates and actual losses may vary from the current estimates. These estimates are reviewed periodically, and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. Therefore, management cannot provide assurance that, in any particular period, the Company will not have significant losses in relation to the amount reserved. The level of the reserve for loan losses is also determined after consideration of bank regulatory guidance and recommendations and is subject to review by such regulatory authorities who may require increases or decreases to the reserve based on their evaluation of the information available to them at the time of their examinations of the Bank.

For purposes of assessing the appropriate level of the reserve for loan losses, the Company analyzes loans and commitments to loan, and the amount of reserves allocated to loans and commitments to loan in each of the following reserve categories: pooled reserves, specifically identified reserves for impaired loans, and the unallocated reserve. Also, for purposes of analyzing loan portfolio credit quality and determining the appropriate level of reserve for loan losses, the Company identifies loan portfolio segments and classes based on the nature of the underlying loan collateral.

The increase in the reserve for loan losses from December 31, 2013 to March 31, 2014 was mainly related to recoveries during the period. The unallocated reserve for loan losses at March 31, 2014 has increased $1.3 million from the balance at December 31, 2013. Management has evaluated the increased balance, which was a result of continued decreases in our expected loss rates in the more recent periods as well as significant recoveries in the first quarter of 2014. Management believes that the amount of unallocated reserve for loan losses is appropriate given the projected growth in specific loan categories and will continue to evaluate the amount going forward.

Transactions and allocations in the reserve for loan losses and unfunded loan commitments, by portfolio segment, for the three months ended March 31, 2014 and 2013 were as follows (dollars in thousands):



	Commercial real estate			Construction			Residential real estate			Commercial and industrial			Consumer			Unallocated		Total
Three months ended March 31, 2014
Reserve for loan losses
Balance at December 31, 2013	$	9,565		$	535		$	2,381		$	6,261		$	1,401		$	714	$	20,857
Loan loss provision (credit)	(1,560		)	278			(55		)	(18		)	62			1,293		—
Recoveries	941			85			124			911			87			—		2,148
Loans charged off	(143		)	(296		)	(223		)	(314		)	(307		)	—		(1,283		)
Balance at end of period	$	8,803		$	602		$	2,227		$	6,840		$	1,243		$	2,007	$	21,722

Reserve for unfunded lending commitments
Balance at December 31, 2013	$	48		$	268		$	25		$	75		$	24		$	—	$	440
Provision for unfunded loan commitments	—			—			—			—			—			—		—
Balance at end of period	$	48		$	268		$	25		$	75		$	24		$	—	$	440

Reserve for credit losses
Reserve for loan losses	$	8,803		$	602		$	2,227		$	6,840		$	1,243		$	2,007	$	21,722
Reserve for unfunded lending commitments	48			268			25			75			24			—		440
Total reserve for credit losses	$	8,851		$	870		$	2,252		$	6,915		$	1,267		$	2,007	$	22,162



	Commercial real estate			Construction			Residential real estate			Commercial and industrial			Consumer			Unallocated			Total
Three months ended March 31, 2013
Reserve for loan losses
Balance at December 31, 2012	$	11,596		$	1,583		$	3,551		$	7,267		$	2,177		$	1,087		$	27,261
Loan loss provision (credit)	(280		)	316			182			125			86			(429		)	—
Recoveries	178			124			117			512			59			—			990
Loans charged off	(269		)	(787		)	(136		)	(2,228		)	(283		)	—			(3,703		)
Balance at end of period	$	11,225		$	1,236		$	3,714		$	5,676		$	2,039		$	658		$	24,548

Reserve for unfunded lending commitments
Balance at December 31, 2012	$	48		$	268		$	25		$	75		$	24		$	—		$	440
Provision for unfunded loan commitments	—			—			—			—			—			—			—
Balance at end of period	$	48		$	268		$	25		$	75		$	24		$	—		$	440

Reserve for credit losses
Reserve for loan losses	$	11,225		$	1,236		$	3,714		$	5,676		$	2,039		$	658		$	24,548
Reserve for unfunded lending commitments	48			268			25			75			24			—			440
Total reserve for credit losses	$	11,273		$	1,504		$	3,739		$	5,751		$	2,063		$	658		$	24,988

An individual loan is impaired when, based on current information and events, management believes that it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. The following table presents the reserve for loan losses and the recorded investment in loans by portfolio segment and impairment evaluation method at March 31, 2014 and December 31, 2013 (dollars in thousands):



	Reserve for loan losses						Recorded investment in loans
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
March 31, 2014
Commercial real estate	$	660	$	8,143	$	8,803	$	29,121	$	514,587	$	543,708
Construction	—		602		602		1,739		53,697		55,436
Residential real estate	62		2,165		2,227		426		100,124		100,550
Commercial and industrial	286		6,554		6,840		5,238		268,206		273,444
Consumer	—		1,243		1,243		—		34,216		34,216
	$	1,008	$	18,707	19,715		$	36,524	$	970,830	$	1,007,354
Unallocated					2,007
					$	21,722

December 31, 2013
Commercial real estate	$	665	$	8,900	$	9,565	$	32,227	$	519,785	$	552,012
Construction	—		535		535		1,987		50,516		52,503
Residential real estate	62		2,319		2,381		430		101,127		101,557
Commercial and industrial	56		6,205		6,261		5,823		248,347		254,170
Consumer	—		1,401		1,401		—		35,990		35,990
	$	783	$	19,360	20,143		$	40,467	$	955,765	$	996,232
Unallocated					714
					$	20,857

The Company uses credit risk ratings, which reflect the Bank’s assessment of a loan’s risk or loss potential, for purposes of assessing the appropriate level of reserve for loan losses. The Bank’s credit risk rating definitions along with applicable borrower characteristics for each credit risk rating are as follows:

Acceptable

The borrower is a reasonable credit risk and demonstrates the ability to repay the loan from normal business operations. Loans are generally made to companies operating in an economy and/or industry that is generally sound. The borrower tends to operate in regional or local markets and has achieved sufficient revenues for the business to be financially viable. The borrowers financial performance has been consistent in normal economic times and has been average or better than average for its industry.

A loan can also be considered Acceptable even though the borrower may have some vulnerability to downturns in the economy due to marginally satisfactory working capital and debt service cushion. Availability of alternate financing sources may be limited or nonexistent. In some cases, the borrower’s management, may have limited depth or continuity but is still considered capable. An adequate primary source of repayment is identified while secondary sources may be illiquid, more speculative, less readily identified, or reliant upon collateral liquidation. Loan agreements will be well defined, including several financial performance covenants and detailed operating covenants. This category also includes commercial loans to individuals with average or better than average capacity to repay.

Pass-Watch

Loans are graded Pass-Watch when temporary situations increase the level of the Bank’s risk associated with the loan, and remain graded Pass-Watch until the situation has been corrected. These situations may involve one or more weaknesses in cash flow, collateral value or indebtedness that could, if not corrected within a reasonable period of time, jeopardize the full repayment of the debt. In general, loans in this category remain adequately protected by the borrower’s net worth and paying capacity, or pledged collateral.

Special Mention

A Special Mention credit has potential weaknesses that may, if not checked or corrected, weaken the loan or leave the Bank inadequately protected at some future date. Loans in this category are deemed by management of the Bank to be currently protected but reflect potential problems that warrant more than the usual management attention but do not justify a Substandard classification.

Substandard

Substandard loans are those inadequately protected by the net worth and paying capacity of the obligor and/or by the value of the pledged collateral, if any. Substandard loans have a high probability of payment default or they have other well-defined weaknesses. They require more intensive supervision and borrowers are generally characterized by current or expected unprofitable operations, inadequate debt service coverage, inadequate liquidity, or marginal capitalization. Repayment may depend on collateral or other credit risk mitigants.

CRE and construction loans are classified Substandard when well-defined weaknesses are present which jeopardize the orderly liquidation of the loan. Well-defined weaknesses include a project’s lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time, and/or the project’s failure to fulfill economic expectations. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

In addition, Substandard loans also include impaired loans. Impaired loans bear the characteristics of Substandard loans as described above, and the Company has determined it does not expect timely payment of all contractually due interest and principal. Impaired loans may be adequately secured by collateral.

During the three months ended March 31, 2014, the Bank reduced loans classified as special mention and substandard by $17.8 million. Remediation was accomplished through credit upgrades mainly owing to improved obligor cash flows as well as payoffs/paydowns, and/or note sales.

The following table presents, by portfolio class, the recorded investment in loans by internally assigned grades at March 31, 2014 and December 31, 2013 (dollars in thousands):



	Loan grades
	Acceptable		Pass-Watch		Special Mention		Substandard		Total
March 31, 2014
Commercial real estate:
Owner occupied	$	145,041	$	17,945	$	10,777	$	21,348	$	195,111
Non-owner occupied	289,886		35,332		13,814		9,565		348,597
Total commercial real estate loans	434,927		53,277		24,591		30,913		543,708
Construction	50,188		2,322		1,798		1,128		55,436
Residential real estate	97,910		1,536		167		937		100,550
Commercial and industrial	257,166		8,572		1,571		6,135		273,444
Consumer	34,165		—		—		51		34,216
	$	874,356	$	65,707	$	28,127	$	39,164	$	1,007,354

December 31, 2013
Commercial real estate:
Owner occupied	$	147,865	$	19,798	$	14,730	$	22,605	$	204,998
Non-owner occupied	278,854		33,827		24,188		10,145		347,014
Total commercial real estate loans	426,719		53,625		38,918		32,750		552,012
Construction	46,274		2,772		2,131		1,326		52,503
Residential real estate	98,633		1,570		147		1,207		101,557
Commercial and industrial	242,053		3,518		2,694		5,905		254,170
Consumer	35,984		—		—		6		35,990
	$	849,663	$	61,485	$	43,890	$	41,194	$	996,232

The following table presents, by portfolio class, an age analysis of past due loans, including loans placed on non-accrual at March 31, 2014 and December 31, 2013 (dollars in thousands):



	30-89 days past due		90 days or more past due		Total past due		Current		Total loans
March 31, 2014
Commercial real estate:
Owner occupied	$	2,035	$	1,054	$	3,089	$	192,022	$	195,111
Non-owner occupied	792		—		792		347,805		348,597
Total commercial real estate loans	2,827		1,054		3,881		539,827		543,708
Construction	—		39		39		55,397		55,436
Residential real estate	362		235		597		99,953		100,550
Commercial and industrial	621		1,607		2,228		271,216		273,444
Consumer	94		51		145		34,071		34,216
	$	3,904	$	2,986	$	6,890	$	1,000,464	$	1,007,354
December 31, 2013
Commercial real estate:
Owner occupied	$	959	$	2,905	$	3,864	$	201,134	$	204,998
Non-owner occupied	—		—		—		347,014		347,014
Total commercial real estate loans	959		2,905		3,864		548,148		552,012
Construction	215		119		334		52,169		52,503
Residential real estate	436		163		599		100,958		101,557
Commercial and industrial	597		2,077		2,674		251,496		254,170
Consumer	53		6		59		35,931		35,990
	$	2,260	$	5,270	$	7,530	$	988,702	$	996,232

Loans contractually past due 90 days or more on which the Company continued to accrue interest were $0.1 million and $1.1 million at March 31, 2014 and December 31, 2013, respectively.

The following table presents information related to impaired loans, by portfolio class, at March 31, 2014 and December 31, 2013 (dollars in thousands):



	Impaired loans
	With a related allowance		Without a related allowance		Total recorded balance		Unpaid principal balance		Related allowance
March 31, 2014
Commercial real estate:
Owner occupied	$	2,754	$	3,629	$	6,383	$	8,561	$	647
Non-owner occupied	1,111		21,627		22,738		22,771		13
Total commercial real estate loans	3,865		25,256		29,121		31,332		660
Construction	689		1,050		1,739		1,740		—
Residential real estate	172		254		426		513		62
Commercial and industrial	3,845		1,393		5,238		6,077		286
Consumer	—		—		—		—		—
	$	8,571	$	27,953	$	36,524	$	39,662	$	1,008

December 31, 2013
Commercial real estate:
Owner occupied	$	2,772	$	6,582	$	9,354	$	12,707	$	652
Non-owner occupied	1,116		21,757		22,873		22,904		13
Total commercial real estate loans	3,888		28,339		32,227		35,611		665
Construction	751		1,236		1,987		2,029		—
Residential real estate	174		256		430		515		62
Commercial and industrial	4,074		1,749		5,823		6,701		56
Consumer	—		—		—		—		—
	$	8,887	$	31,580	$	40,467	$	44,856	$	783

At March 31, 2014 and December 31, 2013, the total recorded balance of impaired loans in the above table included $31.1 million and $33.2 million, respectively, of Troubled Debt Restructuring (“TDR”) loans which were not on non-accrual status.

The following table presents, by portfolio class, the average recorded investment in impaired loans for the three months ended March 31, 2014 and 2013 (dollars in thousands):



	Three Months Ended March 31,
	2014		2013
Commercial real estate:
Owner occupied	$	7,868	$	15,209
Non-owner occupied	22,806		28,250
Total commercial real estate loans	30,674		43,459
Construction	1,863		6,514
Residential real estate	428		4,836
Commercial and industrial	5,530		9,384
Consumer	—		1,788
	$	38,495	$	65,981

Interest income recognized for cash payments received on impaired loans for the three months ended March 31, 2014 was insignificant.

Information with respect to the Company’s non-accrual loans, by portfolio class, at March 31, 2014 and December 31, 2013 is as follows (dollars in thousands):



	March 31, 2014		December 31, 2013
Commercial real estate:
Owner occupied	$	2,572	$	4,443
Non-owner occupied	280		280
Total commercial real estate loans	2,852		4,723
Construction	106		236
Residential real estate	465		399
Commercial and industrial	2,398		1,868
Total non-accrual loans	$	5,821	$	7,226

Accruing loans which are contractually past due 90 days or more:
Commercial real estate:
Owner occupied	$	—	$	—
Non-owner occupied	—		—
Total commercial real estate loans	—		—
Construction	39		—
Residential real estate	—		—
Commercial and industrial	—		1,077
Consumer	51		6
Total accruing loans which are contractually past due 90 days or more	$	90	$	1,083

TDRs

The Company allocated $1.0 million and $0.8 million of specific reserves to customers whose loan terms have been modified in TDRs as of March 31, 2014 and December 31, 2013, respectively. TDRs involve the restructuring of terms to allow customers to mitigate the risk of foreclosure by meeting a lower loan payment requirement based upon their current cash flow. As indicated above, TDRs may also include loans to borrowers experiencing financial distress that renewed at existing contractual rates, but below market rates for comparable credit quality. The Company has been actively utilizing these programs and working with its customers to improve obligor cash flow and related prospect for repayment. Concessions may include, but are not limited to, interest rate reductions, principal forgiveness, deferral of interest payments, extension of the maturity date, and other actions intended to minimize potential losses to the Company. For each commercial loan restructuring, a comprehensive credit underwriting analysis of the borrower’s financial condition and prospects of repayment under the revised terms is performed to assess whether the new structure can be successful and whether cash flows will be sufficient to support the restructured debt. Generally, if the loan is on accrual at the time of restructuring, it will remain on accrual after the restructuring. After six consecutive payments under the restructured terms, a nonaccrual restructured loan is reviewed for possible upgrade to accruing status.

Typically, once a loan is identified as a TDR it will retain that designation until it is paid off, because restructured loans generally are not at market rates following restructuring. Under certain circumstances a TDR may be removed from TDR status if it is determined to no longer be impaired and the loan is at a competitive interest rate. Under such circumstances, allowance allocations for loans removed from TDR status would be based on the historical allocation for the applicable loan grade and loan class.

The following table presents, by portfolio segment, information with respect to the Company’s loans that were modified and recorded as TDRs during the three months ended March 31, 2014 and 2013 (dollars in thousands):



	Three months ended March 31,
	2014			2013
	Number of loans	TDR outstanding recorded investment		Number of loans	TDR outstanding recorded investment
Commercial real estate	—	$	—	5	$	27,677
Construction	—	—		2	115
Residential real estate	—	—		3	152
Commercial and industrial	—	—		8	399
Consumer	—	—		12	358
	—	$	—	30	$	28,701

There were no loans modified and recorded as TDRs during the three months ended March 31, 2014. During the same period in 2013, TDR activity was primarily the result of remediation to bolster cash flow of stressed loans, and included the restructuring of a large CRE credit in the Bank’s loan portfolio.

At March 31, 2014 and 2013, the Company had remaining commitments to lend on loans accounted for as TDRs of $0 and $0.02 million, respectively.

The following table presents, by portfolio segment, the post modification recorded investment for TDRs restructured during the three months ended March 31, 2013 by the primary type of concession granted (dollars in thousands). There were no TDRs restructured during the three months ended March 31, 2014.



Three Months Ended March 31, 2013	Rate reduction		Term extension		Rate reduction and term extension		Total
Commercial real estate	$	3,809	$	2,368	$	21,500	$	27,677
Construction	—		115		—		115
Residential real estate	—		152		—		152
Commercial and industrial	174		173		52		399
Consumer	—		358		—		358
	$	3,983	$	3,166	$	21,552	$	28,701

The following table presents, by portfolio segment, the TDRs which had payment defaults during the three months ended March 31, 2014 and 2013 that had been previously restructured within the last twelve months prior to March 31, 2014 and 2013 (dollars in thousands):



	Three months ended March 31,
	2014			2013
	Number of loans	TDRs restructured in the period with a payment default		Number of loans	TDRs restructured in the period with a payment default
Commercial real estate	—	$	—	2	$	3,500
Construction	—	—		—	—
Residential real estate	—	—		—	—
Commercial and industrial loans	1	963		—	—
Consumer loans	—	—		—	—
	1	$	963	2	$	3,500