Loans and reserve for credit losses

The composition of the loan portfolio at September 30, 2015 and December 31, 2014 was as follows (dollars in thousands):



	September 30, 2015					December 31, 2014
	Amount			Percent		Amount			Percent
Originated loans (a):
Commercial real estate:
Owner occupied	$	263,621		18.9	%	$	198,845		16.8	%
Non-owner occupied	421,749			30.2	%	383,287			32.4	%
Total commercial real estate loans	685,370			49.1	%	582,132			49.2	%
Construction	121,737			8.7	%	100,437			8.5	%
Residential real estate	206,521			14.8	%	122,478			10.4	%
Commercial and industrial	344,410			24.7	%	342,746			29.0	%
Consumer	37,786			2.7	%	34,897			2.9	%
Total loans	1,395,824			100.0	%	1,182,690			100.0	%

Less:
Deferred loan fees	(1,608		)			(1,703		)
Reserve for loan losses	(26,623		)			(22,053		)
Loans, net	$	1,367,593				$	1,158,934

Acquired loans (b):
Commercial real estate:
Owner occupied	$	40,761		18.7	%	$	48,413		18.0	%
Non-owner occupied	88,046			40.3	%	102,890			38.2	%
Total commercial real estate loans	128,807			59.0	%	151,303			56.2	%
Construction	10,749			4.9	%	22,564			8.4	%
Residential real estate	58,246			26.7	%	71,385			26.5	%
Commercial and industrial	19,277			8.8	%	22,444			8.3	%
Consumer	1,365			0.6	%	1,963			0.6	%
Total loans	$	218,444		100.0	%	$	269,659		100.0	%


Acquired covered loans (c):
Commercial real estate:
Owner occupied	$	10,610		32.0	%	$	11,851		29.5	%
Non-owner occupied	10,206			30.7	%	11,366			28.3	%
Total commercial real estate loans	20,816			62.7	%	23,217			57.8	%
Construction	2,121			6.4	%	2,427			6.0	%
Residential real estate	7,548			22.7	%	10,824			26.9	%
Commercial and industrial	2,423			7.3	%	3,285			8.2	%
Consumer	293			0.9	%	438			1.1	%
Total loans	$	33,201		100.0	%	$	40,191		100.0	%



Total loans:
Commercial real estate:
Owner occupied	$	314,992		19.1	%	$	259,109		17.4	%
Non-owner occupied	520,001			31.6	%	497,543			33.3	%
Total commercial real estate loans	834,993			50.7	%	756,652			50.7	%
Construction	134,607			8.2	%	125,428			8.4	%
Residential real estate	272,315			16.5	%	204,687			13.7	%
Commercial and industrial	366,110			22.2	%	368,475			24.7	%
Consumer	39,444			2.4	%	37,298			2.5	%
Total loans	1,647,469			100.0	%	1,492,540			100.0	%

Less:
Deferred loan fees	(1,608		)			(1,703		)
Reserve for loan losses	(26,623		)			(22,053		)
Loans, net	$	1,619,238				$	1,468,784

(a) Originated loans are loans organically made through the Company’s normal and customary origination process, including ARM purchases.
(b) Acquired loans are loans acquired in the acquisition of Home Federal Bancorp, Inc. (“Home”), discussed elsewhere in this Quarterly Report on Form 10-Q (the “Form 10-Q”), less acquired covered loans.
(c) Acquired covered loans are loans acquired in the acquisition of Home that are covered under FDIC loss share agreements.

The following describes the distinction between originated, acquired and acquired covered loan portfolios and certain significant accounting policies relevant to each of these portfolios.

Originated loans

Loans originated for investment are stated at their principal amount outstanding adjusted for partial charge-offs, the reserve for loan losses and net deferred loan fees and costs. Interest income on loans is accrued over the term of the loans. Interest is not accrued on loans where collectability is uncertain. Accrued interest on loans is presented in “Other assets” on the condensed consolidated balance sheet. Loan origination fees and certain direct costs incurred to extend credit are deferred and amortized over the term of the loan as an adjustment to the related loan yield.

Approximately 72.6% of the Bank’s originated loan portfolio at September 30, 2015 consisted of real estate-related loans, including construction and development loans, residential mortgage loans, and commercial loans secured by commercial real estate. At September 30, 2015, approximately 75.4% of the Bank’s total portfolio (inclusive of acquired and acquired covered loans) consisted of real estate-related loans as described above. 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, as well as the greater Boise/Treasure Valley, Idaho and Seattle, Washington metro areas. Real estate values could be affected by, among other things, a worsening of national and local 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 in the event of a sustained downturn 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 expects to diversify its commercial real estate (“CRE”) concentration over time, but real estate-related loans will remain a significant portfolio component due to the nature of the economies, businesses, and markets the Bank serves.

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 September 30, 2015 and December 31, 2014, the portion of loans participated to third parties (which are not included in the accompanying condensed consolidated financial statements) totaled $50.2 million and $34.5 million, respectively.

Acquired and acquired covered loans

Acquired loans and acquired covered loans are those purchased in the Company’s acquisition of Home, which was completed on May 16, 2014 (the “Acquisition Date”). See the 2014 Annual Report for further information on the Home acquisition. These loans were recorded at estimated fair value at the Acquisition Date. The fair value estimates for acquired and acquired covered loans are based on expected prepayments, charge-offs and the amount and timing of undiscounted expected principal, interest and other cash flows. The net fair value adjustment to the acquired and acquired covered loans at acquisition was a reduction of $6.0 million, representing a valuation adjustment for interest rate and credit which will be accreted over the life of the loans (approximately 10 years).

Of the loans acquired on the Acquisition Date and still held at September 30, 2015, $10.2 million, or 4.0%, were graded substandard. Of that amount, $1.5 million, or 14.5%, of the substandard loans were covered under a loss sharing agreement with the FDIC. With the amount of classified loans acquired being nominal, all loans acquired are treated in a manner consistent with originated loans for credit risk management and accounting purposes.

As of September 30, 2015, $33.2 million, or 13.2%, of the $251.6 million in acquired and acquired covered loans were covered under loss sharing agreements with the FDIC (“covered loans”). The agreements were entered into in September 2009 and September 2010 between the FDIC and Home. The loss sharing agreements have limited terms (10 years for net losses on single-family residential real estate loans, as defined by the FDIC, five years for losses on non-residential real estate loans, as defined by the FDIC, and an additional three years with respect to recoveries on non-residential real estate loans). After the expiration of the loss sharing agreements, the Company will not be indemnified for losses and related expenses on covered loans. When the loss sharing agreements expire, the Company’s and the Bank’s risk-based capital ratios will be reduced. While the agreements are in place, the covered loans receive a 20% risk-weighting. When the agreements expire, the risk-weighting for previously covered loans will most likely increase to 100%, based on current regulatory capital definitions. Nearly all of the assets remaining in the covered loans portfolios are non-single family covered loans. Therefore, most of the covered loans were no longer indemnified after September 30, 2014 or were no longer indemnified after September 30, 2015. Only $1.5 million of the acquired covered loans were graded substandard. With the amount of classified loans covered under these agreements being nominal, amounts that may be due to or due from the FDIC under loss sharing agreements will be accounted for on a cash basis.

A net loss share payable was recorded at the Acquisition Date which represents the estimated value of reimbursement the Company expects to pay to the FDIC for recoveries net of incurred losses on covered loans. These expected reimbursements are recorded as part of covered loans in the accompanying consolidated balance sheets. Upon the determination of an incurred loss or recovery, the loss share receivable/payable will be changed by the amount due to or due from the FDIC.

Changes in the loss share payable (receivable) associated with acquired covered loans for the three and nine months ended September 30, 2015 were as follows (dollars in thousands):



	Three months ended			Nine months ended
	September 30, 2015
Balance at beginning of period	$	(268	)	$	(449	)
Paid to FDIC	268			1,049
Increase due to impairment	—			73
FDIC reimbursement	(300		)	(1,100		)
Shared loss expenses	66			171
Adjustments from prior periods	(124		)	(140		)
OREO loss carryforward	—			38
Balance at end of period	$	(358	)	$	(358	)

Reserve for loan losses

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.

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.

As of March 31, 2015, the reserve for loan loss methodology was enhanced within the Company’s commercial and industrial (“C&I”) loan portfolio with respect to its holdings of shared national credits (“SNCs”). Risk ratings for individual SNCs are estimated using analysis of both public debt ratings and internal ratings. Expected loss rates are determined based upon historical published specific loss data for similar loans based on average losses and losses stratified by public debt ratings. Public ratings combined with internal risk rates are used to determine a minimum historical loss factor for each SNC loan. This amount may be increased for qualitative conditions including macroeconomic environment and observations by the Company’s SNC management group. The SNC lending strategy is intended to diversify the Company’s credit risk profile geographically and by industry. Additionally, such loans enhance the Company’s interest rate risk profile as they float with LIBOR rates.

The increase in the reserve for loan losses from December 31, 2014 to September 30, 2015 was related to net recoveries during the period. The unallocated reserve for loan losses at September 30, 2015 has increased $0.1 million from the balance at December 31, 2014. Management believes that the amount of unallocated reserve for loan losses is appropriate and will continue to evaluate the amount going forward.

Acquired reserve for loan losses

The fair value estimates for acquired and acquired covered loans are based on expected prepayments, charge-offs, and the amount and timing of undiscounted expected principal, interest and other cash flows. The net fair value adjustment to the acquired and acquired covered loans was $6.0 million, representing a valuation adjustment for interest rate and credit quality. The credit portion of the fair value adjustment not accreted at any point in time represents the estimated reserve for loan losses for acquired loans. If the Company determines that this amount is insufficient, a provision to the reserve for loan losses will be made.

Covered reserve for loan losses

The reserve for loan losses on covered loans is estimated similarly to acquired loans as described above except any increase to the reserve from a recovery or a decrease in the reserve from a charge-off is partially offset by an increase in the loss share payable (or receivable) for the portion of the losses recoverable and recoveries payable to the FDIC under the loss sharing agreements. No allowance was recorded at quarter-end given management’s judgment that purchase discounts adequately addressed the estimated losses in the acquired loans.

Transactions and allocations in the reserve for loan losses and unfunded loan commitments, by portfolio segment, for the three and nine months ended September 30, 2015 and 2014 were as follows (dollars in thousands):



	Commercial real estate			Construction			Residential real estate			Commercial and industrial			Consumer			Unallocated		Total
For the three months ended September 30, 2015
Allowance for Loan Losses
Balance at June 30, 2015	$	5,032		$	1,356		$	2,463		$	11,355		$	1,001		$	2,294	$	23,501
Loan loss provision (credit)	(490		)	(293		)	(162		)	(2,245		)	99			3,091		—
Recoveries	408			155			162			2,885			179			—		3,789
Loans charged off	—			—			(50		)	(293		)	(324		)	—		(667		)
Balance at end of period	$	4,950		$	1,218		$	2,413		$	11,702		$	955		$	5,385	$	26,623

Reserve for unfunded lending commitments
Balance at June 30, 2015	$	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	$	4,950		$	1,218		$	2,413		$	11,702		$	955		$	5,385	$	26,623
Reserve for unfunded lending commitments	48			268			25			75			24			—		440
Total reserve for credit losses	$	4,998		$	1,486		$	2,438		$	11,777		$	979		$	5,385	$	27,063



	Commercial real estate			Construction			Residential real estate			Commercial and industrial			Consumer			Unallocated		Total
For the nine months ended September 30, 2015
Allowance for Loan Losses
Balance at December 31, 2014	$	5,614		$	1,133		$	2,121		$	6,844		$	1,047		$	5,294	$	22,053
Loan loss provision (credit)	(4,397		)	(193		)	(60		)	2,024			535			91		(2,000		)
Recoveries	4,011			278			746			3,440			457					8,932
Loans charged off	(278		)	—			(394		)	(606		)	(1,084		)			(2,362		)
Balance at end of period	$	4,950		$	1,218		$	2,413		$	11,702		$	955		$	5,385	$	26,623

Reserve for unfunded lending commitments
Balance at December 31, 2014	$	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	$	4,950		$	1,218		$	2,413		$	11,702		$	955		$	5,385	$	26,623
Reserve for unfunded lending commitments	48			268			25			75			24			—		440
Total reserve for credit losses	$	4,998		$	1,486		$	2,438		$	11,777		$	979		$	5,385	$	27,063



	Commercial real estate			Construction			Residential real estate			Commercial and industrial			Consumer			Unallocated		Total
For the three months ended September 30, 2014
Allowance for Loan Losses
Balance at June 30, 2014	$	7,960		$	728		$	2,068		$	6,615		$	1,181		$	1,919	$	20,471
Loan loss provision (credit)	(1,203		)	(597		)	6			469			211			1,114		—
Recoveries	317			869			349			512			76			—		2,123
Loans charged off	(91		)	—			(539		)	(244		)	(369		)	—		(1,243		)
Balance at end of period	$	6,983		$	1,000		$	1,884		$	7,352		$	1,099		$	3,033	$	21,351

Reserve for unfunded lending commitments
Balance at June 30, 2014	$	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	$	6,983		$	1,000		$	1,884		$	7,352		$	1,099		$	3,033	$	21,351
Reserve for unfunded lending commitments	48			268			25			75			24			—		440
Total reserve for credit losses	$	7,031		$	1,268		$	1,909		$	7,427		$	1,123		$	3,033	$	21,791



	Commercial real estate			Construction			Residential real estate			Commercial and industrial			Consumer			Unallocated		Total
For the nine months ended September 30, 2014
Allowance for Loan Losses
Balance at December 31, 2013	$	9,565		$	535		$	2,381		$	6,261		$	1,401		$	714	$	20,857
Loan loss provision	(2,681		)	(482		)	(264		)	706			402			2,319		—
Recoveries	1,318			1,243			630			1,969			230			—		5,390
Loans charged off	(1,219		)	(296		)	(863		)	(1,584		)	(934		)	—		(4,896		)
Balance at end of period	$	6,983		$	1,000		$	1,884		$	7,352		$	1,099		$	3,033	$	21,351

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	$	6,983		$	1,000		$	1,884		$	7,352		$	1,099		$	3,033	$	21,351
Reserve for unfunded lending commitments	48			268			25			75			24			—		440
Total reserve for credit losses	$	7,031		$	1,268		$	1,909		$	7,427		$	1,123		$	3,033	$	21,791

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 September 30, 2015 and December 31, 2014 (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
September 30, 2015
Commercial real estate	$	78	$	4,872	$	4,950	$	3,679	$	831,314	$	834,993
Construction	—		1,218		1,218		365		134,242		134,607
Residential real estate	—		2,413		2,413		—		272,315		272,315
Commercial and industrial	123		11,579		11,702		2,561		363,549		366,110
Consumer	—		955		955		—		39,444		39,444
	$	201	$	21,037	21,238		$	6,605	$	1,640,864	$	1,647,469
Unallocated					5,385
					$	26,623

December 31, 2014
Commercial real estate	$	60	$	5,554	$	5,614	$	28,947	$	727,705	$	756,652
Construction	—		1,133		1,133		963		124,465		125,428
Residential real estate	—		2,121		2,121		317		204,370		204,687
Commercial and industrial	25		6,819		6,844		3,495		364,980		368,475
Consumer	—		1,047		1,047		—		37,298		37,298
	$	85	$	16,674	16,759		$	33,722	$	1,458,818	$	1,492,540
Unallocated					5,294
					$	22,053

The above reserve for loan losses includes an unallocated allowance of $5.4 million at September 30, 2015 and $5.3 million at December 31, 2014. The change in the unallocated allowance is mainly a result of an enhanced reserve methodology for the C&I loans, specifically related to SNC loans as described above.

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.

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 nine months ended September 30, 2015, the Bank saw improved credit quality, as demonstrated by a reduction in the aggregate balance of all loans adversely classified. The improvement was mainly in Special Mention loans, resulting from improving economic conditions as well as payoffs and paydowns in the Special Mention portfolio. Substandard loan balances have increased modestly, with improvements in certain credits offset by an increase related to a SNC, included in C&I loans, that was downgraded during the period.

The following table presents, by portfolio class, the recorded investment in loans by internally assigned grades at September 30, 2015 and December 31, 2014 (dollars in thousands):



	Loan grades
	Acceptable		Pass-Watch		Special Mention		Substandard		Total
September 30, 2015
Originated loans (a):
Commercial real estate:
Owner occupied	$	241,110	$	8,556	$	3,283	$	10,672	$	263,621
Non-owner occupied	400,442		9,121		7,056		5,130		421,749
Total commercial real estate loans	641,552		17,677		10,339		15,802		685,370
Construction	119,700		813		1,208		16		121,737
Residential real estate	204,711		714		596		500		206,521
Commercial and industrial	311,794		10,118		9,926		12,572		344,410
Consumer	37,786		—		—		—		37,786
	$	1,315,543	$	29,322	$	22,069	$	28,890	$	1,395,824



Acquired loans (b):
Commercial real estate:
Owner occupied	$	29,198	$	3,513	$	7,795	$	255		$	40,761
Non-owner occupied	65,798		5,699		8,930		7,619			88,046
Total commercial real estate loans	94,996		9,212		16,725		7,874			128,807
Construction	10,749		—		—		—			10,749
Residential real estate	57,408		—		—		838			58,246
Commercial and industrial	15,678		121		3,493		(15		)	19,277
Consumer	1,362		—		—		3			1,365
	$	180,193	$	9,333	$	20,218	$	8,700		$	218,444

Acquired covered loans (c):
Commercial real estate:
Owner occupied	$	10,518	$	—	$	—	$	92		$	10,610
Non-owner occupied	5,134		—		4,572		500			10,206
Total commercial real estate loans	15,652		—		4,572		592			20,816
Construction	44		2,041		—		36			2,121
Residential real estate	7,207		—		—		341			7,548
Commercial and industrial	1,921		—		—		502			2,423
Consumer	293		—		—		—			293
	$	25,117	$	2,041	$	4,572	$	1,471		$	33,201

Total loans:
Commercial real estate:
Owner occupied	$	280,826	$	12,069	$	11,078	$	11,019		$	314,992
Non-owner occupied	471,374		14,820		20,558		13,249			520,001
Total commercial real estate loans	752,200		26,889		31,636		24,268			834,993
Construction	130,493		2,854		1,208		52			134,607
Residential real estate	269,326		714		596		1,679			272,315
Commercial and industrial	329,393		10,239		13,419		13,059			366,110
Consumer	39,441		—		—		3			39,444
	$	1,520,853	$	40,696	$	46,859	$	39,061		$	1,647,469

(a) Originated loans are loans organically made through the Company’s normal and customary origination process, including ARM purchases.
(b) Acquired loans are loans acquired in the acquisition of Home less acquired covered loans.
(c) Acquired covered loans are loans acquired in the acquisition of Home that are covered under FDIC loss share agreements.

Loan grades

Acceptable

Pass-Watch

Special
Mention

Substandard

Total

December 31, 2014

Originated loans (a):

Commercial real estate:



Owner occupied	$	167,509	$	8,749	$	4,035	$	18,552	$	198,845
Non-owner occupied	350,420		10,383		16,145		6,339		383,287
Total commercial real estate loans	517,929		19,132		20,180		24,891		582,132
Construction	95,440		3,086		1,850		61		100,437
Residential real estate	119,280		1,380		552		1,266		122,478
Commercial and industrial	306,030		18,721		14,676		3,319		342,746
Consumer	34,852		—		—		45		34,897
	$	1,073,531	$	42,319	$	37,258	$	29,582	$	1,182,690

Acquired loans (b):
Commercial real estate:
Owner occupied	$	42,673	$	1,125	$	4,352	$	263	$	48,413
Non-owner occupied	75,340		11,019		12,265		4,266		102,890
Total commercial real estate loans	118,013		12,144		16,617		4,529		151,303
Construction	22,448		—		—		116		22,564
Residential real estate	70,002		—		—		1,383		71,385
Commercial and industrial	22,236		151		—		57		22,444
Consumer	1,907		—		—		56		1,963
	$	234,606	$	12,295	$	16,617	$	6,141	$	269,659

Acquired covered loans (c):
Commercial real estate:
Owner occupied	$	10,363	$	—	$	1,048	$	440	$	11,851
Non-owner occupied	5,668		361		4,641		696		11,366
Total commercial real estate loans	16,031		361		5,689		1,136		23,217
Construction	48		2,332		—		47		2,427
Residential real estate	9,601		—		—		1,223		10,824
Commercial and industrial	2,779		—		—		506		3,285
Consumer	438		—		—		—		438
	$	28,897	$	2,693	$	5,689	$	2,912	$	40,191

Total loans:
Commercial real estate:
Owner occupied	$	220,545	$	9,874	$	9,435	$	19,255	$	259,109
Non-owner occupied	431,428		21,763		33,051		11,301		497,543
Total commercial real estate loans	651,973		31,637		42,486		30,556		756,652
Construction	117,936		5,418		1,850		224		125,428
Residential real estate	198,883		1,380		552		3,872		204,687
Commercial and industrial	331,045		18,872		14,676		3,882		368,475
Consumer	37,197		—		—		101		37,298
	$	1,337,034	$	57,307	$	59,564	$	38,635	$	1,492,540

(a) Originated loans are loans organically made through the Company’s normal and customary origination process, including ARM purchases.

(b) Acquired loans are loans acquired in the acquisition of Home less acquired covered loans.

(c) Acquired covered loans are loans acquired in the acquisition of Home that are covered under FDIC loss share agreements.

The following table presents, by portfolio class, an age analysis of past due loans, including loans placed on non-accrual at September 30, 2015 and December 31, 2014 (dollars in thousands):



	30-89 days past due		90 days or more past due		Total past due		Current		Total loans
September 30, 2015
Originated loans (a):
Commercial real estate:
Owner occupied	$	46	$	1,215	$	1,261	$	262,360	$	263,621
Non-owner occupied	604		—		604		421,145		421,749
Total commercial real estate loans	650		1,215		1,865		683,505		685,370
Construction	172		—		172		121,565		121,737
Residential real estate	238		—		238		206,283		206,521
Commercial and industrial	593		350		943		343,467		344,410
Consumer	95		—		95		37,691		37,786
	$	1,748	$	1,565	$	3,313	$	1,392,511	$	1,395,824

Acquired loans (b):
Commercial real estate:
Owner occupied	$	—	$	—	$	—	$	40,761	$	40,761
Non-owner occupied	—		—		—		88,046		88,046
Total commercial real estate loans	—		—		—		128,807		128,807
Construction	48		—		48		10,701		10,749
Residential real estate	1,266		370		1,636		56,610		58,246
Commercial and industrial	39		—		39		19,238		19,277
Consumer	8		—		8		1,357		1,365
	$	1,361	$	370	$	1,731	$	216,713	$	218,444

Acquired covered loans (c):
Commercial real estate:
Owner occupied	$	—	$	—	$	—	$	10,610	$	10,610
Non-owner occupied	—		—		—		10,206		10,206
Total commercial real estate loans	—		—		—		20,816		20,816
Construction	2,041		—		2,041		80		2,121
Residential real estate	100		248		348		7,200		7,548
Commercial and industrial	3		11		14		2,409		2,423
Consumer	7		—		7		286		293
	$	2,151	$	259	$	2,410	$	30,791	$	33,201

Total loans:
Commercial real estate:
Owner occupied	$	46	$	1,215	$	1,261	$	313,731	$	314,992
Non-owner occupied	604		—		604		519,397		520,001
Total commercial real estate loans	650		1,215		1,865		833,128		834,993
Construction	2,261		—		2,261		132,346		134,607



Residential real estate	1,604		618		2,222		270,093		272,315
Commercial and industrial	635		361		996		365,114		366,110
Consumer	110		—		110		39,334		39,444
	$	5,260	$	2,194	$	7,454	$	1,640,015	$	1,647,469

December 31, 2014
Originated loans (a):
Commercial real estate:
Owner occupied	$	732	$	3,716	$	4,448	$	194,397	$	198,845
Non-owner occupied	1,718		971		2,689		380,598		383,287
Total commercial real estate loans	2,450		4,687		7,137		574,995		582,132
Construction	—		100		100		100,337		100,437
Residential real estate	662		110		772		121,706		122,478
Commercial and industrial	288		334		622		342,124		342,746
Consumer	139		45		184		34,713		34,897
	$	3,539	$	5,276	$	8,815	$	1,173,875	$	1,182,690

Acquired loans (b):
Commercial real estate:
Owner occupied	$	24	$	—	$	24	$	48,389	$	48,413
Non-owner occupied	—		120		120		102,770		102,890
Total commercial real estate loans	24		120		144		151,159		151,303
Construction	—		—		—		22,564		22,564
Residential real estate	1,361		288		1,649		69,736		71,385
Commercial and industrial	—		—		—		22,444		22,444
Consumer	55		—		55		1,908		1,963
	$	1,440	$	408	$	1,848	$	267,811	$	269,659

Acquired covered loans (c):
Commercial real estate:
Owner occupied	$	—	$	—	$	—	$	11,851	$	11,851
Non-owner occupied	—		27		27		11,339		11,366
Total commercial real estate loans	—		27		27		23,190		23,217
Construction	—		—		—		2,427		2,427
Residential real estate	375		—		375		10,449		10,824
Commercial and industrial	—		—		—		3,285		3,285
Consumer	11		—		11		427		438
	$	386	$	27	$	413	$	39,778	$	40,191

Total loans:
Commercial real estate:
Owner occupied	$	756	$	3,716	$	4,472	$	254,637	$	259,109
Non-owner occupied	1,718		1,118		2,836		494,707		497,543
Total commercial real estate loans	2,474		4,834		7,308		749,344		756,652
Construction	—		100		100		125,328		125,428
Residential real estate	2,398		398		2,796		201,891		204,687
Commercial and industrial	288		334		622		367,853		368,475
Consumer	205		45		250		37,048		37,298



	$	5,365	$	5,711	$	11,076	$	1,481,464	$	1,492,540

(a) Originated loans are loans organically made through the Company's normal and customary origination process, including ARM purchases.
(b) Acquired loans are loans acquired in the acquisition of Home less acquired covered loans.
(c) Acquired covered loans are loans acquired in the acquisition of Home that are covered under FDIC loss share agreements.

Loans contractually past due 90 days or more on which the Company continued to accrue interest were $0.21 million and $0.05 million at September 30, 2015 and December 31, 2014, respectively.

The following table presents information related to impaired loans, by portfolio class, at September 30, 2015 and December 31, 2014 (dollars in thousands):



	Impaired loans
	With a related allowance		Without a related allowance		Total recorded balance		Unpaid principal balance		Related allowance
September 30, 2015
Commercial real estate:
Owner occupied	$	1,055	$	1,974	$	3,029	$	4,207	$	73
Non-owner occupied	650		—		650		650		5
Total commercial real estate loans	1,705		1,974		3,679		4,857		78
Construction	—		365		365		365		—
Residential real estate	—		—		—		—		—
Commercial and industrial	2,399		162		2,561		2,954		123
Consumer	—		—		—		—		—
	$	4,104	$	2,501	$	6,605	$	8,176	$	201

December 31, 2014
Commercial real estate:
Owner occupied	$	436	$	5,624	$	6,060	$	8,699	$	41
Non-owner occupied	1,087		21,800		22,887		22,943		19
Total commercial real estate loans	1,523		27,424		28,947		31,642		60
Construction	—		963		963		963		—
Residential real estate	—		317		317		353		—
Commercial and industrial	2,702		793		3,495		3,962		25
Consumer	—		—		—		—		—
	$	4,225	$	29,497	$	33,722	$	36,920	$	85

At September 30, 2015 and December 31, 2014, the total recorded balance of impaired loans in the above table included $0.8 million and $22.8 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 and nine months ended September 30, 2015 and 2014 (dollars in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30, 2015
	2015		2014		2015		2014
Commercial real estate:
Owner occupied	$	3,063	$	6,010	$	3,225	$	6,134
Non-owner occupied	1,072		22,586		8,297		22,637
Total commercial real estate loans	4,135		28,596		11,522		28,771
Construction	443		963		543		1,221
Residential real estate	28		391		66		403
Commercial and industrial	2,712		3,663		2,815		4,188
Consumer	—		—		—		—
	$	7,318	$	33,613	$	14,946	$	34,583

Interest income recognized for cash payments received on impaired loans for the three and nine months ended September 30, 2015 was insignificant.

Information with respect to the Company’s non-performing loans, by portfolio class, at September 30, 2015 and December 31, 2014 is as follows (dollars in thousands):



	September 30, 2015		December 31, 2014
Commercial real estate:
Owner occupied	$	2,570	$	5,564
Non-owner occupied	479		1,940
Total commercial real estate loans	3,049		7,504
Construction	16		216
Residential real estate	1,455		3,165
Commercial and industrial	401		744
Consumer	3		56
Total non-accrual loans	$	4,924	$	11,685

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	—		—
Residential real estate	—		—
Commercial and industrial	209		9
Consumer	—		45
Total accruing loans which are contractually past due 90 days or more	$	209	$	54

TDRs

The Company allocated $0.2 million and $0.1 million of specific reserves to customers whose loan terms have been modified in TDRs as of September 30, 2015 and December 31, 2014, 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 status at the time of restructuring, it will remain on accrual status after the restructuring. After six consecutive payments under the restructured terms, a non-accrual restructured loan is reviewed for possible upgrade to accrual 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.

There were no loans modified and recorded as TDRs during the three and nine months ended September 30, 2015 or 2014. At both September 30, 2015 and 2014, the Company had no remaining commitments to lend on loans accounted for as TDRs.

There were no TDRs which had payment defaults during the nine months ended September 30, 2015 or 2014 that had been previously restructured within the twelve months prior to September 30, 2015 or 2014.