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 effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, 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. 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 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.

On August 27, 2009, the Bank entered into an agreement with the Federal Deposit Insurance Corporation ("FDIC"), its principal federal banking regulator, and the Oregon Division of Finance and Corporate Securities ("DFCS") which required the Bank to take certain measures to improve its safety and soundness. In connection with this agreement, the Bank stipulated to the issuance by the FDIC and the DFCS of a cease-and-desist order (the “Order”) against the Bank based on certain findings from an examination of the Bank concluded in February 2009 based upon financial and lending data measured as of December 31, 2008 (the Report of Examination, or “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 was 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 assure that its reserve for loan losses is maintained at an appropriate level. Among the corrective actions required were 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 December 31, 2012, the requirement relating to increasing the Bank’s Tier 1 leverage ratio was met.

The Order further required the Bank to ensure the level of the reserve for loan losses be 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 December 31, 2012, the requirement that the amount of classified loans as of the ROE be reduced to no more than 75% of capital was 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 required 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 15.00%. As of December 31, 2012, the requirement relating to Bank's primary liquidity ratio was met.

In addition, pursuant to the Order, the Bank was required to retain qualified management and to notify the FDIC and the DFCS in writing before adding any individual to its Board of Directors or employing any new senior executive officer. Under the Order, the Bank's Board of Directors also was required to 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 restricted 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.

On March 7, 2013, the Bank entered into a memorandum of understanding (“MOU”) with the FDIC and the DFCS which terminated the Order. The MOU restricted the Bank from paying dividends without the written consent of the FDIC and DFCS and required that the Bank maintain higher levels of capital than may be required by published capital adequacy requirements. In particular the MOU required the Bank to maintain the minimum capital requirements for a “well-capitalized” bank, including a Tier 1 leverage ratio of at least 10.00%. On September 5, 2013, the MOU was lifted by the FDIC and DFCS.

On October 26, 2009, Bancorp entered into a written agreement with the Federal Reserve Bank of San Francisco ("FRB") and DFCS (the “Written Agreement”), which required Bancorp to take certain measures to improve its safety and soundness. Under the Written Agreement, Bancorp was required to develop and submit for approval, a plan to maintain sufficient capital at Bancorp and the Bank within 60 days of the date of the Written Agreement. The Company submitted a strategic plan on October 28, 2009. As of December 31, 2012, Bancorp met the 10% Tier 1 leverage ratio requirement per the Written Agreement. On July 8, 2013, the Bancorp entered into a memorandum of understanding (“FRB-MOU”) with the FRB and the DFCS which terminated the Written Agreement. On October 23, 2013, the FRB-MOU was lifted by the FRB and DFCS.

At December 31, 2013 and 2012 the Bank and Bancorp met the regulatory benchmarks to be “well-capitalized” under the applicable regulations. Additionally, at December 31, 2012, the Bank and Bancorp met the regulatory benchmarks to be "well capitalized" under Order and the Written Agreement. As all regulatory orders were lifted in 2013, no additional requirements were in place as of December 31, 2013.

Bancorp’s actual and required capital amounts and ratios as of December 31, 2013 and 2012 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
2013
Tier 1 leverage (to average assets)	$	142,937	10.5	%	$	54,527	4.0	%	$	136,317	10.0	%	⁽²⁾
Tier 1 capital (to risk-weighted assets)	142,937		13.0		44,021		4.0		66,031		6.0
Total capital (to risk-weighted assets)	156,787		14.3		88,041		8.0		110,052		10.0

2012
Tier 1 leverage (to average assets)	$	136,960	10.4	%	$	52,470	4.0	%	$	131,174	10.0	%	⁽¹⁾
Tier 1 capital (to risk-weighted assets)	136,960		14.1		38,811		4.0		58,216		6.0
Total capital (to risk-weighted assets)	149,296		15.4		77,621		8.0		97,027		10.0

(1) Pursuant to the Written Agreement, which was terminated effective July 8, 2013, Bancorp was required to maintain a Tier 1 leverage ratio of at least 10.00% in order to be deemed "well capitalized".

(2) Pursuant to the FRB-MOU, which was terminated effective October 23, 2013, Bancorp was required to maintain a Tier 1 leverage ratio of at least 10.00%.

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
2013
Tier 1 leverage (to average assets)	$	142,964	10.5	%	$	54,529	4.0	%	$	136,323	10.0	%	⁽¹⁾
Tier 1 capital (to risk-weighted assets)	142,964		13.0		43,939		4.0		65,909		6.0
Total capital (to risk-weighted assets)	156,788		14.3		87,879		8.0		109,848		10.0

2012
Tier 1 leverage (to average assets)	$	136,658	10.4	%	$	52,457	4.0	%	$	131,142	10.0	%	⁽²⁾
Tier 1 capital (to risk-weighted assets)	136,658		14.1		38,803		4.0		58,205		6.0
Total capital (to risk-weighted assets)	148,991		15.4		77,607		8.0		97,008		10.0

(1) Pursuant to the MOU, which was terminated effective September 5, 2013, the Bank was required to maintain a Tier 1 leverage ratio of at least 10.00% in order to be deemed "well-capitalized".

(2) Pursuant to the Order, which was terminated effective March 7, 2013, the Bank was required to maintain a Tier 1 leverage ratio of at least 10.00% in order to be deemed "well capitalized".