SECURITIES
& EXCHANGE COMMISSION


Washington
D.C. 20549





FORM
10-K





[ X
]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.





[    ]  TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2007





COMMISSION
FILE NUMBER 0-30106





PACIFIC
CONTINENTAL CORPORATION


(Exact
name of registrant as specified in its charter)





OREGON                                                             93-1269184


(State of
Incorporation)                                                 (IRS
Employer Identification No)





111
West 7th Avenue


Eugene,
Oregon   97401


(Address
of principal executive offices)





(541)
686-8685


(Registrant’s
telephone number)





Securities
registered pursuant to 12(b) of the Act:  None





Securities
registered pursuant to 12(g) of the Act:


No
Par Value Common Stock





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act                    Yes   __No  X





Indicate
by check mark if the registrant is not required to file report pursuant to
Section 13 or Section 15(d) of the
Act                    Yes   __No  X





Check
whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.   Yes  X  No
___





Check if
there is no disclosure of delinquent filers in response to item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K.    (
X  )





Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.


Large
accelerated
filer   __                                                                Accelerated
filer   X                                                      Non-accelerated
filer   __





Indicate
by check mark whether the registrant is registrant is a shell company (as
defined in Rule 12b-2 of the Exchange
Act     Yes  __                   No  X





The
aggregate market value of the voting stock held by non-affiliates of the
Registrant at June 29, 2007 (the last business day of the most recent second
quarter) was $191,733,000 based on the closing price as quoted on the NASDAQ
National Market on that date.





The
number of shares outstanding of each of the registrant’s classes of common
stock, as of March 7, 2008, was 11,936,197 shares of no par value Common
Stock.





DOCUMENTS
INCORPORATED BY REFERENCE





Part III
incorporates by reference information from the registrant’s definitive proxy
statement for the 2008 annual meeting of shareholders.








PACIFIC
CONTINENTAL CORPORATION


FORM
10-K


ANNUAL
REPORT


TABLE OF
CONTENTS


PART 1
              
              PageItem 1:
              Business
              3Item 1a:
              Risk Factors
              17Item 1b:
              Unresolved Staff Comments
              18Item 2:
              Properties
              18Item 3:
              Legal Proceedings
              19Item 4:
              Submission of Matters to a Vote of
      Security Holders
              19PART IIItem 5:
              Market for Company’s Common Equity,
      Related
              19Stockholder Matters, and Issuer
      Purchases of Equity SecuritiesItem 6:
              Selected Financial Data
              22Item 7:
              Management’s Discussion and Analysis of
      Financial
              23Condition and Results of
      OperationsItem 7a:
              Quantitative and Qualitative Disclosures About
      Market Risk
              37Item 8:
              Financial Statements and Supplementary
      Data
              39Item 9:
              Changes In and Disagreements with
      Accountants
              67on Accounting and Financial
      DisclosureItem 9a:
              Controls and Procedures
              67Item 9b:
              Other Information
              68PART III
              (Items
      10 through 14 are incorporated by reference fromPacific
      Continental Corporation’s definitive proxy statement for
    theannual
      meeting of shareholders scheduled for April 21, 2008)Item 10:
              Directors, Executive Officers and
      Corporate Governance
              69Item 11:
              Executive Compensation
              69Item 12:
              Security Ownership of Certain Beneficial
      Owners
              69and Management and Related Stockholder
      MattersItem 13:
              Certain Relationships, Related Transactions
      and Director Independence
              69Item 14:
              Principal Accountant Fees and
      Services
              69PART IVItem 15:
              Exhibits and Financial Statement
      Schedules
              70SIGNATURES
              
              71CERTIFICATIONS
              
              72


PART
I





Item
1.                      Business


General





Pacific
Continental Corporation (the “Company” or the “Registrant”) is an Oregon
corporation and registered bank holding company located in Eugene,
Oregon.  The Company was organized on June 7, 1999, pursuant to a
holding company reorganization of Pacific Continental Bank, its wholly owned
subsidiary.





The
Company’s principal business activities are conducted through its full-service
commercial bank subsidiary, Pacific Continental Bank (the “Bank”), an Oregon
state-chartered bank with deposits insured by the Federal Deposit Insurance
Corporation (“FDIC”).   The Bank has two subsidiaries, PCB
Service Corporation (presently inactive), which holds and manages Bank property,
and PCB Loan Services (presently inactive), which manages certain other real
estate owned.





The Bank
operates in three primary markets: Portland, Oregon / Southwest Washington;
Seattle, Washington; and Eugene, Oregon.  At December 31, 2007, the
Bank operated fourteen full-service offices in six Oregon and three Washington
cities.  During the second quarter 2007, the Bank sold its two
Consumer Finance offices and loan portfolio.  During the fourth
quarter 2007, the bank relocated its Tualatin, Oregon office to a new highly
visible site located off I-5 approximately one mile from the previous Tualatin
office location.  Also, during the fourth quarter, the Bank reopened
its Bellevue office that had been closed due to an accident at a nearby
construction site that severely damaged the Bank’s facility.  The Bank
operated in a temporary office in the Bellevue market during the first three
quarters of 2007 and experienced no significant loss of business due to the
temporary closure. The facilities and equipment were fully insured for all
damage.





On
November 30, 2005, the Company acquired NWB Financial Corporation (“NWBF”) for a
combination of stock and cash and entered the metropolitan Seattle market in the
State of Washington.  Combined, the stock and cash transaction was
valued at approximately $40.4 million.  The acquisition was accounted
for under the purchase method of accounting and, accordingly, the results of
operations of NWBF have been included in the consolidated financial statements
only since the date of acquisition.  For more information regarding
the Company’s acquisition of NWBF see “Financial Statements and Supplementary
Data” in Item 8 of this Form 10-K.





Results





For the
year ended December 31, 2007, the consolidated net income of the Company was
$12.9 million or $1.08 per diluted share.  At December 31, 2007, the
consolidated equity of the Company was $107.5 million with 11.9 million shares
outstanding and a book value of $9.00 per share.  Total assets were
$949.3 million.  Loans, including loans held for sale, net of
allowance for loan losses and unearned fees, were $813.6 million at December 31,
2007 and represented 86% of total assets.  Deposits totaled $644.4
million at year-end 2007 with core deposits representing 96% or $615.9 of total
deposits.  For more information regarding the Company’s financial
condition and results of operations, see “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and “Financial Statements and
Supplementary Data” in sections 7 and 8 of this Form 10-K.





THE
BANK





General





The Bank
commenced operations on August 15, 1972.  At December 31, 2007, the
Bank operated fourteen banking offices in Oregon and Washington.  The
primary business strategy of the Bank is to provide comprehensive banking and
related services tailored to community-based business, not-for-profits,
professional service providers and private banking services for business owners
and executives.  The Bank emphasizes the diversity of its product
lines, high levels of personal service, and through technology, offers
convenient access typically associated with larger financial institutions, while
maintaining local decision-making authority and market knowledge, typical of a
local community bank.  More information on the Bank and its banking
services can be found on its Website www.therightbank.com.  The Bank
operates under the banking laws of the State of Oregon, State of Washington and
the rules and regulations of the FDIC and the Federal Reserve Bank of San
Francisco.





3




Primary
Market Area





The
Bank’s primary markets consist of metropolitan Portland, which includes
Southwest Washington, and metropolitan Eugene in the State of Oregon and
metropolitan Seattle in the State of Washington.  The Bank has five
full-service banking offices in the metropolitan Portland and Southwest
Washington, seven full-service banking offices in the metropolitan Eugene, and
two full-service offices in the metropolitan Seattle.  The Bank has
its headquarters and administrative office in Eugene, Oregon.





Competition





Commercial
banking in the states of Oregon and Washington is highly competitive with
respect to providing banking services, including making loans and attracting
deposits.  The Bank competes with other banks, as well as with savings
and loan associations, savings banks, credit unions, mortgage companies,
investment banks, insurance companies, and other financial
institutions.  Banking in Oregon and Washington is dominated by
several large banking institutions, including U.S. Bank, Wells Fargo Bank, Bank
of America, and Washington Mutual Bank, which together account for a majority of
the total commercial and savings bank deposits in Oregon and
Washington.  These competitors have significantly greater financial
resources and offer a much greater number of branch locations.  The
Bank has attempted to offset the advantage of the larger competitors by focusing
on certain market segments, providing high levels of customization and personal
service, and tailoring its technology, products, and services to the specific
market segments that the Bank serves.





In
addition to larger institutions, numerous “community” banks and credit unions
have been formed, expanded or moved into the Bank’s three primary areas and have
developed a similar focus to the Bank.  These institutions have
further increased competition in all three of the Bank’s primary
markets.  This growing number of similar financial institutions and an
increased focus by larger institutions in the Bank’s primary markets has led to
intensified competition in all aspects of the Bank’s business, particularly in
the area of loan and deposit pricing.







The
adoption of the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) has led to
further intensification of competition in the financial services industry. 
The GLB Act has eliminated many of the barriers to affiliation among providers
of various types of financial services and has permitted business combinations
among financial service providers such as banks, insurance companies, securities
or brokerage firms, and other financial service providers.  Additionally,
the rapid adoption of financial services through the Internet has reduced or
even eliminated many barriers to entry by financial services providers
physically located outside our market area. For example, remote deposit
services, partly developed in response to the recently adopted Check 21 law,
allow depository companies physically located in other geographical markets to
service local businesses with minimal cost of entry.  Although the Bank has
been able to compete effectively in the financial services business in its
markets to date, there can be no assurance that it will be able to continue to
do so in the future.






The
financial services industry has experienced widespread consolidation over the
last decade.  The Company anticipates that consolidation among financial
institutions in its market area will continue.  The Company seeks
acquisition opportunities, from time to time, in its existing markets and in new
markets of strategic importance.  However, other financial institutions
aggressively compete against the Bank in the acquisition market.  
Some of these institutions may have greater access to capital markets, larger
cash reserves, and stock for use in acquisitions that is more liquid and more
highly valued by the market.




4





Services
Provided





Lending
Activities





The Bank
emphasizes specific areas of lending within its primary market areas: loans to
community-based businesses, professional service providers, not-for-profit
organizations and private banking services for business owners and
executives.





Commercial
loans, secured and unsecured, are made primarily to professionals,
community-based businesses, and not-for-profit organizations.  These
loans are available for general operating purposes, acquisition of fixed assets,
purchases of equipment and machinery, financing of inventory and accounts
receivable, and other business purposes.  The Bank also originates
Small Business Administration (“SBA”) loans and enjoys a national preferred
lender status with the SBA.





Within
its primary markets, the Bank also concentrates on permanent and construction
loan financing for commercial facilities and for pre-sold, custom, and
speculative home construction.  The major thrust of residential
construction lending is for the construction of single-family
residences.  The Bank also finances requests for multi-family
residences.





Fixed-rate
and variable rate residential mortgage loans are offered through the Bank’s
mortgage loan department.  Most residential mortgage loans originated
are sold in the secondary market along with the mortgage loan servicing
rights.





The Bank
makes secured and unsecured loans to individuals for various purposes including
purchases of automobiles, mobile homes, boats, and other recreational vehicles,
home improvements, education, and personal investment.





The Bank
offers credit card services to its business customers and uses an outside vendor
for credit card processing.  In addition, the Bank provides merchant
bankcard processing services through an outside processor, for its client base,
including businesses, not-for-profits, and professional service
providers.





The Board
of Directors has approved specific lending policies and procedures for the Bank
and management is responsible for implementation of the policies.  The
lending policies and procedures include guidelines for loan term, loan-to-value
ratios, collateral appraisals, and cash flow coverage.  The loan
policies also vest varying levels of loan authority in management, the Bank’s
Loan Committee, and the Board of Directors.  Bank management monitors
lending activities through management meetings, loan committee meetings, monthly
reporting, and periodic review of loans by third-party contractors.





Deposit
Services





The Bank
offers a full range of deposit services that are typically available in most
banks and other financial institutions, including checking, savings, money
market accounts, and time deposits.  The transaction accounts and time
deposits are tailored to the Bank’s primary markets and market segments at rates
competitive with those offered in the area.  Additional deposits are
generated through national networks for institutional deposits and the State of
Oregon and State of Washington for public time deposits.  All deposit
accounts are insured by the FDIC to the maximum amount permitted by
law.





The Bank
has invested continuously in image technology since 1994 for the processing of
checks.  The Bank was the first financial institution in Lane,
Multnomah, Clackamas, and Washington Counties to offer this
service.  Due to this investment in image technology, commencing in
July 2007, the Bank has been able to accelerate its funds availability by
presenting all items for clearing to its correspondent banks via an imaged file.
In addition, the Bank provides on-line cash management, remote deposit capture,
and banking services to businesses and consumers. The Bank also allows 24-hour
customer access to deposit and loan information via telephone and on-line cash
management products.


5







Merchant
Card Services





The Bank
provides merchant card services to its clients, which includes processing of
credit card transactions and issuance of business credit cards.  This
service is an integral part of the Bank’s strategy to focus on marketing to
community-based business, not-for-profits, and service
providers.  During 2007, the Company processed approximately $175
million in credit card transactions for its merchant clients.





Other
Services





The Bank
provides other traditional commercial and consumer banking services, including
cash management products for businesses, on-line banking, safe deposit services,
debit and ATM cards, ACH transactions, savings bonds, cashier’s checks,
travelers’ checks, notary services and others.  The Bank is a member
of numerous ATM networks and utilizes an outside processor for the processing of
these automated transactions.





Employees





At
December 31, 2007, the Bank employed 266 full-time equivalent employees with 26
FTE’s in the Seattle market, 54 FTE’s in the Portland market, 98 FTE’s in the
Eugene market, and 88 FTE’s in administrative areas located in Eugene,
Oregon.  None of these employees are represented by labor unions, and
management believes that the Company’s relationship with employees is
good.  The Company emphasizes a positive work environment for its
employees, which is validated by recognition from independent third
parties.  In December 2007, the Bank was recognized as one of Oregon’s
ten most admired companies in the Portland Business Journal’sthird annual Most Admired Companies survey.  During 2007, the
Bank was also recognized for the sixth consecutive year by Oregon Business Magazine as
one of Oregon’s Best 100
Companiesfor which to work.  In addition, in 2004, the Bank
was named as the number one small company (employees under 250) to work for in
the State of Oregon by Oregon
Business Magazine.  The Bank and its employees have also been
recognized for their involvement in the community and in 2007 received the
American Community Bankers Award for Fundraising for Foundations and Local
Groups.  Management continually strives to retain and attract top
talent as well as provide career development opportunities to enhance skill
levels.  A number of benefit programs are available to eligible
employees, including group medical plans, paid sick leave, paid vacation, group
life insurance, 401(k) plans, and equity compensation plans.





Supervision
and Regulation





General





The
following discussion describes elements of the extensive regulatory framework
applicable to the Company and the Bank. This regulatory framework is primarily
designed for the protection of depositors, federal deposit insurance funds and
the banking system as a whole, rather than specifically for the protection of
shareholders. Due to the breadth of this regulatory framework, our costs of
compliance continue to increase in order to monitor and satisfy these
requirements.





To the
extent that this section describes statutory and regulatory provisions, it is
qualified in its entirety by reference to those provisions. These statutes and
regulations, as well as related policies, are subject to change by Congress,
state legislatures and federal and state regulators. Changes in statutes,
regulations or regulatory policies applicable to us, including the
interpretation or implementation thereof, could have a material effect on our
business or operations.





Federal
Bank Holding Company Regulation





General. The Company
is a bank holding company as defined in the Bank Holding Company Act of 1956, as
amended (“BHCA”), and is therefore subject to regulation, supervision and
examination by the Federal Reserve. In general, the BHCA limits the business of
bank holding companies to owning or controlling banks and engaging in other
activities closely related to banking. The Company must file reports with and
provide the Federal Reserve such additional information as it may require. Under
the Financial Services Modernization Act of 1999, a bank holding company may
apply to the Federal Reserve to become a financial holding company, and thereby
engage (directly or through a subsidiary) in certain expanded activities deemed
financial in nature, such as securities brokerage and insurance
underwriting.





6




Holding Company Bank
Ownership. The BHCA requires every bank holding company to obtain the
prior approval of the Federal Reserve before (i) acquiring, directly or
indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5%
of such shares;(ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company.





Holding Company Control of
Nonbanks. With some exceptions, the BHCA also prohibits a bank holding
company from acquiring or retaining direct or indirect ownership or control of
more than 5% of the voting shares of any company which is not a bank or bank
holding company, or from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or providing services for
its subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities that, by statute or by Federal Reserve regulation or order,
have been identified as activities closely related to the business of banking or
of managing or controlling banks.





Transactions with
Affiliates. Subsidiary banks of a bank holding company are subject to
restrictions imposed by the Federal Reserve Act on extensions of credit to the
holding company or its subsidiaries, on investments in their securities and on
the use of their securities as collateral for loans to any borrower. These
regulations and restrictions may limit the Company’s ability to obtain funds
from the Bank for its cash needs, including funds for payment of dividends,
interest and operational expenses.





Tying Arrangements.
We are prohibited from engaging in certain tie-in arrangements in connection
with any extension of credit, sale or lease of property or furnishing of
services. For example, with certain exceptions, neither the Company nor its
subsidiaries may condition an extension of credit to a customer on either (i) a
requirement that the customer obtain additional services provided by us; or (ii)
an agreement by the customer to refrain from obtaining other services from a
competitor.





Support of Subsidiary
Banks. Under Federal Reserve policy, the Company is expected to act as a
source of financial and managerial strength to the Bank.  This means
that the Company is required to commit, as necessary, resources to support the
Bank. Any capital loans a bank holding company makes to its subsidiary banks are
subordinate to deposits and to certain other indebtedness of those subsidiary
banks.





State Law
Restrictions. As an Oregon corporation, the Company is subject to certain
limitations and restrictions under applicable Oregon corporate law. For example,
state law restrictions in Oregon include indemnification of directors,
distributions to shareholders, transactions involving directors, officers or
interested shareholders, maintenance of books, records and minutes, and
observance of certain corporate formalities.





Federal
and State Regulation of Pacific Continental Bank





General. The Bank is
an Oregon commercial bank operating in Oregon and Washington with deposits
insured by the FDIC.  As a result, the Bank is subject to supervision
and regulation by the Oregon Department of Consumer and Business Services and
the FDIC. These agencies have the authority to prohibit banks from engaging in
what they believe constitute unsafe or unsound banking
practices.  Additionally, the Bank’s branches in Washington are
subject to supervision and regulation by the Washington Department of Financial
Institutions and must comply with applicable Washington laws regarding community
reinvestment, consumer protection, fair lending and intrastate
branching.





Community
Reinvestment.  The Community Reinvestment Act of 1977 requires
that, in connection with examinations of financial institutions within their
jurisdiction, the Federal Reserve or the FDIC evaluate the record of the
financial institution in meeting the credit needs of its local communities,
including low and moderate-income neighborhoods, consistent with the safe and
sound operation of the institution. A bank’s community reinvestment record is
also considered by the applicable banking agencies in evaluating mergers,
acquisitions and applications to open a branch or facility.





7




Insider Credit
Transactions. Banks are also subject to certain restrictions imposed by
the Federal Reserve Act on extensions of credit to executive officers,
directors, principal shareholders or any related interests of such persons.
Extensions of credit (i) must be made on substantially the same terms, including
interest rates and collateral, and follow credit underwriting procedures that
are at least as stringent as those prevailing at the time for comparable
transactions with persons not covered above and who are not employees; and (ii)
must not involve more than the normal risk of repayment or present other
unfavorable features. Banks are also subject to certain lending limits and
restrictions on overdrafts to insiders. A violation of these restrictions may
result in the assessment of substantial civil monetary penalties, the imposition
of a cease and desist order, and other regulatory sanctions.





Regulation of
Management. Federal law (i) sets forth circumstances under which officers
or directors of a bank may be removed by the institution's federal supervisory
agency; (ii) places restraints on lending by a bank to its executive officers,
directors, principal shareholders, and their related interests; and (iii)
prohibits management personnel of a bank from serving as a director or in other
management positions of another financial institution whose assets exceed a
specified amount or which has an office within a specified geographic
area.





Safety and Soundness
Standards.  Federal law imposes certain non-capital safety and
soundness standards upon banks. These standards cover internal controls,
information systems and internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, such other operational and managerial standards as the agency
determines to be appropriate, and standards for asset quality, earnings and
stock valuation. An institution that fails to meet these standards must develop
a plan acceptable to its regulators, specifying the steps that the institution
will take to meet the standards. Failure to submit or implement such a plan may
subject the institution to regulatory sanctions.





Interstate
Banking And Branching





The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate
Act”) relaxed prior interstate branching restrictions under federal law by
permitting nationwide interstate banking and branching under certain
circumstances. Generally, bank holding companies may purchase banks in any
state, and states may not prohibit these purchases. Additionally, banks are
permitted to merge with banks in other states, as long as the home state of
neither merging bank has opted out under the legislation. The Interstate Act
requires regulators to consult with community organizations before permitting an
interstate institution to close a branch in a low-income area. Federal banking
agency regulations prohibit banks from using their interstate branches primarily
for deposit production and the federal banking agencies have implemented a
loan-to-deposit ratio screen to ensure compliance with this
prohibition.





Oregon
and Washington have both enacted “opting in” legislation in accordance with the
Interstate Act provisions allowing banks to engage in interstate merger
transactions, subject to certain “aging” requirements. Oregon restricts an
out-of-state bank from opening de novo branches. However, once an out-of-state
bank has acquired a bank within Oregon, either through merger or acquisition of
all or substantially all of the bank's assets, the out-of-state bank may open
additional branches within Oregon. Under Washington law, an out-of-state bank
may, subject to Department of Financial Institutions’ approval, open de novo
branches in Washington or acquire an in-state branch so long as the home state
of the out-of-state bank has reciprocal laws with respect to de novo branching
or branch acquisitions.





Deposit
Insurance





In 2006,
federal deposit insurance reform legislation was enacted that (i) required the
FDIC to merge the Bank Insurance Fund and the Savings Association Insurance Fund
into a newly created Deposit Insurance Fund; (ii) increases the amount of
deposit insurance coverage for retirement accounts; (iii) allows for deposit
insurance coverage on individual accounts to be indexed for inflation starting
in 2010; (iv) provides the FDIC more flexibility in setting and imposing deposit
insurance assessments; and (v) provides eligible institutions credits on future
assessments.





8




The
Bank’s deposits are currently insured to a maximum of $100,000 per depositor
through the Deposit Insurance Fund. The Bank is required to pay deposit
insurance premiums, which are assessed and paid regularly.  The
premium amount is based upon a risk classification system established by the
FDIC.  Banks with higher levels of capital and a low degree of
supervisory concern are assessed lower premiums than banks with lower levels of
capital or a higher degree of supervisory concern.





Dividends





The
principal source of the Company’s cash is from dividends received from the Bank,
which are subject to government regulation and limitations. Regulatory
authorities may prohibit banks and bank holding companies from paying dividends
in a manner that would constitute an unsafe or unsound banking practice or would
reduce the amount of its capital below that necessary to meet minimum applicable
regulatory capital requirements. Oregon law also limits a bank’s ability to pay
dividends that are greater than retained earnings without approval of the Oregon
Department.





Capital
Adequacy





Regulatory Capital
Guidelines.  Federal bank regulatory agencies use capital
adequacy guidelines in the examination and regulation of bank holding companies
and banks. The guidelines are “risk-based,” meaning that they are designed to
make capital requirements more sensitive to differences in risk profiles among
banks and bank holding companies.





Tier I and Tier II
Capital.  Under the guidelines, an institution’s capital is
divided into two broad categories, Tier I capital and Tier II
capital.  Tier I capital generally consists of common stockholders’
equity, surplus and undivided profits.  Tier II capital generally
consists of the allowance for loan losses, hybrid capital instruments, and
subordinated debt.  The sum of Tier I capital and Tier II capital
represents an institution’s total capital.  The guidelines require
that at least 50% of an institution’s total capital consist of Tier I
capital.





Risk-based Capital
Ratios.  The adequacy of an institution’s capital is gauged
primarily with reference to the institution’s risk-weighted
assets.  The guidelines assign risk weightings to an institution’s
assets in an effort to quantify the relative risk of each asset and to determine
the minimum capital required to support that risk.  An institution’s
risk-weighted assets are then compared with its Tier I capital and total capital
to arrive at a Tier I risk-based ratio and a total risk-based ratio,
respectively.  The guidelines provide that an institution must have a
minimum Tier I risk-based ratio of 4% and a minimum total risk-based ratio of
8%.





Leverage
Ratio.  The guidelines also employ a leverage ratio, which is
Tier I capital as a percentage of average total assets, less
intangibles.  The principal objective of the leverage ratio is to
constrain the maximum degree to which a bank holding company may leverage its
equity capital base. The minimum leverage ratio is 3%; however, for all but the
most highly rated bank holding companies and for bank holding companies seeking
to expand, regulators expect an additional cushion of at least 1% to
2%.





Prompt Corrective
Action. Under the guidelines, an institution is assigned to one of five
capital categories depending on its total risk-based capital ratio, Tier I
risk-based capital ratio, and leverage ratio, together with certain subjective
factors. The categories range from “well capitalized” to “critically
undercapitalized.”  Institutions that are “undercapitalized” or lower
are subject to certain mandatory supervisory corrective actions.





In 2007,
the federal banking agencies, including the FDIC and the Federal Reserve,
approved final rules to implement new risk-based capital requirements.
Presently, this new advanced capital adequacy framework, called Basel II, is
applicable only to large and internationally active banking organizations. Basel
II changes the existing risk-based capital framework by enhancing its risk
sensitivity. Whether Basel II will be expanded to apply to banking organizations
that are the size of the Company or the Bank is unclear at this time, and what
effect such regulations would have on us cannot be predicted, but we do not
expect our operations would be significantly impacted.





9





Regulatory
Oversight and Examination





The
Federal Reserve conducts periodic inspections of bank holding companies, which
are performed both onsite and offsite. The supervisory objectives of the
inspection program are to ascertain whether the financial strength of the bank
holding company is being maintained on an ongoing basis and to determine the
effects or consequences of transactions between a holding company or its
non-banking subsidiaries and its subsidiary banks. For holding companies under
$10 billion in assets, the inspection type and frequency varies depending on
asset size, complexity of the organization, and the holding company’s rating at
its last inspection.





Banks are
subject to periodic examinations by their primary regulators. Bank examinations
have evolved from reliance on transaction testing in assessing a bank’s
condition to a risk-focused approach. These examinations are extensive and cover
the entire breadth of operations of the bank. Generally, safety and soundness
examinations occur on an 18-month cycle for banks under $500 million in total
assets that are well capitalized and without regulatory issues, and 12-months
otherwise. Examinations alternate between the federal and state bank regulatory
agency or may occur on a combined schedule. The frequency of consumer compliance
and CRA examinations is linked to the size of the institution and its compliance
and CRA ratings at its most recent examinations. However, the examination
authority of the Federal Reserve and the FDIC allows them to examine supervised
banks as frequently as deemed necessary based on the condition of the bank or as
a result of certain triggering events.





Corporate
Governance and Accounting Legislation





Sarbanes-Oxley Act of
2002.The
Sarbanes-Oxley Act of 2002 (the “Act”) addresses, among other things, corporate
governance, auditing and accounting, enhanced and timely disclosure of corporate
information, and penalties for non-compliance. Generally, the Act (i) requires
chief executive officers and chief financial officers to certify to the accuracy
of periodic reports filed with the Securities and Exchange Commission (the
“SEC”); (ii) imposes specific and enhanced corporate disclosure requirements;
(iii) accelerates the time frame for reporting of insider transactions and
periodic disclosures by public companies; (iv) requires companies to adopt and
disclose information about corporate governance practices, including whether or
not they have adopted a code of ethics for senior financial officers and whether
the audit committee includes at least one “audit committee financial expert;”
and (v) requires the SEC, based on certain enumerated factors, to regularly and
systematically review corporate filings.





To deter
wrongdoing, the Act (i) subjects bonuses issued to top executives to
disgorgement if a restatement of a company's financial statements was due to
corporate misconduct; (ii) prohibits an officer or director misleading or
coercing an auditor; (iii) prohibits insider trades during pension fund
“blackout periods”; (iv) imposes new criminal penalties for fraud and other
wrongful acts; and (v) extends the period during which certain securities fraud
lawsuits can be brought against a company or its officers.





As a
publicly reporting company, we are subject to the requirements of the Act and
related rules and regulations issued by the SEC and NASDAQ. After enactment, we
updated our policies and procedures to comply with the Act’s requirements and
have found that such compliance, including compliance with Section 404 of the
Act relating to management control over financial reporting, has resulted in
significant additional expense for the Company. We anticipate that we will
continue to incur such additional expense in our ongoing
compliance.





Anti-terrorism
Legislation





USA Patriot Act of
2001.  The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001,
intended to combat terrorism, was renewed with certain amendments in 2006 (the
“Patriot Act”).  Certain provisions of the Patriot Act were made
permanent and other sections were made subject to extended “sunset” provisions.
The Patriot Act, in relevant part, (i) prohibits banks from providing
correspondent accounts directly to foreign shell banks; (ii) imposes due
diligence requirements on banks opening or holding accounts for foreign
financial institutions or wealthy foreign individuals; (iii) requires financial
institutions to establish an anti-money-laundering compliance program; and (iv)
eliminates civil liability for persons who file suspicious activity
reports.  The Act also includes provisions providing the government
with power to investigate terrorism, including expanded government access to
bank account records.  While the Patriot Act has had minimal affect on
our record keeping and reporting expenses, we do not believe that the renewal
and amendment will have an adverse effect on our business or
operations.





10




Financial
Services Modernization





Gramm-Leach-Bliley Act of
1999.  The Gramm-Leach-Bliley Financial Services Modernization
Act of 1999 brought about significant changes to the laws affecting banks and
bank holding companies.  Generally, the Act (i) repeals historical
restrictions on preventing banks from affiliating with securities firms; (ii)
provides a uniform framework for the activities of banks, savings institutions
and their holding companies; (iii) broadens the activities that may be conducted
by national banks and banking subsidiaries of bank holding companies; (iv)
provides an enhanced framework for protecting the privacy of consumer
information and requires notification to consumers of bank privacy policies; and
(v) addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions. Bank
holding companies that qualify and elect to become financial holding companies
can engage in a wider variety of financial activities than permitted under
previous law, particularly with respect to insurance and securities underwriting
activities.





Recent
Legislation





Financial Services
Regulatory Relief Act of 2006. In 2006, the President signed the
Financial Services Regulatory Relief Act of 2006 into law (the “Relief Act”).
The Relief Act amends several existing banking laws and regulations, eliminates
some unnecessary and overly burdensome regulations of depository institutions
and clarifies several existing regulations. The Relief Act, among other things,
(i) authorizes the Federal Reserve Board to set reserve ratios; (ii) amends
regulations of national banks relating to shareholder voting and granting of
dividends; (iii) amends several provisions relating to loans to insiders,
regulatory applications, privacy notices, and golden parachute payments; and
(iv) expands and clarifies the enforcement authority of federal banking
regulators. Our business, expenses, and operations have not been significantly
impacted by this legislation.





Effects
Of Government Monetary Policy





Our
earnings and growth are affected not only by general economic conditions, but
also by the fiscal and monetary policies of the federal government, particularly
the Federal Reserve. The Federal Reserve implements national monetary policy for
such purposes as curbing inflation and combating recession, and its open market
operations in U.S. government securities, control of the discount rate
applicable to borrowings from the Federal Reserve, and establishment of reserve
requirements against certain deposits, influence the growth of bank loans,
investments and deposits, and also affect interest rates charged on loans or
paid on deposits. The nature and impact of future changes in monetary policies,
such as the recent lowering of the Federal Reserve’s discount rate, and their
impact on us cannot be predicted with certainty.


11





Statistical
Information





Selected
Quarterly Information





The
following chart contains data for the last eight quarters ending December 31,
2007. All data, except number of shares and per share data, is in thousands of
dollars.





YEAR
              
              2007
              
              
              
              
              
              
              
              
              
              
              
              2006QUARTER
              
              Fourth
              
              
              Third
              
              
              Second
              
              
              First
              
              
              Fourth
              
              
              Third
              
              
              Second
              
              
              FirstInterest
      income
              
              $
              17,350
              
              
              $
              17,419
              
              
              $
              17,751
              
              
              $
              16,647
              
              
              $
              16,743
              
              
              $
              16,062
              
              
              $
              15,165
              
              
              $
              14,002Interest
      expense
              
              
              6,157
              
              
              
              6,441
              
              
              
              6,813
              
              
              
              6,329
              
              
              
              6,139
              
              
              
              5,865
              
              
              
              5,269
              
              
              
              4,642Net
      interest income
              
              
              11,193
              
              
              
              10,978
              
              
              
              10,938
              
              
              
              10,318
              
              
              
              10,604
              
              
              
              10,197
              
              
              
              9,896
              
              
              
              9,360Provision
      for loan loss
              
              
              275
              
              
              
              125
              
              
              
              125
              
              
              
              200
              
              
              
              -
              
              
              
              150
              
              
              
              200
              
              
              
              250Noninterest
      income
              
              
              1,030
              
              
              
              997
              
              
              
              949
              
              
              
              948
              
              
              
              1,033
              
              
              
              1,354
              
              
              
              1,056
              
              
              
              957Noninterest
      expense
              
              
              6,591
              
              
              
              6,399
              
              
              
              6,513
              
              
              
              6,358
              
              
              
              6,590
              
              
              
              6,109
              
              
              
              5,704
              
              
              
              5,389Net
      income
              
              
              3,307
              
              
              
              3,421
              
              
              
              3,211
              
              
              
              2,996
              
              
              
              3,093
              
              
              
              3,441
              
              
              
              3,188
              
              
              
              2,932PER
      COMMONSHARE
      DATA (1)Net
      income (basic)
              
              $
              0.28
              
              
              $
              0.29
              
              
              $
              0.26
              
              
              $
              0.25
              
              
              $
              0.26
              
              
              $
              0.29
              
              
              $
              0.28
              
              
              $
              0.26Net
      income (diluted)
              
              $
              0.28
              
              
              $
              0.29
              
              
              $
              0.26
              
              
              $
              0.25
              
              
              $
              0.26
              
              
              $
              0.29
              
              
              $
              0.27
              
              
              $
              0.26Cash
      dividends
              
              $
              0.09
              
              
              $
              0.09
              
              
              $
              0.09
              
              
              $
              0.08
              
              
              $
              0.08
              
              
              $
              0.07
              
              
              $
              0.07
              
              
              $
              0.07WEIGHTED AVERAGE
      SHARES OUTSTANDINGBasic
              
              
              11,896,187
              
              
              
              11,848,059
              
              
              
              11,814,931
              
              
              
              11,761,039
              
              
              
              11,693,344
              
              
              
              11,652,256
              
              
              
              11,577,926
              
              
              
              11,417,899Diluted
              
              
              11,995,087
              
              
              
              11,981,303
              
              
              
              11,971,279
              
              
              
              11,967,135
              
              
              
              11,917,181
              
              
              
              11,774,250
              
              
              
              11,781,325
              
              
              
              11,622,754(1)
      All prior year per share data has been retroactively adjusted for the 10%
      stock dividend paid in June 2007.





Investment
Portfolio





The
following chart contains information regarding the Company’s investment
portfolio.  All of the Company’s investment securities are accounted
for as available-for-sale and are reported at estimated fair
value.  The difference between estimated fair value and amortized
cost, net of deferred taxes, is recorded as a separate component of
stockholders’ equity.





INVESTMENT
PORTFOLIO


ESTIMATED FAIR
VALUE


December
      31,2007
            
            
            2006
            
            
            2005(dollars
      in thousands)US
      Treasury, US Government agencies and corporations, andagency
      mortgage-backed securities
            
            $
            10,541
            
            
            $
            14,501
            
            
            $
            16,757Obligations
      of states and political subdivisions
            
            
            7,514
            
            
            
            5,596
            
            
            
            4,820Other
      mortgage-backed securities
            
            
            35,938
            
            
            
            18,686
            
            
            
            17,768Total
            
            $
            53,993
            
            
            $
            38,783
            
            
            $
            39,345





12











The
following chart presents the fair value of each investment category by maturity
date and includes a weighted average yield for each
period.  Mortgage-backed securities have been classified based on
their December 31, 2007 projected average life.





SECURITIES
AVAILABLE-FOR-SALE  After
      One
              
              
              After
      FiveYear
      But
              
              
              Years
      ButWithin
              
              
              Within
              
              
              WithinOne
      Year
              
              
              Five
      Years
              
              
              Ten
      YearsAmount
              
              
              Yield
              
              
              Amount
              
              
              Yield
              
              
              Amount
              
              
              Yield(dollars
      in thousands)US
      Treasury, US Governmentagencies
      and agency mortgage-backed
      securities
              
              $
              13,566
              
              
              
              4.30
              %
              
              $
              29,099
              
              
              
              5.36
              %
              
              $
              3,814
              
              
              
              5.19
              %Obligations
      of states and politicalsubdivisions
              
              
              -
              
              
              
              -
              
              
              
              2,213
              
              
              
              4.05
              %
              
              
              5,301
              
              
              
              3.88
              %Total
              
              $
              13,566
              
              
              
              4.30
              %
              
              $
              31,312
              
              
              
              5.26
              %
              
              $
              9,115
              
              
              
              4.43
              %




Loan
Portfolio





Loans
represent a significant portion of the Company’s total
assets.  Average balance and average rates paid by category of loan
for the fourth quarter and full year 2007 is included in the Company’s
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included later in this report.  The following tables
contain information related to the Company’s loan portfolio, including loans
held for sale, for the five-year period ended December 31, 2007.





LOAN
      PORTFOLIODecember
      31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003(dollars
      in thousands)Commercial
      Loans
              
              $
              188,940
              
              
              $
              169,566
              
              
              $
              160,988
              
              
              $
              107,538
              
              
              $
              89,127Real
      Estate Loans
              
              
              627,140
              
              
              
              590,855
              
              
              
              507,479
              
              
              
              341,111
              
              
              
              255,150Loans
      held for sale
              
              
              -
              
              
              
              2,140
              
              
              
              642
              
              
              
              2,072
              
              
              
              1,958Consumer
      Loans
              
              
              8,226
              
              
              
              9,168
              
              
              
              12,463
              
              
              
              10,380
              
              
              
              11,424824,306
              
              
              
              771,729
              
              
              
              681,572
              
              
              
              461,101
              
              
              
              357,659Deferred
      loan origination fees
              
              
              (1,984
              )
              
              
              (2,489
              )
              
              
              (2,609
              )
              
              
              (2,061
              )
              
              
              (1,582
              )822,322
              
              
              
              769,240
              
              
              
              678,963
              
              
              
              459,040
              
              
              
              356,077Allowance
      for loan losses
              
              
              (8,675
              )
              
              
              (8,284
              )
              
              
              (7,792
              )
              
              
              (5,224
              )
              
              
              (5,225
              )$
              813,647
              
              
              $
              760,956
              
              
              $
              671,171
              
              
              $
              453,816
              
              
              $
              350,852
 13


The
following table presents loan portfolio information by loan category related to
maturity and repricing sensitivity.  Variable rate loans are included
in the time frame in which the interest rate on the loan could be first
adjusted.





MATURITY
      AND REPRICING DATA FOR LOANSCommercial
              
              
              Real
      Estate
              
              
              Consumer
              
              
              Total(dollars
      in thousands)Three
      months or less
              
              $
              93,731
              
              
              $
              300,194
              
              
              $
              6,689
              
              
              $
              400,614Over
      three months through 12 months
              
              
              4,488
              
              
              
              35,867
              
              
              
              115
              
              
              
              40,470Over
      1 year through 3 years
              
              
              20,674
              
              
              
              126,508
              
              
              
              526
              
              
              
              147,708Over
      3 years through 5 years
              
              
              41,077
              
              
              
              124,802
              
              
              
              555
              
              
              
              166,434Over
      5 years through 15 years
              
              
              26,970
              
              
              
              33,346
              
              
              
              242
              
              
              
              60,558Thereafter
              
              
              2,000
              
              
              
              6,423
              
              
              
              99
              
              
              
              8,522Total
      loans
              
              $
              188,940
              
              
              $
              627,140
              
              
              $
              8,226
              
              
              $
              824,306




Loan
Concentrations





At
December 31, 2007, residential construction loans totaled $96,918 and
represented 11.8% of outstanding loans.  In addition, at December 31,
2007, unfunded loan commitments for residential construction totaled
$46,461.  Approximately 75% of the Bank’s loans are secured by real
estate.    The granular nature of the portfolio, both from
industry mix and loan size, continues to disperse risk
concentration.





Nonperforming
Assets





The
following table presents nonperforming loans and assets as of the date
shown.





NONPERFORMING
      ASSETS December
      31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003(dollars
      in thousands)Nonaccrual
      loans
              
              $
              4,122
              
              
              $
              -
              
              
              $
              180
              
              
              $
              1,004
              
              
              $
              1,50690
      or more days past due and still accruing
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              213
              
              
              
              545Total
      nonperforming loans
              
              
              4,122
              
              
              
              -
              
              
              
              180
              
              
              
              1,217
              
              
              
              2,051Government
      guarantees
              
              
              (451
              )
              
              
              -
              
              
              
              (28
              )
              
              
              (101
              )
              
              
              (233
              )Net
      nonperforming loans
              
              
              3,671
              
              
              
              -
              
              
              
              152
              
              
              
              1,116
              
              
              
              1,818Foreclosed
      assets
              
              
              423
              
              
              
              -
              
              
              
              131
              
              
              
              262
              
              
              
              411Total
      nonperforming assets
              
              $
              4,094
              
              
              $
              -
              
              
              $
              283
              
              
              $
              1,378
              
              
              $
              2,229Nonperforming
      assets as a percentage ofof
      total assets
              
              
              0.45
              %
              
              
              0.00
              %
              
              
              0.04
              %
              
              
              0.27
              %
              
              
              0.52
              %


If
interest on nonaccrual loans had been accrued, such income would have been
approximately $140, $14, and $89, respectively, for years 2007, 2006 and
2005.


14





Allowance
for Loan Loss





The
following chart presents information about the Company’s allowances for loan
losses.  Management evaluates the allowance monthly and considers the
amount to be adequate to absorb possible loan losses.





ALLOWANCE
      FOR LOAN LOSSDecember
      31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003(dollars
      in thousands)Balance
      at beginning of year
              
              $
              8,284
              
              
              $
              7,792
              
              
              $
              5,224
              
              
              $
              5,225
              
              
              $
              4,403Charges
      to the allowanceReal
      estate loans
              
              
              -
              
              
              
              -
              
              
              
              (214
              )
              
              
              (79
              )
              
              
              (843
              )Consumer
      loans
              
              
              (46
              )
              
              
              (71
              )
              
              
              (106
              )
              
              
              (269
              )
              
              
              (104
              )Commercial
              
              
              (350
              )
              
              
              (152
              )
              
              
              (316
              )
              
              
              (168
              )
              
              
              (238
              )Total
      charges to the allowance
              
              
              (396
              )
              
              
              (223
              )
              
              
              (636
              )
              
              
              (516
              )
              
              
              (1,185
              )Recoveries
      against the allowanceReal
      estate loans
              
              
              15
              
              
              
              4
              
              
              
              37
              
              
              
              73
              
              
              
              799Consumer
      loans
              
              
              27
              
              
              
              20
              
              
              
              56
              
              
              
              54
              
              
              
              15Commercial
              
              
              20
              
              
              
              91
              
              
              
              31
              
              
              
              70
              
              
              
              103Total
      recoveries against the allowance
              
              
              62
              
              
              
              115
              
              
              
              124
              
              
              
              197
              
              
              
              917Acquisition
              
              
              -
              
              
              
              -
              
              
              
              2,014
              
              
              
              -
              
              
              
              190Provisions
              
              
              725
              
              
              
              600
              
              
              
              1,100
              
              
              
              500
              
              
              
              900Unfunded
      commitments *
              
              
              -
              
              
              
              -
              
              
              
              (34
              )
              
              
              (182
              )
              
              
              -Balance
      at end of the year
              
              $
              8,675
              
              
              $
              8,284
              
              
              $
              7,792
              
              
              $
              5,224
              
              
              $
              5,225Net
      charge offs as a percentage of  totalaverage
      loans
              
              
              0.04
              %
              
              
              0.01
              %
              
              
              0.10
              %
              
              
              0.08
              %
              
              
              0.08
              %




*
Allowance for unfunded commitments is presented as part of the other liabilities
in the balance sheet and has been omitted from this table since implementation
of this accounting practice in 2005.





The
following table sets forth the allowance for loan losses allocated by loan type
at December 31, 2007:


Real
      estate loans
              
              $
              6,275Consumer
      loans
              
              
              87Commercial
              
              
              1,515Unallocated
              
              
              798Allowance
      for loan losses
              
              $
              8,675


During
2007, the Bank recorded a provision for loan losses of $725 compared to $600 for
the year 2006.  The increase in the loan loss provision was related
primarily to loan growth as credit quality remained solid throughout the year
2007.  Although nonaccrual and impaired loans increased at the during
the fourth quarter 2007, no significant losses are expected from this increase
within this real estate portfolio due to the fact that one client is involved
with the majority of impaired loans, and the bank holds a 20% guarantee on
approximately $3,500 the principal balance of total nonaccrual and impaired
loans at December 31, 2007.  At December 31, 2007, the recorded
investment in certain loans totaling $3,671, net of government guarantees, was
considered impaired.  A specific reserve of $160 is provided for these
loans and is included in the $8,675 allowance for loan losses at December 31,
2007.


15





Deposits





Deposits
represent a significant portion of the Company’s liabilities.  Average
balance and average rates paid by category of deposit is included in the
Company’s “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” of this report.  The chart below details the
Company’s time deposits at December 31, 2007.  The Company does not
have any foreign deposits.  Variable rate deposits are listed by first
repricing opportunity.





TIME
DEPOSITS
 Time
      Deposits
              
              
              Time
      Depositsof
      $100,000
              
              
              of
      less than
              
              
              TotalOr
      more
              
              
              
              $100,000
              
              
              Time
      Deposits(dollars
      in thousands)Three
      months or less
              
              $
              22,157
              
              
              $
              15,459
              
              
              $
              37,616Over
      three months through twelve months
              
              
              8,594
              
              
              
              16,094
              
              
              
              24,688Over
      one year through three years
              
              
              583
              
              
              
              2,944
              
              
              
              3,527Over
      three years
              
              
              522
              
              
              
              416
              
              
              
              938$
              31,856
              
              
              $
              34,913
              
              
              $
              66,769





Short-term
Borrowings





The
Company uses short-term borrowings to fund fluctuations in deposits and loan
demand.  The Company’s only subsidiary, Pacific Continental Bank, has
access to both secured and unsecured overnight borrowing lines.  At
December 31, 2007, the Bank had unsecured and secured borrowing lines totaling
approximately $425,000.  The Federal Home Loan Bank of Seattle (FHLB)
also provides a secured borrowing line using a blanket pledge of commercial real
estate loans.  The Bank’s FHLB borrowing limit at December 31, 2007
was 30% of assets or $285,000, subject to sufficient collateral and stock
investment.  At December 31, 2007, available unsecured borrowing lines
with various correspondent banks and a secured line with the Federal Reserve
Bank of San Francisco was approximately $240,000.





SHORT-TERM
BORROWINGS 2007
              
              
              2006
              
              
              2005
              
              
              2004(dollars
      in thousands)Federal
      Funds Purchased, FHLB CMA & Short Term AdvancesAverage
      interest rateAt
      year end
              
              
              4.39
              %
              
              
              5.55
              %
              
              
              4.33
              %
              
              
              2.75
              %For
      the year
              
              
              5.25
              %
              
              
              5.31
              %
              
              
              3.35
              %
              
              
              2.46
              %Average
      amount outstanding for the year
              
              $
              93,733
              
              
              $
              73,171
              
              
              $
              17,693
              
              
              $
              12,596Maximum
      amount outstanding at any month end
              
              $
              151,360
              
              
              $
              99,410
              
              
              $
              34,825
              
              
              $
              31,790Amount
      outstanding at year end
              
              $
              151,360
              
              
              $
              99,410
              
              
              $
              24,000
              
              
              $
              31,790


In
addition to the short-term borrowings, at December 31, 2007, the Bank had other
FHLB borrowings totaling $33,500 with a weighted average interest rate of
4.36%  and a remaining average maturity of approximately 2.5
years.





Long-term
Borrowings





The
Company’s long-term borrowings consist of $8,248 in junior subordinated
debentures on November 28, 2005, due on January 7, 2036.  The interest
rate on the debentures is 6.265% until November 2010 after which it is converted
to a floating rate of three-month LIBOR plus 135 basis points.


16





ITEM
1A                      Risk
Factors





The
following is a discussion of the most significant risks and uncertainties that
may affect our business, financial condition and future results.





Fluctuating
interest rates can adversely affect our profitability





Our
profitability is dependent to a large extent upon net interest income, which is
the difference (or “spread”) between the interest earned on loans, securities
and other interest-earning assets and interest paid on deposits, borrowings, and
other interest-bearing liabilities.  Because of the differences in
maturities and repricing characteristics of our interest-earning assets and
interest-bearing liabilities, changes in interest rates do not produce
equivalent changes in interest income earned on interest-earning assets and
interest paid on interest-bearing liabilities.  Accordingly,
fluctuations in interest rates could adversely affect our interest rate spread,
and, in turn, our profitability.  Because our Company is asset
sensitive, we seek to manage our interest rate risk within well established
guidelines.  Generally, the Company seeks an asset and liability
structure that insulates net interest income from large deviations attributable
to changes in market rates.





Our
allowance for loan losses may not be adequate to cover actual loan losses, which
could adversely affect our earnings





We
maintain an allowance for loan losses in an amount that we believe is adequate
to provide for losses inherent in the portfolio.  While we strive to
carefully manage and monitor credit quality and to identify loans that may
become nonperforming, at any time there are loans included in the portfolio that
will result in losses, but that have not been identified as nonperforming or
potential problem loans.  By managing our credit quality, we attempt
to identify deteriorating loans before they become nonperforming assets and
adjust the loan loss reserve accordingly.  However, because future
events are uncertain, there may be loans that deteriorate to a nonperforming
status in an accelerated time frame.  As a result, future additions to
the allowance may be necessary.  Because the loan portfolio contains a
significant number of commercial and commercial real estate loans with
relatively large balances, the deterioration of one or a few of these loans may
cause a significant increase in nonperforming loans, requiring an increase to
the loan loss allowance.  Additionally, future additions to the
allowance may be required based on changes in the loans comprising the portfolio
and changes in the financial condition of borrowers, such as may result from
changes in economic conditions, or as a result of incorrect assumptions by
management in determining the allowance.  Additionally, federal
banking regulators, as an integral part of their supervisory function,
periodically review our allowance for loan losses.  These regulatory
agencies may require us to recognize further loan loss provisions or charge-offs
based upon their judgments, which may be different from ours.  Any
increase in the allowance for loan losses could have a negative effect on our
financial condition and results of operation.





Concentration
in real estate market





We have a
high concentration of loans secured by real estate and a downturn in the real
estate market, for any reason, could hurt our business and our
prospects.  Our business activities and credit exposure are
concentrated in loans secured by real estate.  A decline in the real
estate market could negatively affect our business because the collateral
securing those loans may decrease in value.  A downturn in the local
economy could have a material adverse effect both on the borrowers’ ability to
repay these loans, as well as the value of the real property held as
collateral.  Our ability to recover on defaulted loans by foreclosing
and selling the real estate collateral would then be diminished and we be would
more likely to suffer losses on defaulted loans.





Tightening
of credit markets and liquidity risk





A
tightening of the credit market and the inability to obtain adequate money to
fund continued loan growth may negatively affect our asset growth  and
liquidity position and, therefore, our earnings capability.  In
addition to core deposit growth, maturity of investment securities and loan
payments, the Company also relies on alternative funding sources through
correspondent banking and a borrowing line with the FHLB to fund
loans.  In the event of a downturn in the economy, particularly in the
housing market, these resources could be negatively affected, both as to price
and availability, which would limit and or raise the cost of the funds available
to the Company.





17




An
economic downturn in the market areas we serve may cause us to have lower
earnings and could increase our credit risk associated with our loan
portfolio





The
inability of borrowers to repay loans can erode our
earnings.  Substantially all of our loans are to businesses and
individuals in Oregon and Washington, and any decline in the economy of these
market areas could impact us adversely.  As a lender, we are exposed
to the risk that our customers will be unable to repay their loans in accordance
with their terms, and that any collateral securing the payment of their loans
may not be sufficient to assure repayment.





ITEM
1B                      Unresolved Staff
Comments





None





ITEM  2                      Properties





The
principal properties of the registrant are comprised of the banking facilities
owned by the Bank.  The Bank operates fourteen full service
facilities.  The Bank owns a total of eight buildings and, with the
exception of two buildings, owns the land on which these buildings are
situated.  Significant properties owned by the Bank are as
follows:





1)
            Three-story
      building and land with approximately 30,000 square feet located on Olive
      Street in Eugene, Oregon.





2)
            Building
      with approximately 4,000 square feet located on West 11th
      Avenue in Eugene, Oregon.  The building is on leased
      land.





3)
            Building
      and land with approximately 8,000 square feet located on High Street in
      Eugene, Oregon.





4)
            Three-story
      building and land with approximately 31,000 square feet located in the
      Gateway area of Springfield, Oregon.  The Bank occupies
      approximately 5,500 square feet of the first floor and approximately 5,900
      square feet on the second floor and leases out, or is seeking to lease
      out, the remaining space.





5)
            Building
      and land with approximately 3,500 square feet located in Beaverton,
      Oregon.





6)
            Building
      and land with approximately 2,000 square feet located in Junction City,
      Oregon.





7)
            Building
      and land with approximately 5,000 square feet located near the Convention
      Center in Portland, Oregon.





8)
            Building
      with approximately 6,800 square feet located at the Nyberg Shopping Center
      in Tualatin, Oregon.  The building is on leased
      land.





The Bank
leases facilities for branch offices in Downtown Seattle, Washington, Downtown
Bellevue, Washington, Downtown Portland, Oregon, and Vancouver,
Washington.  In addition, the Bank leases a portion of an adjoining
building to the High Street office for administrative and training
functions.  Management considers all owned and leased facilities
adequate for current use.  The Bank is presently investigating
building new facilities or additional leased space in Eugene, Oregon to house
various Bank administrative departments.





During
the fourth quarter 2006, the Bank lost the use of its office in Bellevue,
Washington due to an accident at a nearby construction site, which severely
damaged the Bank’s facility.  The Bank opened a temporary office in
the Bellevue market during first quarter 2007.  During September 2007,
the original Bellevue office was reopened, and the Bank vacated the temporary
facilities.  The Bank was fully insured for any damage to its
equipment and facility.  During the fourth quarter 2007, the Bank
opened its relocated Tualatin, Oregon office to a new highly visible site on
I-5, approximately one mile from the previous office location.





18




ITEM
3                      Legal
Proceedings





As of the
date of this report, neither the Company nor the Bank or any of its subsidiaries
is party to any material pending legal proceedings, including proceedings of
governmental authorities, other than ordinary routine litigation incidental to
the business of the Bank.





ITEM
4                      Submissions of Matters to a
Vote of Security Holders





There
were no matters submitted to a vote of security holders during the fourth
quarter of 2007.





PART II





ITEM
5                  Market for Company’s Common Equity,
Related Stockholder Matters and Purchases of


Equity
Securities





Issuer
Purchases of Securities





The
Company did not repurchase any shares of its common stock during the fourth
quarter of 2007.  The Company had no sales of securities during the
past three years, other than those issued pursuant to its stock option
plans.





Dividends





The
Company pays cash dividends on a quarterly basis, typically in March, June,
September and December of each year.  The Board of Directors considers
the dividend amount quarterly and takes a broad perspective in its dividend
deliberations including a review of recent operating performance, capital
levels, and loan concentrations as a percentage of capital, and growth
projections.  The Board also considers dividend payout ratios,
dividend yield, and other financial metrics in setting the quarterly
dividend.   The Company declared and paid cash dividends of $0.35
per share for the year 2007 when adjusted for the 10% stock dividend paid in
June 2007.  That compares to cash dividends of $0.29 per share paid
for the year 2006, also adjusted for the 10% stock dividend paid in June
2007.


19





Equity
Compensation Plan Information





Year
      Ended December 31, 2007Number
      of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and
      Rights (2)(3)
            Weighted-Average
      Exercise Price of Outstanding Options, Warrants and Rights (2)
            Number
      of Shares Remaining Available for Future Issuance Under Equity
      Compensation Plans (2)(3)Equity
      compensation plans approved by security holders(1)
            736,318
            $
      13.64
            340,397Equity
      compensation plans not approved by security holders
            0
            $0
            0





(1)
            Under
      the Company’s respective equity compensation plans, the Company may grant
      incentive stock options and non-qualified stock options, restricted stock,
      restricted stock units and stock appreciation rights to its employees and
      directors, however only employees may receive incentive stock
      options.





(2)
            All
      amounts have been adjusted to reflect subsequent stock splits and stock
      dividends.





(3)
            Includes
      21,140 shares reserved for issuance under the NWBF Plans that were assumed
      by the Company in


connection
with the acquisition of NWB Financial Corporation in November
2005.  No additional shares are available for future issuance under
these plans.





Market
Information





The
Company’s common stock trades on the NASDAQ Global Market under the symbol
PCBK.  At March 7, 2008, the Company had 11,936,197 shares of common
stock outstanding held by approximately 678 shareholders.





The high,
low and closing sales prices (based on daily closing price) for the last eight
quarters are shown in the table below.  All share prices for the year
2006 and first and second quarters of 2007 have been retroactively adjusted to
reflect the 10% stock dividend paid in June 2007.





YEAR
            
            2007
            
            
            
            
            2006QUARTER
            Fourth
            Third
            Second
            First
            
            Fourth
            Third
            Second
            FirstMarket
      value:High
            $16.00
            $16.41
            $17.27
            $18.95
            
            $17.82
            $16.59
            $15.77
            $15.91Low
            12.00
            14.32
            15.18
            16.86
            
            16.44
            14.32
            14.55
            14.90Close
            12.52
            15.57
            16.20
            17.03
            
            17.68
            16.58
            15.00
            15.18





The
information contained in the following chart entitled “Total Return Performance”
is not considered to be “soliciting material”, or “filed”, or incorporated by
reference in any past or future filing by the Company under the Securities
Exchange Act of 1934 or the Securities Act of 1933 unless and only to the extent
that the Company specifically incorporates it by reference.





20


STOCK PERFORMANCE GRAPH








The above
graph and following table compares the total cumulative shareholder return on
the Company’s Common Stock, based on reinvestment of all dividends, to the
cumulative total returns of the Russell 2000 Index and SNL Securities $500 to $1
Billion Bank Asset Size Index.  The graph assumes $100 invested on
December 31, 2002, in the Company’s Common Stock and each of the
indices.




Period
      EndingIndex
              12/31/02
              12/31/03
              12/31/04
              12/31/05
              12/31/06
              12/31/07Pacific
      Continental Corporation
              100.00
              149.36
              188.67
              193.70
              241.47
              174.79Russell
      2000
              100.00
              147.25
              174.24
              182.18
              215.64
              212.26SNL
      Bank $500M-$1B Index
              100.00
              144.19
              163.41
              170.41
              193.81
              155.31


21





ITEM
6                                Selected Financial
Data





Selected
financial data for the past five years is shown in the table below.


($ in
thousands, except for per share data)


2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003For
      the yearNet
      interest income
              
              $
              43,427
              
              
              $
              40,057
              
              
              $
              30,240
              
              
              $
              24,952
              
              
              $
              22,220Provision
      for loan losses
              
              
              725
              
              
              
              600
              
              
              
              1,100
              
              
              
              500
              
              
              
              900Noninterest
      income
              
              
              3,924
              
              
              
              4,401
              
              
              
              4,083
              
              
              
              4,463
              
              
              
              4,946Noninterest
      expense
              
              
              25,861
              
              
              
              23,791
              
              
              
              18,134
              
              
              
              16,041
              
              
              
              15,202Income
      taxes
              
              
              7,830
              
              
              
              7,412
              
              
              
              5,510
              
              
              
              4,925
              
              
              
              4,233Net
      income
              
              
              12,935
              
              
              
              12,655
              
              
              
              9,578
              
              
              
              7,948
              
              
              
              6,831Cash
      dividends
              
              $
              4,175
              
              
              $
              3,381
              
              
              $
              2,556
              
              
              $
              2,164
              
              
              $
              1,841Per
      common share data (1)Net
      income:Basic
              
              $
              1.09
              
              
              $
              1.09
              
              
              $
              0.98
              
              
              $
              0.85
              
              
              $
              0.74Diluted
              
              $
              1.08
              
              
              $
              1.08
              
              
              $
              0.95
              
              
              $
              0.82
              
              
              $
              0.72Cash
      dividends
              
              $
              0.35
              
              
              $
              0.29
              
              
              $
              0.25
              
              
              $
              0.23
              
              
              $
              0.20Market
      value, end of year
              
              $
              12.52
              
              
              $
              17.68
              
              
              $
              14.45
              
              
              $
              14.32
              
              
              $
              11.55At
      year endAssets
              
              $
              949,271
              
              
              $
              885,351
              
              
              $
              791,794
              
              
              $
              516,630
              
              
              $
              425,799Loans,
      less allowance for loan loss (2)
              
              $
              813,647
              
              
              $
              760,957
              
              
              $
              671,171
              
              
              $
              453,817
              
              
              $
              350,852Core
      deposits
              
              $
              615,892
              
              
              $
              580,210
              
              
              $
              529,794
              
              
              $
              381,601
              
              
              $
              330,473Total
      deposits
              
              $
              644,424
              
              
              $
              641,272
              
              
              $
              604,271
              
              
              $
              403,791
              
              
              $
              356,099Shareholders'
      equity
              
              $
              107,509
              
              
              $
              95,735
              
              
              $
              81,412
              
              
              $
              49,392
              
              
              $
              42,234Average
      for the yearAssets
              
              $
              903,932
              
              
              $
              825,671
              
              
              $
              573,717
              
              
              $
              463,509
              
              
              $
              402,195Earning
      assets
              
              $
              832,451
              
              
              $
              755,680
              
              
              $
              533,930
              
              
              $
              431,374
              
              
              $
              369,574Loans,
      less allowance for loan losses
              
              $
              785,132
              
              
              $
              712,563
              
              
              $
              501,541
              
              
              $
              398,739
              
              
              $
              342,192Core
      deposits
              
              $
              590,714
              
              
              $
              533,861
              
              
              $
              425,716
              
              
              $
              352,693
              
              
              $
              296,418Total
      deposits
              
              $
              654,632
              
              
              $
              605,814
              
              
              $
              461,013
              
              
              $
              379,618
              
              
              $
              329,157Interest-paying
      liabilities
              
              $
              627,569
              
              
              $
              567,708
              
              
              $
              372,880
              
              
              $
              290,569
              
              
              $
              256,441Shareholders'
      equity
              
              $
              103,089
              
              
              $
              90,238
              
              
              $
              54,528
              
              
              $
              46,043
              
              
              $
              39,758Financial
      ratiosReturn
      on average:Assets
              
              
              1.43
              %
              
              
              1.53
              %
              
              
              1.67
              %
              
              
              1.71
              %
              
              
              1.70
              %Equity
              
              
              12.55
              %
              
              
              14.02
              %
              
              
              17.57
              %
              
              
              17.26
              %
              
              
              17.18
              %Avg
      shareholders' equity / avg assets
              
              
              11.40
              %
              
              
              10.93
              %
              
              
              9.50
              %
              
              
              9.93
              %
              
              
              9.89
              %Dividend
      payout ratio
              
              
              32.28
              %
              
              
              26.72
              %
              
              
              26.69
              %
              
              
              27.23
              %
              
              
              26.95
              %Risk-based
      capital:Tier
      I capital
              
              
              10.00
              %
              
              
              9.93
              %
              
              
              9.32
              %
              
              
              10.19
              %
              
              
              10.95
              %Tier
      II capital
              
              
              10.96
              %
              
              
              10.98
              %
              
              
              10.48
              %
              
              
              11.29
              %
              
              
              12.20
              %(1) Per
      common share data is retroactively adjusted to reflect the 10% stock
      dividend, 5-for-4 stock split,and
      4-for-3 stock split of 2007, 2004, and 2003, respectively.(2) Outstanding
      loans include loans held for sale.
  22


ITEM
7                                Management’s Discussion and
Analysis of Financial Condition and Results of
Operations





The
following discussion is intended to provide a more comprehensive review of the
Company’s operating results and financial condition than can be obtained from
reading the Consolidated Financial Statements alone.  The discussion
should be read in conjunction with the audited financial statements and the
notes included later in this report.  All numbers, except per share
data, are expressed in thousands of dollars.





In
addition to historical information, this report contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 ("PSLRA").  Such forward-looking statements are subject to
risks and uncertainties that may cause actual results to differ materially from
those projected, including but not limited to the following: the concentration
of loans of the company's banking subsidiary, particularly with respect to
commercial and residential real estate lending; a continued decline in the
housing and real estate market, changes in the regulatory environment and
increases in associated costs, particularly ongoing compliance expenses and
resource allocation needs in response to the Sarbanes-Oxley Act and related
rules and regulations; vendor quality and efficiency; employee recruitment and
retention, specifically in the Bank's Portland and Seattle markets; the
company's ability to control risks associated with rapidly changing technology
both from an internal perspective as well as for external providers; increased
competition among financial institutions; fluctuating interest rate
environments; a tightening of available credit, and similar
matters.  Readers are cautioned not to place undue reliance on the
forward-looking statements. Pacific Continental Corporation undertakes no
obligation to publicly revise or update the forward-looking statements to
reflect events or circumstances that arise after the date of this
release.  Readers should carefully review any risk factors described
in Pacific Continental’s Annual Report on Form 10-K, Quarterly Reports on Form
10-Q and other documents, including any Current Reports on Form 8-K furnished to
or filed from time to time with the Securities Exchange
Commission.  This statement is included for the express purpose of
invoking PSLRA's safe harbor provisions.





HIGHLIGHTS





2007
            2006
            %
      Change
              2007 vs. 2006
            2005
            %
      Change
              2006 vs. 2005(2)Operating
      revenue (1)
            $47,351
            $44,458
            7%
            $34,323
            30%Net
      income
            $12,935
            $12,655
            2%
            $9,578
            32%Earnings
      per share (3)Basic
            $1.09
            $1.09
            0%
            $0.98
            11%Diluted
            $1.08
            $1.08
            0%
            $0.95
            14%Assets,
      period-end
            $949,271
            $885,351
            7%
            $791,794
            12%Deposits,
      period-end
            $644,424
            $641,272
            0%
            $604,271
            6%Return
      on assets
            1.43%
            1.53%
            
            1.67%Return
      on equity
            12.55%
            14.02%
            
            17.57%Return
      on tangible equity (4)
            16.23%
            19.12%
            
            18.25%





(1)
            Operating
      income is defined as net interest income plus noninterest
      income.





(2)
            On
      November 30, 2005, the Company acquired NWBF for a combination of stock
      and cash.    Combined, the stock and cash transaction
      was valued at approximately $40,434.  The acquisition was
      accounted for under the purchase method of accounting and accordingly, the
      results of operations of NWBF have been included in the consolidated
      financial statement only since the date of
  acquisition.





(3)
            Per
      share data for 2006 and 2005 was retroactively adjusted to reflect the 10%
      stock dividend paid in June 2007.





(4)
            Tangible
      equity excludes goodwill and core deposit intangible related to
      acquisitions.





23




Net
income for the year 2007 was $12,935, an increase of $280 or 2% over the $12,655
reported for the year 2006.  Net income improvement in 2007 over 2006
was modest due to much slower growth in operating revenue, which was up 7% in
2007 over 2006.  Growth in operating revenue is primarily driven by
net interest income, which accounted for 92% of total operating revenue in
2007.  While average earning assets increased 10% in 2007 over 2006,
growth in net interest income in 2007 was slowed by an 8 basis point compression
in the net interest margin.  Offsetting some of the impact from slower
revenue growth was effective management of noninterest expense
growth.  During 2007, the Company implemented a number of cost control
initiatives that stabilized noninterest expense on a linked quarter basis
beginning with the first quarter 2007 and overall saw 9% growth in noninterest
expense in 2007 when compared to 2006.





The
Company earned $12,655 in 2006 compared to $9,578 in 2005.  Growth in
operating revenue,was primarily responsible for the increased earnings in 2006
over 2005. Operating revenues were $44,458 in 2006, up $10,135 or 30% over
2005.  Operating revenue growth was driven by a 42% increase in
average earning assets resulting in a $9,817 increase in net interest
income.  Growth in earning assets was due to the full year effect of
assets acquired in the NWBF acquisition and organic growth.





When
comparing 2006 and 2005 results, it is also fair to consider the effects of
several unusual transactions and the adoption of new accounting
standards.  Effective January 1, 2006, the Company implemented FAS
123(R),” Share-Based
Payment,” which requires the expensing of stock-based
compensation.  The Company elected to implement FAS 123(R) using the
modified prospective method, meaning there was no restatement of prior
periods.  Had the accounting principle been effective in 2005, the
Company would have recognized $515 in stock-based compensation expense which
would have reduced full year 2005 diluted earnings per share by
$0.06.  Also during 2005 the Oregon legislature, as required in the
Oregon Constitution, refunded to the Company a state income tax “kicker”
reducing 2005 state income taxes by $241 which was recognized by the Company in
the fourth quarter, increasing diluted earnings per share for the year 2005 by
$0.02.




Period-end
assets at December 31, 2007 were $949,271, compared to $885,351 at December 31,
2006.  Core deposits, which are defined as demand deposits, interest
checking, money market accounts, and local time deposits (including local time
deposits over $100 thousand) constitute 96% of December 31, 2007 outstanding
deposits.  Non-interest bearing deposits were $175,941 or 27% of total
deposits at year-end December 31, 2007.





During
2008, the Company believes the following factors could impact reported financial
results:





§
            The
      strength of national, regional, and local economies and their effect on
      loan demand, the credit quality of existing clients with lending
      relationships, and vacancy rates of commercial real estate properties,
      since a significant portion of our loan portfolio is secured by real
      estate.





§
            A
      slowing real estate market and increases in residential home inventories
      for sale and the impact on residential construction lending, delinquency
      and default rates of existing residential construction loans in the Bank’s
      portfolio, residential mortgage lending, and refinancing activities of
      existing homeowners.





§
            The
      ability to grow core deposits, to fund loan growth during
      2008.





§
            A
      continuation of high rates on alternative funding sources or inability to
      tap alternative funding sources due to current disruption in the financial
      and capital markets flowing from the significant downturn in the housing
      industry





§
            A
      continuation of the relatively flat yield curve that would reduce spreads
      between the Bank’s yield on fixed rate loans and the Bank’s short-term
      borrowing costs and costs of core deposits, which could negatively affect
      the net interest margin and revenue
growth.





§
            The
      ability to manage noninterest expense growth in light of possible slow
      revenue growth.





§
            Increased
      expenses related to personnel costs and the rising costs of providing
      employee benefits plus staffing, consulting, fees, and other expenses
      related to internal auditing and compliance with current and future
      regulations.





§
            The
      ability to attract and retain qualified and experienced bankers in all
      markets.





24


SUMMARY
OF CRITICAL ACCOUNTING POLICIES





The SEC
defines “critical accounting policies” as those that require the application of
management’s most difficult, subjective, or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain and may change in future periods.  Significant accounting
policies are described in Note 1 of the Notes to Consolidated Financial
Statements for the year ended December 31, 2007 in Item 8 of this
report.  Management believes that the following policies and those
disclosed in the Notes to
Consolidated Financial Statements should be considered critical under the
SEC definition:





Allowance
for Loan Losses and Reserve for Unfunded Commitments





The
allowance for outstanding loans is classified as a contra-asset account
offsetting outstanding loans, and the allowance for unfunded commitments is
classified as an “other” liability on the balance sheet.  The
allowance for loan losses is established through a provision for loan losses
charged against earnings.  The balances of the allowance for loan
losses for outstanding loans and unfunded commitments are maintained at an
amount management believes will be adequate to absorb known and inherent losses
in the loan portfolio and commitments to loan funds.  The appropriate
balance of the allowance for loan losses is determined by applying loss factors
to the credit exposure from outstanding loans and unfunded loan
commitments.  Estimated loss factors are based on subjective
measurements including management’s assessment of the internal risk
classifications, changes in the nature of the loan portfolios, industry
concentrations, and the impact of current local, regional, and national economic
factors on the quality of the loan portfolio.  Changes in these
estimates and assumptions are reasonably possible and may have a material impact
on the Company’s consolidated financial statements, results of operations, or
liquidity.





Goodwill
and Intangible Assets





At
December 31, 2007, the Company had $23,127 in goodwill and other intangible
assets.  In accordance with Financial Accounting Standard 142, Goodwill and Other Intangible
Assets, assets with indefinite lives are no longer amortized, but instead
are periodically tested for impairment.  Management performs an
impairment analysis of the intangible assets with indefinite lives at least
annually and has determined that there was no impairment as of December 31,
2007, 2006, and 2005.





Share-based
Compensation





In
December 2004, the Financial Accounting Standards Board (“FASB”) issued FAS
123(R), Share Based
Payment, a revision to the previously issued guidance on accounting for
stock options and other forms of equity-based forms of compensation issued to
employees.  This standard became effective in the first quarter of
2006.  The method for determining the grant date fair value of equity
based payments under FAS 123(R) is presented in Note 1 of the Notes to
Consolidated Financial Statements in Item 8 below.





The
Company adopted FAS 123(R) using the modified prospective
method.  Therefore, previously reported financial data was not
restated, and expenses related to equity-based payments granted and vesting
during 2006 and 2007 were recorded as compensation expense.


25





Recent Accounting
Pronouncements





Recent
accounting pronouncements are discussed in Note 1 of the Notes to the
Consolidated Financial Statements for the year ended December 31, 2007 in item 8
of this report.  None of these pronouncements are expected to have a
significant effect on the Company’s financial condition or results of
operations.





RESULTS
OF OPERATIONS





Net
Interest Income





The
largest component of the Company’s earnings is net interest
income.  Net interest income is the difference between interest income
derived from earning assets, principally loans, and the interest expense
associated with interest-bearing liabilities, principally
deposits.  The volume and mix of earning assets and funding sources,
market rates of interest, demand for loans, and the availability of deposits
affect net interest income.





4th Quarter
2007 Compared to 4th Quarter
2006





Two
tables follow which analyze the changes in net interest income for the fourth
quarter 2007 and fourth quarter 2006.  Table I “Average Balance
Analysis of Net Interest Earnings”, provides information with regard to average
balances of assets and liabilities, as well as associated dollar amounts of
interest income and interest expense, relevant average yields or rates, and net
interest income as a percent of average earning assets.  Table II
“Analysis of Changes in Interest Income and Interest Expense”, shows the
increase (decrease) in the dollar amount of interest income and interest expense
and the differences attributable to changes in either volume or
rates.





The
Bank’s net interest margin for the fourth quarter 2007 was 5.15% compared to
5.35% for the fourth quarter 2006.   Table I shows that earning
asset yields for the fourth quarter 2007 of 7.98% were down 46 basis points from
fourth quarter 2006 earning asset yields due primarily to a 47 basis point
decline in the yield on net loans.  The decline in loan yields was due
to the 100 basis point drop in the Bank’s prime-lending rate during the last
four months of 2007 that lowered yields on the Bank’s variable rate loan
portfolio.  The cost of interest-bearing liabilities also showed a
decline from 4.13% for fourth quarter 2006 to 3.77% for fourth quarter
2007.  This decrease is reflected in both the cost of interest-bearing
core deposits and cost of alternative funding.  However, note that the
cost of the alternative funding dropped only 25 basis points compared to 40
basis points for the cost of core deposits.  This relatively smaller
decline in the cost of alternative funding is reflective of the recent turmoil
in the financial markets, which has created liquidity issues for many large
financial institutions and has kept the cost of alternative or wholesale funding
higher than the cost of core deposits.  Each of the Bank’s
interest-bearing core deposit categories showed a decrease in rates, with the
exception of core time deposits.  The rates on core time deposits did
not fall due to the lag effect of the repricing of these
instruments.  For the quarter ended December 31, 2007, the cost of
interest-bearing core deposits was 3.24% or 164 basis points below the cost of
alternative funding at 4.88%.  When average noninterest-bearing
deposits of $173,706 are included in the core deposit base, the average cost of
core deposits drops to 2.32% for the fourth quarter 2007 or 256 basis points
below the cost of alternative funding.





Table II,
which provides the change in net interest income due to volume and rate, shows
that interest income including loan fees improved by $607 over the same period
last year.  Higher volumes of earning assets increased interest income
by $1,492, and while lower yields on loans decreased interest income by
$885.  Table II shows that interest expense for the quarter ended
December 31, 2007 increased by $18 over the same quarter last year, as higher
volumes and changes in mix of deposits and alternative funding increased
interest expense by $536, while lower rates on all deposits and alternative
funding categories caused interest expense to decrease by $518.




26


Table I
 Average Balance Analysis of Net
Interest Earnings
 (dollars in
thousands)
 Quarter
      Ended
              
              
              Quarter EndedDecember 31, 2007
              
              
              
              
              December 31, 2006Interest
              Average
              
              
              
              Interest
              AverageAverage
              
              Income
      or
              Yields
      or
              
              Average
              
              Income
      or
              Yields
      orBalance
              
              Expense
              Rates
              
              Balance
              
              Expense
              RatesInterest
      Earning AssetsFederal
      funds sold and interest-bearing
      deposits in banks
              
              $         809
              
              $          10
              4.90%
              
              $        960
              
              $           10
              4.13%Securities
      available for sale:Taxable
      (1)
              
              52,756
              
              622
              4.68%
              
              39,395
              
              404
              4.07%Tax-exempt
              
              5,247
              
              49
              3.71%
              
              3,545
              
              34
              3.81%Loans,
      net of allowance for loan losses(2)(3)(4)
              803,999
              
              16,669
              8.23%
              
              742,911
              
              16,295
              8.70%Total
      interest earning assets
              
              862,811
              
              17,350
              7.98%
              
              786,811
              
              16,743
              8.44%Non
      Earning AssetsCash
      and due from banks
              
              19,623
              
              
              
              
              24,046Premises
      and equipment
              
              20,856
              
              
              
              
              18,483Goodwill
      & other intangibles
              
              23,159
              
              
              
              
              23,882Interest
      receivable and other
              
              6,925
              
              
              
              
              6,386Total
      non interest assets
              
              70,563
              
              
              
              
              72,797Total
      assets
              
              $  933,374
              
              
              
              
              $
      859,608Interest-Bearing
      LiabilitiesMoney
      market and NOW accounts
              
              378,845
              
              (3,066)
              -3.21%
              
              333,235
              
              (3,143)
              -3.74%Savings
      deposits
              
              20,650
              
              (82)
              -1.58%
              
              24,971
              
              (121)
              -1.92%Time
      deposits - core (5)
              
              38,313
              
              (424)
              -4.39%
              
              39,253
              
              (380)
              -3.84%Total
      interest-bearing core deposits
              
              437,808
              
              (3,572)
              -3.24%
              
              397,459
              
              (3,644)
              -3.64%Time
      deposits - non-core
              
              49,588
              
              (651)
              -5.21%
              
              63,286
              
              (851)
              -5.33%Federal
      funds purchased
              
              16,579
              
              (212)
              -5.07%
              
              6,684
              
              (57)
              -3.38%FHLB
      borrowings
              
              135,748
              
              (1,594)
              -4.66%
              
              114,683
              
              (1,459)
              -5.05%Trust
      preferred
              
              8,248
              
              (128)
              -6.16%
              
              8,248
              
              (128)
              -6.16%Total
      interest-bearing alternative funding
              
              210,163
              
              (2,585)
              -4.88%
              
              192,901
              
              (2,495)
              -5.13%Total
      interest-bearing liabilities
              
              647,971
              
              (6,157)
              -3.77%
              
              590,360
              
              (6,139)
              -4.13%Noninterest-Bearing
      LiabilitiesDemand
      deposits
              
              173,706
              
              
              
              
              168,971Interest
      payable and other
              
              4,326
              
              
              
              
              4,629Total
      noninterest liabilities
              
              178,032
              
              
              
              
              173,600Total
      liabilities
              
              826,003
              
              
              
              
              763,960Stockholders'
      equity
              
              107,371
              
              
              
              
              95,648Total
      liabilities and stockholders' equity
              
              $  933,374
              
              
              
              
              $
      859,608Net
      Interest Income
              
              
              
              $   11,193
              
              
              
              
              $    10,604Net
      Interest Income as a Percent of Earning Assets
              
              5.15%
              
              
              
              
              5.35%(1)
      Federal Home Loan Bank stock is included in securities available for
      sale.(2)
      Nonaccrual loans have been included in average balance
    totals.(3)
      Interest income includes recognized loan origination fees of $447 and $604
      for the three months endedDecember
      31, 2007 and 2006, respectively.(4)
      Total includes loans held for sale.(5)
      Core time deposits include all local time deposits, including time
      deposits over $100.
 
 27




Table II


Analysis of Changes in Interest
Income and Interest Expense




Three
      Months EndedDecember
      31, 2007 compared to December 31, 2006Increase (decrease) due toVolume
            
            
            Rate
            
            
            NetInterest
      earned on:Federal
      funds sold and interestbearing
      deposits in banks
            
            $
            (2
            )
            
            $
            2
            
            
            $
            -Securities
      available-for-sale:Taxable
            
            
            138
            
            
            
            80
            
            
            
            218Tax-exempt
            
            
            16
            
            
            
            (1
            )
            
            
            15Loans,
      net of allowance for loan losses
            
            
            1,340
            
            
            
            (966
            )
            
            
            374Total
      interest income
            
            
            1,492
            
            
            
            (885
            )
            
            
            607Interest
      paid on:Money
      market and NOW accounts
            
            
            (369
            )
            
            
            446
            
            
            
            77Savings
      deposits
            
            
            17
            
            
            
            22
            
            
            
            39Time
      deposits - core
            
            
            10
            
            
            
            (54
            )
            
            
            (44
            )Total
      interest-bearing core deposits
            
            
            (342
            )
            
            
            414
            
            
            
            72Time
      deposits - non-core
            
            
            180
            
            
            
            20
            
            
            
            200Federal
      funds purchased
            
            
            (127
            )
            
            
            (28
            )
            
            
            (155
            )FHLB
      borrowings
            
            
            (247
            )
            
            
            112
            
            
            
            (135
            )Trust
      preferred
            
            
            -
            
            
            
            -
            
            
            
            -Total
      interest-bearing alternative funding
            
            
            (194
            )
            
            
            104
            
            
            
            (90
            )Total
      interest expense
            
            
            (536
            )
            
            
            518
            
            
            
            (18
            )Net
      interest income
            
            $
            957
            
            
            $
            (368
            )
            
            $
            589





2007
Compared to 2006





Two
tables follow which analyze the changes in net interest income for the years
2007, 2006, and 2005.  Table III “Average Balance Analysis of Net
Interest Earnings”, provides information with regard to average balances of
assets and liabilities, as well as associated dollar amounts of interest income
and interest expense, relevant average yields or rates, and net interest income
as a percent of average earning assets.  Table IV, “Analysis of
Changes in Interest Income and Interest Expense”, shows the increase (decrease)
in the dollar amount of interest income and interest expense and the differences
attributable to changes in either volume or rates.





The net
interest margin for the full year 2007 was 5.22%, a decline of 8 basis points
from the 5.30% net interest margin reported for the year 2006.  Table
III shows that earning asset yields improved by 11 basis points for the year
2007 when compared to 2006 from 8.20% to 8.31%.  Compression in the
net interest margin was primarily due to the increase in the Bank’s cost of
funding, which more than offset the growth in earning asset
yields.  Table III shows the overall cost of interest-bearing
liabilities for the year 2007 was up 24 basis points from 3.86% in 2006 to 4.10%
in 2007.  Table III also illustrates the difference between the cost
of interest-bearing core deposits for the year 2007 as compared to the cost of
interest-bearing alternative funding.  The cost of interest-bearing
core deposits was 3.61% or 150 basis points less than the 5.11% cost of
alternative funding.  When noninterest-bearing demand deposits are
included in the core deposit base the overall cost of the Bank’s core deposit
base falls to 2.58% or 253 basis points below the cost of alternative
funding.





The
year-to-date December 31, 2007 rate/volume analysis shows that interest income
including loan fees improved by $7,196 over last year.  Higher volumes
of earning assets increased interest income by $6,301 and higher yields on loans
increased interest income by $895.  The rate/volume analysis shows
that interest expense for the year 2007 increased by $3,825 over last year, as
higher volumes on all deposit categories caused interest expense to increase by
$2,171, combined with higher rates, which increased interest expense by
$1,654.





28




On
December 11, 2007, the Federal Reserve lowered market interest rates by 25 basis
points and lowered market interest rates by 100 basis points in the last three
and one-half months of the year 2007.  Due to the Bank’s balanced
interest rate-risk profile, the net interest margin is not expected to be
materially impacted by the recent or any future decline in short-term market
interest rates.  However, should short-term market interest rates fall
precipitously, some margin compression is likely due to the fact the rates on
certain core deposits, such as interest checking, money market, and savings
accounts will be at virtual floors.





2006
Compared to 2005





Net
interest income for 2006 was $40,057, an increase of $9,817 over 2005 net
interest income of $30,240.  The growth in net interest income in 2006
over 2005 was attributable to a $221,750 or 42% increase in earning
assets.  The acquisition of NWBF in November 30, 2005 was accounted
for under the purchase method of accounting, thus the assets acquired and
liabilities assumed have been included in the balance sheet only since the date
of acquisition.  The earning assets acquired in this transaction
accounted for approximately $145,000 of the growth in earning assets in 2006
when compared to 2005.  For the year 2006, the net interest income as
a percentage of earning assets decreased by 36 basis points from 5.66% to
5.30%.   Much of the decline in the net interest margin in 2006
when compared to 2005 can be attributed to the acquisition of NWBF, which had a
much lower net interest margin at 4.20% than the Bank’s net interest margin of
approximately 5.68% prior to the acquisition.





For 2006,
interest and fees earned on earning assets increased by $22,379 over
2005.  Referring to Table II, total interest income and fees improved
by $16,566 due to increased earning asset volumes and improved $5,813 due to
higher yields on earning assets.  Average earning assets for 2006 were
$755,680, a 42% increase over 2005 average earning assets.  Growth in
earning assets was primarily attributable to loan growth as average loans, net
of the allowance for loan losses for the year 2006, were up $211,022 or 42% over
2005.  The acquisition of NWBF increased average loans by
approximately $145,000 in 2006 when compared to 2005.  Referring to
Table III, earning asset yields increased by 78 basis points, from 7.42% in 2005
to 8.20% in 2006.  The improvement in earning asset yield was
primarily due to increased loan yields, which were up 78 basis points in 2006
over 2005.  The increase in loan yields is reflective of the
consistent increase in the prime-lending rate throughout the first six months of
2006.





Interest
expense on interest-bearing liabilities during 2006 increased by $12,562 over
2005.  Referring to Table III, overall average interest-bearing
liabilities in 2006 increased by $194,828 over 2005, while the average rate paid
on interest-bearing liabilities increased by 135 basis points from 2.51% to
3.86%.  The acquisition of NWBF accounted for a substantial portion of
the growth in interest-bearing deposits in addition to the organic growth from
the two Oregon markets.  Referring to Table IV, interest expense
increased by $5,874 due to the change in the mix and increased volumes of
interest-bearing liabilities. Table IV also indicates that interest expense for
the year increased an additional $6,688 due to higher rates, a direct result of
the increase in short-term market interest rates during the first six months of
2006.  Table IV shows the increase in the average volumes of money
market and NOW accounts, time deposits, and FHLB borrowings, were primarily
responsible for the increase in interest expense due to higher volumes for 2006
when compared to 2005.   The increase in interest expense for the
year 2006 over 2005 resulting from higher rates was primarily due to increased
volumes and a higher rate paid on money market and NOW accounts, time deposits,
and FHLB borrowings.  Table III shows the 2006 average volume of money
market and NOW accounts increased $87,073 or 40%, and average time deposit
volume increased $38,360 or 51% over 2005 average volumes, while the rate on
these deposits increased 124 basis points  and 132 basis points,
respectively.  Tables III and IV show that the increase in the average
balance of FHLB term borrowings increased $59,654 and accounted for $2,244 or
38% of the total increase in interest expense for the year 2006 over 2005 that
was related to volume.  The average balance of trust preferred
securities increased by $7,480 in 2006 over 2005, which resulted in $469
additional interest expense in 2006 over 2005.  The Trust preferred
securities were issued in conjunction with the acquisition of NWBF and thus were
only included in the 2005 average balance sheet since the date of acquisition on
November 30, 2005.





29




Table III


Average Balance Analysis of Net Interest
Earnings


2007
            
            
            
            
            
            
            
            
            2006
            
            
            
            
            
            
            
            
            2005Average
            
            
            Interest
            
            
            Average
            
            
            Average
            
            
            Interest
            
            
            Average
            
            
            Average
            
            
            Interest
            
            
            AverageBalance
            
            
            Income/(Expense)
            
            
            Yield/(Cost)
            
            
            Balance
            
            
            Income/(Expense)
            
            
            Yield/(Cost)
            
            
            Balance
            
            
            Income/(Expense)
            
            
            Yield/(Cost)(dollars
      in thousands)
            
            
            (dollars
      in thousands)Interest
      Earning AssetsFederal
      funds sold and interest-bearing
      deposits in banks
            
            $
            981
            
            
            $
            51
            
            
            
            5.16
            %
            
            $
            960
            
            
            $
            44
            
            
            
            4.58
            %
            
            $
            1,002
            
            
            $
            26
            
            
            
            2.62
            %Securities
      available for sale:Taxable
      (1)
            
            
            41,112
            
            
            
            1,838
            
            
            
            4.47
            %
            
            
            38,855
            
            
            
            1,546
            
            
            
            3.98
            %
            
            
            29,142
            
            
            
            965
            
            
            
            3.31
            %Tax-exempt
            
            
            5,226
            
            
            
            156
            
            
            
            2.99
            %
            
            
            3,302
            
            
            
            125
            
            
            
            3.79
            %
            
            
            2,245
            
            
            
            82
            
            
            
            3.64
            %Loans,
      net of allowance for loanlosses(2)(3)(4)
            
            
            785,132
            
            
            
            67,122
            
            
            
            8.55
            %
            
            
            712,563
            
            
            
            60,257
            
            
            
            8.46
            %
            
            
            501,541
            
            
            
            38,520
            
            
            
            7.68
            %Total
      interest earning assets
            
            
            832,451
            
            
            
            69,167
            
            
            
            8.31
            %
            
            
            755,680
            
            
            
            61,972
            
            
            
            8.20
            %
            
            
            533,930
            
            
            
            39,593
            
            
            
            7.42
            %Non
      Earning AssetsCash
      and due from banks
            
            
            21,662
            
            
            
            
            
            
            
            
            
            
            
            23,272
            
            
            
            
            
            
            
            
            
            
            
            19,324Premises
      and equipment
            
            
            19,755
            
            
            
            
            
            
            
            
            
            
            
            17,694
            
            
            
            
            
            
            
            
            
            
            
            14,923Goodwill
      & other intangibles
            
            
            23,376
            
            
            
            
            
            
            
            
            
            
            
            24,057
            
            
            
            
            
            
            
            
            
            
            
            130Interest
      receivable and other
            
            
            6,688
            
            
            
            
            
            
            
            
            
            
            
            4,968
            
            
            
            
            
            
            
            
            
            
            
            5,410Total
      non interest earning assets
            
            
            71,481
            
            
            
            
            
            
            
            
            
            
            
            69,991
            
            
            
            
            
            
            
            
            
            
            
            39,787Total
      assets
            
            $
            903,932
            
            
            
            
            
            
            
            
            
            
            $
            825,671
            
            
            
            
            
            
            
            
            
            
            $
            573,717Interest-Bearing
      LiabilitiesMoney
      market and NOW accounts
            
            $
            364,780
            
            
            $
            (13,358
            )
            
            
            -3.66
            %
            
            $
            307,054
            
            
            $
            (10,551
            )
            
            
            -3.44
            %
            
            $
            219,981
            
            
            $
            (4,840
            )
            
            
            -2.20
            %Savings
      deposits
            
            
            24,309
            
            
            
            (486
            )
            
            
            -2.00
            %
            
            
            23,559
            
            
            
            (360
            )
            
            
            -1.53
            %
            
            
            24,148
            
            
            
            (222
            )
            
            
            -0.92
            %Time
      deposits - core
            
            
            32,589
            
            
            
            (1,381
            )
            
            
            -4.24
            %
            
            
            40,989
            
            
            
            (1,466
            )
            
            
            -3.58
            %
            
            
            39,344
            
            
            
            (1,078
            )
            
            
            -2.74
            %Total
      interest-bearing core deposits
            
            
            421,678
            
            
            
            (15,225
            )
            
            
            3.61
            %
            
            
            371,602
            
            
            
            (12,377
            )
            
            
            -3.33
            %
            
            
            283,473
            
            
            
            (6,140
            )
            
            
            -2.17
            %Time
      deposits - non-core
            
            
            63,918
            
            
            
            (3,347
            )
            
            
            -5.24
            %
            
            
            71,954
            
            
            
            (3,504
            )
            
            
            -4.87
            %
            
            
            35,239
            
            
            
            (1,221
            )
            
            
            -3.46
            %Federal
      funds purchased
            
            
            10,128
            
            
            
            (539
            )
            
            
            -5.31
            %
            
            
            7,580
            
            
            
            (380
            )
            
            
            -5.01
            %
            
            
            4,730
            
            
            
            (113
            )
            
            
            -2.39
            %FHLB
      borrowings
            
            
            123,597
            
            
            
            (6,121
            )
            
            
            -4.95
            %
            
            
            108,324
            
            
            
            (5,144
            )
            
            
            -4.75
            %
            
            
            48,670
            
            
            
            (1,831
            )
            
            
            -3.76
            %Trust
      preferred
            
            
            8,248
            
            
            
            (508
            )
            
            
            -6.16
            %
            
            
            8,248
            
            
            
            (510
            )
            
            
            -6.18
            %
            
            
            768
            
            
            
            (48
            )
            
            
            -6.27
            %Total
      interest-bearing alternative funding
            
            
            205,891
            
            
            
            (10,515
            )
            
            
            5.11
            %
            
            
            196,106
            
            
            
            (9,538
            )
            
            
            -4.86
            %
            
            
            89,407
            
            
            
            (3,213
            )
            
            
            -3.59
            %Total
      interest-bearing liabilities
            
            
            627,569
            
            
            
            (25,740
            )
            
            
            -4.10
            %
            
            
            567,708
            
            
            
            (21,915
            )
            
            
            -3.86
            %
            
            
            372,880
            
            
            
            (9,353
            )
            
            
            -2.51
            %Noninterest-Bearing
      LiabilitiesDemand
      deposits
            
            
            169,035
            
            
            
            
            
            
            
            
            
            
            
            162,259
            
            
            
            
            
            
            
            
            
            
            
            142,301Interest
      payable and other
            
            
            4,239
            
            
            
            
            
            
            
            
            
            
            
            5,466
            
            
            
            
            
            
            
            
            
            
            
            4,008Total
      noninterest-bearing liabilities
            
            
            173,274
            
            
            
            
            
            
            
            
            
            
            
            167,725
            
            
            
            
            
            
            
            
            
            
            
            146,309Total
      liabilities
            
            
            800,843
            
            
            
            
            
            
            
            
            
            
            
            735,433
            
            
            
            
            
            
            
            
            
            
            
            519,189Stockholders'
      equity
            
            
            103,089
            
            
            
            
            
            
            
            
            
            
            
            90,238
            
            
            
            
            
            
            
            
            
            
            
            54,528Total
      liabilities and stockholders' equity
            
            $
            903,932
            
            
            
            
            
            
            
            
            
            
            $
            825,671
            
            
            
            
            
            
            
            
            
            
            $
            573,717Net
      Interest Income
            
            
            
            
            
            $
            43,427
            
            
            
            
            
            
            
            
            
            
            $
            40,057
            
            
            
            
            
            
            
            
            
            
            $
            30,240Net
      Interest Income as a Percent ofEarning
      Assets
            
            
            
            
            
            
            5.22
            %
            
            
            
            
            
            
            
            
            
            
            5.30
            %
            
            
            
            
            
            
            
            
            
            
            5.66
            %(1)
      Federal Home Loan Bank stock is included in securities available for
      sale.(2)
      Nonaccrual loans have been included in average balance
    totals.(3)
      Interest income includes recognized loan origination fees of $2,099,
      $2,099 and $1,642 for the years ended 2007, 2006, and 2005,
      respectively.(4)
      Total includes loans held for sale.(5)
      Core time deposits include all local time deposits, including local time
      deposits over $100.





30





2007
      compared to 2006
              
              
              2006
      compared to 2005Increase
      (decrease) due to
              
              
              Increase
      (decrease) due toVolume
              
              
              Rate
              
              
              Net
              
              
              Volume
              
              
              Rate
              
              
              Net(dollars
      in thousands)Interest
      earned on:Federal
      funds sold and interestbearing
      deposits in banks
              
              $
              1
              
              
              $
              6
              
              
              $
              7
              
              
              $
              (1
              )
              
              $
              19
              
              
              $
              18Securities
      available-for-sale:Taxable
              
              
              90
              
              
              
              202
              
              
              
              292
              
              
              
              322
              
              
              
              259
              
              
              
              581Tax-exempt
              
              
              73
              
              
              
              (42
              )
              
              
              31
              
              
              
              38
              
              
              
              5
              
              
              
              43Loans,
      net of allowance for loanlosses
              
              
              6,137
              
              
              
              729
              
              
              
              6,866
              
              
              
              16,207
              
              
              
              5,530
              
              
              
              21,737Total
      interest income
              
              
              6,301
              
              
              
              895
              
              
              
              7,196
              
              
              
              16,566
              
              
              
              5,813
              
              
              
              22,379Interest
      paid on:Money
      market and NOW accounts
              
              
              (1,997
              )
              
              
              (810
              )
              
              
              (2,807
              )
              
              
              (1,915
              )
              
              
              (3,796
              )
              
              
              (5,711
              )Savings
      deposits
              
              
              (12
              )
              
              
              (115
              )
              
              
              (127
              )
              
              
              5
              
              
              
              (142
              )
              
              
              (137
              )Time
      deposits
              
              
              299
              
              
              
              (214
              )
              
              
              85
              
              
              
              (44
              )
              
              
              (344
              )
              
              
              (388
              )Total
      interest-bearing core deposits
              
              
              (1,709
              )
              
              
              (1,139
              )
              
              
              (2,848
              )
              
              
              (1,954
              )
              
              
              (4,282
              )
              
              
              (6,236
              )Time
      deposits - non-core
              
              
              393
              
              
              
              (236
              )
              
              
              157
              
              
              
              (1,139
              )
              
              
              (1,145
              )
              
              
              (2,284
              )Federal
      funds purchased
              
              
              (129
              )
              
              
              (30
              )
              
              
              (159
              )
              
              
              (68
              )
              
              
              (236
              )
              
              
              (304
              )FHLB
      borrowings
              
              
              (725
              )
              
              
              (252
              )
              
              
              (977
              )
              
              
              (2,244
              )
              
              
              (1,032
              )
              
              
              (3,276
              )Trust
      preferred
              
              
              -
              
              
              
              2
              
              
              
              2
              
              
              
              (469
              )
              
              
              7
              
              
              
              (462
              )Total
      interest-bearing alternative funding
              
              
              (461
              )
              
              
              (516
              )
              
              
              (977
              )
              
              
              (3,920
              )
              
              
              (2,406
              )
              
              
              (6,326
              )Total
      interest expense
              
              
              (2,170
              )
              
              
              (1,655
              )
              
              
              (3,825
              )
              
              
              (5,874
              )
              
              
              (6,688
              )
              
              
              (12,562
              )Net
      interest income
              
              $
              4,131
              
              
              $
              (760
              )
              
              $
              3,371
              
              
              $
              10,692
              
              
              $
              (875
              )
              
              $
              9,817


Provision
for Possible Loan Losses





Management
provides for possible loan losses by maintaining an allowance.  The
level of the allowance is determined based upon judgments regarding the size and
nature of the loan portfolio, historical loss experience, the financial
condition of borrowers, the level of nonperforming loans, and current general
economic conditions.  Additions to the allowance are charged to
expense.  Loans are charged against the allowance when management
believes the collection of principal is unlikely.





The
provision for loan losses totaled $725 in 2007, $600 in 2006, and $1,100 in
2005.  The increase in the provision for 2007 when compared to 2006
was due to loan growth and increased economic uncertainty, although the overall
credit quality of the Bank’s loan portfolio remains good despite a modest
increase in nonperforming loans.  The lower provision for 2006 when
compared 2005 resulted from improvement in credit quality throughout the year
2006.





At
December 31, 2007, the Bank had $4,109 or 0.43% of total assets in nonperforming
assets, net of government guarantees compared to none at December 31,
2006.  Nonperforming assets at December 31, 2007 consist of $3,671 of
nonaccrual loans (net of $451 in government guarantees) and $438 of other real
estate owned consisting of three residential
properties.  Approximately $3,500 of the nonaccrual loans at December
31, 2007 are consumer residential construction loans.  Management
presently does not expect any significant losses on these or any future
nonperforming loans in the consumer residential construction segment of the loan
portfolio due to a cash-secured 20% principal guarantee for each of these loans.
In addition, no special allocation to the allowance for loan losses for these
specific loans is expected.





The
allowance for loan losses at December 31, 2007 was $8,675 (1.05% of outstanding
loans) compared to $8,284 (1.08% of loans) and $7,792 (1.15% of loans) at years
end 2006 and 2005, respectively.  At December 31, 2007, the Bank also
has reserved $196 for possible losses on unfunded loan commitments, which is
classified in other liabilities.  The 2007 ending allowance includes
$160 in specific allowance for $3,671 in impaired loans (net of government
guarantees).  At December 31, 2006, the Company had $496 of impaired
loans (net of government guarantees) with a specific allowance assigned of
$109.





31




Net loan
charge offs were $334 in 2007 compared to $108 in 2006, and $512 in
2005.  Net charge offs as a percentage of average loans were 0.04%,
0.01%, and 0.10% for 2007, 2006, and 2005, respectively.





Looking
forward, the 2008 provision for loans losses will be contingent on current
economic and market conditions, and overall loan growth.  Management
believes that the allowance for loan losses is adequate for estimated loan
losses in the portfolio at year-end based on management’s assessment of various
factors including past due and impaired loans, past history and loss experience,
loan concentrations in specific industries, and current economic
conditions.





Noninterest
Income





Noninterest
income is derived from sources other than fees and interest on earning
assets.  The Company’s primary sources of noninterest income are
service charge fees on deposit accounts, merchant bankcard activity, income
derived from mortgage banking services, and gains on the sale of
loans.





2007
Compared to 2006





Noninterest
income in 2007 was $3,924, down $477 or 11% from the $4,401 reported for the
year 2006.  Excluding the one-time gain of $335 on the sale of
property included in 2006 results, noninterest income in 2007 was down $142 or
4% from 2006.  The following discussion will exclude the effect of the
gain on sale of property in 2006.  The $142 decline in 2007
noninterest income when compared to 2006 was primarily due to a $435 decrease in
mortgage banking income.  The decline in mortgage banking income was
attributable to a significant slow down in the residential housing
market.  The decline in mortgage banking income was partially offset
by increases in service charges on deposit accounts, other fee income,
principally bankcard processing fee income, and the other income
category.  Service charges on deposit accounts increased $76 or 6% due
to lower earnings credit rate, which increased fees on analyzed business
accounts.  Other fee income, principally bankcard processing fee
income in 2007 increased $135 or 9% over 2006.  Bankcard processing
fee income accounted for $53 of this increase, while other service charge
income, primarily wire transfer fees accounted for $68 of this
increase.  The other income category in 2007 was $417, a $94 or 29%
increase over the $323 reported in the other income category for the year
2006.  The increase in the other income category was due to collection
of approximately $70 in loan referral fees during the year 2007.





2006
Compared to 2005





Noninterest
income in 2006 was $4,401, up $318 or 8% from 2005.  Excluding the
nonrecurring gain on the sale of property of $335, noninterest income was down
$17 from 2005.  Total noninterest income through December 31, 2006
included approximately $70 of revenues from the Seattle market not included in
2005 results.  The decrease in noninterest income (excluding the
nonrecurring gain on sale of property) was primarily due to lower account
service charges, mortgage banking revenues, and loan servicing
income.  Account service charges were down $44 or 3% from 2006 as the
increased earnings credit on analyzed business accounts lowered fee
income.  Mortgage banking revenues were down $118 or 13% from 2005 as
higher long-term interest rates slowed the level of mortgage loan originations
and the service release premium on loans sold.  Loan servicing income
was down $43 or 29% from 2005 as the average volume of loans serviced declined
in 2006 from 2005.  Declines in these categories of noninterest income
were partially offset by $110 increase in merchant bankcard fee income and a $67
increase in the other income category.  The increase in merchant
bankcard revenues resulted from an 8% increase in sales transaction
volume.  The increase in the other income category was due to lockbox
fees and sundry recoveries.


32








Noninterest
Expense





Noninterest
expense represents all expenses other than the provision for loan losses and
interest costs associated with deposits and other interest-bearing
liabilities.  It incorporates personnel, premises and equipment, data
processing and other operating expenses.





2007
Compared to 2006





Noninterest
expense for the year 2007 was $25,861, up $2,070 or 9% over the $23,791 reported
for the year 2006.  All noninterest expense categories showed an
increase in 2007 when compared to 2006.  Personnel expense in 2007 was
up $1,089 and accounted for 53% of the total increase in noninterest expense in
the year.  Total salary expense was up $515 or 5% and benefits and
taxes were up $823 or 20% over last year due to performance increases for
existing employees, increased group insurance, and increased accruals for
officer incentives.  These increases were partially offset by a
decline in commission expense in 2007 from 2006.  The other expense
category accounted for the majority of the remaining increase in noninterest
expense in 2007 over 2006.  Other expenses were $4,902 in 2007, up
$708 or 17% over 2006 other expenses of $4,194.  The increase in the
other expense category can be attributed to the following areas: 1) increased
FDIC assessment of $146; 2) increased communications expense (primarily armored
car and courier services) of $133; 3) increased other data processing expense of
$199 due to new contracts in place; 4) increased expense related to the unfunded
loan commitment of $196; and 5) increased local taxes (Multnomah County and
State of Washington B&O taxes) of $107.





During
the year 2007, management implemented a number of cost control
initiatives.  On a linked quarter basis, noninterest expenses during
the year 2007, beginning with the first quarter 2007, were $6,358, $6,513,
$6,399, and $6,591, reflecting the effectiveness of the cost controls put into
place.





2006
Compared to 2005





Noninterest
expense in 2006 was $23,791, up $5,657 or 31% over 2005 with every expense
category up in 2006 when compared to 2005.  Total noninterest expense
in 2006 includes $3,114 of expenses from the Seattle market not included in 2005
results.  In addition, the Company implemented FAS 123(R) in 2006,
which required the expensing of equity-based compensation.  The
Company implemented this new accounting principle using the modified prospective
basis, meaning there was no restatement of prior periods.  For the
year 2006, the Company recognized $586 more in equity compensation expense than
was  recorded during 2005.  Excluding the $3,114 increase
due to Seattle market expenses and equity-based compensation of $586,
noninterest expense in 2006 increased $1,957 or 11% over
2005.  Increased personnel expense accounted for the majority of the
total increase in noninterest expense.  Total personnel expense was up
$3,380 and accounted for 60% of the total increase in noninterest
expense.  The increase in personnel expense in 2006 over 2005 reflects
the addition of the Seattle market, increased staffing in the Portland market
where two new offices were opened, and increased administrative
staff.  Premises and equipment expense was up $911 or 42% and reflects
the new costs in the Seattle market, plus additional expense related to new
offices in the Portland market.  The other expense category was up
$1,161 or 38% primarily due to higher professional services including legal
fees, consulting fees, and fees related to compliance with Section 404 of The
Sarbanes-Oxley Act.





BALANCE
SHEET





Loans





At
December 31, 2007 outstanding loans, net of deferred loan fees and excluding
loans held for sale, were $822,322, up $55,222 over outstanding loans of
$767,100 at December 31, 2006.  A summary of loan growth by market for
the year 2007 follows:





33


Balance
              
              
              Balance
              
              
              $
      Increase
              
              
              %
      IncreaseDec.
      31, 2007
              
              
              Dec.
      31, 2006
              
              
              (Decrease)
              
              
              (Decrease)Eugene
      Market
              
              $
              217,962
              
              
              $
              231,978
              
              
              $
              (14,016
              )
              
              
              -6.04
              %Portland
      Market
              
              
              389,053
              
              
              
              378,904
              
              
              
              10,149
              
              
              
              2.68
              %Seattle
      Market
              
              
              215,307
              
              
              
              156,218
              
              
              
              59,089
              
              
              
              37.82
              %Total
              
              $
              822,322
              
              
              $
              767,100
              
              
              $
              55,222
              
              
              
              7.20
              %


The
Seattle market was primarily responsible for the majority of the growth in
outstanding loans for the Company during 2007.  Outstanding loan
growth in the Portland market slowed in 2007 as compared to prior years, and
much of the decline in the Eugene market loans can be attributed to the sale of
approximately $10,800 of Consumer Finance Division loans during the year
2007.  More information on the loan portfolio can be found in
statistical information in Item 1 and in Note 4 of the Notes to Consolidated Financial
Statements in Item 8 below.





Goodwill
and Intangible Assets





At
December 31, 2007, the Company had a recorded balance of $22,031 in goodwill
from the November 30, 2005 acquisition of NWBF.  During the year
2007, the Bank sold the loans and offices of its Consumer Finance Division and
eliminated $275 of goodwill from the 2003 acquisition of the Coos Bay consumer
finance office.  In addition, at December 31, 2007 the Company had
$1,096 core deposit intangible assets resulting from the acquisition of
NWBF.  The core deposit intangible was determined to have an expected
life of approximately seven years and is being amortized over that period using
the straight-line method.  During 2007, the Company amortized $223 of
the core deposit intangible.  In accordance with Financial Accounting
Standard (“FAS”) 142, Goodwill
and Other Intangible Assets, the Company does not amortize goodwill or
other intangible assets with indefinite lives, but instead periodically tests
these assets for impairment.  Management did perform an impairment
analysis at December 31, 2007 and determined there was no impairment of the
goodwill at the time of the analysis.





Deposits





Outstanding
deposits at December 31, 2007 were $644,424, an increase of $3,152 over
outstanding deposits of $641,272 at December 31, 2006.  Core deposits,
which are defined by the Company as demand, interest checking, money market,
savings, and local time deposits, including local time deposits in excess of
$100 thousand, were $615,892, up 6.15% over outstanding core deposits of
$580,210 at December 31, 2006.  At December 31, 2007 and 2006,
respectively, core deposits represented 96% and 90% of total deposits,
respectively.  A summary of deposit growth by market for the year 2007
follows:


Balance
              
              
              Balance
              
              
              $
      Increase
              
              
              %
      IncreaseDec.
      31, 2007
              
              
              Dec.
      31, 2006
              
              
              (Decrease)
              
              
              (Decrease)Eugene
      Market core deposits
              
              $
              405,351
              
              
              $
              392,903
              
              
              $
              12,448
              
              
              
              3.17
              %Portland
      Market core deposits
              
              
              109,698
              
              
              
              124,273
              
              
              
              (14,575
              )
              
              
              -11.73
              %Seattle
      Market core deposits
              
              
              100,843
              
              
              
              63,034
              
              
              
              37,809
              
              
              
              59.98
              %Total
      core deposits
              
              
              615,892
              
              
              
              580,210
              
              
              
              35,682
              
              
              
              6.15
              %Other
      deposits
              
              
              28,532
              
              
              
              61,062
              
              
              
              (32,530
              )
              
              
              -53.27
              %Total
              
              $
              644,424
              
              
              $
              641,272
              
              
              $
              3,152
              
              
              
              0.49
              %




Growth in
outstanding core deposits was driven primarily by the Seattle and Eugene
markets.  Outstanding core deposits in the Portland market showed a
decline of $14,575, primarily due to reduction in balances of several of the
market’s large depositors, which continue to maintain relationships with the
Bank.  The other deposit category includes national market CDs,
brokered CDs, and public funds.  The $32,530 decline in these balances
in 2007 when compared to 2006 was attributable to the disruption in the
financial markets in the last five months of 2007 resulting from the significant
slowdown and credit quality problems in the residential housing
market.  Rates on these alternative funding sources spiked and
remained very high relative to other alternative funding sources, thus the Bank
elected to allow these deposits to mature and used primarily FHLB funding rather
than these higher rate sources of funding.





34




Junior
Subordinated Debentures





The
Company had $8,248 in junior subordinated debentures at December 31, 2007, which
were issued in conjunction with the acquisition of NWBF.  At December
31, 2007, the entire $8,248 in junior subordinated debentures had an interest
rate of 6.265% that is fixed through November 2010.  As of December
31, 2007, the entire balance of the junior subordinated debentures qualified as
Tier 1 capital under regulatory capital purposes.  Additional
information regarding the terms of the junior subordinated debentures, including
maturity/repricing dates and interest rate, is included in Note 12 of the Notes to Consolidated Financial
Statements in Item 8 below.





CAPITAL
RESOURCES





Capital
is the shareholders’ investment in the Company.  Capital grows through
the retention of earnings and the issuance of new stock through the exercise of
stock options.  Capital formation allows the Company to grow assets
and provides flexibility in times of adversity.





Shareholders’
equity at December 31, 2007 was $107,509, an increase of $11,774 or 12% from
December 31, 2006.  The increase in shareholders’ equity during
2007 was principally due to the retention of approximately $8,760 net income for
the year and the exercise of stock options and the related tax benefit accounted
for another $1,939.





The
Federal Reserve Board and the FDIC have in place guidelines for risk-based
capital requirements applicable to U.S. banks and bank holding
companies.  These risk-based capital guidelines take into
consideration risk factors, as defined by regulation, associated with various
categories of assets, both on and off-balance sheet.  Under the
guidelines, capital strength is measured in two tiers, which are used in
conjunction with risk-adjusted assets to determine the risk-based capital
ratios.  These guidelines require a minimum of 8% total risk-based
capital ratio, of which 4% must be Tier I capital.  The regulations
also specify that a 10% total risk-based capital ratio is required to be
designated “well-capitalized” (the highest FDIC capital rating) by the
FDIC.  The Company’s Tier I capital, which consists of shareholders’
equity and qualifying trust preferred securities, less other comprehensive
income, goodwill, and deposit-based intangibles, totaled $92,194 at December 31,
2007.  Tier II capital components include all, or a portion of the
allowance for loan losses and the portion of trust preferred securities in
excess of Tier I statutory limits.  The total of Tier I and Tier II
capital components is referred to as Total Risk-Based Capital, and was $101,065
at December 31, 2007.  The Bank’s total risk-based capital ratio was
10.96%, at December 31, 2007 compared to 10.98% at December 31,
2006.





The
Company pays cash dividends on a quarterly basis, typically in March, June,
September and December of each year.  The Board of Directors considers
the dividend amount quarterly and takes a broad perspective in its dividend
deliberations including a review of recent operating performance, capital
levels, and concentrations of loans as a percentage of capital, and growth
projections.  The Board also considers dividend payout ratios,
dividend yield, and other financial metrics in setting the quarterly
dividend.  The Company declared and paid cash dividends of $0.35 per
share for the year 2007 when adjusted for the 10% stock dividend paid in June
2007.  That compares to dividends of $0.29 paid during 2006, also
retroactively adjusted for the 10% stock dividend paid in June
2007.





The Board
of Directors, at its February 19, 2008 meeting, approved a dividend of $0.10 per
share for shareholders of record as of February 28, 2008.  If
continued for each quarter during 2008, this would result in an annual increase
of 14.3% in 2008 dividends over 2007 dividends.





The
Company projects that earnings retention and existing capital will be sufficient
to fund anticipated asset growth, while maintaining a well-capitalized
designation from all regulatory agencies.





OFF-BALANCE
SHEET ARRANGEMENTS AND COMMITMENTS





In the
normal course of business, the Bank commits to extensions of credit and issues
letters of credit.  The Bank uses the same credit policies in making
commitments to lend funds and conditional obligations as it does for other
credit products.  In the event of nonperformance by the customer, the
Bank’s exposure to credit loss is represented by the contractual amount of the
instruments.  Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition established by the
contract.  Since some commitments may expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements.  At December 31, 2007, the Bank had $279,655 in
commitments to extend credit.





35




Letters
of credit written are conditional commitments issued by the Bank to guarantee
performance of a customer to a third party.  The credit risk involved
is essentially the same as that involved in extending loan facilities to
customers.  At December 31, 2007, the Bank had $2,449 in letters of
credit and financial guarantees written.





The Bank
also has internal guidance lines of credit established for certain borrowers,
primarily in the residential construction industry.  These guidance
lines are not contractual commitments to extend credit, and may be terminated by
the Bank for any reason without any obligation to the borrower.  These
lines provide the Bank’s lenders limits on future extensions of credit to
certain borrowers.  The Bank uses the same credit policies in
establishing internal guidance lines as it does for other credit
products.  At December 31, 2007, the Bank had established unused and
uncommitted guidance lines totaling approximately $38,321 compared to unused and
uncommitted guidance lines of $56,572 at December 31, 2006.





The
Company has certain other financial commitments.  These future
financial commitments are outlined below:





Contractual
      Obligations(dollars
      in thousands)
              
              Total
              
              
              Less
      than One Year
              
              
              1
      - 3 Years
              
              
              3
      - 5 Years
              
              
              More
      than 5 YearsJunior
      subordinated debenture
              
              $
              8,248
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              8,248FHLB
      borrowings
              
              
              179,500
              
              
              
              156,500
              
              
              
              16,000
              
              
              
              5,000
              
              
              
              2,000Time
      Deposits
              
              
              66,769
              
              
              
              62,304
              
              
              
              3,527
              
              
              
              912
              
              
              
              26Operating
      lease obligations
              
              
              6,266
              
              
              
              849
              
              
              
              1,369
              
              
              
              612
              
              
              
              3,436$
              260,783
              
              
              $
              219,653
              
              
              $
              20,896
              
              
              $
              6,524
              
              
              $
              13,710




LIQUIDITY





Liquidity
is the term used to define the Company’s ability to meet its financial
commitments.  The Company maintains sufficient liquidity to ensure
funds are available for both lending needs and the withdrawal of deposit
funds.  The Company derives liquidity through core deposit growth,
maturity of investment securities, and loan payments.  Core deposits
include demand, interest checking, money market, savings, and local time
deposits, including local time deposits in excess of $100. Additional liquidity
and funding sources are provided through the sale of loans, sales of securities,
access to national CD markets, and both secured and unsecured
borrowings.





Core
deposits at December 31, 2007 were 96% of total deposits compared to 90% at
December 31, 2006.  Core deposit growth of $35,682 in all markets
funded 65% of loan growth during the year 2007.  The remainder of loan
growth was funded through alternative funding sources, including overnight
borrowed funds, Federal Home Loan Bank term advances, public deposits available
from the State of Oregon and State of Washington, national market time deposits,
and brokered time deposits.





The
Company has deposit relationships with several large clients, which are closely
monitored by Bank officers.  At December 31, 2007, 26 large deposit
relationships with the Bank account for $202,728 or 31% of total
deposits.  The single largest client represented 7% of total deposits
at December 31, 2007.  The loss of this deposit relationship or other
large deposit relationships could cause an adverse effect on short-term
liquidity.  The Company expects to maintain these relationships and
believes it has sufficient sources of liquidity to mitigate the loss of one or
more of these clients.





Borrowing
lines have been established at various correspondent banks, the Federal Home
Loan Bank of Seattle and with the Federal Reserve Bank of San
Francisco.  At December 31, 2007, the Bank had secured and unsecured
borrowing lines totaling approximately $425,000 consisting of $285,000 with the
Federal Home Loan Bank of Seattle, $118,000 with various correspondent banks,
and $22,000 with the Federal Reserve Bank of San Francisco.  The
Federal Home Loan Bank borrowing line is limited to the amount of collateral
pledged.  At December 31, 2007, the Bank had collateral pledged to the
FHLB in the form of commercial real estate loans that had a discounted
collateral value of approximately $205,000 for this line.  The $22,000
borrowing line with the Federal Reserve Bank of San Francisco is also secured
through the pledging of commercial loans under the Bank’s Borrower-In-Custody
program.  The $118,000 in borrowing lines with correspondent banks is
unsecured.  At December 31, 2007, the Bank had $179,500 in borrowings
outstanding from the FHLB of Seattle and $5,360 outstanding on its overnight
correspondent bank lines.  In addition, the Bank is part of the State
of Oregon and State of Washington community bank time deposit program and at
December 31, 2007 had approximately $26,800 available from these
sources.  The Bank’s loan portfolio also contains approximately
$28,315 in guaranteed government loans, which can be sold on the secondary
market.





36




INFLATION





Substantially
all of the assets and liabilities of the Company are
monetary.  Therefore, inflation has a less significant impact on the
Company than does fluctuation in market interest rates.  Inflation can
lead to accelerated growth in noninterest expenses, which impacts net
earnings.  During the last two years, inflation, as measured by the
Consumer Price Index, has not changed significantly.  The effects of
this inflation have not had a material impact on the Company.





ITEM
7A                      Quantitative and Qualitative
Disclosures About Market Risk





The
Company’s results of operations are largely dependent upon its ability to manage
market risks.  Changes in interest rates can have a significant effect
on the Company’s financial condition and results of operations. Although
permitted by its funds management policy, the Company does not presently use
derivatives such as forward and futures contracts, options, or interest rate
swaps to manage interest rate risk.  Other types of market risk such
as foreign currency exchange rate risk and commodity price risk do not arise in
the normal course of the Company’s business activities.





Interest
rate risk generally arises when the maturity or repricing structure of the
Company’s assets and liabilities differ significantly.  Asset and
liability management, which among other things addresses such risk, is the
process of developing, testing and implementing strategies that seek to maximize
net interest income while maintaining sufficient liquidity.  This
process includes monitoring contractual maturity and prepayment expectations
together with expected repricing of assets and liabilities under different
interest rate scenarios.  Generally, the Company seeks a structure
that insulates net interest income from large deviations attributable to changes
in market rates.





Interest
rate risk is managed through the monitoring of the Company’s balance sheet by
subjecting various asset and liability categories to interest rate shocks and
gradual interest rate movements over a one-year period of
time.  Interest rate shocks use an instantaneous adjustment in market
rates of large magnitudes on a static balance sheet to determine the effect such
a change in interest rates would have on the Company’s net interest income and
capital for the succeeding twelve-month period.  Such an extreme
change in interest rates and the assumption that management would take no steps
to restructure the balance sheet does limit the usefulness of this type of
analysis.  This type of analysis tends to provide a best-case or
worst-case scenario.  In addition to the interest rate shock analysis,
the company also prepares a rolling four quarter forecast of the balance sheet
and income statement using a flat rate scenario i.e. rates unchanged and a
most-likely rate scenario where rates are projected to change based on
management’s analysis of expected economic conditions and interest rate
environment.  This analysis takes into account growth in loans and
deposits and management strategies that could be employed to maximize the net
interest margin and net interest income.





The
Company utilizes in-house asset/liability modeling software, ProfitStar to
determine the effect changes in interest rates have on net interest income.
Interest rate shock scenarios are modeled in a parallel shift of the yield curve
in 100 basis point increments (plus or minus) in the federal funds
rate.  Although certain assets and liabilities may have similar
repricing characteristics, they may not react correspondingly to changes in
market interest rates.  In the event of a change in interest rates,
prepayment of loans and early withdrawal of time deposits would likely deviate
from those previously assumed.  Increases in market rates may also
affect the ability of certain borrowers to make scheduled principal
payments.





The model
attempts to account for such limitations by imposing weights on the differences
between repricing assets and repricing liabilities within each time
segment.  These weights are based on the ratio between the amount of
rate change of each category of asset or liability, and the amount of change in
the federal funds rate.  Certain non-maturing liabilities such as
checking accounts and money market deposit accounts are allocated among the
various repricing time segments to meet local competitive conditions and
management’s strategies.





37




During
2007, the model indicated that the Company continued to be asset sensitive and
projects rising margins in a rising rate environment and declining margins in a
falling rate environment.  However, the shape of the yield curve may
significantly affect these projections.  The following table shows the
estimated impact of interest rate changes plus 300 basis points and minus 300
basis points on net interest income in 100 basis point
increments.  The base figure of $43,427 used in the analysis
represents actual net interest income for the year 2007. Due to the various
assumptions used for this modeling, no assurance can be given that projections
will reflect actual results.





Interest
Rate Shock Analysis


Net
Interest Income and Market Value Performance


($ in
thousands)





Projected
            
            
            Net
      Interest IncomeInterest
            
            
            Estimated
            
            
            $
      Change
            
            
            %
      ChangeRate
      Change
            
            
            Value
            
            
            From
      Base
            
            
            From
      Base+300
            
            
            $
            44,044
            
            
            $
            617
            
            
            
            1.42
            %+200
            
            
            
            44,013
            
            
            
            586
            
            
            
            1.35
            %+100
            
            
            
            43,874
            
            
            
            447
            
            
            
            1.03
            %Base
            
            
            
            43,427
            
            
            
            0
            
            
            
            0.00
            %-100
            
            
            
            42,372
            
            
            
            (1,055
            )
            
            
            (2.43
            )%-200
            
            
            
            41,299
            
            
            
            (2,128
            )
            
            
            (4.90
            )%-300
            
            
            
            39,010
            
            
            
            (4,417
            )
            
            
            (10.17
            )%





38








ITEM
8                                Financial Statements and
Supplementary Data

















Report
of Independent Registered Public Accounting Firm





To the
Board of Directors and Stockholders


Pacific
Continental Corporation and Subsidiary








We have
audited the accompanying consolidated balance sheets of Pacific Continental
Corporation and Subsidiary (Company) as of December 31 2007 and 2006, and the
related consolidated statements of income, changes in stockholders’ equity,
comprehensive income and cash flows for the years ended December 31, 2007, 2006
and 2005. We also have audited the Company’s internal control over financial
reporting as of December 31, 2007, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for these financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Report of
Management on Internal Control over Financial Reporting. Our responsibility is
to express an opinion on these financial statements, and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.





We
conducted our audit in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation.  Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risks.  Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.





The
Company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. The Company’s internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and Directors of
the Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Company's
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Pacific
Continental Corporation and Subsidiary as of





39











Report of
Independent Registered Public Accounting Firm








Page
Two







December
31, 2007 and 2006, and the results of their operations and their cash flows for
the years ended December 31, 2007, 2006 and 2005, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, Pacific Continental Corporation and Subsidiary maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2007 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).











Portland,
Oregon


March 14,
2008




















40


Pacific
Continental Corporation and Subsidiaries


Consolidated
Balance Sheets





December
      312007
              
              
              2006ASSETSCash
      and due from banks
              
              $
              23,809,383
              
              
              $
              32,322,704Interest-bearing
      deposits with banks
              
              
              409,998
              
              
              
              405,759Federal
      funds sold
              
              
              1,857,311
              
              
              
              49,520Total
      cash and cash equivalents
              
              
              26,076,692
              
              
              
              32,777,983Securities
      available-for-sale, at fair value
              
              
              53,993,468
              
              
              
              38,783,063Loans
      held for sale
              
              
              -
              
              
              
              2,140,417Loans,
      less allowance for loan losses and unearned fees
              
              
              813,647,438
              
              
              
              758,816,132Interest
      receivable
              
              
              3,652,259
              
              
              
              3,998,139Federal
      Home Loan Bank stock
              
              
              3,794,900
              
              
              
              3,479,900Property,
      net of accumulated depreciation
              
              
              20,876,333
              
              
              
              18,591,317Goodwill
      and other intangible assets
              
              
              23,126,915
              
              
              
              23,625,699Other
      assets
              
              
              4,103,298
              
              
              
              3,138,058Total
      assets
              
              $
              949,271,303
              
              
              $
              885,350,708LIABILITIES
      and STOCKHOLDERS' EQUITYLiabilities:Deposits:Noninterest-bearing
              
              $
              175,941,026
              
              
              $
              187,833,848Savings
      and interest-bearing demand
              
              
              401,714,261
              
              
              
              355,863,095Time,
      $100,000 and over
              
              
              31,855,842
              
              
              
              48,875,678Other  time
              
              
              34,912,782
              
              
              
              48,699,403Total
      deposits
              
              
              644,423,911
              
              
              
              641,272,024Federal
      funds purchased
              
              
              5,360,000
              
              
              
              4,410,000Federal
      Home Loan Bank borrowings
              
              
              179,500,000
              
              
              
              131,803,763Junior
      subordinated debentures
              
              
              8,248,000
              
              
              
              8,248,000Accrued
      merger consideration liability
              
              
              240,995
              
              
              
              256,360Accrued
      interest and other liabilities
              
              
              3,989,389
              
              
              
              3,625,780Total
      liabilities
              
              
              841,762,295
              
              
              
              789,615,927Commitments
      and contingencies (Notes 6, 17 and 19)Stockholders'
      equity:Common
      stock, no par value; 25,000,000 sharesauthorized;
      11,934,866 and 10,647,264 sharesoutstanding
      in 2007 and 2006, respectively
              
              
              77,908,957
              
              
              
              58,254,777Retained
      earnings
              
              
              29,622,204
              
              
              
              37,725,453Accumulated
      other comprehensive loss
              
              
              (22,153
              )
              
              
              (245,449
              )Total
      stockholders' equity
              
              
              107,509,008
              
              
              
              95,734,781Total
      liabilities and stockholders' equity
              
              $
              949,271,303
              
              
              $
              885,350,708The
      accompanying notes are an integral part of these consolidated financial
      statements.


41


Pacific
Continental Corporation and Subsidiaries


Consolidated
Statements of Income





Year
      Ended December 312007
              
              
              2006
              
              
              2005Interest
      income:Loans
              
              $
              67,122,278
              
              
              $
              60,256,669
              
              
              $
              38,519,936Investment
      securities
              
              
              1,973,100
              
              
              
              1,667,468
              
              
              
              1,058,761Federal
      funds sold and FHLB stock dividends
              
              
              71,167
              
              
              
              47,822
              
              
              
              14,59969,166,545
              
              
              
              61,971,959
              
              
              
              39,593,296Interest
      expense:Deposits
              
              
              18,572,192
              
              
              
              15,881,357
              
              
              
              7,361,230Federal
      Home Loan Bank borrowings
              
              
              6,160,017
              
              
              
              5,144,325
              
              
              
              1,830,984Federal
      funds purchased and junior subordinated debentures
              
              
              1,007,540
              
              
              
              889,436
              
              
              
              161,00225,739,749
              
              
              
              21,915,118
              
              
              
              9,353,216Net
      interest income
              
              
              43,426,796
              
              
              
              40,056,841
              
              
              
              30,240,080Provision
      for loan losses
              
              
              725,000
              
              
              
              600,000
              
              
              
              1,100,000Net
      interest income after provision forloan
      losses
              
              
              42,701,796
              
              
              
              39,456,841
              
              
              
              29,140,080Noninterest
      income:Service
      charges on deposit accounts
              
              
              1,408,702
              
              
              
              1,333,421
              
              
              
              1,377,695Other
      fee income, principally bankcard processing
              
              
              1,629,841
              
              
              
              1,494,764
              
              
              
              1,384,728Loan
      servicing
              
              
              98,759
              
              
              
              108,644
              
              
              
              151,878Mortgage
      banking income and gains on salesof
      loans
              
              
              370,196
              
              
              
              805,234
              
              
              
              922,991Losses
      on sales of securities
              
              
              -
              
              
              
              -
              
              
              
              (10,674
              )Gain
      on sale of fixed assets
              
              
              -
              
              
              
              335,341
              
              
              
              -Other
              
              
              416,839
              
              
              
              323,295
              
              
              
              256,2143,924,337
              
              
              
              4,400,699
              
              
              
              4,082,832Noninterest
      expense:Salaries
      and employee benefits
              
              
              15,666,806
              
              
              
              14,577,938
              
              
              
              11,197,445Premises
      and equipment
              
              
              3,280,922
              
              
              
              3,064,930
              
              
              
              2,153,967Bankcard
      processing
              
              
              524,012
              
              
              
              509,461
              
              
              
              485,327Business
      development
              
              
              1,487,351
              
              
              
              1,444,176
              
              
              
              1,263,467Other
              
              
              4,901,905
              
              
              
              4,194,229
              
              
              
              3,033,93125,860,996
              
              
              
              23,790,734
              
              
              
              18,134,137Income
      before income taxes
              
              
              20,765,137
              
              
              
              20,066,806
              
              
              
              15,088,775Provision
      for income taxes
              
              
              7,830,488
              
              
              
              7,412,288
              
              
              
              5,510,476Net
      income
              
              $
              12,934,649
              
              
              $
              12,654,518
              
              
              $
              9,578,299Earnings
      per share:Basic
              
              $
              1.09
              
              
              $
              1.09
              
              
              $
              .98Diluted
              
              $
              1.08
              
              
              $
              1.08
              
              
              $
              .95The
      accompanying notes are an integral part of these consolidated financial
      statements.


42








Pacific
Continental Corporation and Subsidiaries


Consolidated
Statements of Changes in Stockholders’ Equity


For
the Years Ended December 31, 2007, 2006, and 2005


Accumulated
      OtherNumber
              
              
              Common
              
              
              Retained
              
              
              Comprehensiveof
      Shares
              
              
              Stock
              
              
              Earnings
              
              
              Income
      (Loss)
              
              
              TotalBalance,
      January 1, 2005
              
              
              8,655,535
              
              
              $
              28,076,125
              
              
              $
              21,429,633
              
              
              $
              (113,701
              )
              
              $
              49,392,057Net
      income
              
              
              
              
              
              
              
              
              
              
              9,578,299
              
              
              
              
              
              
              
              9,578,299Other
      comprehensive loss:Unrealized
      losses on securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (408,817
              )Reclassification
      of net losses realized
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              10,674Deferred
      income taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              152,713Other
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (245,430
              )
              
              
              (245,430
              )Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,332,869Stock
      opt. exercised and related tax ben.
              
              
              166,615
              
              
              
              1,363,033
              
              
              
              
              
              
              
              
              
              
              
              1,363,033Stock
      issued in NWBF acq. and fract.
              
              
              1,411,430
              
              
              
              23,879,812
              
              
              
              
              
              
              
              
              
              
              
              23,879,812Cash
      dividends
              
              
              
              
              
              
              
              
              
              
              (2,555,777
              )
              
              
              
              
              
              
              (2,555,777
              )Balance,
      December 31, 2005
              
              
              10,233,580
              
              
              
              53,318,970
              
              
              
              28,452,155
              
              
              
              (359,131
              )
              
              
              81,411,994Net
      income
              
              
              
              
              
              
              
              
              
              
              12,654,518
              
              
              
              
              
              
              
              12,654,518Other
      comprehensive loss:Unrealized
      gains on securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              184,430Reclassification
      of net losses realized
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Deferred
      income taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (70,748
              )Other
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              113,682
              
              
              
              113,682Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              12,768,200Stock
      options exercised and related tax benefit
              
              
              413,684
              
              
              
              4,349,887
              
              
              
              
              
              
              
              
              
              
              
              4,349,887Share-based
      payments
              
              
              
              
              
              
              585,920
              
              
              
              
              
              
              
              
              
              
              
              585,920Cash
      dividends
              
              
              
              
              
              
              
              
              
              
              (3,381,220
              )
              
              
              
              
              
              
              (3,381,220
              )Balance,
      December 31, 2006
              
              
              10,647,264
              
              
              
              58,254,777
              
              
              
              37,725,453
              
              
              
              (245,449
              )
              
              
              95,734,781Net
      income
              
              
              
              
              
              
              
              
              
              
              12,934,649
              
              
              
              
              
              
              
              12,934,649Other
      comprehensive loss:Unrealized
      gains on securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              362,257Deferred
      income taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (138,961
              )Other
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              223,296
              
              
              
              223,296Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              13,157,945Stock
      options exercised and related tax benefit
              
              
              212,823
              
              
              
              2,239,836
              
              
              
              
              
              
              
              
              
              
              
              2,239,836Stock
      dividend - 10%
              
              
              1,074,779
              
              
              
              16,863,283
              
              
              
              (16,863,283
              )Shared-based
      payments
              
              
              
              
              
              
              551,196
              
              
              
              
              
              
              
              
              
              
              
              551,196Cash
      dividends
              
              
              
              
              
              
              (136
              )
              
              
              (4,174,615
              )
              
              
              
              
              
              
              (4,174,751
              )Balance,
      December 31, 2007
              
              
              11,934,866
              
              
              $
              77,908,956
              
              
              $
              29,622,204
              
              
              $
              (22,153
              )
              
              $
              107,509,008The
      accompanying notes are an integral part of these consolidated financial
      statements.
  43










Pacific
Continental Corporation and Subsidiaries


Consolidated
Statements of Cash Flows





Years
      Ended December 31,2007
              
              
              2006
              
              
              2005Cash
      flows from operating activities:Net
      income
              
              $
              12,934,649
              
              
              $
              12,654,518
              
              
              $
              9,578,299Adjustments
      to reconcile net income to net cashfrom
      operating activities:Depreciation
              
              
              1,398,997
              
              
              
              1,673,173
              
              
              
              1,169,809Gain
      on sale of property
              
              
              -
              
              
              
              (335,341
              )
              
              
              -Loss
      on sale or write-down of property and equipment
              
              
              -
              
              
              
              5,641
              
              
              
              -Provision
      for loan losses
              
              
              725,000
              
              
              
              600,000
              
              
              
              1,100,000(Gains)
      losses on foreclosed assets
              
              
              
              
              
              
              (42,091
              )
              
              
              (60,391
              )Deferred
      income taxes
              
              
              (334,000
              )
              
              
              (1,049,000
              )
              
              
              33,000Losses
      on sale of securities
              
              
              -
              
              
              
              -
              
              
              
              10,674Federal
      Home Loan Bank stock dividend
              
              
              -
              
              
              
              -
              
              
              
              (11,200
              )Shared-based
      compensation
              
              
              577,199
              
              
              
              585,920
              
              
              
              -Excess
      tax benefit of stock options exercised
              
              
              (200,946
              )
              
              
              (272,000
              )
              
              
              -Change
      in:Interest
      receivable
              
              
              345,880
              
              
              
              (654,219
              )
              
              
              (620,238
              )Deferred
      loan fees
              
              
              (449,787
              )
              
              
              (120,525
              )
              
              
              548,177Capitalized
      loan servicing rights
              
              
              45
              
              
              
              4,714
              
              
              
              23,098Production
      of mortgage loans held-for-sale
              
              
              (11,234,624
              )
              
              
              (31,988,422
              )
              
              
              (36,719,062
              )Proceeds
      from the sale of mortgage loans held-for-sale
              
              
              13,375,041
              
              
              
              30,490,185
              
              
              
              38,149,233Accrued
      interest payable and other liabilities
              
              
              213,774
              
              
              
              (1,157,061
              )
              
              
              167,955Income
      taxes payable
              
              
              450,836
              
              
              
              890,707
              
              
              
              (39,288
              )Other
      assets
              
              
              (800,133
              )
              
              
              (231,730
              )
              
              
              (212,046
              )Net
      cash used by operating activities
              
              
              17,001,931
              
              
              
              11,054,468
              
              
              
              13,118,020Cash
      flow from investing activities:Proceeds
      from sales and maturities of available for sale investment
      securities
              
              
              10,867,492
              
              
              
              6,685,618
              
              
              
              8,148,608Purchase
      of available for sale investment securities
              
              
              (25,584,146
              )
              
              
              (6,166,764
              )
              
              
              (10,092,408
              )Loans
      made net of principal collections received and ORE
    transfers
              
              
              (92,444,786
              )
              
              
              (86,667,223
              )
              
              
              (72,806,087
              )Proceeds
      from sales of loans
              
              
              37,809,267
              
              
              
              4,232,122
              
              
              
              -Purchase
      of loans
              
              
              (117,878
              )
              
              
              (6,314,912
              )
              
              
              (7,715,383
              )Cash
      paid for acquisitions
              
              
              (15,365
              )
              
              
              (12,748,953
              )
              
              
              3,003,468Purchase
      of property
              
              
              (3,669,889
              )
              
              
              (2,905,826
              )
              
              
              (4,208,717
              )Proceeds
      from sale of property
              
              
              -
              
              
              
              403,007
              
              
              
              -Proceeds
      on sale of foreclosed assets
              
              
              -
              
              
              
              194,405
              
              
              
              880,281Purchase
      of FHLB stock
              
              
              (315,000
              )
              
              
              -
              
              
              
              (258,000
              )Net
      cash provided by investing activities
              
              
              (73,470,305
              )
              
              
              (103,288,526
              )
              
              
              (83,048,238
              )Cash
      flow from financing activities:Change
      in deposits
              
              
              3,151,886
              
              
              
              37,321,028
              
              
              
              76,663,834Change
      in federal funds purchased and FHLB CMA
              
              
              (1,050,000
              )
              
              
              28,410,000
              
              
              
              (10,290,000
              )Proceeds
      from FHLB term advances originated
              
              
              689,500,000
              
              
              
              489,002,006
              
              
              
              60,088,197FHLB
      advances paid-off
              
              
              (639,803,763
              )
              
              
              (462,002,006
              )
              
              
              (47,502,005
              )Change
      in junior subordinated debentures
              
              
              -
              
              
              
              -
              
              
              
              8,248,000Proceeds
      from stock options exercised
              
              
              1,942,629
              
              
              
              3,546,887
              
              
              
              1,039,033Income
      tax benefit for stock options exercised
              
              
              200,946
              
              
              
              272,000
              
              
              
              -Dividends
      paid
              
              
              (4,174,615
              )
              
              
              (3,381,220
              )
              
              
              (2,555,777
              )Net
      cash provided by financing activities
              
              
              49,767,083
              
              
              
              93,168,695
              
              
              
              85,691,282Net
      increase (decrease) in cash and cash equivalents
              
              
              (6,701,291
              )
              
              
              934,637
              
              
              
              15,761,064Cash
      and cash equivalents, beginning of year
              
              
              32,777,983
              
              
              
              31,843,346
              
              
              
              16,082,282Cash
      and cash equivalents, end of year
              
              $
              26,076,692
              
              
              $
              32,777,983
              
              
              $
              31,843,346Supplemental
      information:Noncash
      investing and financing activities:Transfers
      of loans to foreclosed assets
              
              $
              422,502
              
              
              $
              21,557
              
              
              $
              508,501Change
      in unrealized gain on securities, net of deferred income
    taxes
              
              
              362,258
              
              
              
              (113,682
              )
              
              
              245,430Adjustment
      to acquired NWBF Goodwill
              
              
              
              
              
              
              (353,007
              )Cash
      paid during the year for:Income
      taxes
              
              $
              7,349,000
              
              
              $
              7,324,581
              
              
              $
              5,429,003Interest
              
              $
              25,959,097
              
              
              $
              21,792,827
              
              
              $
              9,005,443Acquisitions:Assets
      acquired
              
              $
              -
              
              
              $
              -
              
              
              $
              (177,072,077
              )Goodwill
      and core deposit intangible
              
              
              -
              
              
              
              -
              
              
              
              23,944,489Liabilities
      assumed
              
              
              -
              
              
              
              -
              
              
              
              142,085,273Compensation
      due NWBF shareholders, deferred taxes , other liab.
              
              
              -
              
              
              
              -
              
              
              
              14,045,783Net
      cash received
              
              $
              -
              
              
              $
              -
              
              
              $
              3,003,468The
      accompanying notes are an integral part of these consolidated financial
      statements.
  44


Pacific
Continental Corporation and Subsidiaries


Notes
to Consolidated Financial Statements














1.    Summary of Significant Accounting
Policies:





Principles of Consolidation –
The consolidated financial statements include the accounts of Pacific
Continental Corporation (the “Company”), a bank holding company, and its
wholly-owned subsidiary, Pacific Continental Bank (the “Bank”) and the Bank’s
wholly-owned subsidiaries, PCB Service Corporation (which owns and operates
bank-related real estate but is currently inactive) and PCB Loan Services
Corporation (which owns and operates certain repossessed or foreclosed
collateral but is currently inactive).  The Bank provides commercial
banking, financing, mortgage lending and other services in Western Oregon and
Western Washington.  All significant intercompany accounts and
transactions have been eliminated in consolidation.





In
November 2005, the Company formed a wholly-owned Delaware statutory business
trust subsidiary, Pacific Continental Corporation Capital Trust (the “Trust”),
which issued $8,248,000 of guaranteed undivided beneficial interests in the
Pacific Continental’s Junior Subordinated Deferrable Interest Debentures (“Trust
Preferred Securities”).  Pacific Continental has not consolidated the
accounts of the Trust in its consolidated financial statements in accordance
with FASB FIN 46R, Consolidation of Variable Interest
Entities.  As a result, the junior subordinated debentures
issued by Pacific Continental to the issuer trust, totaling $8,248,000, are
reflected on Pacific Continental’s consolidated balance sheet at December 31,
2007, under the caption, “Junior Subordinated Debentures”.  Pacific
Continental also recognized its $248,000 investment in the Trust, which is
recorded among “Other Assets” in its consolidated balance sheet at December 31,
2007.





Use of Estimates – The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting
period.  Actual results could differ from those
estimates.  The most significant estimations made by management
involve fair value calculations made in connection with accounting for business
combinations, the calculation of the allowance for loan losses, the fair value
of investment securities, and the impairment calculation for
goodwill.





Cash and Cash Equivalents –
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from or deposited with banks, interest-bearing balances due
from banks, and federal funds sold.  Generally, federal funds are sold
for one-day periods.





The Bank
is required to maintain certain reserves as defined by
regulation.  Such reserves totaling $3,779,000 and $1,411,000 were
maintained in cash at December 31, 2007 and 2006, respectively.





Securities Available-for-Sale
– Securities available-for-sale are held for indefinite periods of time and may
be sold in response to movements in market interest rates, changes in the
maturity or mix of Bank assets and liabilities or demand for
liquidity.  Although management determines the appropriate
classification of securities at the time of purchase, the Bank classified all
securities as available-for-sale throughout 2007 and 2006.  Securities
classified as available-for-sale are reported at estimated fair
value.  The difference between estimated fair value and amortized cost
is recorded as a separate component of stockholders’ equity (accumulated other
comprehensive income).  Fair values for these investment securities
are based on available market prices.  Gains and losses on the sale of
available-for-sale securities are determined using the specific-identification
method.   Interest income on securities available-for-sale is
included in income using the level yield method.





Declines
in fair value of individual available-for-sale securities below their cost that
are other than temporary would result in write-downs of the individual
securities to their fair value.  The related write-downs would be
included in earnings as realized losses.  Management believes that all
unrealized losses on investment securities at December 31, 2007 and 2006 are
temporary.




Loans Held for Sale and Mortgage
Banking Activities – The Bank originates residential real estate loans
for resale in the secondary market.  Sales are without recourse and
the Bank generally does not retain mortgage servicing rights.  Loans
held for sale are carried at the lower of cost or market.  Market
value is determined on an aggregate loan basis.





45




Loans and Income Recognition –
Loans are stated at the amount of unpaid principal plus loan premiums for
purchased loans, reduced by net deferred loan origination fees, discounts
associated with retained portions of loans sold, and an allowance for loan
losses.  Interest on loans is calculated using the simple-interest
method on daily balances of the principal amount outstanding.  Accrual
of interest is discontinued on contractually delinquent loans when management
believes, after considering economic and business conditions and collection
efforts that the borrower’s financial condition is such that collection of the
interest is doubtful.  Interest income is subsequently recognized only
to the extent cash payments are received or the principal balance of the loan is
brought current.  Loan origination fees, net of origination costs and
discounts, are amortized over the lives of the loans as adjustments to
yield.





Allowance for Loan Losses –
The allowance for loan losses is established through a provision for loan losses
charged to expense.  Loans are charged against the allowance for loan
losses when management believes that the collectibility of principal is
unlikely.  The allowance is an amount that management considers
adequate to absorb possible losses on existing loans that may become
uncollectible based on evaluations of the collectibility of loans and prior loss
experience.  The evaluations take into consideration such factors as
changes in the nature of the loan portfolio, overall portfolio quality, review
of specific loans, estimated value of underlying collateral, and current
economic conditions that may affect the borrower’s ability to
pay.  This evaluation is inherently subjective as it requires
estimates that are susceptible to significant subsequent revision as more
information becomes available.





A loan is
considered impaired when management believes that it is probable that all
amounts will not be collected according to the contractual terms.  An
impaired loan is valued using the present value of expected cash flows
discounted at the loan’s effective interest rate, the observable market price of
the loan or the estimated fair value of the loan’s collateral or related
guaranty.  Loans deemed impaired are specifically allocated for in the
allowance for loan losses if the value of the impaired loan is less than the
recorded investment in the loan.





Federal Home Loan Bank Stock –
The investment in Federal Home Loan Bank (“FHLB”) stock is carried at par value,
which approximates its fair value.  As a member of the FHLB system,
the Bank is required to maintain a minimum level of investment in FHLB stock
based on specific percentages of its outstanding mortgages, total assets or FHLB
advances.  As of December 31, 2007, the minimum required investment
was approximately $3,794,900.  The Bank may request redemption at par
value of any stock in excess of the amount the Bank is required to
hold.  Stock redemptions are at the discretion of the
FHLB.





Foreclosed Assets – Assets
acquired through foreclosure, or deeds in lieu of foreclosure, are initially
recorded at fair value, less the estimated cost of disposal, at the date of
foreclosure.  Any excess of the loan’s balance over the fair value of
its foreclosed collateral is charged to the allowance for loan
losses.





Improvements
to foreclosed assets are capitalized.  Subsequent to foreclosure,
management performs periodic valuations and the assets’ carrying value may be
adjusted to the lower of carrying amount or fair value, less costs to
sell.  Write downs to net realizable value, if any, or any disposition
gains or losses are included in noninterest income or expense.





Property – Property is stated
at cost, net of accumulated depreciation and amortization.  Additions,
betterments and replacements of major units are
capitalized.  Expenditures for normal maintenance, repairs and
replacements of minor units are charged to expense as incurred.  Gains
or losses realized from sales or retirements are reflected in operations
currently.





Depreciation
and amortization is computed by the straight-line method over the estimated
useful lives of the assets.  Estimated useful lives are 30 to 40 years
for buildings, 3 to 10 years for furniture and equipment, and up to the lesser
of the useful life or lease term for leasehold improvements.




Goodwill and Other Intangible Assets–Goodwill represents the excess of cost over the fair value of net assets
acquired in business combinations.  Under Statement of Financial
Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible
Assets, the Bank does not amortize the balance of goodwill, but completes
periodic assessments of goodwill impairment.  Goodwill impairment is
deemed to exist if the net book value of a reporting unit giving rise to the
recognition of goodwill exceeds estimated fair value.  The Bank’s
assessments have not identified impairment of goodwill such that the net book
value of the applicable reporting unit exceeded its estimated fair value as of
December 31, 2007 and 2006.




46





Advertising – Advertising
costs are charged to expense during the year in which they are
incurred.  Advertising expenses were $882,784 and $845,136 and
$780,033 for the years ended December 31, 2007, 2006 and 2005,
respectively.





Income Taxes – Income taxes
are accounted for using the asset and liability method.  Deferred tax
assets and liabilities are recognized for the expected future tax consequences
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax
bases.  Deferred tax assets and liabilities are calculated using tax
rates in effect for the year in which the differences are expected to
reverse.  Valuation allowances are established to reduce the net
carrying amount of deferred tax assets if it is determined to be more likely
than not, that all or some of the potential deferred tax asset will not be
realized.





Earnings Per Share – Basic
earnings per share are computed by dividing net income by the weighted average
number of shares outstanding during the period.  Diluted earnings per
share include the effect of common stock equivalents that would arise from the
exercise of stock options discussed in Note 15.  Weighted shares
outstanding are adjusted retroactively for the effect of stock
dividends.





Weighted
average shares outstanding at December 31 are as follows:





2007
              
              
              2006
              
              
              2005Basic
              
              
              11,830,369
              
              
              
              11,586,295
              
              
              
              9,773,699Common
      stock equivalents attributableto
      stock-based compensation plans
              
              
              110,816
              
              
              
              180,880
              
              
              
              281,133Diluted
              
              
              11,941,185
              
              
              
              11,767,175
              
              
              
              10,054,832





As of
December 31, 2007 and December 31, 2006, 266,324 and 315,405 of outstanding
options to purchase stock were excluded from the dilutive shares calculation
because of the current anti-dilutive nature of these options.





Share-Based Payment Plans–
The Company adopted Financial Accounting Standards Board Statement No. 123R,
“Share-Based Payment” (“SFAS 123R”) effective January 1, 2006.  SFAS
123R requires companies to measure and recognize compensation expense for all
share-based payments at the grant date based on the fair value of the award, as
defined in SFAS 123R, and include such costs as an expense in our income
statements over the requisite service (vesting) period.  The Company
adopted SFAS 123R using a modified prospective application, whereby the
provisions of the statement have been applied prospectively only from the date
of adoption for new (issued subsequent to December 31, 2005) and unvested stock
option awards for which the requisite service is rendered after the date of
adoption.  Thus, the Company recognizes as expense the fair value of
stock options issued prior to January 1, 2006, but vesting after January 1,
2006, over the remaining vesting period.  In addition, compensation
expense must be recognized for any awards modified, repurchased, or cancelled
after the date of adoption.  The Company uses the Black-Scholes option
pricing model to measure fair value.





47


Year
      Ended December 312005Net
      income - as reported
                
                $
                9,578,299Deduct
      total stock-basedemployee
      compensationexpense
      determined underfair
      value method for allawards,
      net of related taxeffects
                
                
                (514,866
                )Net
      income - pro forma
                
                $
                9,063,433Earnings
      per share:Basic
      - as reported
                
                $
                0.98Basic
      - pro forma
                
                
                0.93Diluted
      - as reported
                
                
                0.95Diluted
      - pro forma
                
                
                0.90


Recently Issued Accounting
Pronouncements – In September 2006, the Financial Accounting Standards
Board (“FASB”) issued FASB Statement No. 157, “Fair Value Measurement”,defining fair value, establishing a framework for measuring fair value in
generally accepted accounting principles, and expanding disclosures about fair
value measurements.  SFAS 157 is effective for the Company beginning
in first quarter 2008.  Implementation of SFAS 157 is not expected to
have a material impact on the Company’s consolidated financial
statements.





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement 158, “Employers’
Accounting for Defined Benefit Pension and Other Post Retirement Plans”,an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS
158”).  This standard requires employers to recognize the under or
over funded status of a defined benefit postretirement plan as an asset or
liability in its statement of financial position and to recognize changes in the
funded status in the year in which the changes occur through accumulated other
comprehensive income.  The new reporting requirements and related new
footnote disclosure rules of SFAS 158 are effective for fiscal years ending
after December 15, 2007, and had no material impact on the Company’s financial
statements as the Company does not currently offer a defined benefit plan for
its employees.





On
February 15, 2007, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities - Including an
Amendment of FASB Statement No. 115”. This standard permits an entity to
choose to measure many financial instruments and certain other items at fair
value.  Most of the provisions in Statement 159 are elective; however,
the amendment to FASB Statement No. 115, Accounting for Certain Investments
in Debt and Equity Securities, applies to all entities with
available-for-sale and trading securities.  The FASB's stated
objective is "to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions.





The fair
value option established by Statement 159 permits all entities to choose to
measure eligible items at fair value at specified election dates. A business
entity will report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. The fair
value option: (a) may
be applied instrument by instrument, with a few exceptions, such as investments
otherwise accounted for by the equity method; (b) is irrevocable (unless a
new election date occurs); and (c) is applied only to entire
instruments and not to portions of instruments.





The
Company does not intend to elect the fair value option on financial assets and
liabilities, other than investment securities held for sale already so
stated..  Implementation of SFAS 159 is not expected to impact on the
Company’s consolidated financial statements.





48




Reclassifications – Certain
amounts contained in the 2006 and 2005 consolidated financial statements have
been reclassified where appropriate to conform with the financial statement
presentation used in 2007.  These reclassifications had no effect on
previously reported net income.





2.    Acquisition NWB Financial
Corporation:





On
November 30, 2005, Pacific Continental Corporation acquired NWB Financial
Corporation and its wholly-owned subsidiary Northwest Business
Bank.  The aggregate purchase price was $40,433,525 and included
1,411,430 shares of common stock, stock options valued at $1,760,737, cash of
$15,472,364, and direct merger costs of $970,402.  The value of the
1,411,430 was determined based on the $15.75 average closing market price of the
Company’s common stock, on August 17, 2005 when the merger agreement was
announced.





The
following information presents unaudited pro forma results of operations for the
year ended December 31, 2005, as though the NWB Financial Corporation
acquisition had occurred on January 1, 2005.  The pro forma results do
not necessarily indicate the results that would have been obtained had the
acquisition actually occurred on January 1, 2005.





2005Total
      interest income and noninterest income
              
              $
              44,100,000Net
      income
              
              $
              11,774,700Basic
      earnings per share
              
              $
              1.05Diluted
      earnings per share
              
              $
              1.02Basic
      shares outstanding
              
              
              11,190,156Diluted
      shares outstanding
              
              
              11,582,208


49





3.    Securities
Available-for-Sale:





The
amortized cost and estimated fair values of securities available-for-sale at
December 31, 2007 are as follows:


Securities
      in
              
              
              Securities
      inContinuous
              
              
              ContinuousUnrealized
              
              
              UnrealizedLoss
              
              
              LossGross
              
              
              Gross
              
              
              Estimated
              
              
              Position
      for
              
              
              Position
      ForAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              Fair
              
              
              Less
      Than
              
              
              12
      MonthsCost
              
              
              Gains
              
              
              Losses
              
              
              Value
              
              
              12
      Months
              
              
              or
      LongerUnrealized Loss PositionsObligations
      of U.S.Government
      agencies
              
              $
              5,230,307
              
              
              $
              -
              
              
              $
              22,182
              
              
              $
              5,208,125
              
              
              $
              248,125
              
              
              $
              4,960,000Obligations
      of states andpolitical
      subdivisions
              
              
              1,796,731
              
              
              
              -
              
              
              
              18,524
              
              
              
              1,778,207
              
              
              
              524,697
              
              
              
              1,253,510Mortgage-backed
      securities
              
              
              25,395,460
              
              
              
              -
              
              
              
              216,418
              
              
              
              25,179,042
              
              
              
              18,734,936
              
              
              
              6,444,106$
              32,422,498
              
              
              $
              -
              
              
              $
              257,124
              
              
              $
              32,165,374
              
              
              $
              19,507,758
              
              
              $
              12,657,616Unrealized Gain PositionsObligations
      of U.S.Government
      agencies
              
              $
              5,301,762
              
              
              $
              31,314
              
              
              $
              -
              
              
              $
              5,333,076Obligations
      of states andpolitical
      subdivisions
              
              
              5,664,248
              
              
              
              71,448
              
              
              
              -
              
              
              
              5,735,696Mortgage-backed
      securities
              
              
              10,640,900
              
              
              
              118,422
              
              
              
              -
              
              
              
              10,759,32221,606,910
              
              
              
              221,184
              
              
              
              -
              
              
              
              21,828,094$
              54,029,408
              
              
              $
              221,184
              
              
              $
              257,124
              
              
              $
              53,993,468


At
December 31, 2007, there were 49 investment securities in unrealized loss
positions.  The decline in value of these securities has resulted from
increases in market interest rates subsequent to the purchase of the
securities.  The projected average life of the securities portfolio is
approximately three years.  Although yields on these securities may be
below market rates during that period, no loss of principal is
expected.





The
amortized cost and estimated fair values of securities available-for-sale at
December 31, 2007 are as follows:





Gross
              
              
              Gross
              
              
              EstimatedAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              FairCost
              
              
              Gains
              
              
              Losses
              
              
              ValueObligations
      of U.SGovernment
      agencies
              
              $
              10,532,069
              
              
              $
              31,314
              
              
              $
              22,182
              
              
              $
              10,541,201Obligation
      of states andpolitical
      subdivisions
              
              
              7,460,979
              
              
              
              71,448
              
              
              
              18,524
              
              
              
              7,513,903Mortgage-backed
      securities
              
              
              36,036,360
              
              
              
              118,422
              
              
              
              216,418
              
              
              
              35,938,364$
              54,029,408
              
              
              $
              221,184
              
              
              $
              257,124
              
              
              $
              53,993,468
  50


The
amortized cost and estimated fair value of securities at December 31, 2007 and
2006 by contractual maturity are shown below.  Expected maturities
will differ from contractual maturities because issuers may have the right to
call or prepay obligations.




2007
              
              
              
              
              
              2006Estimated
              
              
              
              
              
              EstimatedAmortized
              
              
              Fair
              
              
              Amortized
              
              
              FairCost
              
              
              Value
              
              
              Cost
              
              
              ValueDue
      in one year or less
              
              $
              7,965,107
              
              
              $
              7,950,325
              
              
              $
              4,476,088
              
              
              $
              4,431,025Due
      after one year through 5 years
              
              
              4,764,133
              
              
              
              4,803,480
              
              
              
              11,739,692
              
              
              
              11,543,625Due
      after 5 years through 10 years
              
              
              5,263,809
              
              
              
              5,301,299
              
              
              
              3,192,889
              
              
              
              3,224,696Due
      after 10 years
              
              
              -
              
              
              
              -
              
              
              
              903,189
              
              
              
              897,605Mortgage-backed
      securities
              
              
              36,036,359
              
              
              
              35,938,364
              
              
              
              18,869,402
              
              
              
              18,686,112$
              54,029,408
              
              
              $
              53,993,468
              
              
              $
              39,181,260
              
              
              $
              38,783,063


No
securities were sold in 2007 and 2006.  Gross realized losses on the
sale of approximately $1,000,000 in available for sale investment securities
were $10,674 in 2005.




At
December 31, 2007, securities with amortized costs of $12,369,637 (estimated
market values of $12,412,394) were pledged to secure certain Treasury and public
deposits as required by law.





4.    Loans:





Major
classifications of loans at December 31 are as follows:





2007
              
              
              2006Commercial
      loans
              
              $
              188,940,072
              
              
              $
              169,565,740Real
      estate loans
              
              
              627,140,162
              
              
              
              590,854,899Consumer
      loans
              
              
              8,226,159
              
              
              
              9,167,936824,306,393
              
              
              
              769,588,575Deferred
      loan origination fees
              
              
              (1,984,344
              )
              
              
              (2,488,600
              )822,322,049
              
              
              
              767,099,975Allowance
      for loan losses
              
              
              (8,674,611
              )
              
              
              (8,283,843
              )$
              813,647,438
              
              
              $
              758,816,132
  51


Scheduled
maturities or repricing, if earlier, of loans at December 31, 2007 are as
follows:





Three
      months or less
              
              $
              400,614,720Three
      months to one year
              
              
              40,468,854One
      year to three years
              
              
              147,708,094Three
      years to five years
              
              
              166,434,288Thereafter
              
              
              69,080,437$
              824,306,393


Allowance for Loan
Losses:





A summary
of activity in the allowance for loan losses is as follows for the periods
indicated:





2007
              
              
              2006
              
              
              2005Balance,
      beginning of year
              
              $
              8,283,843
              
              
              $
              7,792,125
              
              
              $
              5,223,979Provision
      charged to income
              
              
              725,000
              
              
              
              600,000
              
              
              
              1,100,000Loans
      charged against the allowance
              
              
              (396,614
              )
              
              
              (222,802
              )
              
              
              (636,267
              )Recoveries
      credited to allowance
              
              
              62,382
              
              
              
              114,520
              
              
              
              123,789Reclassify
      unfunded loan commitments
              
              
              -
              
              
              
              -
              
              
              
              (34,000
              )Additional
      allowance resulting from acquisition
              
              
              -
              
              
              
              -
              
              
              
              2,014,624Balance,
      end of year
              
              $
              8,674,611
              
              
              $
              8,283,843
              
              
              $
              7,792,125




It is
management’s opinion that the allowance for loan losses is adequate to absorb
known and inherent risks in the loan portfolio.  However, actual
results may differ from estimates.





Restructured
and other loans considered impaired, net of government guarantees, including all
nonaccrual loans, totaled $3,671,733, $495,843, and $675,714 at December 31,
2007, 2006, and 2005, respectively.  The specific valuation allowance
for loan losses related to these impaired loans was approximately $160,000,
$109,000, and $238,000 at December 31, 2007, 2006, and 2005,
respectively.  The average recorded investment in impaired loans was
approximately $1,512,000, $637,000, and $1,218,000 in 2007, 2006, and 2005,
respectively.  Interest income recognized on impaired loans during
2007, 2006, and 2005 was approximately $226,000, $72,000, and $103,000,
respectively.  Additional interest income which would have been
realized on nonaccrual and impaired loans if they had remained current and still
accruing interest would have been approximately $140,000, $14,000, and $89,000
in 2007, 2006 and 2005, respectively.  There were no loans 90 days
contractually past due and continuing to accrue interest as of December 31,
2007, 2006, and 2005, respectively.





A
substantial portion of the loan portfolio is collateralized by real estate and
is, therefore, susceptible to changes in local market
conditions.  However, management believes that the loan portfolio is
diversified among industry groups.  At December 31, 2007, outstanding
residential construction loans totaled approximately $96,918,000 and represented
11.8% of total outstanding loans.  In addition, at December 31, 2007,
unfunded loan commitments for residential construction totaled approximately
$46,461,000.  There are no other industry concentrations in excess of
10% of the total loan portfolio.





5.    Loan Participations and Servicing:





In the
normal course of business, the Bank has sold portions of loans to other
institutions in order to extend the Bank’s lending capacity or to mitigate
risk.  The unpaid principal balances of these serviced loans at
December 31, 2007 and 2006 were $28,314,818 and $20,515,848,
respectively.  These loans are not included in the accompanying
consolidated balance sheets.







52





6.    Property:





The
balance of property and accumulated depreciation and amortization at December 31
consists of the following:





2007
              
              
              2006Land
              
              $
              3,833,651
              
              
              $
              3,833,651Buildings
      and improvements
              
              
              17,994,415
              
              
              
              15,049,848Furniture
      and equipment
              
              
              9,315,598
              
              
              
              8,804,05831,143,664
              
              
              
              27,687,557Less
      accumulated depreciation & amortization
              
              
              10,267,331
              
              
              
              9,096,240$
              20,876,333
              
              
              $
              18,591,317


Lease Commitments – The Bank
leases certain facilities for office locations under noncancelable operating
lease agreements expiring through 2027.  Rent expense related to these
leases totaled $653,922, $711,703, and $387,562 in 2007, 2006 and 2005,
respectively.





Property Leased to Others –
The Bank leases approximately 52% of its Springfield Gateway building to others
under noncancelable operating lease agreements extending through
2012.





Future
minimum payments required and anticipated lease revenues under these leases
are:


PropertyLease
              
              
              LeasedCommitments
              
              
              to
      Others2008
              
              $
              848,549
              
              
              $
              359,6382009
              
              
              817,757
              
              
              
              325,6152010
              
              
              550,905
              
              
              
              317,6312011
              
              
              391,737
              
              
              
              220,4942012
              
              
              220,597
              
              
              
              150,590Thereafter
              
              
              3,436,059
              
              
              
              -$
              6,265,604
              
              
              $
              1,373,968


Depreciation
expense was $1,384,873, $1,244,134 and $942,426 for the years ended December 31,
2007, 2006 and 2005, respectively.




The Bank
capitalized $38,576, $36,853, and $10,110 of interest expense related to
property additions during 2007, 2006, and 2005, respectively.







53





7.    Goodwill
and Core Deposit Intangibles:





The
following table summarizes the changes in the Company’s goodwill and core
deposit intangible asset for the year ended December 31, 2007. CoreDeposit
              
              
              TotalGoodwill
              
              
              Intangible
              
              
              IntangiblesBalance,
      December 31, 2005
              
              $
              22,659,097
              
              
              $
              1,542,361
              
              
              $
              24,201,458Adjustment
              
              
              (353,007
              )
              
              
              -
              
              
              
              (353,007
              )Amortization
              
              
              -
              
              
              
              (222,752
              )
              
              
              (222,752
              )Balance,
      December 31, 2006
              
              $
              22,306,090
              
              
              $
              1,319,609
              
              
              $
              23,625,699Sale
      of Consumer Finance Division loans and offices
              
              
              (275,552
              )
              
              
              -
              
              
              
              (275,552
              )Amortization
              
              
              -
              
              
              
              (223,232
              )
              
              
              (223,232
              )Balance,
      December 31, 2007
              
              $
              22,030,538
              
              
              $
              1,096,377
              
              
              $
              23,126,915


The
goodwill and core deposit intangible asset additions in 2005 relate primarily to
the NWBF acquisition which is more fully described in Note 2.  During
the year 2007, the Bank sold the loan portfolio and office locations of its
Consumer Finance Division, thus eliminating goodwill recognized on the 2003
purchase of the Coos Bay Consumer Finance office.  In accordance with
SFAS No. 142, Goodwill and
Other Intangible Assets, the Company does not recognize amortization
expense related to its goodwill but completes periodic assessments of goodwill
impairment.  Impairment, if deemed to exist, would be charged to
noninterest expense in the period identified.





Forecasted
amortization expense is approximately $223,000 per year from 2007 through 2012
for the core deposit intangible assets acquired during 2005.





8.    Other Assets:





Other
assets are comprised of the following for the periods indicated:




2007
              
              
              2006Foreclosed
      assets
              
              $
              422,502
              
              
              $
              -Servicing
      asset
              
              
              -
              
              
              
              45Deferred
      taxes
              
              
              2,207,835
              
              
              
              1,652,276Prepaid
      expenses and other
              
              
              1,472,961
              
              
              
              1,485,737$
              4,103,298
              
              
              $
              3,138,058
  54


9.    Deposits:





Scheduled
maturities or repricing of time deposits at December 31 are as
follows:


2007
              
              
              2006Less
      than three months
              
              $
              37,615,680
              
              
              $
              48,690,728Three
      months to one year
              
              
              24,688,515
              
              
              
              37,727,414One
      to three years
              
              
              3,526,390
              
              
              
              10,269,412Thereafter
              
              
              938,039
              
              
              
              887,527$
              66,768,624
              
              
              $
              97,575,081


10.  Federal Funds
Purchased:





The Bank
has unsecured federal funds borrowing lines with correspondent banks totaling
$118,000,000 at December 31, 2007 of which $5,360,000 was outstanding as of
December 31, 2007.  The outstanding balance of these overnight funds
was due January 2, 2008 and carried an interest rate of 4.75%.  At
December 31, 2006, there was $4,410,000 borrowed against these
lines.





The Bank
also has a secured federal funds borrowing line with the Federal Reserve Bank
totaling approximately $22,000,000 at December 31, 2007.  The Federal
Reserve Bank borrowing line is secured through the pledging of approximately
$27,500,000 of commercial loans under the Bank’s Borrower-In-Custody program. No
balance was outstanding against this line as of December 31, 2007 or December
31, 2006.





11.  Federal Home Loan Bank
Borrowings:





The Bank
has a borrowing limit with the FHLB equal to 30% of total assets, subject to
discounted collateral.  At December 31, 2007, the borrowing line was
approximately $284,800,000.  At December 31, 2007, there was
$179,500,000 borrowed on this line, including an overnight $46,000,000 Cash
Management Advance and $133,500,000 in term advances.  FHLB stock,
funds on deposit with FHLB, and loans are pledged as collateral for borrowings
from FHLB.  At December 31, 2007, the Bank had pledged
approximately $260,000,000 in real estate loans to the FHLB ($205,000,000 in
discounted pledged collateral).





Federal
Home Loan Bank borrowings by year of maturity and applicable interest rate are
summarized as follows as of December 31:


Rate
              
              
              2007
              
              
              2006Cash
      Management Advance
              
              
              4.35
              %
              
              $
              46,000,000
              
              
              $
              48,000,0002007
              
              
              2.91
      - 5.48
              %
              
              
              -
              
              
              
              61,803,7632008
              
              
              2.99
      - 4.65
              %
              
              
              110,500,000
              
              
              
              9,500,0002009
              
              
              3.78
      - 5.33
              %
              
              
              8,000,000
              
              
              
              6,000,0002010
              
              
              4.12
      - 5.28
              %
              
              
              8,000,000
              
              
              
              4,500,0002011
              
              
              5.14
      - 5.29
              %
              
              
              2,500,000
              
              
              
              -2012
              
              
              5.15
      -5.29
              %
              
              
              2,500,0002016
              
              
              5.05
      - 5.05
              %
              
              
              2,000,000
              
              
              
              2,000,000$
              179,500,000
              
              
              $
              131,803,763
  55


12.  Junior Subordinated
Debentures:





In
connection with the November 2005 acquisition of NWB Financial Corporation,, the
Company formed a wholly-owned Delaware statutory business trust subsidiary,
Pacific Continental Corporation Capital Trust (the “Trust”), which issued
$8,248,000 of guaranteed undivided beneficial interests in the Pacific
Continental’s Junior Subordinated Deferrable Interest Debentures (“Trust
Preferred Securities”).  These debentures qualify as Tier 1 capital
under Federal Reserve Board guidelines.  All of the common securities
of the Trust are owned by Pacific Continental.  The proceeds from the
issuance of the common securities and the Trust Preferred Securities were used
by the Trust to purchase $8,248,000 of junior subordinated debentures of the
Company.  The debentures which represent the sole asset of the Trust
accrue and pay distributions quarterly at a fixed rate of 6.265% per annum of
the stated liquidation value of $1,000 per capital security.




Pacific
Continental has entered into contractual arrangements which, taken collectively,
fully and unconditionally guarantee payment of: (1) accrued and unpaid
distributions required to be paid on the Trust Preferred Securities, (2) the
redemption price with respect to any Trust Preferred Securities called for
redemption by the Trust, and (3) payments due upon a voluntary or involuntary
dissolution, winding up, or liquidation of the Trust.  The Trust
Preferred Securities are mandatorily redeemable upon maturity of the debentures
on January 7, 2036, or upon earlier redemption as provided in the
indenture.  Pacific Continental has the right to redeem the debentures
purchased by the Trust in whole or in part, on or after, January, 7,
2011.  As specified in the indenture, if the debentures are redeemed
prior to maturity, the redemption price will be the principal amount and any
accrued interest.  For the years ended December 31, 2007, 2006 and
2005, the Company recognized net interest expense of $508,000, $510,000 and
$48,000, respectively, related to the Trust Preferred Securities.




In
accordance with provision of FIN 46R, the Trust has not been consolidated in
these financial statements.  As a result, the junior subordinated
debentures, totaling $8,248,000, are reflected on the Company’s consolidated
balance sheet at December 31, 2007, under the caption, “Junior Subordinated
Debentures”.  The Company’s $248,000 investment in the Trust is
recorded in “Other Assets” in its consolidated balance sheet at December 31,
2007.





13.  Income Taxes:





The
provision for income taxes for the years ended December 31 consists of the
following:





2007
              
              
              2006
              
              
              2005Currently
      payable:Federal
              
              $
              7,608,000
              
              
              $
              7,626,000
              
              
              $
              4,862,000State
              
              
              556,000
              
              
              
              835,000
              
              
              
              615,0008,164,000
              
              
              
              8,461,000
              
              
              
              5,477,000Deferred:Federal
              
              
              (288,000
              )
              
              
              (905,000
              )
              
              
              29,000State
              
              
              (46,000
              )
              
              
              (144,000
              )
              
              
              4,000(334,000
              )
              
              
              (1,049,000
              )
              
              
              33,000Total
      provision for income taxes
              
              $
              7,830,000
              
              
              $
              7,412,000
              
              
              $
              5,510,000
  56





The
provision for income taxes results in effective tax rates which are different
than the federal income tax statutory rate.  The nature of the
differences for the years ended December 31 was as follows:


2007
                
                
                
                
                
                2006
                
                
                
                
                
                2005Expected
      federal incometax
      provision
                
                $
                7,268,000
                
                
                
                35.00
                %
                
                $
                7,023,000
                
                
                
                35.00
                %
                
                $
                5,130,000
                
                
                
                34.00
                %State
      income tax, net offederal
      income tax effect
                
                
                733,000
                
                
                
                3.53
                %
                
                
                726,000
                
                
                
                3.62
                %
                
                
                402,000
                
                
                
                2.66
                %Municipal
      securities tax benefit
                
                
                (47,000
                )
                
                
                -0.23
                %
                
                
                (42,000
                )
                
                
                -0.21
                %
                
                
                (32,000
                )
                
                
                -0.21
                %Equity-based
      compensation
                
                
                199,000
                
                
                
                0.96
                %
                
                
                184,000
                
                
                
                0.92
                %
                
                
                -Benefit
      of purchased tax credits
                
                
                (395,000
                )
                
                
                -1.90
                %
                
                
                (231,000
                )
                
                
                -1.15
                %
                
                
                (42,000
                )
                
                
                -0.28
                %Deferred
      tax rate adjustmentsand
      other
                
                
                72,000
                
                
                
                0.35
                %
                
                
                (248,000
                )
                
                
                -1.24
                %
                
                
                52,000
                
                
                
                0.35
                %Provision
      for income taxes
                
                $
                7,830,000
                
                
                
                37.71
                %
                
                $
                7,412,000
                
                
                
                36.94
                %
                
                $
                5,510,000
                
                
                
                36.52
                %


The tax
benefit associated with stock option plans reduced taxes payable by $301,000,
$803,000 and $324,000 at December 31, 2007, 2006 and 2005,
respectively.  Such benefit is credited to additional paid-in
capital.





The
components of deferred tax assets and liabilities at December 31 are as
follows:


2007
              
              
              2006
              
              
              2005Assets:Allowance
      for loan losses
              
              $
              3,052,031
              
              
              $
              2,810,785
              
              
              $
              2,027,720Basis
      adjustments on loans
              
              
              141,211
              
              
              
              200,390
              
              
              
              47,579Reserve
      for self-funded insurance
              
              
              103,989
              
              
              
              70,216
              
              
              
              71,568Oregon
      purchased tax credits
              
              
              1,247,896
              
              
              
              886,992
              
              
              
              104,131Nonqualified
      stock options
              
              
              58,908
              
              
              
              37,326
              
              
              
              -Net
      unrealized losses on securities
              
              
              13,787
              
              
              
              152,748
              
              
              
              223,496Other
              
              
              -
              
              
              
              -
              
              
              
              -Total
      deferred tax assets
              
              
              4,617,822
              
              
              
              4,158,457
              
              
              
              2,474,494Liabilities:Federal
      Home Loan Bank stock dividends
              
              
              582,580
              
              
              
              597,483
              
              
              
              579,329Excess
      tax over book depreciation
              
              
              393,594
              
              
              
              329,944
              
              
              
              339,222Prepaid
      expenses
              
              
              179,274
              
              
              
              179,226
              
              
              
              127,070NWBF
      acquisition adjustments
              
              
              438,881
              
              
              
              571,965
              
              
              
              587,439Other,
      principally loan orig. costs and deferred fees
              
              
              815,659
              
              
              
              827,563
              
              
              
              950,433Total
      deferred tax liabilities
              
              
              2,409,988
              
              
              
              2,506,181
              
              
              
              2,583,493Net
      deferred tax assets/(liabilities)
              
              $
              2,207,834
              
              
              $
              1,652,276
              
              
              $
              (108,999
              )
     57


The
Company adopted the provision of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (“FIN 48) on January 1, 2007.  As a result
of the implementation of FIN 48, the Company recognized no liability for
unrecognized tax benefits.  The Company files tax returns with the
Internal Revenue Service and the Oregon Department of Revenue.  Tax
returns for years subsequent to 2003 remain open to examination by these taxing
jurisdictions.  The Company’s policy with respect to interest and
penalties ensuing from income tax settlements is to recognize them as
noninterest expense.





14.  Retirement Plan:





The Bank
has a 401(k) profit sharing plan covering substantially all
employees.  The plan provides for employee and employer
contributions.  The total plan expenses, including employer
contributions, were $783,796, $747,748 and $532,251 in 2007, 2006 and 2005,
respectively.





15.  Stock Option
Plans:





Pursuant
to the approval of the 2006 Stock Option and Equity Compensation Plan (the “2006
SOEC Plan”) at the annual shareholders’ meeting in April 2006, incentive stock
options, nonqualified stock options, restricted stock, restricted stock units,
or stock appreciation rights may be awarded to attract and retain the best
available personnel for positions of responsibility with the corporation and its
subsidiaries.  Upon adoption of the 2006 SOEC Plan, the Company’s 1999
Employees’ Stock Option Plan (“1999 ESOP Plan”) and the Directors’ Stock Option
Plan (“1999 DSOP Plan”) were cancelled and no longer available for future
grants.  The exercise price for shares of common stock subject to an
option under the SOEC Plan shall not be less than 100% of the fair market value
of a share of common stock as of the date of grant of the option; provided,
however, that in the case of an incentive stock option granted to an employee
who immediately before the grant of such incentive stock option is a
shareholder-employee, the incentive stock option exercise price shall be at
least 110% of the fair value of the common stock as of the date of grant of the
incentive stock option. The Compensation Committee of the Board of Directors may
impose any terms or conditions on the vesting of an award that it determines to
be appropriate.  For the year ended December 31, 2007, the Company
issued 71,446 incentive stock options, with a fair value of $4.45 per unit, to
selected employees.





Pursuant
to the Company’s 2006 SOEC Plan, stock appreciation rights (SARs) may be granted
to employees.  The stock appreciation rights may be settled in cash or
cash and common stock as determined at the date of issuance.  The
Compensation Committee or the Board of Directors determines vesting provisions
when awards are granted, and the awards granted generally vest over three or
four years and have a maximum life of ten years.  SARs settled in
stock are recognized as equity-based awards while SARs settled in cash are
recognized on the balance sheet as liability-based awards, both of which are
granted at the fair market value of our common stock at the grant
date.  The grant-date fair value of the liability based awards vesting
in the current period, along with the change in fair value of the awards during
the period, are recognized as compensation expense and as an adjustment to the
recorded liability.  For the year ended December 31, 2007, the Company
issued 152,142 SARs, with a fair value of $4.45 per unit, of which 66,356 are to
be settled in cash and 85,786 are to be settled in stock.  The
conversion of SARs, to be settled in stock, is estimated to be one share of
common stock for every 4.89 SARs.  Therefore, 17,543 shares of common
stock are expected to be issued if all 85,786 SARs are settled.





Also,
pursuant to the Company’s 2006 SOEC Plan, non-qualified options awards have been
granted to directors.  Stock options have been granted at exercise
prices of not less than 100% of the fair market value of our common stock at the
grant date.  The maximum life of options granted under this plan is
ten years from the grant date.  The Company issued 21,120 nonqualified
stock options, with a fair value of $2.65 per option, during the third quarter
2006.  For the year ended December 31, 2007, the Company issued 17,292
nonqualified stock options, with a fair value of $3.09 per option.





The
following tables identify the compensation expenses and tax benefits received by
the Company according to the compensation plans and awards described above for
the years 2007 and 2006:




58


2007
              
              
              
              
              
              2006Comp.
      Exp.
              
              
              Tax
      Benefit
              
              
              Comp.
      Exp.
              
              
              Tax
      Benefit1999
      ESOP Plan
              
              $
              282,434
              
              
              $
              -
              
              
              $
              425,920
              
              
              $
              -1999
      DSOP Plan
              
              
              6,559
              
              
              
              2,516
              
              
              
              61,017
              
              
              
              23,4062006
      SOEC - ISOs
              
              
              108,150
              
              
              
              -
              
              
              
              19,609
              
              
              
              -2006
      SOEC - SARS stock
              
              
              127,849
              
              
              
              49,043
              
              
              
              23,834
              
              
              
              9,1432006
      SOEC - SARS cash
              
              
              26,003
              
              
              
              9,975
              
              
              
              23,328
              
              
              
              8,9492006
      SOEC - DSOs
              
              
              26,204
              
              
              
              10,052
              
              
              
              4,599
              
              
              
              1,764Total
              
              $
              577,199
              
              
              $
              71,586
              
              
              $
              558,307
              
              
              $
              43,262





Stock
Options –


The
following table provides the weighted-average fair values for stock options,
exclusive of the options issued as a result of the NWBF acquisition, granted
during the last three years.  These values were estimated using the
Black-Scholes option valuation model with the following weighted-average
assumptions:


Year
      Ended December 31,2007
              
              
              2006
              
              
              2005Expected
      life in years (1)
              
              
              5.61
              
              
              
              5.26
              
              
              
              4.00Volatility
      (1)
              
              
              17.87
              %
              
              
              17.97
              
              
              
              19.20Interest
      Rate (2)
              
              
              4.81
              %
              
              
              4.70
              %
              
              
              4.22
              %Yield
      Rate (3)
              
              
              1.58
              %
              
              
              1.77
              %
              
              
              1.77
              %Average
      Fair-Value
              
              $
              4.18
              
              
              $
              3.78
              
              
              $
              2.90





(1)
            Volatility
      is based on historical experience over a period equivalent to the expected
      life in years.


(2)
            Based
      on the U.S. Treasury constant maturity interest rate with a term
      consistent with the expected life of the options
  granted.


(3)
            The
      Company has paid cash dividends on common stock since
      1985.  Each grant’s dividend yield is calculated by annualizing
      the most recent quarterly cash dividend and dividing that amount by the
      market price of the Company’s common stock as of the grant
      date.





For any
future grants, as required by FAS 123R, the Company will estimate the impact of
forfeitures based  on our historical experience with previously
granted stock options, and consider the impact of the forfeitures when
determining the amount of expense to record for the stock options
granted.  For stock options issued prior to the adoption of FAS 123R,
forfeitures were recognized when the stock option was actually
forfeited.  The Company generally issues new shares of common stock to
satisfy stock option exercises.


59





A summary
of stock option activity adjusted for all stock dividends and splits for all
Company plans during the current fiscal year is presented below:


Total
      Stock Options
              
              Shares
              
              
              Average
      Price Per Share
              
              
              Weighted-Average
      Remaining Contractual Life
              
              
              Aggregate
      Intrinsic ValueOutstanding
      at December 31, 2006
              
              
              841,536
              
              
              $
              11.68Granted
              
              
              88,738
              
              
              
              18.39Exercised
              
              
              (223,301
              )
              
              
              8.68Forfeited
      or expired
              
              
              (9,338
              )
              
              
              14.11Outstanding
      at December 31, 2007
              
              
              697,635
              
              
              $
              13.46
              
              
              
              3.49
              
              
              $
              777,826Exercisable
      at December 31, 2007
              
              
              464,316
              
              
              $
              11.93
              
              
              
              2.30
              
              
              $
              770,103
   Nonvested
      Options
              
              Shares
              
              
              Weighted-Average
      Grant Date Fair ValueOutstanding
      at December 31, 2006
              
              
              311,420
              
              
              $
              2.88Granted
              
              
              88,738
              
              
              
              4.18Vested
              
              
              (157,501
              )
              
              
              2.73Forfeited
      or expired
              
              
              (9,338
              )
              
              
              2.74Outstanding
      at December 31, 2007
              
              
              233,319
              
              
              $
              3.48


A summary
of value received by employees and directors exercising stock options over the
last three years is presented below:


Year
      Ended December 312007
              
              
              2006
              
              
              2005Total
      intrinsic value ofstock
      options exercised
              
              $
              1,206,281
              
              
              $
              2,883,349
              
              
              $
              1,572,657


Stock
Appreciation Rights -


The
following table provides the weighted-average fair values for stock appreciation
rights (SARs) to be settled in stock.  These are considered to be
equity-based awards.  No activity was recognized for the year ended
2005. The values were estimated using the Black-Scholes option valuation model
with the following weighted-average assumptions:





Year
      Ended December 31,2007
              
              
              2006Expected
      life in years (1)
              
              
              6.00
              
              
              
              6.00Volatility
      (1)
              
              
              18.68
              %
              
              
              19.51
              %Interest
      Rate (2)
              
              
              4.81
              %
              
              
              4.72
              %Yield
      Rate (3)
              
              
              1.58
              %
              
              
              1.78
              %Average
      Fair-Value
              
              $
              4.45
              
              
              $
              4.27




(1)
            Volatility
      is based on historical experience over a period equivalent to the expected
      life in years.


(2)
            Based
      on the U.S. Treasury constant maturity interest rate with a term
      consistent with the expected life of the options
  granted.


(3)
            The
      Company has paid cash dividends on common stock since
      1985.  Each grant’s dividend yield is calculated by annualizing
      the most recent quarterly cash dividend and dividing that amount by the
      market price of the Company’s common stock as of the grant
      date.




60




A summary
of SAR – stock awards activity adjusted for all stock dividends during the
current fiscal year is presented below:


Total
      SAR - Stock Awards
              
              Awards
              
              
              Average
      Price Per Award
              
              
              Weighted-Average
      Remaining Contractual LifeOutstanding
      at December 31, 2006
              
              
              74,646
              
              
              $
              16.34Granted
              
              
              85,786
              
              
              
              18.39Exercised
              
              
              -
              
              
              
              -Forfeited
      or expired
              
              
              (5,614
              )
              
              
              17.39Outstanding
      at December 31, 2007
              
              
              154,817
              
              
              $
              17.44
              
              
              
              8.94Exercisable
      at September 30, 2007
              
              
              17,980
              
              
              $
              16.34
              
              
              
              8.94
   Nonvested
      SAR - Stock Awards
              
              Awards
              
              
              Weighted-Average
      Grant Date Fair ValueOutstanding
      at December 31, 2006
              
              
              74,646
              
              
              $
              3.88Granted
              
              
              85,786
              
              
              
              4.45Vested
              
              
              (17,980
              )
              
              
              3.88Forfeited
      or expired
              
              
              (5,614
              )
              
              
              4.17Outstanding
      at December 31, 2007
              
              
              136,838
              
              
              $
              4.22
   A summary
of SAR – cash awards activity during the current fiscal year is presented
below:





Total
      SAR - Cash Awards
            
            Shares
            
            
            Average
      Price Per Share
            
            
            Weighted-Average
      Remaining Contractual LifeOutstanding
      at December 31, 2006
            
            
            60,313
            
            
            $
            16.34Granted
            
            
            66,356
            
            
            
            18.39Exercised
            
            
            -
            
            
            
            -Forfeited
      or expired
            
            
            (10,700
            )
            
            
            17.40Outstanding
      at December 31, 2007
            
            
            115,969
            
            
            $
            17.41
            
            
            
            8.93Exercisable
      at December 31, 2007
            
            
            13,791
            
            
            $
            16.34
            
            
            
            8.93






61





Nonvested
      SAR - Cash Awards
              
              Shares
              
              
              Weighted-Average
      Grant Date Fair ValueOutstanding
      at December 31, 2006
              
              
              60,313
              
              
              
              3.88Granted
              
              
              66,356
              
              
              
              4.45Vested
              
              
              (13,791
              )
              
              
              3.88Forfeited
      or expired
              
              
              (10,700
              )
              
              
              3.88Outstanding
      at December 31, 2007
              
              
              102,178
              
              
              $
              4.22


For any
future grants, as required by SFAS 123R, the Company will estimate the impact of
forfeitures based  on our historical experience with previously
granted stock options, and consider the impact of the forfeitures when
determining the amount of expense to record for both stock and cash settled
SARs.





At
December 31, 2007, the Company has estimated unrecognized compensation expense
of approximately $580,000, $390,000, and $128,000 for unvested stock options,
SAR – stock awards and SAR – cash awards, respectively.  These amounts
are based on a forfeiture rate assumption of 20% for all awards granted to
employees.  The weighted-average period of time the unrecognized
compensation expense will be recognized for the unvested stock options, SAR –
stock awards and SAR – cash awards is approximately 2.6, 3.2 and 3.2 years,
respectively.





16.  Transactions with Related
Parties:





The Bank
has granted loans to officers and directors and to companies with which they are
associated.  Such loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated parties.  Activity with respect
to these loans during the year ended December 31 was as follows:


2007
              
              
              2006Balance,
      beginning of year
              
              $
              2,241,194
              
              
              $
              771,001Additions
      or renewals
              
              
              249,373
              
              
              
              1,696,178Amounts
      collected
              
              
              (1,028,895
              )
              
              
              (225,985
              )Balance,
      end of year
              
              $
              1,461,672
              
              
              $
              2,241,194


In
addition, there were $733,313 in commitments to extend credit to directors and
officers at December 31, 2007, which are included among loan commitments,
disclosed Note 17.





17.  Financial Instruments with
Off-Balance-Sheet Credit Risk:





In order
to meet the financing needs of its clients, the Bank commits to extensions of
credit and issues letters of credit.  The Bank uses the same credit
policies in making commitments and conditional obligations as it does for other
products.  In the event of nonperformance by the client, the Bank’s
exposure to credit loss is represented by the contractual amount of the
instruments.  The Bank’s collateral policies related to financial
instruments with off-balance-sheet risk conform with its general underwriting
guidelines.





Commitments
to extend credit are agreements to lend to a client as long as there is no
violation of any condition established in the contract.  Commitments
generally have expiration dates or other termination clauses and may require
payment of a fee.  Since some of the commitments may expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.





62




Letters
of credit written are conditional commitments issued by the Bank to guarantee
the performance of a client to a third party.  The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to clients.





Off-balance-sheet
instruments at December 31 consist of the following:





2007
              
              
              2006Commitments
      to extend credit (principallyvariable
      rate)
              
              $
              279,655,000
              
              
              $
              196,033,000Letters
      of credit and financial guarantees written
              
              
              2,449,000
              
              
              
              6,720,000





18.  Fair Value Disclosures of Financial
Instruments:





The
following disclosures are made in accordance with provisions of SFAS No. 107,
Disclosures About Fair Value
of Financial Instruments.  The use of different assumptions and
estimation methods could have a significant effect on fair value
amounts.  Accordingly, the estimates of fair value herein are not
necessarily indicative of the amounts that might be realized in a current market
exchange.





The
estimated fair values of the financial instruments at December 31 are as
follows:


2007
              
              
              
              
              
              2006Carrying
              
              
              
              
              
              CarryingAmount
              
              
              Fair
      Value
              
              
              Amount
              
              
              Fair
      ValueFinancial
      assets:Cash
      and cash equivalents
              
              $
              26,076,692
              
              
              $
              26,076,692
              
              
              $
              32,777,983
              
              
              $
              32,777,983Securities
              
              
              53,993,468
              
              
              
              53,993,468
              
              
              
              38,783,063
              
              
              
              38,783,063Loans
      held for sale
              
              
              -
              
              
              
              -
              
              
              
              2,140,417
              
              
              
              2,140,417Loans,
      net of allowancefor
      loan losses
              
              
              813,647,438
              
              
              
              809,910,211
              
              
              
              758,816,132
              
              
              
              748,030,182Interest
      receivable
              
              
              3,652,259
              
              
              
              3,652,259
              
              
              
              3,998,139
              
              
              
              3,998,139Federal
      Home LoanBank
      stock
              
              
              3,794,900
              
              
              
              3,794,900
              
              
              
              3,479,900
              
              
              
              3,479,900Financial
      liabilities:Deposits
              
              
              644,423,911
              
              
              
              644,293,425
              
              
              
              641,272,024
              
              
              
              640,583,922Federal
      funds purchased
              
              
              5,360,000
              
              
              
              5,360,000
              
              
              
              4,410,000
              
              
              
              4,410,000Federal
      Home LoanBank
      borrowings
              
              
              179,500,000
              
              
              
              179,819,000
              
              
              
              131,803,763
              
              
              
              131,049,652Junior
      subordinated debentures
              
              
              8,248,000
              
              
              
              7,758,000
              
              
              
              8,248,000
              
              
              
              8,152,162Accrued
      interest payable
              
              
              324,016
              
              
              
              324,016
              
              
              
              551,976
              
              
              
              551,976


Cash and Cash Equivalents –
The carrying amount approximates fair value.





Securities and Federal Home Loan
Bank stock – Fair value is based on quoted market prices.  If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.  FHLB stock is valued based on
the most recent redemption price.





Loans Held for Sale – Fair
value represents the anticipated proceeds from the sale of related
loans.





Loans – For variable-rate
loans that reprice frequently and have no significant change in credit risk,
fair values are based on carrying values.  Fair value of fixed-rate
loans is estimated by discounting the future cash flows using current rates at
which similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities.  Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral values,
where applicable.





63




Interest receivable and
payable – The carrying amounts of accrued interest receivable and payable
approximate their fair value.





Deposits – Fair value of
demand, interest-bearing demand and savings deposits is the amount payable on
demand at the reporting date.  Fair value of time deposits is
estimated using the interest rates currently offered for deposits of similar
remaining maturities.





Federal Funds Purchased – The
carrying amount is a reasonable estimate of fair value because of the short-term
nature of these borrowings.





Federal Home Loan Bank
Borrowings – Fair value of Federal Home Loan Bank borrowings is estimated
by discounting future cash flows at rates currently available for debt with
similar terms and remaining maturities.





Junior Subordinated
Debentures – Fair value of Junior Subordinated Debentures is estimated by
discounting future cash flows at rates currently available for debt with similar
terms and remaining maturities.





Off-Balance-Sheet Financial
Instruments – The carrying amount and fair value are based on fees
charged for similar commitments and are not material.





19.  Commitments and Legal
Contingencies:





The
Company has entered into employment agreements with two key executive
officers.  The employment agreements provide for minimum aggregate
annual base salaries of $550,000, plus performance adjustments, life insurance
coverage, and other perquisites commonly found in such
agreements.  The two employment agreements expire in 2010 unless
extended or terminated earlier.





Various
legal claims arise from time to time in the normal course of
business.  Based upon analysis of management, in consultation with the
Company’s legal counsel, there are no current legal matters which are expected
to have a material effect on the Company’s consolidated financial
statements.





20.  Regulatory
Matters:





The
Company and the Bank are subject to the regulations of certain federal and state
agencies and receive periodic examinations by those regulatory
authorities.  In addition, they are subject to various regulatory
capital requirements administered by federal 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
consolidated financial statements.  Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank’s
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices.  The Company 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
Company and the Bank to maintain minimum amounts and ratios of Total and Tier I
capital to risk-weighted assets and of Tier I capital to leverage
assets.  Management believes, as of December 31, 2007, that the
Company and the Bank meet all capital adequacy requirements to which they are
subject.





As of
December 31, 2007 and according to FDIC guidelines, the Bank is considered to be
well capitalized.  To be categorized as well capitalized, the Bank
must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the following table.  There are no conditions
or events since that notification that management believes have changed the
institution’s category.


64





The
Bank’s actual capital amounts and ratios are presented in the table (the
Company’s capital ratios do not differ significantly from those of the
Bank).


To
      Be WellCapitalized
      UnderActual
              
              
              
              
              
              For
      Capital
                Adequacy
      Purposes
              
              
              Prompt
      CorrectiveAction ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioAs
      of December 31, 2007:Total
      capital (to riskweighted
      assets)
              
              $
              101,065,000
              
              
              
              10.96
              %
              
              $
              73,780,160
              
              
              
              8
              %
              
              $
              92,225,200
              
              
              
              10
              %Tier
      I capital (to riskweighted
      assets)
              
              
              92,194,000
              
              
              
              10.00
              %
              
              
              36,890,080
              
              
              
              4
              %
              
              
              55,335,120
              
              
              
              6
              %Tier
      I capital (to leverageassets)
              
              
              92,194,000
              
              
              
              10.11
              %
              
              
              36,491,440
              
              
              
              4
              %
              
              
              45,614,300
              
              
              
              5
              %As
      of December 31, 2006:Total
      capital (to riskweighted
      assets)
              
              $
              88,493,000
              
              
              
              10.98
              %
              
              $
              64,471,280
              
              
              
              8
              %
              
              $
              80,589,100
              
              
              
              10
              %Tier
      I capital (to riskweighted
      assets)
              
              
              80,058,000
              
              
              
              9.93
              %
              
              
              32,235,640
              
              
              
              4
              %
              
              
              48,353,460
              
              
              
              6
              %Tier
      I capital (to leverageassets)
              
              
              80,058,000
              
              
              
              9.56
              %
              
              
              33,503,480
              
              
              
              4
              %
              
              
              41,879,350
              
              
              
              5
              %





21.  Parent Company Financial
Information:





Financial
information for Pacific Continental Corporation (Parent Company only) is
presented below:





BALANCE
SHEETS


December
31


2007
              
              
              2006Assets:Cash
      deposited with the Bank
              
              $
              336,821
              
              
              $
              414,565Prepaid
      expenses
              
              
              4,442
              
              
              
              4,324Deferred
      income taxes
              
              
              -
              
              
              
              -Equity
      in Trust
              
              
              248,000
              
              
              
              248,000Investment
      in the Bank, at cost plus equityin
      earnings
              
              
              115,299,800
              
              
              
              103,439,335$
              115,889,063
              
              
              $
              104,106,224Liabilities
      and stockholders' equity:Liabilities
              
              $
              132,055
              
              
              $
              123,443Junior
      subordinated debentures
              
              
              8,248,000
              
              
              
              8,248,000Stockholders'
      equity
              
              
              107,509,008
              
              
              
              95,734,781$
              115,889,063
              
              
              $
              104,106,224
   65








STATEMENTS
OF INCOME


For the
Periods Ended December 31


2007
              
              
              2006
              
              
              2005Income:Cash
      dividends from the Bank
              
              $
              2,610,000
              
              
              $
              -
              
              
              $
              2,495,0002,610,000
              
              
              
              -
              
              
              
              2,495,000Expenses:Interest
      expense
              
              
              508,420
              
              
              
              509,699
              
              
              
              48,117Investor
      relations
              
              
              52,335
              
              
              
              84,760
              
              
              
              86,381Legal,
      registration expense, and other
              
              
              74,372
              
              
              
              80,114
              
              
              
              55,009Personnel
      costs paid to Bank
              
              
              109,148
              
              
              
              95,327
              
              
              
              267,698744,275
              
              
              
              769,900
              
              
              
              457,205Income
      (loss) before income tax (expense) benefitand
      equity in undistributedearnings
      of the Bank
              
              
              1,865,725
              
              
              
              (769,900
              )
              
              
              2,037,795Income
      tax  (expense) benefit
              
              
              (708,976
              )
              
              
              292,562
              
              
              
              (774,362
              )Equity
      in undistributed earnings of the Bank
              
              
              11,777,900
              
              
              
              13,131,856
              
              
              
              8,314,866Net
      income
              
              $
              12,934,649
              
              
              $
              12,654,518
              
              
              $
              9,578,299








66










2007
            
            
            2006
            
            
            2005Cash
      flows from operating activities:Net
      income
            
            $
            12,934,649
            
            
            $
            12,654,518
            
            
            $
            9,578,299Adjustments
      to reconcile net incometo
      net cash provided by operatingactivities:Equity
      in undistributed earnings of
            
            
            (11,777,900
            )
            
            
            (13,131,856
            )
            
            
            (8,314,866
            )the
      BankOther,
      net
            
            
            (1,608,714
            )
            
            
            65,901
            
            
            
            619,790Net
      cash provided by operating activities
            
            
            (451,965
            )
            
            
            (411,437
            )
            
            
            1,883,223Cash
      flows from investing activities:Dividend
      received from bank subsidiary
            
            
            2,610,000
            
            
            
            -
            
            
            
            2,495,000Cash
      paid to shareholders of NWBF
            
            
            -
            
            
            
            -
            
            
            
            (2,467,051
            )Investment
      in subsidiary
            
            
            -
            
            
            
            -
            
            
            
            (8,000,000
            )Investment
      in Trust
            
            
            -
            
            
            
            -
            
            
            
            (248,000
            )Net
      cash used in investing activities
            
            
            2,610,000
            
            
            
            -
            
            
            
            (8,220,051
            )Cash
      flows from financing activities:Proceeds
      from stock options exercised
            
            
            1,938,836
            
            
            
            3,546,887
            
            
            
            1,039,033Dividends
      paid
            
            
            (4,174,615
            )
            
            
            (3,381,220
            )
            
            
            (2,555,777
            )Issuance
      of trust preferreds
            
            
            -
            
            
            
            -
            
            
            
            8,248,000Net
      cash provided (used in) financing activities
            
            
            (2,235,779
            )
            
            
            165,667
            
            
            
            6,731,256Net
      (decrease) increase in cash
            
            
            (77,744
            )
            
            
            (245,770
            )
            
            
            394,428Cash,
      beginning of period
            
            
            414,565
            
            
            
            660,335
            
            
            
            265,907Cash,
      end of period
            
            $
            336,821
            
            
            $
            414,565
            
            
            $
            660,335





ITEM
9                 Changes In and Disagreements
with Accountants on Accounting and Financial Disclosure





None





ITEM 9A  Controls and
Procedures





Evaluation
of Disclosure Controls and Procedures





An
evaluation was carried out under the supervision and with the participation of
the Company’s management, including the Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls
and procedures, as required by Rule 13a-15(b) of the Securities Exchange Act of
1934.  Based on that evaluation, the CEO and CFO have concluded that
as of the end of the period covered by this report, our disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized, and timely
reported as provided in the SEC rules and forms.  As a result of this
evaluation, there were no significant changes in our internal control over
financial reporting during the three months ended December 31, 2007 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.





67




Management’s
Report on Internal Control Over Financial Reporting





The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting.  This internal
control system has been designed to provide reasonable assurance to the
Company’s management and board of directors regarding the preparation and fair
presentation of the Company’s published financial statements.





All
internal control systems, no matter how well designed, have inherent
limitations.  Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.





The
management of Pacific Continental Corporation has assessed the effectiveness of
its internal control over financial reporting at December 31,
2007.  To make this assessment, the Company used the criteria for
effective internal control over financial reporting described in Internal Control – Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission.  Based on this assessment, the Company believes
that as of December 31, 2007, the internal control system over financial
reporting met those criteria.





The
Company’s independent auditors, Moss Adams, L.L.P., have issued an attestation
report on the Company’s internal control over financial
reporting.  The attestation report can be found on pages 35 and 36 of
this document.





ITEM 9b.  Other
Information





On
November 9, 2007, the Board of Directors of the Company approved replacement
employment agreements for Hal Brown, the Company’s Chief Executive Officer and
Roger Busse, the Company’s President and Chief Operating Officer.  Mr.
Brown is also a director of the Company.  The terms of the agreements
are for a three-year term, however, the Board considers annually extending the
agreement by an additional year, thereby reestablishing a new three-year
term.





Hal
Brown.  The new Agreement extends the original expiration date
to April 30, 2010 and establishes a base salary of $290,000, with a cash bonus
opportunity.  In the event Mr. Brown terminates his employment before
the term ends for “good reason” or his employment is terminated by the Company
or the Bank "without cause,” Mr. Brown will be entitled to receive compensation
(including any bonus earned) and benefits in the amounts that he would have
received had he been employed, including any employer 401(k) payments made by
the Company, for a period of 12 months from the date of termination, and all
unvested equity awards will become immediately vested upon termination. In
addition, the Agreement provides for severance payments in the event employment
is terminated (i) voluntarily (for good reason) or involuntarily (without cause)
within one year after a change in control (as defined); or (ii) involuntarily
(without cause) or voluntarily (for good reason) within one year prior to the
occurrence of the Company entering into an agreement for a change of control. In
either event, executive will be eligible to receive a lump sum payment equal to
a multiple of two and one half times the executive’s “potential annual
compensation,” less the amount of any Termination Payments (as defined), the
continuation of certain benefits, including portions of medical and dental
premiums for a period of the later of one year or upon closing of a change in
control, and the immediate vesting of all unvested equity awards upon closing of
the change in control or termination. In the event of voluntary termination
without good reason, death, or disability that results in his inability to
perform his duties, Mr. Brown will receive all compensation and benefits earned
and expenses reimbursable through the date of his termination. Payments made
under Mr. Brown’s agreement are limited to the provisions of Section
280G(b)(2)(A) of the Internal Revenue Code.





The
agreement also precludes Mr. Brown from directly or indirectly soliciting any
employee or client of the Bank or the Company, that would result in the employee
terminating his or her employment or the client terminating his or her
relationship with the Bank or the Company for a period of two years





Roger
Busse.The terms of Mr. Busse’s Agreement are essentially
identical to those of Mr. Brown’s employment agreement.  The Agreement
promises severance benefits and change in control severance benefits on the same
terms and calculated in the same manner as Mr. Brown’s, except that in the event
of a change in control, he will be eligible to receive a lump sum payment equal
to a multiple of two times his “potential annual compensation.”  The
Compensation Committee set Mr. Busse’s base salary at $260,000.





68




Mr.
Busse’s employment agreement includes a prohibition from soliciting employees or
clients of the Bank or the Company identical to the prohibition in Mr. Brown’s
agreement, and limits payments made under his agreement to the provisions of
Section 280G(b)(2)(A) of the Internal Revenue Code.





PART III





ITEM
10                           Directors and Executive
Officers of the Company





The
information regarding “Directors and Executive Officers of the Registrant” of
the Company is incorporated by reference from the sections entitled “ELECTION OF
DIRECTORS—Nominees for Director and Continuing Directors,” “MANAGEMENT” and
“COMPLIANCE WITH SECTION 16(a) FILING REQUIREMENTS” of the Company’s 2008 Annual
Meeting Proxy Statement (the “Proxy Statement”).





In
September of 2003, consistent with the requirements of The Sarbanes-Oxley Act,
the Company adopted a Code of Ethics applicable to senior financial officers
including the principal executive officer.  There have been no changes
in the Code of Ethics since that time.  The Code of Ethics is filed as
Exhibit 14 to the Company’s Annual Report on Form 10-K for the year-end December
31, 2007.  The Code of Ethics can also be accessed electronically by
visiting the Company’s website at www.therightbank.com.





Information
regarding the Company’s Audit Committee financial expert appears under the
section entitled “INFORMATION REGARDING THE BOARD OF DIRECTORS AND ITS
COMMITTEES – Certain Committees of the Board of Directors” in the Company’s
Proxy Statement and is incorporated by reference.








ITEM
11                           Executive
Compensation





The
information regarding “Executive Compensation” is incorporated by reference from
the sections entitled “COMPENSATION DISCUSSION AND ANALYSIS,” “EXECUTIVE
COMPENSATION” and “DIRECTOR COMPENSATION” of the Proxy Statement.





ITEM
12                           Security Ownership of
Certain Beneficial Owners and Management and Related Shareholder
Matters





The
information regarding “Security Ownership of Certain Beneficial Owners and
Management” is incorporated by reference from the section entitled “SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” of the Proxy
Statement.





ITEM
13                           Certain Relationships and
Related Transactions and Director Independence





The
information regarding “Certain Relationships and Related Transactions” is
incorporated by reference from the section entitled “TRANSACTIONS WITH
MANAGEMENT” of the Proxy Statement.





ITEM
14                           Principal Accountant Fees
and Services





For
information concerning principal accountant fees and services as well as related
pre-approval policies, see “AUDITORS – Fees Paid to Independent Accountants” in
the Company’s Proxy Statement, which is incorporated by
reference.


69





ITEM 15  Exhibits and Financial
Statement Schedules





(a)(1)
See Index to Consolidated Financial Statements filed under item 8 of this
report.





All other
schedules to the financial statements required by Regulation S-X are omitted
because they are not applicable, not material, or because the information is
included in the financial statements or related notes.





(a)(2)                     Exhibit
Index





Exhibit


3.1
              Amended
      Articles of Incorporation (1)3.2
              Amended
      and Restated Bylaws10.1
              1999
      Employee Stock Option Plan (2)10.2
              1999
      Director’s Stock Option Plan (2)10.3
              2006
      Stock Option and Equity Compensation Plan (3)10.4
              Form
      of Restricted Stock Award Agreement (3)10.5
              Form
      of Stock Option Award Agreement (3)10.6
              Form
      of Restricted Stock Unit Agreement (3)10.7
              Form
      of Stock Appreciation Rights Agreement (3)10.8
              Change
      of Control/Salary Continuation Agreement for Michael Reynolds
      (4)10.9
              Change
      of Control /Salary Continuation Agreement for Daniel Hempy
    (4)10.10
              Change
      of Control/ Salary Continuation Agreement for Basant Singh
    (5)10.9
              Executive
      Employment Agreement for Roger Busse10.10
              Executive
      Employment Agreement for Hal Brown10.11
              NWB
      Financial Corporation Employee Stock Option Plan (6)10.12
              NWB
      Financial Corporation Director Stock Option Plan (6)10.13
              Director
      Fee Schedule, Effective January 1, 200810.14
              Director
      Stock Trading Plan14
              Code
      of Ethics for Senior Financial Officers andPrincipal
      Executive Officer23.1
              Accountants
      Consent of Moss Adams L.L.P.31.1
              302
      Certification, Hal Brown, President and Chief Executive
      Officer31.2
              302
      Certification, Michael A. Reynolds, Executive Vice President
      andChief
      Financial Officer32
              Certifications
      Pursuant to 18 U.S.C. Section
1350


(1)
            Incorporated
      by reference to Exhibit 3 of the Company’s Quarterly Report on 10-Q for
      the Quarter ended June 30, 2007.





(2)
            Incorporated
      by reference to Exhibits 99.1 – 99.4 of the Company’s S-8 Registration
      Statement on S-4 (File No.
333-109501).





(3)
            Incorporated
      by reference to Exhibits 99.1 – 99.5 of the Company’s S-8 Registration
      Statement (File No. 333-134702).





(4)
            Incorporated
      by reference to Exhibits 10.1 and 10.2 of the Company’s Quarterly Report
      on 10-Q for the Quarter ended March 31,
2005.





(5)
            Incorporated
      by reference to Exhibit 10.10 of the Registration Statement on S-4 (File
      No. 333-128968).





(6)
            Incorporated
      by reference to Exhibits 99.1 and 99.2 of the Company’s S-8 Registration
      Statement (File No. 333-130886).





(a)(3)
            Financial
      Statement Schedules





70




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned on March 14, 2008.





PACIFIC
CONTINENTAL CORPORATION


(Company)











By:     /s/ Hal M. Brown


Hal Brown


Chief Executive Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities indicated on the 14th day of March, 2008.





Principal
Executive Officer








By  /s/  Hal M.
Brown Chief
Executive Officer


Hal
Brown                                     and
Director





Principal
Financial and Accounting Officer








By  
/s/  Michael
A.
Reynolds             Executive
Vice President and


Michael A.
Reynolds                   Chief Financial
Officer





Remaining
Directors








By   /s/ Robert A. BallinChairman
of the Board


Robert A. Ballin





By  /s/  Donald G.
MontgomeryVice
Chairman           By
/s/ Michael D. Holzgang  Director


Donald G.
Montgomery                                                                        
Michael D. Holzgang








By /s/ Larry G. Campbell   Director                         By /s/  Donald L.
Krahmer, Jr.  Director


Larry G. Campbell          Donald
L. Krahmer, Jr.








By /s/ Cathi Hatch    Director                         By
/s/ John H. Rickman  Director


Cathi
Hatch                                                                          John H.
Rickman








By    /s/  Michael S.
Holcomb                             Director                         By /s/ R. Jay Tejera   Director


Michael S.
Holcomb                                                                   R. Jay
Tejera








By  /s/  Michael E.
Heijer                                    Director


Michael E. Heijer


71


CERTIFICATION




I, Hal
Brown, certify that:


1.
            I
      have reviewed this Form 10-K of Pacific Continental
      Corporation;




2.
            Based
      on my knowledge, this report does not contain any untrue statement of a
      material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;




3.
            Based
      on my knowledge, the financial statements, and other financial information
      included in this report, fairly present in all material respects the
      financial condition, results of operations and cash flows of the
      registrant as of, and for, the periods presented in this
      report;




4.
            The
      registrant's other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and
  have:




(a)
            Designed
      such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure
      that material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;




(b)
            Designed
      such internal control over financial reporting, or caused such internal
      control over financial reporting to be designed under our supervision, to
      provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting
      principles;




(c)
            Evaluated
      the effectiveness of the registrant's disclosure controls and procedures
      and presented in this report our conclusions about the effectiveness of
      the disclosure controls and procedures, as of the end of the period
      covered by this report based on such evaluation;
  and




(d)
            Disclosed
      in this report any change in the registrant’s internal control over
      financial reporting that occurred during the registrant’s most recent
      fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
      annual report) that has materially affected, or is reasonably likely to
      materially affect, the registrant’s internal control over financial
      reporting; and




5.
            The
      registrant's other certifying officer(s) and I have disclosed, based on
      our most recent evaluation of internal control over financial reporting,
      to the registrant's auditors and the audit committee of the registrant's
      board of directors (or persons performing the equivalent
      functions):


(a)
            All
      significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the registrant’s ability to record,
      process, summarize and report financial information;
  and


(b)
            Any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal control
      over financial reporting.





Date:  March
      14, 2008
            /s/ Hal
      BrownHal
      Brown, Chief Executive Officer





72








CERTIFICATION




I,
Michael A. Reynolds, certify that:


1.
            I
      have reviewed this Form 10-K of Pacific Continental
      Corporation;




2.
            Based
      on my knowledge, this report does not contain any untrue statement of a
      material fact or omit to state a material fact necessary to make the
      statements made, in light of the circumstances under which such statements
      were made, not misleading with respect to the period covered by this
      report;




3.
            Based
      on my knowledge, the financial statements, and other financial information
      included in this report, fairly present in all material respects the
      financial condition, results of operations and cash flows of the
      registrant as of, and for, the periods presented in this
      report;




4.
            The
      registrant's other certifying officer(s) and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
      control over financial reporting (as defined in Exchange Act Rules
      13a-15(f) and 15d-15(f)) for the registrant and
  have:




(a)
            Designed
      such disclosure controls and procedures, or caused such disclosure
      controls and procedures to be designed under our supervision, to ensure
      that material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;




(b)
            Designed
      such internal control over financial reporting, or caused such internal
      control over financial reporting to be designed under our supervision, to
      provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external
      purposes in accordance with generally accepted accounting
      principles;




(c)
            Evaluated
      the effectiveness of the registrant's disclosure controls and procedures
      and presented in this report our conclusions about the effectiveness of
      the disclosure controls and procedures, as of the end of the period
      covered by this report based on such evaluation;
  and




(d)
            Disclosed
      in this report any change in the registrant’s internal control over
      financial reporting that occurred during the registrant’s most recent
      fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
      annual report) that has materially affected, or is reasonably likely to
      materially affect, the registrant’s internal control over financial
      reporting; and




5.
            The
      registrant's other certifying officer(s) and I have disclosed, based on
      our most recent evaluation of internal control over financial reporting,
      to the registrant's auditors and the audit committee of the registrant's
      board of directors (or persons performing the equivalent
      functions):


(a)
            All
      significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the registrant’s ability to record,
      process, summarize and report financial information;
  and


(b)
            Any
      fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal control
      over financial reporting.





Date:  March
14,
2008                                                                                               /s/ Michael A.
Reynolds


Michael A. Reynolds,
Executive Vice President & CFO


73


CERTIFICATION
PURSUANT TO


18
U.S.C. SECTION 1350,


AS
ADOPTED PURSUANT TO


SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002











In
connection with the Annual Report of Pacific Continental
Corporation  (the “Company”) on Form 10-K for the period ending
December 31, 2007 as filed with the Securities and Exchange Commission on the
date hereof (the “Report”), we, Hal M. Brown, Chief Executive Officer, and
Michael A. Reynolds, Chief Financial Officer, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:





(1)
            The
      Report fully complies with the requirements of Section 13(a) or 15(d) of
      the Securities Exchange Act of 1934;
and





(2)
            The
      information contained in the Report fairly presents, in all material
      respects, the financial condition and results of operations of the
      Company.








/s/ Hal M.
      Brown
            /s/ Michael A.
      ReynoldsHal
      M. Brown
            Michael
      A. ReynoldsChief
      Executive Officer
            Chief
      Financial Officer





Dated:  March
14, 2008


74