Regulatory Matters

6 Months Ended

Jun. 30, 2011

Regulatory Matters

15. Regulatory Matters

Bancorp and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s consolidated financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bancorp and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.  The Bancorp’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bancorp and the Bank to maintain minimum amounts and ratios (set forth in the tables below) of Tier 1 capital to average assets and Tier 1 and total capital to risk-weighted assets (all as defined in the regulations).

Federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy certain minimum capital requirements. Such actions could potentially include a leverage capital limit, a risk-based capital requirement, and any other measure of capital deemed appropriate by the federal banking regulator for measuring the capital adequacy of an insured depository institution. In addition, payment of dividends by Bancorp and the Bank are subject to restriction by state and federal regulators and availability of retained earnings. At June 30, 2011, Bancorp and the Bank met the regulatory benchmarks to be “well-capitalized” under the applicable regulations.

    On August 27, 2009, the Bank entered into an agreement with the FDIC, its principal federal banking regulator, and the Oregon Division of Finance and Corporate Securities (“DFCS”) which requires the Bank to take certain measures to improve its safety and soundness (the “Order”).

    In connection with this agreement, the Bank stipulated to the issuance by the FDIC and the DFCS of the Order based on certain findings from an examination of the Bank conducted in February 2009 based upon financial and lending data measured as of December 31, 2008 (the “ROE”). In entering into the stipulation and consenting to entry of the Order, the Bank did not concede the findings or admit to any of the assertions therein.

                Under the Order, the Bank is required to take certain measures to improve its capital position, maintain liquidity ratios, reduce its level of non-performing assets, reduce its loan concentrations in certain portfolios, improve management practices and board supervision, and to assure that its reserve for loan losses is maintained at an appropriate level.

    Among the corrective actions required are for the Bank to develop and adopt a plan to maintain the minimum capital requirements for a “well-capitalized” bank, including a Tier 1 leverage ratio of at least 10% at the Bank level beginning 150 days from the issuance of the Order. As of June 30, 2011, the requirement relating to increasing the Bank’s Tier 1 leverage ratio has been met.

                The Order further requires the Bank to ensure the level of the reserve for loan losses is maintained at appropriate levels to safeguard the book value of the Bank’s loans and leases, and to reduce the amount of classified loans as of the ROE to no more than 75% of capital.  As of June 30, 2011, the requirement that the amount of classified loans as of the ROE be reduced to no more than 75% of capital has been met.  As required by the Order, all assets classified as “Loss” in the ROE have been charged-off. The Bank has also developed and implemented a process for the review and approval of all applicable asset disposition plans.

                The Order further requires the Bank to maintain a primary liquidity ratio (net cash, plus net short-term and marketable assets divided by net deposits and short-term liabilities) of at least 15%.  At June 30, 2011, the Bank’s primary liquidity ratio was 20.4%.

     In addition, pursuant to the Order, the Bank must retain qualified management and must notify the FDIC and the DFCS in writing when it proposes to add any individual to its Board or to employ any new senior executive officer. Under the Order, the Bank’s Board must also increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all the Bank’s activities. The Order also restricts the Bank from taking certain actions without the consent of the FDIC and the DFCS, including paying cash dividends, and from extending additional credit to certain types of borrowers.
 

                 As of June 30, 2011 the Order remains in place until lifted by the FDIC and DFCS, and, therefore, the Bank remains subject to the requirements and restrictions set forth therein.

                 On October 26, 2009, Bancorp entered into a written agreement with the FRB and DFCS (the Written Agreement), which requires Bancorp to take certain measures to improve its safety and soundness. Under the Written Agreement, Bancorp is required to develop and submit for approval, a plan to maintain sufficient capital at the Bancorp and the Bank within 60 days of the date of the Written Agreement.  Bancorp submitted a strategic plan on October 28, 2009, and, as of the completion of the Capital Raise on January 28, 2011, management believes that Bancorp is in compliance with regulatory capital-related terms of the Written Agreement.

                 As of June 30, 2011, Bancorp and the Bank met the minimum regulatory requirements for a “well-capitalized” institution under the terms of the Order and Written Agreement.

                 Bancorp’s actual and required capital amounts and ratios are presented in the following table:

	Actual					Regulatory minimum to be "adequately capitalized"					Regulatory minimum to be "well capitalized" under prompt corrective action provisions
	Capital amount		Ratio			Capital amount		Ratio			Capital amount		Ratio
June 30, 2011:
Tier 1 leverage
(to average assets)	$	207,827		13.1	%	$	63,629		4.0	%	$	79,536		5.0	%
Tier 1 capital
(to risk-weighted assets)		207,827		17.1			48,687		4.0			73,030		6.0
Total capital
(to risk-weighted assets)		223,378		18.4			97,374		8.0			121,717		10.0
December 31, 2010:
Tier 1 leverage
(to average assets)		7,158		0.4			70,257		4.0			87,821		5.0
Tier 1 capital
(to risk-weighted assets)		7,158		0.5			53,451		4.0			80,176		6.0
Total capital
(to risk-weighted assets)		14,316		1.1			106,902		8.0			133,627		10.0

The Bank’s actual and required capital amounts and ratios are presented in the following table (dollars in thousands):

	Actual					Regulatory minimum to be "adequately capitalized"					Regulatory minimum to be "well capitalized" under prompt corrective action provisions
	Capital amount		ratio			Capital amount		ratio			Capital amount		ratio
June 30, 2011:
Tier 1 leverage
(to average assets)	$	229,445		14.4	%	$	63,603		4.0	%	$	159,008		10.0	% (1)
Tier 1 capital
(to risk-weighted assets)		229,445		18.6			49,219		4.0			73,829		6.0
Total capital
(to risk-weighted assets)		245,143		19.9			98,438		8.0			123,048		10.0
December 31, 2010:
Tier 1 leverage
(to average assets)		75,662		4.3			70,145		4.0			175,364		10.0	(1)
Tier 1 capital
(to risk-weighted assets)		75,662		5.7			53,497		4.0			80,245		6.0
Total capital
(to risk-weighted assets)		92,768		6.9			106,993		8.0			133,742		10.0

(1) Pursuant to the Order, in order to be deemed "well capitalized", the Bank must maintain a Tier 1 leverage ratio of at least 10.00%.