Loans and reserve for credit losses

3 Months Ended

Mar. 31, 2013

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

3. Loans and reserve for credit losses

The composition of the loan portfolio at March 31, 2013 and December 31, 2012 was as follows (dollars in thousands):

	March 31, 2013						December 31, 2012
	Amount			Percent			Amount			Percent
Commercial real estate:
Owner occupied	$	199,026			22.7	%	$	196,821			22.9	%
Non-owner occupied and other		345,969			39.4	%		328,480			38.3	%
Total commercial real estate loans		544,995			62.1	%		525,301			61.2	%
Construction		38,834			4.4	%		45,650			5.3	%
Residential real estate		93,475			10.7	%		85,494			10.0	%
Commerical and industrial		161,758			18.4	%		162,213			18.9	%
Consumer		38,022			4.4	%		39,506			4.6	%
Total loans		877,084			100.0	%		858,164			100.0	%
Less:
Deferred loan fees		(1,771	)					(1,846	)
Reserve for loan losses		(24,548	)					(27,261	)
Loans, net	$	850,765					$	829,057

For the first quarter of 2013, total loan balances increased by $18.9 million mainly due to increased commercial real estate (“CRE”) loans as well as residential real estate loans. The increase in CRE loans was mainly due to a few large commercial office loans in our local markets.

A substantial portion of the Bank’s loans are collateralized by real estate in four major markets (Central, Southern and Northwest Oregon, as well as the greater Boise/Treasure Valley, Idaho area). As such, the Bank’s results of operations and financial condition are affected by the general economic trends and, in particular, the local residential and commercial real estate markets it serves. Economic trends can significantly affect the strength of the local real estate market. Approximately 77% of the Bank’s loan portfolio at March 31, 2013 consisted of real estate-related loans, including construction and development loans, residential mortgage loans, and commercial loans secured by commercial real estate. While broader economic conditions currently appear to be stabilizing, real estate prices remain at markedly lower levels compared to periods before the economic recession that began in 2008. Should the period of lower real estate prices persist for an extended duration or should real estate markets further decline, the Bank could be materially and adversely affected. Specifically, collateral for the Bank’s loans would provide less security and the Bank’s ability to recover on defaulted loans by selling real estate collateral would be diminished. 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 nonperforming 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 participates portions of loans to third parties in order to extend the Bank’s lending capability or to mitigate risk. At March 31, 2013 and December 31, 2012, the portion of these loans participated to third-parties (which are not included in the accompanying condensed consolidated financial statements) totaled approximately $11.3 million and $12.7 million, respectively.

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, 2013 and December 31, 2012, 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 ultimate 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 decline in the reserve for loan losses from December 31, 2012 to March 31, 2013 was mainly related to the Bank’s ongoing remediation of adversely classified loans.

Transactions and allocations in the reserve for loan losses and unfunded loan commitments, by portfolio segment, for the three months ended March 31, 2013 and 2012 were as follows (dollars in thousands):

	Commercial real estate			Construction			Residential real estate			Commercial  and  industrial			Consumer			Unallocated			Total
For the three months ended March 31, 2013
Allowance 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

	Commercial real estate			Construction			Residential real estate			Commercial  and  industrial			Consumer			Unallocated		Total
For the three months ended March 31, 2012
Allowance for Loan Losses
Balance at December 31, 2011	$	21,648		$	5,398		$	3,259		$	11,291		$	2,292		$	17	$	43,905
Loan loss provision		667			(489	)		1,132			(919	)		709			-		1,100
Recoveries		6			151			34			180			89			-		460
Loans charged off		(7	)		-			(561	)		(644	)		(302	)		-		(1,514	)
Balance at end of period	$	22,314		$	5,060		$	3,864		$	9,908		$	2,788		$	17	$	43,951
Reserve for unfunded lending commitments
Balance at December 31, 2011	$	28		$	29		$	184		$	487		$	822		$	-	$	1,550
Provision for unfunded loan commitments		-			-			-			-			-			-		-
Balance at end of period	$	28		$	29		$	184		$	487		$	822		$	-	$	1,550
Reserve for credit losses
Reserve for loan losses	$	22,314		$	5,060		$	3,864		$	9,908		$	2,788		$	17	$	43,951
Reserve for unfunded lending commitments		28			29			184			487			822			-		1,550
Total reserve for credit losses	$	22,342		$	5,089		$	4,048		$	10,395		$	3,610		$	17	$	45,501

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, 2013 and December 31, 2012 (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, 2013
Commercial real estate	$	1,312	$	9,913	$	11,225	$	44,060	$	500,935	$	544,995
Construction		416		820		1,236		3,293		35,541		38,834
Residential real estate		1,141		2,573		3,714		4,833		88,642		93,475
Commerical and industrial		1,230		4,446		5,676		9,165		152,593		161,758
Consumer		330		1,709		2,039		1,938		36,084		38,022
	$	4,429	$	19,461		23,890	$	63,289	$	813,795	$	877,084
Unallocated						658
					$	24,548
December 31, 2012
Commercial real estate	$	1,088	$	10,508	$	11,596	$	42,859	$	482,442	$	525,301
Construction		440		1,143		1,583		9,734		35,916		45,650
Residential real estate		1,141		2,410		3,551		4,840		80,654		85,494
Commerical and industrial		829		6,438		7,267		9,602		152,611		162,213
Consumer		301		1,876		2,177		1,636		37,870		39,506
	$	3,799	$	22,375		26,174	$	68,671	$	789,493	$	858,164
Unallocated						1,087
					$	27,261

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 first quarter of 2013, the Bank significantly reduced loans classified as special mention and substandard by $57.2 million by working with customers to either payoff, paydown, restructure and/or foreclose on the loans.

The following table presents, by portfolio class, the recorded investment in loans by internally assigned grades at March 31, 2013 and December 31, 2012 (dollars in thousands):

	Loan grades
	Acceptable		Pass-Watch		Special Mention		Substandard		Total
March 31, 2013
Commercial real estate:
Owner occupied	$	121,494	$	34,451	$	9,185	$	33,896	$	199,026
Non-owner occupied		236,223		59,091		22,605		28,050		345,969
Total commercial real estate loans		357,717		93,542		31,790		61,946		544,995
Construction		27,649		7,048		728		3,409		38,834
Residential real estate		86,840		1,877		1,371		3,387		93,475
Commerical and industrial		140,118		5,834		3,243		12,563		161,758
Consumer		37,416		605		-		1		38,022
	$	649,740	$	108,906	$	37,132	$	81,306	$	877,084
December 31, 2012
Commercial real estate:
Owner occupied	$	122,125	$	26,326	$	13,622	$	34,748	$	196,821
Non-owner occupied		214,990		39,879		24,910		48,701		328,480
Total commercial real estate loans		337,115		66,205		38,532		83,449		525,301
Construction		25,308		6,079		1,795		12,468		45,650
Residential real estate		74,576		2,207		2,086		6,625		85,494
Commerical and industrial		126,208		7,005		6,473		22,527		162,213
Consumer		37,264		603		-		1,639		39,506
	$	600,471	$	82,099	$	48,886	$	126,708	$	858,164

The following table presents, by portfolio class, an age analysis of past due loans, including loans placed on non-accrual at March 31, 2013 and December 31, 2012 (dollars in thousands):

	30-89 days past due		90 days or more past due		Total past due		Current		Total loans
March 31, 2013
Commercial real estate:
Owner occupied	$	3,464	$	4,613	$	8,077	$	190,949	$	199,026
Non-owner occupied		460		3,708		4,168		341,801		345,969
Total commercial real estate loans		3,924		8,321		12,245		532,750		544,995
Construction		298		1,166		1,464		37,370		38,834
Residential real estate		326		462		788		92,687		93,475
Commerical and industrial		2,665		2,337		5,002		156,756		161,758
Consumer		40		14		54		37,968		38,022
	$	7,253	$	12,300	$	19,553	$	857,531	$	877,084
December 31, 2012
Commercial real estate:
Owner occupied	$	1,240	$	4,221	$	5,461	$	191,360	$	196,821
Non-owner occupied		8,660		7,183		15,843		312,637		328,480
Total commercial real estate loans		9,900		11,404		21,304		503,997		525,301
Construction		1,288		2,793		4,081		41,569		45,650
Residential real estate		818		364		1,182		84,312		85,494
Commerical and industrial		2,825		1,858		4,683		157,530		162,213
Consumer		61		12		73		39,433		39,506
	$	14,892	$	16,431	$	31,323	$	826,841	$	858,164

Loans contractually past due 90 days or more on which the Company continued to accrue interest were $0.2 million and $1.5 million at March 31, 2013 and December 31, 2012, respectively.

The following table presents information related to impaired loans, by portfolio class, at March 31, 2013 and December 31, 2012 (dollars in thousands):

	Impaired loans
	With a related allowance		Without a related allowance		Total recorded balance		Unpaid principal balance		Related allowance
March 31, 2013
Commercial real estate:
Owner occupied	$	5,472	$	8,965	$	14,437	$	16,970	$	712
Non-owner occupied		4,511		25,112		29,623		31,359		600
Total commercial real estate loans		9,983		34,077		44,060		48,329		1,312
Construction		2,418		875		3,293		3,323		416
Residential real estate		4,539		294		4,833		5,021		1,141
Commerical and industrial		6,401		2,764		9,165		10,560		1,230
Consumer		1,938		-		1,938		1,938		330
	$	25,279	$	38,010	$	63,289	$	69,171	$	4,429
December 31, 2012
Commercial real estate:
Owner occupied	$	8,538	$	7,443	$	15,981	$	21,610	$	988
Non-owner occupied		3,712		23,166		26,878		32,630		100
Total commercial real estate loans		12,250		30,609		42,859		54,240		1,088
Construction		2,348		7,386		9,734		9,867		440
Residential real estate		4,530		310		4,840		5,018		1,141
Commerical and industrial		6,493		3,109		9,602		10,982		829
Consumer		1,636		-		1,636		1,638		301
	$	27,257	$	41,414	$	68,671	$	81,745	$	3,799

At March 31, 2013 and December 31, 2012, the total recorded balance of impaired loans in the above table included $40.9 million and $43.6 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, 2013 and 2012:

	Three months ended March 31,
	2013		2012
Commercial real estate:
Owner occupied	$	15,209	$	14,985
Non-owner occupied		28,250		36,640
Total commercial real estate loans		43,459		51,625
Construction		6,514		4,207
Residential real estate		4,836		5,552
Commerical and industrial		9,384		11,341
Consumer		1,788		997
	$	65,981	$	73,722

Interest income recognized for cash payments received on impaired loans for the three months ended March 31, 2013 was insignificant.

Information with respect to the Company’s non-accrual loans, by portfolio class, at March 31, 2013 and December 31, 2012 is as follows (dollars in thousands):

	March 31, 2013		December 31, 2012
Commercial real estate:
Owner occupied	$	5,727	$	4,836
Non-owner occupied		4,465		5,756
Total commercial real estate loans		10,192		10,592
Construction		1,211		2,839
Residential real estate		735		556
Commerical and industrial		3,913		3,233
Total non-accrual loans		16,051		17,220
Accruing loans which are contractually past due 90 days or more:
Commerical real estate:
Owner occupied		153		-
Non-owner occupied		-		1,427
Total commercial real estate loans		153		1,427
Residential real estate		-		94
Consumer		14		12
Total accruing loans which are contractually past due 90 days or more		167		1,533

TDRs

A loan is classified as a TDR when a borrower is experiencing financial difficulties and the Company grants a concession to the borrower in the restructuring that the Company would not otherwise consider in the origination of a loan. In some situations a borrower may be experiencing financial distress, but the Company does not provide a concession.

These modifications are not considered TDRs. In other cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress. This could be the case if the Company is matching a competitor’s interest rate. These modifications would also not be considered TDRs. Finally, any renewals at existing terms for borrowers not experiencing financial distress would not be considered TDRs. A TDR loan is considered to be impaired and is individually evaluated for impairment.

The Company allocated $2.7 million of specific reserves to customers whose loan terms have been modified in TDRs as of both March 31, 2013 and December 31, 2012. TDRs involved 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 active at utilizing these programs and working with its customers to reduce the risk of foreclosure. These 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 based allocation for the applicable loan grade and loan class.

As with other impaired loans, an allowance for loan loss is estimated for each TDR based on the most likely source of repayment for each loan. For impaired commercial real estate loans that are collateral dependent, the allowance is computed based on the fair value of the underlying collateral. For impaired commercial loans where repayment is expected from cash flows from business operations and/or sale of collateral, the allowance is computed based on a discounted cash flow computation. The allowance allocations for commercial TDRs where we have reduced the contractual interest rate are computed by measuring cash flows using the new payment terms discounted at the original contractual rate.

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, 2013 and 2012 (dollars in thousands):

	For the three months ended March 31,
	2013				2012
	Number of loans		TDR outstanding recorded investment		Number of loans		TDR outstanding recorded investment
Commercial real estate		5	$	27,677		3	$	1,601
Construction		2		115		-		-
Residential real estate		3		152		6		272
Commerical and industrial		8		399		4		200
Consumer		12		358		20		181
		30	$	28,701		33	$	2,254

The increase in the outstanding recorded investment of loans modified and recorded as TDRs during the three months ended March 31, 2013 was the result of restructuring a large CRE credit in the Bank’s loan portfolio.

There was no change in the pre and post TDR outstanding recorded investment for loans restructured during the twelve months ended March 31, 2013 and 2012. At both March 31, 2013 and 2012, the Company had remaining commitments to lend on loans accounted for as TDRs of $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:

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
Commerical 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, 2013 and 2012 that had been previously restructured within the last twelve months prior to March 31, 2013 and 2012:

	For the three months ended March 31,
	2013				2012
	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		1	$	2,264
Construction		-		-		1		160
Residential real estate		-		-		1		40
Commercial and industrial loans		-		-		2		4,858
Consumer loans		-		-		4		42
		2	$	3,500		9	$	7,364