**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, 2004





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**





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 an accelerated filer (as defined by
Exchange Act Rule 12b-2).


Yes X   No
__





The
aggregate market value of the voting stock held by non-affiliates of the
Registrant at June 30, 2004 (the last business day of the most recent second
quarter) was $96,865,902 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 February 16, 2005, was 8,695,523 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 2005 annual meeting of shareholders.














**PACIFIC
CONTINENTAL CORPORATION**


**FORM
10-K**


**ANNUAL
REPORT**


**TABLE
OF CONTENTS**


**PART
      1**
    
    **Page**Item
      1:
    Business
    3Item
      2:
    Properties
    14Item
      3:
    Legal
      Proceedings
    15Item
      4:
    Submission
      of Matters to a Vote of Security Holders
    15**PART
      II**Item
      5:
    Market for Company’s Common Equity, Related
    15Stockholder Mattes, and Issuer Purchases of Equity
      SecuritiesItem
      6:
    Selected
      Financial Data
    17Item
      7:
    Management’s
      Discussion and Analysis of Financial
    18Condition and Results of
      OperationsItem
      7a:
    Quantitative
      and Qualitative Disclosures About Market Risk
    28Item
      8:
    Financial Statements adn Supplementary
    Data
    31Item
      9:
    Changes
      In and Disagreements with Accountants
    53on Accounting and Financial DisclosureItem
      9a:
    Controls
      and Procedures
    54Item
      9b:
    Other
      Information
    55**PART
      III**
    (Items
      10 through 13 are incorporated by reference fromPacific
      Continental Corporation’s definitive proxy statement for theannual
      meeting of shareholders scheduled for April 19, 2005)Item
      10:
    Directors
      and Executive Officers of the Company
    55Item
      11:
    Executive
      Compensation
    55Item
      12:
    Security
      Ownership of Certain Beneficial Owners
    56and ManagementItem
      13:
    Certain
      Relationships and Related Transactions
    56Item
      14:
    Principal
      Accountant Fees and Services
    56Item
      15:
    Exhibits
      and Financial Statement Schedules
    56on Form 8-K**SIGNATURES**
    
    58


****
















**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”). At December 31, 2004, the Bank had facilities in seven
Oregon cities and operated ten full-service offices and two consumer finance
lending offices.





Results





For the
year ended December 31, 2004, the operations of the Company on a combined basis
earned net income of $7.9 million or $0.90 per diluted share. At December 31,
2004, the consolidated equity of the Company was $49.4 million with 8.7 million
shares outstanding and a book value of $5.71 per share. Total assets were $516.7
million. Loans, including loans held for sale, net of allowance for loan losses,
were $453.8 million at December 31, 2004 and represented 88% of total assets.
Deposits totaled $403.8 million at year-end 2004. For more information regarding
the Company’s results, see “Management’s Discussion and Analysis of Financial
Condition and Results of Operation” 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, 2004, the Bank operated
ten banking offices and two consumer finance lending offices in Oregon. The Bank
specializes in meeting the deposit and lending needs of community-based
businesses, professional service groups and not-for-profit organizations. 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 and the rules and regulations of the FDIC.





Primary
Market Area





The
Bank’s markets consist of Lane, Multnomah, Washington, and Clackamas Counties in
the State of Oregon and Clark County in Southwest Washington State. The Bank has
ten full-service offices and two consumer finance offices. The Bank has seven
full-service offices and one consumer finance lending office in Lane County, two
full-service offices in Washington County, one full-service office in Multnomah
County and one consumer finance office in Coos County. Within Lane County, the
Bank has its administrative office and four branch offices and one consumer
finance lending office in Eugene, one branch office in Springfield, and one
branch office in Junction City. Within Washington County, the Bank has a branch
office in Beaverton and one branch office in Tualatin. Within Multnomah County,
the Bank has one branch office in Portland. Within Coos County, the Bank has one
consumer finance lending office.





Competition





The Bank
competes with a number of commercial banks, savings banks, and credit unions.
Commercial banking within the State of Oregon is highly competitive for both
deposits and loans. The Bank differentiates itself by providing superior levels
of service for its selected client base. The Bank focuses on community-based
businesses, professional service groups, and not-for-profit organizations in
addition to local construction lending.








Services
Provided





*Lending
Activities*





The Bank
emphasizes two areas of lending within its primary market area: loans to
community-based businesses, professional service groups, not-for-profit
organizations and loans to builders for the construction of commercial
facilities and single-family residences.





Commercial
loans, secured and unsecured, are made primarily to professionals,
community-based businesses, and not-for-profit organizations operating in
primary service areas. 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 has a preferred
lender status with the SBA.





Within
its primary markets, the Bank also concentrates on 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
duplexes and other 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. The Bank uses an outside
vendor for credit card processing. In addition, the Bank provides merchant
bankcard processing services to the Bank’s business customers through an outside
processor.





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 interest rates. 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, weekly loan committee meetings, monthly reporting, and periodic review
of loans by third-party contractors.





The Bank
has a Consumer Finance Division and operates under the business name Pacific
Continental Finance. At December 31, 2004, this division had approximately $9.1
million in outstanding loans. This division of the Bank makes primarily secured
loans to individuals for various purposes including automobiles, mobile homes,
boats, and home improvements or home equity loans. A small percentage of loans
made by this division are unsecured. The majority of loans made by the Consumer
Finance Division are classified as sub-prime lending and have yields appropriate
to the credit risk assumed.





*Deposit
Services*





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





The Bank
has invested in image technology for the processing of checks. The Bank was the
first financial institution in Lane, Multnomah, Clackamas, and Washington
Counties to offer this service. In addition, the Bank allows 24-hour customer
access to deposit and loan information via telephone and on-line cash management
products.








Other
Services





The Bank
provides other traditional commercial and consumer banking services, including
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 the Star and Plus ATM networks and utilizes an outside processor for
the processing of these automated transactions.





Employees





At
December 31, 2004, the Bank employed 190 full-time equivalent employees. None of
these employees are represented by labor unions. 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 stock option
plans.





Supervision
and Regulation





*General*





We are
extensively regulated under federal and state law. These laws and regulations
are primarily intended to protect depositors, not shareholders. The discussion
below describes and summarizes certain statutes and regulations. These
descriptions and summaries are qualified in their entirety by reference to the
particular statute or regulation. Changes in applicable laws or regulations may
have a material effect on our business and prospects. Our operations may also be
affected by changes in the policies of banking and other government regulators.
We cannot accurately predict the nature or extent of the possible future effects
on our business and earnings of changes in fiscal or monetary policies, or new
federal or state laws and regulations.





*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, and is therefore subject to regulation, supervision and
examination by the Federal Reserve. In general, the Bank Holding Company Act
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 the Federal Reserve and must provide it with such additional
information as it may require. Holding
Company Bank Ownership . The
Bank Holding Company Act requires every bank holding company to obtain the prior
approval of the Federal Reserve before (1) 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, **** (2)
acquiring all or substantially all of the assets of another bank or bank holding
company, or (3) merging or consolidating with another bank holding company.


Holding
Company Control of Nonbanks . With
some exceptions, the Bank Holding Company Act 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 (1) a requirement that
the customer obtain additional services provided by us or (2) 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 limitations and restrictions relating to lending
limits related to individual borrowers, 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 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.





Community
Reinvestment . The
Community Reinvestment Act 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. These factors
are also considered in evaluating mergers, acquisitions and applications to open
a branch or facility.





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 (1) must be made on
substantially the same terms, including interest rates and collateral as, and
follow credit underwriting procedures that are not less stringent than, those
prevailing at the time for comparable transactions with persons not covered
above and who are not employees, and (2) 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 (1) sets forth circumstances under which officers or directors of a bank may
be removed by the institution's federal supervisory agency; (2) places
restraints on lending by a bank to its executive officers, directors, principal
shareholders, and their related interests; and (3) 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 upon banks certain non-capital safety and soundness standards. 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") permits nationwide interstate banking and branching under certain
circumstances. This legislation generally authorizes interstate branching and
relaxes federal law restrictions on interstate banking. Currently, 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.


FDIC
regulations prohibit banks from using their interstate branches primarily for
deposit production. The FDIC has implemented a loan-to-deposit ratio screen to
ensure compliance with this prohibition.





Oregon
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 the
state, 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 the
state.





*Deposit
Insurance*





The
Bank’s deposits are currently insured to a maximum of $100,000 per depositor
through the Bank Insurance Fund administered by the FDIC. The Bank is required
to pay deposit insurance premiums, which are assessed semiannually and paid
quarterly. 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.





The FDIC
is also empowered to make special assessments on insured depository institutions
in amounts determined by the FDIC to be necessary to give it adequate assessment
income to repay amounts borrowed from the U.S. Treasury and other sources or for
any other purpose the FDIC deems necessary.





*Dividends*





The
principal source of the Company’s cash reserves is dividends received from the
Bank. The payment of dividends is subject to government regulation, in that
regulatory authorities may prohibit banks and bank holding companies from paying
dividends in a manner that would constitute an unsafe or unsound banking
practice. In addition, a bank may not pay cash dividends if doing so would
reduce the amount of its capital below that necessary to meet minimum applicable
regulatory capital requirements. State laws also limit a bank's ability to pay
dividends.





*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.





*Corporate
Governance and Accounting Legislation*





Sarbanes-Oxley
Act of 2002 . ****** The
Sarbanes-Oxley Act of 2002 (the “Act”) addresses, among other things, accounting
fraud and corporate governance matters. The Act establishes a new accounting
oversight board to enforce auditing standards and restricts the scope of
services that accounting firms may provide to their public company audit
clients. In addition, it also (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 new disclosure
requirements regarding internal controls, off-balance-sheet transactions, and
pro forma (non-GAAP) disclosures; (iii) accelerates the time frame for reporting
of insider transactions and periodic disclosures by public companies; and (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.”





The Act
also 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. In 2004, we were
required for the first time to comply with the requirements of Section 404 of
the Act regarding the Company’s system of internal controls over financial
reporting, and such compliance resulted in a significant expense for the
Company. We anticipate that we will continue to incur additional expense
involving ongoing compliance with Section 404 of the Act and the related rules
and regulations issued by the SEC and NASDAQ.





*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 (“USA Patriot Act”) is intended to
combat terrorism. Among other things, the USA Patriot Act (1) prohibits banks
from providing correspondent accounts directly to foreign shell banks; (2)
imposes due diligence requirements on banks opening or holding accounts for
foreign financial institutions or wealthy foreign individuals (3) requires
financial institutions to establish an anti-money-laundering compliance program,
and (4) eliminates civil liability for persons who file suspicious activity
reports. The Act also increases governmental powers to investigate terrorism,
including expanded government access to account records. The Department of the
Treasury is empowered to administer and make rules to implement the Act. While
we believe the USA Patriot Act may, to some degree, affect our record keeping
and reporting expenses, we do not believe that the Act will have a material
adverse effect on our business and operations.








*Financial
Services Modernization*





Gramm-Leach-Bliley
Act of 1999 . The
Financial Services Modernization Act of 1999, also known as the
Gramm-Leach-Bliley Act, brought about significant changes to the laws affecting
banks and bank holding companies. Generally, the Act (i) repealed the historical
restrictions on preventing banks from affiliating with securities firms, (ii)
provided a uniform framework for the activities of banks, savings institutions
and their holding companies, (iii) broadened the activities that may be
conducted by national banks and banking subsidiaries of bank holding companies,
(iv) provided an enhanced framework for protecting the privacy of consumer
information and (v) addressed 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. In addition, in a change from previous law, bank holding companies
will be in a position to be owned, controlled or acquired by any company engaged
in financially related activities, so long as the company meets certain
regulatory requirements. The Act also permits national banks (and, in states
with wildcard statutes, certain state banks), either directly or through
operating subsidiaries, to engage in certain non-banking financial
activities.





We do not
believe that the act will negatively affect our operations in the short term.
However, to the extent the legislation permits banks, securities firms and
insurance companies to affiliate, the financial services industry may experience
further consolidation. This consolidation could result in a growing number of
larger financial institutions that offer a wider variety of financial services
than we currently offer, and these companies may be able to aggressively compete
in the markets we currently serve.





*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 can and does implement national
monetary policy for such purposes as curbing inflation and combating recession,
but 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 and their impact on us cannot be predicted with certainty.














Statistical
Information





*Selected
Quarterly Information*





The
following chart contains data for the last eight quarters ending December 31,
2004. All data, except per share data, is in thousands of dollars.





**YEAR**
    ****
    **2004**
    ****
    **2003**
    ******QUARTER**
    
    **Fourth**
    ****
    **Third**
    ****
    **Second**
    
    **First**
    ****
    **Fourth**
    ****
    **Third**
    ****
    **Second**
    ****
    **First**Interest
      income
    
    $
    8,235
    
    $
    7,492
    
    $
    6,894
    
    $
    6,714
    
    $
    6,809
    
    $
    6,501
    
    $
    6,742
    
    $
    6,477Interest
      expense
    
    
    1,341
    
    
    1,100
    
    
    1,012
    
    
    1,020
    
    
    1,049
    
    
    1,065
    
    
    1,102
    
    
    1,093Net
      interest income
    
    
    6,894
    
    
    6,392
    
    
    5,972
    
    
    5,694
    
    
    5,760
    
    
    5,436
    
    
    5,640
    
    
    5,384Provision
      for loan loss
    
    
    200
    
    
    125
    
    
    75
    
    
    100
    
    
    100
    
    
    0
    
    
    200
    
    
    600Noninterest
      income
    
    
    1,102
    
    
    1,132
    
    
    1,152
    
    
    1,077
    
    
    1,116
    
    
    1,297
    
    
    1,167
    
    
    1,366Noninterest
      expense
    
    
    4,201
    
    
    4,065
    
    
    3,898
    
    
    3,877
    
    
    3,879
    
    
    3,744
    
    
    3,779
    
    
    3,800Net
      income
    
    
    2,219
    
    
    2,058
    
    
    1,948
    
    
    1,724
    
    
    1,795
    
    
    1,847
    
    
    1,743
    
    
    1,446PER
      COMMONSHARE
      DATANet
      income (basic) (1)
    
    $
    0.26
    
    $
    0.24
    
    $
    0.22
    
    $
    0.20
    
    $
    0.21
    
    $
    0.22
    
    $
    0.20
    
    $
    0.18Cash
      dividends (1)
    
    $
    0.06
    
    $
    0.064
    
    $
    0.064
    
    $
    0.064
    
    $
    .06
    
    $
    .054
    
    $
    .054
    
    $
    .054





(1) All
current year and prior year per share data has been retroactively adjusted for
4-for-3 and 5-for-4 stock splits in September 2003 and September 2004,
respectively.





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 market value. The difference
between estimated fair value and amortized cost, net of deferred taxes, is a
separate component of stockholders’ equity.





**INVESTMENT
      PORTFOLIO****ESTIMATED
      MARKET VALUE**(dollars
      in thousands)December
      31,2004
    
    2003
    
    2002US
      Treasury, US Government agencies and corporations,and
      agency mortgage-backed securities
    
    $
    6,390
    
    $
    6,477
    
    $
    1,047Obligations
      of states and political subdivisions
    
    
    3,059
    
    
    2,993
    
    
    118Other
      mortgage-backed securities & corporate notes
    
    
    18,109
    
    
    20,559
    
    
    9,680Total
    
    $
    27,558
    
    $
    30,029
    
    $
    10,845














The
following chart presents the amount 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, 2004 projected
average life.





**SECURITIES
      AVAILABLE-FOR-SALE****DECEMBER
      31, 2004**(dollars
      in thousands)After
      One
    
    After
      FiveYear
      But
    
    Years
      ButWithin
    
    Within
    
    Within
    
    AfterOne
      Year
    
    Five
      Years
    
    Ten
      Years
    
    Ten
      YearsAmount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    Yield
    
    Amount
    
    YieldUS
      Treasury, US
      Government
      agenciesand
      agency mortgage-backed
      securities
    
    $
    1,761
    
    
    3.39
    %
    $
    19,058
    
    
    3.85
    %
    $
    3,679
    
    
    4.23
    %
    
    -
    
    
    -Obligations
      of states andpolitical
      subdivisions
    
    
    -
    
    
    -
    
    $
    1,471
    
    
    3.87
    %
    $
    1,192
    
    
    3.36
    %
    $
    397
    
    
    3.05
    %Total
    
    $
    1,761
    
    
    3.39
    %
    $
    20,529
    
    
    3.85
    %
    $
    4,871
    
    
    4.02
    %
    $
    397
    
    
    3.05
    %





*Loan
Portfolio*





The
following tables contain information related to the Company’s loan portfolio,
including loans held for sale, for the five-year period ending December 31,
2004.





**LOAN
      PORTFOLIO**(dollars
      in thousands)December
      31,2004
    
    2003
    
    2002
    
    2001
    
    2000**Loan
      Portfolio**Commercial
      Loans
    
    $
    107,538
    
    $
    89,127
    
    $
    94,345
    
    $
    63,058
    
    $
    54,798Real
      Estate Loans
    
    
    341,111
    
    
    255,150
    
    
    222,727
    
    
    169,776
    
    
    159,481Loans
      held for sale
    
    
    2,072
    
    
    1,958
    
    
    5,546
    
    
    1,924
    
    
    814Consumer
      Loans
    
    
    10,380
    
    
    11,424
    
    
    9,579
    
    
    9,454
    
    
    10,582461,101
    
    
    357,659
    
    
    332,197
    
    
    244,212
    
    
    225,675Deferred
      loan origination fees
    
    
    (2,061
    )
    
    (1,582
    )
    
    (1,394
    )
    
    (1,111
    )
    
    (1,081
    )459,040
    
    
    356,077
    
    
    330,803
    
    
    243,101
    
    
    224,594Allowance
      for loan loss
    
    
    (5,224
    )
    
    (5,225
    )
    
    (4,403
    )
    
    (3,418
    )
    
    (2,149
    )$
    453,816
    
    $
    350,852
    
    $
    326,400
    
    $
    239,683
    
    $
    222,445

















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. Nonperforming loans totaling $1,217 are included. Loans
      held for sale of $2,072 are included in the Real Estate category.**MATURITY
      AND REPRICING DATA FOR LOANS**December
      31, 2004(dollars
      in thousands)Commercial
    
    Real
      Estate
    
    Consumer
    
    TotalThree
      months or less
    
    $
    77,542
    
    $
    138,945
    
    $
    4,542
    
    $
    221,029Over
      three months through 12 months
    
    
    1,145
    
    
    5,153
    
    
    1,882
    
    
    8,180Over
      1 year through 3 years
    
    
    9,225
    
    
    59,642
    
    
    1,382
    
    
    70,249Over
      3 years through 5 years
    
    
    12,388
    
    
    48,759
    
    
    1,133
    
    
    62,280Over
      5 years through 15 years
    
    
    7,238
    
    
    90,684
    
    
    1,441
    
    
    99,363Total
      loans
    
    $
    107,538
    
    $
    343,183
    
    $
    10,380
    
    $
    461,101





**Loan
Concentrations**





At
December 31, 2004, residential construction loans totaled $67,938 and
represented 14.73% of outstanding loans. In addition, at December 31, 2004,
unfunded loan commitments for residential construction totaled approximately
$19,008. At year end there were no nonaccrual loans and no impaired loans in
this industry. No other single industry group represents more than 10% of
outstanding loans. Approximately 74% 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 disburse risk concentration.





Loans in
the hotel/motel industry have contracted to less than 6% of the total loan
portfolio at December 31, 2004, a reduction from 6% at the previous fiscal year
end. There were no foreclosed or non-accrual hotel/motel properties remaining as
of year end. At December 31, 2004, one restructured loan in this industry
totaled $1,896 and is performing according to the restructured terms of the
loan. Subsequent to the end of the year, this restructured loan returned to full
amortization at market interest rates and is no longer classified as
restructured. All other hotel/motel loans are performing according to their
contractual terms. In view of the uncertainties in the hotel/motel industry, the
Company continues to carefully monitor loans made by the Bank in this industry.





December
      31,2004
    
    2003
    
    2002
    
    2001
    
    2000**Nonperforming
      Assets**Nonaccrual
      loans
    
    $
    1,004
    
    $
    1,506
    
    $
    6,176
    
    $
    6,049
    
    $
    49090
      or more days past due and still accruing
    
    
    213
    
    
    545
    
    
    359
    
    
    953
    
    
    155Total
      nonperforming loans
    
    
    1,217
    
    
    2,051
    
    
    6,535
    
    
    7,002
    
    
    645Government
      guarantees
    
    
    (101
    )
    
    (233
    )
    
    (1,563
    )
    
    (1,020
    )
    
    0Net
      nonperforming loans
    
    
    1,116
    
    
    1,818
    
    
    4,972
    
    
    5,982
    
    
    645Foreclosed
      assets
    
    
    262
    
    
    411
    
    
    864
    
    
    0
    
    
    385Total
      nonperforming assets
    
    $
    1,378
    
    $
    2,229
    
    $
    5,836
    
    $
    5,982
    
    $
    1,030Nonperforming
      assets as a percentage ofof
      total assets
    
    
    0.27
    %
    
    0.52
    %
    
    1.54
    %
    
    1.93
    %
    
    0.35
    %








If
interest on nonaccrual loans had been accrued, such income would have been
approximately $98, $159, and $446, respectively, for years 2004, 2003 and 2002.





*Allowance
for Loan Loss*





The
following chart presents information about the Company’s allowances for loan
loss. The Company does not allocate the allowance among specific loan types or
categories. Management evaluates the allowance monthly and considers the amount
to be adequate to absorb possible loan losses.





**ALLOWANCE
      FOR LOAN LOSS**(dollars
      in thousands)December
      31,2004
    
    2003
    
    2002
    
    2001
    
    2000**Allowance
      for loan losses**Balance
      at beginning of year
    
    $
    5,225
    
    $
    4,403
    
    $
    3,418
    
    $
    2,149
    
    $
    2,448Charges
      to the allowanceReal
      estate loans
    
    
    (79
    )
    
    (843
    )
    
    (4,138
    )
    
    (54
    )
    
    (336
    )Consumer
      loans
    
    
    (269
    )
    
    (104
    )
    
    (123
    )
    
    (99
    )
    
    (208
    )Commercial
    
    
    (168
    )
    
    (238
    )
    
    (542
    )
    
    (121
    )
    
    (1,185
    )Total
      charges to the allowance
    
    
    (516
    )
    
    (1,185
    )
    
    (4,803
    )
    
    (274
    )
    
    (1,729
    )Recoveries
      against the allowanceReal
      estate loans
    
    
    73
    
    
    799
    
    
    49
    
    
    8
    
    
    48Consumer
      loans
    
    
    54
    
    
    15
    
    
    10
    
    
    29
    
    
    7Commercial
    
    
    70
    
    
    103
    
    
    69
    
    
    51
    
    
    35Total
      recoveries against the allowance
    
    
    197
    
    
    917
    
    
    128
    
    
    88
    
    
    90Acquisition
    
    
    0
    
    
    190
    
    
    0
    
    
    0
    
    
    0Provisions
    
    
    500
    
    
    900
    
    
    5,660
    
    
    1,455
    
    
    1,340Unfunded
      commitments *
    
    
    (182
    )
    
    0
    
    
    0
    
    
    0
    
    
    0Balance
      at end of the year
    
    $
    5,224
    
    $
    5,225
    
    $
    4,403
    
    $
    3,418
    
    $
    2,149Net
      charge offs as a percentage of total average loans
    
    
    0.08
    %
    
    0.08
    %
    
    1.62
    %
    
    0.08
    %
    
    0.72
    %





*
Allowance for unfunded commitments is presented as part of the other liabilities
in the balance sheet.





During
2004, the Bank recorded a provision for loan losses of $500 of which $182 was
reserved for unfunded loan commitments and recorded in other liabilities. The
continued reductions in the loan loss provision over the last two years
reflected improving quality of the loan portfolio and related reduction in
nonperforming loans. At December 31, 2004, the recorded investment in certain
loans totaling $2,799 (net of government guarantees), were considered impaired.
Impaired loans at December 31, 2004 consist of $903 in nonaccrual loans and one
restructured motel/hotel loan totaling $1,896. A specific related valuation of
$510 is provided for these loans and is included in the $5,224 ending allowance
at December 31, 2004.





**Deposits**





Deposits
represent a significant portion of the Company’s liabilities. Average balance
and average rates paid by category of deposit is included in Table I, Average
Balance Analysis of Net Interest Earnings, within the Company’s “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included later in this report. The chart below details the Company’s time
deposits at December 31, 2004. The Company does not have any foreign deposits.
Variable rate deposits are listed by first repricing opportunity.














**TIME
      DEPOSITS**(dollars
      in thousands)Time
      Deposits
    
    Time
      Depositsof
      $100,000
    
    of
      less than
    
    TotalOr
      more
    
    $100,000
    
    Time
      DepositsThree
      months or less
    
    $
    10,615
    
    $
    6,665
    
    $
    17,280Over
      three months through twelve months
    
    
    11,148
    
    
    7,224
    
    
    18,372Over
      one year through three years
    
    
    3,312
    
    
    5,212
    
    
    8,524Over
      three years
    
    
    6,039
    
    
    1,645
    
    
    7,684$
    31,114
    
    $
    20,746
    
    $
    51,860








*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, 2004, the
Bank had available unsecured and secured borrowing lines totaling $188,000. At
December 31, 2004, available unsecured borrowing lines with various
correspondent banks and a secured line with the Federal Reserve Bank of San
Francisco totaling $59,500 ($49,210 available at December 31, 2004). 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, 2004 was 25% of assets or $129,100 and subject to sufficient
collateral and stock investment.





**SHORT-TERM
      BORROWINGS**(dollars
      in thousands)2004
    
    2003
    
    2002Federal
      Funds Purchased & FHLB Cash Management AdvancesAverage
      interest rateAt
      year end
    
    
    2.75
    %
    
    1.10
    %
    
    1.60
    %For
      the year
    
    
    2.46
    %
    
    1.59
    %
    
    2.00
    %Average
      amount outstanding for the year
    
    $
    12,596
    
    $
    4,066
    
    $
    3,735Maximum
      amount outstanding at any month end
    
    $
    31,790
    
    $
    21,710
    
    $
    15,000Amount
      outstanding at year end
    
    $
    31,790
    
    $
    0
    
    $
    9,000





ITEM 2 Properties





The
principal properties of the registrant are comprised of the banking facilities
owned by the Bank. The Bank operates ten full service facilities and two
consumer finance offices. The Bank and Bank subsidiaries own a total of six
buildings and owns the land under four of the buildings. 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. The Bank occupies the entire building.





2)
    Building
      with approximately 4,000 square feet located on West 11thAvenue 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 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.





The Bank
leases facilities for branch offices in Portland, Oregon and Tualatin, Oregon,
two branch offices and one consumer finance lending office located in Eugene,
Oregon, and one consumer finance office in Coos Bay, Oregon. 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 and anticipated future use.





Subsequent
to the end of the year, the bank entered into an agreement to purchase a
building and land for a new office in the Portland Metropolitan area. The
purchase is expected to close prior to the end of the first quarter 2005.





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 2004.





**PART
II**





ITEM
5Market
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 2004. The Company had no sales of securities during the past three
years, other than those 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 growth projections. The board also considers dividend payout ratios,
dividend yield, and other financial metrics in setting the quarterly dividend.
Adjusting for the September 2004 stock split, the Company declared and paid cash
dividends of $0.252 per share for the year 2004. That compares to cash dividends
of $0.216 paid during 2003, also adjusted for the stock split.














*Equity
Compensation Plan Information*





**Year
      Ended December 31, 2004****Number
      of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and
      Rights****(1)**
    **Weighted-Average
      Exercise Price of Outstanding Options, Warrants and
      Rights**
    **Number
      of Shares Remaining Available for Future Issuance Under Equity
      Compensation Plans****(1)****Equity
      compensation plans approved by security holders**
    1,006,542
    $
      10.37
    776,401**Equity
      compensation plans not approved by security
    holders**
    0
    $0
    0





(1)
    Consists
      of shares that are outstanding and shares available for future issuance
      under the respective plans. The material terms of the plans are described
      above. All figures have been adjusted to reflect the September
      2004,


5-for-4
stock split.





*Market
Information*





The
Company’s common stock trades on the NASDAQ National Market under the symbol
PCBK. At February 16, 2005, the Company had 8,695,523 shares of common stock
outstanding held by approximately 1,350 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 prices have been adjusted
retroactively to reflect the 5-for-4 and 4-for-3 stock split declared in
September 2004 and September 2003, respectively.





YEAR
    
    
    
    2004
    
    
    
    
    
    
    
    2003QUARTER
    
    Fourth
    
    Third
    
    Second
    
    First
    
    Fourth
    
    Third
    
    Second
    
    FirstMarket
      value:High
    
    $
    16.74
    
    $
    15.19
    
    $
    12.80
    
    $
    12.48
    
    $
    12.71
    
    $
    12.00
    
    $
    9.33
    
    $
    9.60Low
    
    
    14.40
    
    
    12.26
    
    
    10.88
    
    
    11.42
    
    
    10.70
    
    
    9.12
    
    
    8.73
    
    
    8.46Close
    
    
    15.75
    
    
    14.94
    
    
    12.38
    
    
    12.38
    
    
    12.71
    
    
    10.78
    
    
    9.15
    
    
    8.84

















ITEM
6Selected
Financial Data





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


$ in
thousands, except for per share data





**2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000**For
      the yearNet
      interest income
    
    $
    24,952
    
    $
    22,220
    
    $
    19,689
    
    $
    18,520
    
    $
    17,262Provision
      for loan losses
    
    $
    500
    
    $
    900
    
    $
    5,660
    
    $
    1,455
    
    $
    1,340Noninterest
      income
    
    $
    4,463
    
    $
    4,946
    
    $
    4,200
    
    $
    3,611
    
    $
    2,824Noninterest
      expense
    
    $
    16,041
    
    $
    15,202
    
    $
    12,594
    
    $
    11,371
    
    $
    10,885Income
      taxes
    
    $
    4,925
    
    $
    4,233
    
    $
    2,181
    
    $
    3,582
    
    $
    3,053Net
      income
    
    $
    7,948
    
    $
    6,831
    
    $
    3,454
    
    $
    5,722
    
    $
    4,808Cash
      dividends
    
    $
    2,164
    
    $
    1,841
    
    $
    1,610
    
    $
    1,401
    
    $
    1,225Per
      common share data (1)Net
      income:Basic
    
    $
    0.93
    
    $
    0.81
    
    $
    0.41
    
    $
    0.69
    
    $
    0.58Diluted
    
    $
    0.90
    
    $
    0.79
    
    $
    0.41
    
    $
    0.67
    
    $
    0.58Cash
      dividends
    
    $
    0.25
    
    $
    0.22
    
    $
    0.19
    
    $
    0.17
    
    $
    0.15Market
      value, end of year
    
    $
    15.75
    
    $
    12.71
    
    $
    8.70
    
    $
    7.62
    
    $
    4.84At
      year endAssets
    
    $
    516,630
    
    $
    425,799
    
    $
    379,846
    
    $
    309,548
    
    $
    294,124Loans,
      less allowance for loan loss
    
    $
    453,817
    
    $
    350,852
    
    $
    326,400
    
    $
    239,683
    
    $
    222,445Deposits
    
    $
    403,791
    
    $
    356,099
    
    $
    309,909
    
    $
    248,328
    
    $
    250,104Shareholders'
      equity
    
    $
    49,392
    
    $
    42,234
    
    $
    36,698
    
    $
    35,604
    
    $
    30,370Average
      for the yearAssets
    
    $
    463,509
    
    $
    402,195
    
    $
    337,258
    
    $
    299,721
    
    $
    288,589Earning
      assets
    
    $
    431,374
    
    $
    369,574
    
    $
    305,763
    
    $
    270,702
    
    $
    260,419Loans,
      less allowance for loan loss
    
    $
    398,739
    
    $
    342,192
    
    $
    284,614
    
    $
    234,441
    
    $
    224,119Deposits
    
    $
    379,619
    
    $
    329,157
    
    $
    271,765
    
    $
    238,856
    
    $
    239,197Interest
      paying liabilities
    
    $
    290,571
    
    $
    256,442
    
    $
    211,745
    
    $
    195,529
    
    $
    195,214Shareholders'
      equity
    
    $
    46,043
    
    $
    39,758
    
    $
    36,117
    
    $
    33,882
    
    $
    28,626Financial
      ratiosReturn
      on average:Assets
    
    
    1.71
    %
    
    1.70
    %
    
    1.02
    %
    
    1.91
    %
    
    1.67
    %Shareholders'
      equity
    
    
    17.26
    %
    
    17.18
    %
    
    9.56
    %
    
    16.89
    %
    
    16.79
    %Average
      shareholders' equity/average assets
    
    
    9.93
    %
    
    9.89
    %
    
    10.71
    %
    
    11.30
    %
    
    9.92
    %Dividend
      payout ratio
    
    
    27.23
    %
    
    26.95
    %
    
    46.61
    %
    
    24.48
    %
    
    25.47
    %Risk-based
      capital:Tier
      I capital
    
    
    10.19
    %
    
    10.95
    %
    
    10.23
    %
    
    12.71
    %
    
    12.30
    %Tier
      II capital
    
    
    11.29
    %
    
    12.20
    %
    
    11.47
    %
    
    13.98
    %
    
    13.17
    %(1)
      Per common share data is retroactively adjusted to reflect the 5-for-4
      stock split , 4-for-3 stock split,and
      10% stock dividend of 2004, 2003, and 2001, respectively.

















ITEM
7Management’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 certain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (“PSLRA”). This statement is included for the
express purpose of availing Pacific Continental Corporation of the protections
of the safe harbor provisions of the PSLRA. The forward-looking statements
contained in this report are subject to factors, risks, and uncertainties that
may cause actual results to differ materially from those projected. Important
factors that might cause such material differences include, but are not limited
to, those discussed in this section of the report. In addition, the following
items are among the factors that could cause actual results to differ materially
from the forward-looking statements in this report: general economic conditions,
including their impact on capital expenditures; business conditions in the
banking industry; recent world events and their impact on interest rates,
businesses and customers; the regulatory environment; new
legislation; ** heightened
national security risks including acts of terrorism and potential for war;
vendor quality and efficiency; employee retention factors; rapidly changing
technology and evolving banking industry standards; competitive standards;
competitive factors, including increased competition with community, regional,
and national financial institutions; fluctuating interest rate environments; and
similar matters. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date of the statement. Pacific Continental Corporation undertakes no obligation
to publicly revise or update these forward-looking statements to reflect events
or circumstances that arise after the date of this report. Readers should
carefully review the risk factors described in this and other documents we file
from time to time with the Securities and Exchange Commission.





**HIGHLIGHTS**





**2004**
    
    **2003**
    
    **%
      Change**
      **2004
      vs. 2003**
    
    **2002**
    
    **%
      Change**
      **2003
      vs. 2002**Operating
      revenue
    
    $
    29,415
    
    $
    27,166
    
    
    8
    %
    $
    25,439
    
    
    7
    %Net
      income
    
    $
    7,948
    
    $
    6,831
    
    
    16
    %
    $
    3,454
    
    
    98
    %Earnings
      per shareBasic
    
    $
    0.93
    
    $
    0.81
    
    
    15
    %
    $
    0.41
    
    
    98
    %Diluted
    
    $
    0.90
    
    $
    0.79
    
    
    14
    %
    $
    0.41
    
    
    93
    %Assets,
      period-end
    
    $
    516,630
    
    $
    425,799
    
    
    21
    %
    $
    379,846
    
    
    12
    %Deposits,
      period-end
    
    $
    403,791
    
    $
    356,099
    
    
    13
    %
    $
    309,099
    
    
    15
    %Return
      on assets
    
    
    1.71
    %
    
    1.70
    %
    
    
    
    
    1.02
    %Return
      on equity
    
    
    17.26
    %
    
    17.18
    %
    
    
    
    
    9.56
    %





Per share
data for 2004 and all prior years was retroactively adjusted to reflect the
5-for 4 and 4-for-3 stock splits declared during September 2004 and September
2003, respectively.





The
Company earned $7,948 in 2004 compared to $6,831 in 2003. Operating revenue
growth of 8%, combined with a decrease in the provision for loan losses were key
elements for the improvement in 2004 earnings when compared to 2003. Operating
revenue (net interest income plus noninterest income) growth was driven by a 17%
increase in average earning assets resulting in a 12% increase in net interest
income. The provision for loan losses for 2004 was $500 compared to $900 for the
year 2003 due to improved credit quality in the loan portfolio and reductions in
nonperforming assets.








The
Company earned $6,831 in 2003 compared to $3,454 in 2002. Operating revenue
growth of 14% combined with a significant decrease in the provision for loan
losses were key elements to the improvement in 2003 earnings when compared to
2002. Operating revenue growth was driven by a 21% increase in earning assets
and an 18% increase in noninterest income due primarily from growth in revenues
from the origination and sales of residential mortgages. The provision for loan
losses for 2003 was $900 compared to $5,600 for the year 2002. The large
provision for loan losses in 2002 was primarily due to problem loans in the
hotel/motel industry.





Period-end
assets and deposits at December 31, 2004 showed growth rates of 21% and 13%,
respectively over year end 2003. Core deposits, which are defined as demand
deposits, interest checking, money market accounts, and local time deposits,
constitute 95% of December 31, 2004 outstanding deposits. Demand deposits were
$132,249 or 33% of total deposits at year-end December 31, 2004.





During
2005, the Company believes the following factors could impact reported financial
results:





§
    We
      are asset sensitive and a continued increase in market interest rates
      during 2005 is expected to positively impact the Bank’s net interest
      margin and increase net interest income in the short term. Conversely, a
      decline in market interest rates would have a negative
    impact.





§
    Ability
      to grow core deposits to fund expected loan growth during
      2005.





§
    The
      local and regional economy and its 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.





§
    Long-term
      interest rates and their impact on residential construction, residential
      mortgage lending, and refinancing activities of existing
      homeowners.





§
    Increased
      expenses related to personnel costs and the rising costs of providing
      employee benefits, plus staffing, consulting, audit fees, and other
      expense related to ongoing compliance with Section 404 of Sarbannes-Oxley
      Act and FDICIA.





§
    Planned
      expansion of new offices in the Portland Metropolitan
  area.





*Subsequent
Event* :
Subsequent to December 31, 2004, the Bank entered into a definitive agreement to
purchase a building and land in Portland, Oregon for a new office location. This
purchase is expected to close prior to the end of the first quarter at a total
price of $1,750. The building will require substantial remodeling, and the new
office is expected to open during the third quarter 2005.





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.





Two
tables follow which analyze the change in net interest income for 2004, 2003,
and 2002. 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. Changes not solely due to volume or rate are allocated to
rate.








**2004
Compared to 2003**





Net
interest income for 2004 was $24,952, an increase of $2,732 or 12% over 2003 net
interest income of $22,220. For the year 2004, the net interest margin as a
percentage of earning assets decreased by 23 basis points, from 6.01% in 2003 to
5.78%.





Short-term
market interest rates were stable during the first six months of 2004 and were
at a 45 year low. Beginning on June 30, 2004, the Federal Reserve began to take
measured steps to increase short-term market rates during the last half of 2004.
During the last half of 2004, the short-term market interest rates moved up on
five occasions in 25 basis point increments for a total increase of 125 basis
points. During this period, the prime-lending rate increased from 4.00% to
5.25%. The Bank’s net interest margin did not immediately benefit from the
increase in the prime-rate as approximately $90,000 of the Bank’s variable rate
loan portfolio had active floors above the calculated rate. The 25 basis point
increase in the prime-lending rate in November 2004 removed all active loan
floors on variable rate loans. As a result, the Bank’s net interest margin
improved during the fourth quarter to 5.87%. That compares to net interest
margins of 5.78%, 5.74%, and 5.74% for the first, second, and third quarters of
2004, respectively.








Interest
and fees earned on earnings assets during 2004 increased by $2,896 or 11% over
2003. Referring to Table II, total interest income and fees improved by $4,577
due to increased earnings asset volumes, which was partially offset by a $1,681
decline in interest income due to lower yields on earning assets. Average
earning assets for 2004 were $431,374, a 17% increase over 2003 average earning
asset levels. Growth in earning assets was primarily attributable to loan growth
as average loans net of the allowance for loan losses for the year 2004 were up
$56,547 or 17% over 2003. Referring to Table I, earning asset yields declined by
36 basis points, from 7.18% in 2003 to 6.82% in 2004. Yields on loans and
securities available for sale contributed to the overall decline in earning
asset yields during 2004. The yield on average loans, which make up 92% of
earning asset volumes, were primarily responsible for the decline in earning
asset yields during 2004. Loan yields for 2004 were 7.13%, a decline of 43 basis
points from loan yields of 7.56% recorded during 2003. The decline in loan
yields is reflective of fixed rate loans booked during the prolonged low
interest rate environment during the past two years, combined with active floors
on variable rate loans above the calculated rate.





Interest
expense on interest-bearing liabilities during 2004 increased by $164 or 4% over
2003. Referring to Table I, overall, average interest-bearing liabilities in
2004 increased by $34,128 or 13% over 2003, while the average rate paid on
interest-bearing liabilities dropped by 14 basis points from 1.68% to 1.54%.
Referring to Table II interest expense increased by $59 due to the change in the
mix and increased volumes of interest-bearing liabilities. Table I also
indicates that interest expense for the year increased an additional $105 due to
rate as a result of the increase in short-term market interest rates during the
last half of 2004. Table II shows the increase in the volume and the increase in
the rate on money market and NOW accounts were primarily responsible for the
increased interest expense during 2004. Referring to Table I the 2004 average
volume of money market and NOW accounts increased $38,155 or 27% over 2003,
while the rate on these deposits increased 17 basis points from 0.93% in 2003 to
1.10% in 2004. A portion of the increase in interest expense due to increased
volume and rate of money market and NOW accounts was offset by a decline in
volume and rate of time deposits. Referring to Table I, average time deposits in
2004 were $10,351 or 16% below 2003 and the rate paid on time deposits dropped
by 31 basis points from 2.42% in 2003 to 2.11% in 2004. Table II shows that the
decline in volume and rate for the time deposit category reduced noninterest
expense in 2004 by $251 and $166, respectively, or a total of $417. The decline
in time deposit volume was primarily national time deposits that matured during
2004 and were not renewed. The decline in the rate on time deposits is
reflective of the lag effect on time deposit rates in a rising rate environment.
Although market interest rates moved up during the last six months of the year,
time deposit rates remained low as many of these deposits were booked during the
prolonged low interest rate environment during 2003 and the first half of 2004.














The
Company’s net interest margin benefited from growth in noninterest-bearing
deposits. For the year 2004, average noninterest-bearing deposits grew by
$20,503 or 20% over 2003. Average nonninterest-bearing deposits funded 27% of
total assets. At December 31, 2004, total noninterest bearing deposits were
$132,249 and accounted for 33% of total outstanding deposits.





The
Bank’s interest rate risk model indicates the Bank is asset sensitive meaning
that loans will reprice faster than interest-bearing liabilities, thus in a
rising interest rate environment, the net interest margin will expand. While
short-term interest rates increased 125 basis points during the last half of
2004 and are expected to continue to increase during the first half of 2005,
long-term interest rates have remained stable creating a flattening of the yield
curve. At December 31, 2004, the Bank has approximately $200,000 of variable
rate loans (approximately 44% of the total loan portfolio), none with active
floors, which will reprice immediately with any increase in short-term market
interest rates. However, maturing fixed rate loans during 2005 will continue to
reprice at relatively low yields as long-term interest rates have not moved
upward in tandem with short-term rates. In addition, approximately $90,000 of
the Bank’s money market and NOW accounts are tied to the 91-day Treasury bill.
The 91-day Treasury bill rate has been moving in advance of increases in the fed
funds rate, which increases the Bank’s cost of funds in advance of increases in
the prime-lending rate. Considering these factors, the Bank’s net interest
margin is expected to decline in the first quarter of 2005 when compared to the
fourth quarter of 2004, but should stabilize or improve as historically lower
cost core deposits grow and stabilize or lower the Bank’s cost of
funds.





**2003
Compared to 2002**





Net
interest income for 2003 was $22,220, an increase of $2,531 or 13% over 2002 net
interest income of $19,689. For the year 2003, the net interest margin as a
percentage of earning assets decreased by 43 basis points, from 6.44% in 2002 to
6.01% in 2003.





Market
interest rates were at a 45 year low for most of 2003. Short-term market rates
were relatively stable for most of 2003, with the exception of a 25 basis point
drop in short-term rates, which lowered the overnight fed funds borrowing rate
and the prime-lending rate in June 2003. As a result of the drop in the
prime-lending rate in June, 2003, the Company experienced compression of its net
interest margin during the last half of the year. The net interest margin
averaged 6.20% for the first six months of 2003 as compared to 5.83% for the
last six months of 2003. During 2003, earning asset yields declined as new loans
were booked at low interest rates and existing loans repriced or renewed at
lower interest rates, while the Company’s cost of funds remained relatively
stable. The stability in the Company’s cost of funds was due to deposits,
specifically interest checking, savings, and money market accounts, which were
priced at their practiical floors in the low interest rate environment. The high
level of liquidity during the last six months of 2003 also negatively impacted
the Company’s net interest margin for the year. During the last six month of
2003, the Company had excess funds averaging $15,000, which were sold overnight
or placed in short-term investments. These short-term investments had an average
yield of approximately 1.00%, which lowered earning asset yields in the last
half the year, contributing to some of the margin compression.





Interest
and fees earned on earnings assets during 2003 increased by $2,303 or 10% over
2002. Referring to Table II, total interest income and fees improved by $4,870
due to increased earnings asset volumes, which was partially offset by a $2,567
decline in interest income due to lower yields on earning assets. Average
earning assets for 2003 were $369,599, a 21% increase over 2002 average earning
asset levels. Nearly all of the growth in earning assets was attributable to
loan growth as average loans net of the allowance for loan losses for the year
2003 were up $57,578 or 20% over 2002. Referring to Table I, earning asset
yields declined by 74 basis points, from 7.92% in 2002 to 7.18% in 2003. Yields
on loans, short-term investments, and securities available for sale contributed
to the overall decline in earning asset yields during 2003. The yield on average
loans, which make up 93% of earning asset volumes, were primarily responsible
for the decline in earning asset yields during 2003. Loan yields for 2003 were
7.56%, a decline of 61 basis points from loan yields of 8.17% recorded during
2002. The decline in loan yields is reflective of the 25 basis point decline in
market rates in June 2003, which lowered yields on existing loan clients, and
new loans booked throughout 2003 lower interest rates.








At
December 31, 2003, the Company had approximately $177,000 in variable rate loans
or 50% of the total loan portfolio. Approximately $150,000 of variable rate
loans had active interest rate floors at December 31, 2003. The high level of
variable rate loans and the maturity structure of the Company’s liabilities,
make the Company asset sensitive, meaning that its loans will reprice faster
than liabilities as interest rates change.





Interest
expense on interest-bearing liabilities during 2003 decreased by $230 or 5% from
2002. Referring to Table I, interest expense increased by $958 due to increased
volumes, which was more than offset by a $1,188 decline in interest expense due
to lower rates. Table II shows that average interest-bearing liabilities for
2003 increased by $44,696 or 21% over 2002, which increased interest expense for
the year. Most of the increase in volume was attributable to growth in money
market and NOW accounts. Rates paid on interest-bearing liabilities fell 46
basis points, from 2.14% in 2002 to 1.68% in 2003. Rates on every category of
interest-bearing liabilities showed a decline in 2003 when compared to
2002.





The
Company’s net interest margin benefited from growth in noninterest-bearing
deposits. For the year 2003, average noninterest-bearing deposits grew by
$16,704 or 19% over 2002. Average nonninterest-bearing deposits funded 26% of
total assets. At December 31, 2003, total noninterest-bearing deposits were
$125,576 and accounted for 35% of total outstanding deposits.
















**Table
I**


**Average
Balance Analysis of Net Interest Earnings**


**$
Thousands**


****
    
    **2004**
    
    
    
    ****
    
    **2003**
    
    
    
    
    
    **2002****Average**
    
    **Interest**
    
    **Average**
    
    **Average**
    
    **Interest**
    
    **Average**
    
    **Average**
    
    **Interest**
    
    **Average****Balance**
    
    **Income/(Expense**
    
    **Yield/(Cost)**
    
    **Balance**
    
    **Income/(Expense**
    
    **Yield/(Cost)**
    
    **Balance**
    
    **Income/(Expense**
    
    **Yield/(Cost)****Interest
      Earning Assets**Federal
      funds sold and interestbearing
      deposits in banks
    
    $
    1,248
    
    $
    16
    
    
    1.24
    %
    $
    8,354
    
    $
    79
    
    
    0.95
    %
    $
    4,042
    
    $
    68
    
    
    1.68
    %Securities
      available for sale:Taxable
      (1)
    
    $
    30,009
    
    $
    936
    
    
    3.12
    %
    $
    18,459
    
    $
    554
    
    
    3.00
    %
    $
    17,108
    
    $
    903
    
    
    5.28
    %Tax-exempt
    
    $
    1,378
    
    $
    50
    
    
    3.61
    %
    $
    594
    
    $
    22
    
    
    3.71
    %Loans,
      net of allowance for loan losses(2)(3)(4)
    
    $
    398,739
    
    $
    28,424
    
    
    7.13
    %
    $
    342,192
    
    $
    25,874
    
    
    7.56
    %
    $
    284,614
    
    $
    23,255
    
    
    8.17
    %Total
      interest earning assets
    
    $
    431,374
    
    $
    29,425
    
    
    6.82
    %
    $
    369,599
    
    $
    26,529
    
    
    7.18
    %
    $
    305,763
    
    $
    24,226
    
    
    7.92
    %**Non
      Earning Assets**Cash
      and due from banks
    
    $
    16,523
    
    
    
    
    
    
    
    $
    15,983
    
    
    
    
    
    
    
    $
    15,752Premises
      and equipment
    
    $
    12,898
    
    
    
    
    
    
    
    $
    13,215
    
    
    
    
    
    
    
    $
    13,157Interest
      receivable and other
    
    $
    2,714
    
    
    
    
    
    
    
    $
    3,398
    
    
    
    
    
    
    
    $
    2,586Total
      non interest assets
    
    $
    32,135
    
    
    
    
    
    
    
    $
    32,596
    
    
    
    
    
    
    
    $
    31,495Total
      assets
    
    $
    463,509
    
    
    
    
    
    
    
    $
    402,195
    
    
    
    
    
    
    
    $
    337,258**Interest
      Bearing Liabilities**Money
      market and NOW accounts
    
    $
    178,815
    
    
    ($1,960
    )
    
    -1.10
    %
    $
    140,660
    
    
    ($1,305
    )
    
    -0.93
    %
    $
    116,836
    
    
    ($1,473
    )
    
    -1.26
    %Savings
      deposits
    
    $
    21,465
    
    
    ($130
    )
    
    -0.61
    %
    $
    19,310
    
    
    ($128
    )
    
    -0.66
    %
    $
    16,607
    
    
    ($134
    )
    
    -0.81
    %Time
      deposits
    
    $
    53,999
    
    
    ($1,142
    )
    
    -2.11
    %
    $
    64,350
    
    
    ($1,558
    )
    
    -2.42
    %
    $
    50,190
    
    
    ($1,515
    )
    
    -3.02
    %Federal
      funds purchased
    
    $
    12,596
    
    
    ($213
    )
    
    -1.69
    %
    $
    4,066
    
    
    ($65
    )
    
    -1.59
    %
    $
    3,735
    
    
    ($75
    )
    
    -2.00
    %Term
      borrowings
    
    $
    23,694
    
    
    ($1,028
    )
    
    -4.34
    %
    $
    28,055
    
    
    ($1,251
    )
    
    -4.46
    %
    $
    24,377
    
    
    ($1,340
    )
    
    -5.50
    %Total
      interest bearing liabilities
    
    $
    290,569
    
    
    ($4,473
    )
    
    -1.54
    %
    $
    256,441
    
    
    ($4,307
    )
    
    -1.68
    %
    $
    211,745
    
    
    ($4,537
    )
    
    -2.14
    %**Non
      Interest Bearing Liabilities**Demand
      deposits
    
    $
    125,339
    
    
    
    
    
    
    
    $
    104,836
    
    
    
    
    
    
    
    $
    88,132Interest
      payable and other
    
    $
    1,558
    
    
    
    
    
    
    
    $
    1,160
    
    
    
    
    
    
    
    $
    1,264Total
      non interest liabilities
    
    $
    126,897
    
    
    
    
    
    
    
    $
    105,996
    
    
    
    
    
    
    
    $
    89,396Total
      liabilities
    
    $
    417,466
    
    
    
    
    
    
    
    $
    362,437
    
    
    
    
    
    
    
    $
    301,141Stockholders'
      equity
    
    $
    46,043
    
    
    
    
    
    
    
    $
    39,758
    
    
    
    
    
    
    
    $
    36,117Total
      liabilities and stockholders equity
    
    $
    463,509
    
    
    
    
    
    
    
    $
    402,195
    
    
    
    
    
    
    
    $
    337,258**Net
      Interest Income**
    
    
    
    
    $
    24,952
    
    
    
    
    
    
    
    $
    22,221
    
    
    
    
    
    
    
    $
    19,689**Net
      Interest Income as a Percent of Earning Assets**
    
    
    
    
    
    5.78
    %
    
    
    
    
    
    
    
    6.01
    %
    
    
    
    
    
    
    
    6.44
    %(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 $1,295,
      $1,038, and $863 for the years-ended 2004, 2003, and 2002,
      respectively.(4)
      Total includes loans held for sale.
















**Table
II**


**Analysis
of Changes in Interest Income and Interest Expense**
 **Dollars
in Thousands**


**2004
      compared to 2003**
    
    
    
    
    
    **2003
      compared to 2002****Increase
      (decrease) due to**
    
    
    
    
    
    **Increase
      (decrease) due to****Volume**
    
    **Rate**
    
    **Net**
    
    **Volume**
    
    **Rate**
    
    **Net****Interest
      earned on:**Federal
      funds sold and interestbearing
      deposits in banks
    
    
    ($67
    )
    $
    4
    
    
    ($64
    )
    $
    72
    
    
    ($61
    )
    $
    12Securities
      available-for-sale:Taxable
    
    $
    347
    
    $
    35
    
    $
    382
    
    $
    71
    
    
    ($420
    )
    
    ($349
    )Tax-exempt
    
    $
    22
    
    $
    6
    
    $
    28
    
    $
    22
    
    $
    0
    
    $
    22Loans,
      net of allowance for loan losses
    
    $
    4,276
    
    
    ($1,725
    )
    $
    2,550
    
    $
    4,705
    
    
    ($2,086
    )
    $
    2,618Total
      interest income
    
    $
    4,577
    
    
    ($1,681
    )
    $
    2,896
    
    $
    4,870
    
    
    ($2,567
    )
    $
    2,303**Interest
      paid on:**Money
      market and NOW accounts
    
    
    ($354
    )
    
    ($301
    )
    
    ($655
    )
    
    ($300
    )
    $
    468
    
    $
    168Savings
      deposits
    
    
    ($14
    )
    $
    12
    
    
    ($2
    )
    
    ($22
    )
    $
    29
    
    $
    7Time
      deposits
    
    $
    251
    
    $
    166
    
    $
    417
    
    
    ($427
    )
    $
    384
    
    
    ($43
    )Federal
      funds purchased
    
    
    ($136
    )
    
    ($13
    )
    
    ($148
    )
    
    ($7
    )
    $
    17
    
    $
    10Term
      borrowings
    
    $
    194
    
    $
    29
    
    $
    224
    
    
    ($202
    )
    $
    291
    
    $
    88Total
      interest expense
    
    
    ($59
    )
    
    ($107
    )
    
    ($164
    )
    
    ($958
    )
    $
    1,189
    
    $
    230Net
      interest income
    
    $
    4,518
    
    
    ($1,788
    )
    $
    2,732
    
    $
    3,912
    
    
    ($1,380
    )
    $
    2,532












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 $500 in 2004, $900 in 2003, and $5,660 in
2002. The lower provision for 2004 reflects improved credit quality in the
Bank’s loan portfolio and reduction in the level of nonperforming assets
throughout the year. The large provision in 2002 reflected identified risks in
the Company’s loan portfolio and a general decline in economic conditions, which
specifically affected the hotel/motel industry. Loan losses in the hotel/motel
industry in 2002 included $4,064 related to two borrowers.





Nonperforming
assets at December 31, 2004 were $1,378 or 0.27% of year-end assets. That
compares to $2,229 of nonperforming assets at December 31, 2003 or 0.52% of
year-end assets. At December 31, 2004, the Bank has a single commercial real
estate property in foreclosed assets with a value of $262.





The
allowance for loan losses for outstanding loans at December 31, 2004 was $5,224
(1.14% of outstanding loans) compared to $5,225 (1.47% of loans) and $4,403
(1.33% of loans) at years end 2003 and 2002, respectively. At December 31, 2004,
the Bank also reserved $182 for possible losses on unfunded loan commitments,
which is classified in other liabilities on the balance sheet. At December 31,
2004, the allowance for loan losses for outstanding loans was 468% of the total
nonperforming loans compared to 287% at year-end December 31, 2003. The 2004
ending allowance includes $510 in specific allowance for impaired loans. At
December 31, 2004, the Company had $2,799 of impaired loans (net of government
guarantees) consisting of one restructured and performing loan of $1,896 and
$903 of nonaccrual loans. Subsequent to the end of the year, the $1,896
restructured and performing impaired loan commenced to amortize at market
interest rates and will no longer be classified as restructured or impaired as
of the end of first quarter 2005. This loan had a specific allowance of $252. At
December 31, 2003, the Company had $3,156 of impaired loans (net of government
guarantees) with a specific allowance assigned of $628.








Net loan
charge offs were $319 in 2004 compared to $268 in 2003, and $4,675 in 2002. Net
charge offs during 2002 in the hotel/motel industry accounted for $4,064 or 87%
of total charge offs for the year and related to two borrowers in the
hotel/motel industry.





The
reduction in the 2004 provision when compared to 2003 was accomplished despite
significant growth in the loan portfolio and reflected improved credit quality
and reductions in nonperforming loans. Going forward into 2005, the provision
for loans losses will be more contingent on current economic and market
conditions and additional loan growth as there is only limited benefit available
from further improvement in the loan portfolio credit statistics. As a result,
management expects the provision for loan losses to increase in 2005 when
compared to 2004. Actual results may differ materially from
projections.





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 present 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.





**2004
Compared to 2003**





Noninterest
income in 2004 was $4,463, down $483 or 10% from year 2003. The decline in
noninterest income was attributable to two categories. Mortgage banking income
and gains on sales of loans in 2004 decreased $618 or 38% from the previous
year. Mortgage banking revenues accounted for $488 of the decline in this
category as higher long term interest rates significantly reduced the level of
refinancing. Gains on the sales of loans were down $130. During 2003, the Bank
recorded a one-time gain on sales of loans of $130. There were no loan sales
during 2004. In addition to the decline in mortgage banking revenues and gains
on sales of loans, the Bank’s loan servicing income decreased by $58 due to an
overall decline in the level of participated loans. Declines in these two
noninterest income categories was partially offset by a $159 or 13% increase in
other fee income, principally merchant bankcard processing revenues.





**2003
Compared to 2002**





Noninterest
income in 2003 was $4,946, up $746 or 18% over year 2002. The majority of growth
in noninterest income was attributable to three categories. Service charges on
deposit accounts were up $249 or 19% due to an increase in the number of
clients, increased fees on analyzed business accounts, and price increases on
NSF/OD fees that went into effect during April 2003. Other fee income,
principally merchant bankcard processing fees grew by $43 or 4% over 2002.
During 2003, the Company converted to a new third party processor for its
merchant bankcard processing. During the conversion process, revenue growth
slowed as processing was temporarily being handled by two different processors,
which increased interchange paid processing expense. Mortgage banking
noninterest income and gains on sales of loans totaled $1,625 in 2003 compared
to $924 for 2002, an improvement of $701 or 76%. Revenues from the originations
of residential mortgages accounted for $594 of the increase as long-term
interest rates fell sharply during 2003 creating a surge in new home sales and
refinancing of existing mortgages. Gains on the sales of loans in 2003 were
$130, up $107 from the $23 reported in 2002. Growth in these noninterest income
categories was partially offset by a $102 decline in loan servicing income and a
$149 decline in gains on sales of securities. The decline in loan servicing
income was due to an overall decline in the level of sold loans. In addition,
the early payoff of a participated loan resulted in a write down of $55 of a
previously recorded servicing asset.








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.





**2004
Compared to 2003**





Noninterest
expense in 2004 was $16,041, an increase of $838 or 6% over the same period in
2003. Comparing 2004 to 2003, the largest increase was in personnel expense,
which grew by $1,110 or 13% over the previous year, reflecting personnel costs
for staff added during the last half 2003 and 2004 and increased group insurance
expense. Staff additions were primarily related to expansion in the Portland
market. Increased salaries, incentive compensation, 401k contribution and
payroll taxes accounted for $851 of the increase in personnel expense for the
year 2004 when compared to 2003. Increased group insurance costs, primarily
medical insurance, accounted for $251 of the total increase in personnel
expense. For the year 2004, group insurance expense was 41% above the previous
year for the same period. Business development expense in 2004 was $1,017, a
$194 or 24% increase as the Bank’s new branding campaign was implemented during
the year. Growth in these noninterest expense categories was offset by a
decrease in other real estate expense. Other real estate expense in 2004
declined by approximately $600 as 2003 included expenses related to write downs
and operating losses associated with motel and hotel properties which were sold
during 2003.





During
2004, the Company incurred incremental expenses totaling $91, primarily in the
fourth quarter, related to compliance with Section 404 of Sarbannes-Oxley in
terms of software, audit fees and professional consulting services. The
incremental expense related to compliance with Section 404 does not include
substantial staff time spent on this project.





For 2005,
the Company expects the rate of expense growth to increase relative to 2004 due
to planned staff increases, expansion plans in the Portland market, and increase
audit fees and professional services.





**2003
Compared to 2002**





Noninterest
expense in 2003 was $15,202, up $2,608 or 21% over 2002. Three categories of
expenses accounted for $2,714 of the total expense increase for the year.
Salaries accounted for $364 of the increase. However, salaries in 2002 reflect
one-time executive severance expense of $443. Excluding this one-time expense
from 2002, salaries were up $807 or 16% over last year and reflect staff
additions during the last half of 2002 and the first half of 2003, primarily
related to expansion in the Portland area market. Commissions paid to
residential mortgage and construction lenders were up $274 over 2002 due to the
higher volume of activity during 2003. Benefits and taxes in 2003 increased by
$687 over 2002. Approximately $503 of the increase was due to incentive based
compensation accruals, including the Bank’s estimated 401(k) contribution. For
the year 2002, the Bank’s incentive based compensation and 401(k) match were
significantly diminished as key financial goals were not met for the year. The
remainder of the increase in benefits and taxes resulted from increased group
insurance costs and payroll taxes. Premises and equipment expense in 2003 were
up $359 or 25% over 2002. Expense related to premises accounted for $194 of the
increase and reflected increased lease costs of the Bank’s KOIN Center office
opened earlier this year. In addition, lease costs on the Coos Bay office of the
Consumer Finance Division and increased lease costs on one of the Bank’s Eugene
offices contributed to the increase. Equipment expense accounted for $165 of the
increase and includes costs related to the Portland area market expansion and
increased software maintenance expense on the Bank’s loan processing systems.
The “other” expense category of noninterest expense was $3,359 for 2003, an
increase of $1,030 or 44% over 2002. Other real estate expense related to
operations and sales of three motel properties during 2003 accounted for $520 of
the increase in the “other” expense category. In addition, repossession and
collection expense related to problem loans accounted for $78 of the increase.
Most of the remaining increase in the “other” expense category was in
professional services, which was up $187 in 2003 compared to 2002. The
professional services category includes legal fees, accounting fees, insurance
expense, and consulting expenses.








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 primarily through core deposit growth, maturity of
investment securities, and loan payments. Core deposits include demand, interest
checking, money market, savings, and local time deposits. 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, 2004 were 95% of total deposits compared to 93% at
December 31, 2003. Loan growth during 2004 significantly outpaced the growth in
core deposits. Outstanding loans grew by $102,850 during 2004 or 29%, while core
deposits grew by $51,128 or 15%. Loan growth during the first half of 2004 was
primarily funded by reducing overnight fed funds sold and core deposit growth.
During the last six months of 2004, the Company relied on alternative funding
sources, including overnight borrowed funds, Federal Home Loan Bank term
advances, public deposits available from the State of Oregon, and national
market time deposits.





The
Company has deposit relationships with several large clients, which are closely
monitored by Bank officers. At December 31, 2004, seven large deposit
relationships with the Bank account for $79,459 or 20% of total deposits. The
single largest client represented 8% of total deposits at December 31, 2004. 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
year-end December 31, 2004, the Bank had borrowing lines totaling approximately
$189,100 consisting of $129,100 with the Federal Home Loan Bank of Seattle,
$57,000 with various correspondent banks, and $3,000 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, 2004, the Bank had
approximately $132,000 in commercial real estate loans pledged as collateral
(discounted collateral value of $105,000) for this line. The $3,000 borrowing
line with the Federal Reserve Bank of San Francisco is also secured. The $57,000
in borrowing lines with correspondent banks are unsecured lines. At December 31,
2004, the Bank had $61,290 in borrowings outstanding and approximately $127,810
available on established lines. In addition, the Bank is part of the State of
Oregon community bank time deposit program and at December 31, 2004 had $11,000
available from this source. The Bank’s loan portfolio also contains
approximately $25,300 in guaranteed government loans, which can be sold on the
secondary market.





CAPITAL
RESOURCES





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





Banking
regulations require the Company to maintain minimum levels of capital. The
Company manages its capital to maintain a “well capitalized” designation (the
FDIC’s highest rating). At December 31, 2004, the Company’s total capital to
risk weighted assets was 11.29%, compared to 12.20% at December 31,
2003.





In
September 2004, the Company paid a 5-for-4 stock split to shareholders of record
at October 15, 2004. All per share data and outstanding shares from prior
periods has been restated to present consistent financial
information.








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 growth projections. The board also considers dividend payout ratios,
dividend yield, and other financial metrics in setting the quarterly dividend.
Adjusting for the September 2004 stock split, the Company declared and paid cash
dividends of $0.252 per share for the year 2004. That compares to cash dividends
of $0.216 paid during 2003, also adjusted for the stock split.





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





CRITICAL
ACCOUNTING POLICIES





Companies
may apply certain critical accounting policies requiring management to make
subjective or complex judgments, often as a result of the need to estimate the
effect of matters that are inherently uncertain. The Company considers its only
material critical accounting policy to be the allowance for loans losses for
outstanding loans and unfunded loan 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 balance of the allowance
for loan losses for outstanding loans and unfunded commitments are maintained at
the 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.





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
7AQuantitative
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. The Company does not
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. A more reasonable approach utilizes gradual
interest rate movements over a one-year period of time to determine the effect
on the Company’s net interest income.





The
Company utilizes the services of the Federal Home Loan Bank’s asset/liability
modeling software to determine the effect changes in interest rates have on net
interest income. Interest rate shock scenarios are modeled in 100 basis point
increments (plus or minus) in the federal funds rate. The more realistic
forecast assumes a gradual interest rate movement of plus or minus 240 basis
points change in the federal funds rate over a one-year period of time with
rates moving up or down 60 basis points each quarter. The model used is based on
the concept that all rates do not move by the same amount. 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.





During
2004, 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. The
following tables show the estimated impact of interest rate changes on net
interest income. Tables show results of Company supplied data for both the rate
shock and gradual interest rate scenarios. The base figure of $24,952 used in
both analyses represents actual net interest income for the year 2004. 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+200
    
    $
      28,605
    $
      3,653
    14.64%+100
    
    26,816
    1,864
    7.47%Base
    
    24,952
    0
    0.00%-100
    
    22,913
    (2,039)
    (8.17)%-200
    
    20,731
    (4,221)
    (16.92)%

















**Gradual
Interest Rate Movement Forecast**


**Net
Interest Income and Market Value Performance**


($ in
thousands)





Projected
    
    Net
      Interest IncomeInterest
    
    Estimated
    $
      Change
    %
      ChangeRate
      Change
    
    Value
    From
      Base
    From
      BaseRising
      2.40%
    
    $
      27,719
    $
      2,767
    11.09%Base
    
    24,952
    0
    0.00%Declining
      2.40%
    
    22,140
    (2,812)
    (11.27)%





Off
Balance Sheet Contingencies





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, 2004, the Bank
had $130,808 in commitments to extend credit.





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, 2004, the Bank had $3,687 in letters of credit and financial
guarantees written.





Subsequent
to December 31, 2004, the Bank entered into a definitive agreement to purchase a
building and land in Portland, Oregon for a new office location. This purchase
is expected to close prior to the end of the first quarter at a total price of
$1,750. The building will require substantial remodeling, and the new office is
expected to open during the third quarter 2005.





The
Company has entered into employment agreements with two key executives, Hal
Brown and Daniel Hempy. The agreements provide for a minimum aggregate annual
base salaries of $330, plus performance adjustments, life insurance coverage,
and other perquisites commonly found in such agreements. During 2004, Mr.
Brown’s contract was extended one year and expires in 2007. Mr. Hempy’s
agreement expires in 2005.














ITEM
8Financial
Statements and Supplementary Data





**ZIRKLE,
LONG, TRIGUEIRO & WARD** , L.L.C.


CERTIFIED
PUBLIC ACCOUNTANTS


Eugene,
Oregon 97401




















**Report
of Independent Registered Public Accounting Firm**











The Board
of Directors and Stockholders


Pacific
Continental Corporation and Subsidiaries:








We have
audited the accompanying consolidated balance sheets of Pacific Continental
Corporation and Subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of income, changes in stockholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2004. We have
also audited management’s assessment, included in management’s report at page
55, that the Company maintained effective control over financial reporting as of
December 31, 2004, 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
consolidated financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on these consolidated financial statements, an opinion on management’s
assessment, and an opinion of the effectiveness of the Company’s internal
control over financial reporting based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the consolidated 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. The audit also included assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.








A
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 (GAAP). A 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
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 GAAP, and that
receipts and expenditures of the company are being made only in accordance with
authorization 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 financial position of Pacific Continental
Corporation and Subsidiaries as of December 31, 2004 and 2003, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion,
management’s assessment that the Company maintained effective internal control
over financial reporting as of December 31, 2004, is fairly stated, in all
material respects, based on “criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO)”. Furthermore, in our opinion the Company maintained
, in all material respects, effective control over financial reporting as of
December 31, 2004, based on “criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO)”.








**Zirkle,
Long, Trigueiro & Ward, L.L.C.**











Eugene,
Oregon


January
31, 2005











**Pacific
Continental Corporation and Subsidiaries**


**Consolidated
Balance Sheets**





**December
      31****2004**
    
    **2003****ASSETS**Cash
      and due from banks
    
    
    
    
    $
    15,649,945
    
    $
    24,149,500Federal
      funds sold
    
    
    
    
    
    432,337
    
    
    1,386,854Total
      cash and cash equivalents
    
    
    
    
    
    16,082,282
    
    
    25,536,354Securities
      available-for-sale
    
    
    
    
    
    27,557,731
    
    
    30,028,736Loans
      held for sale
    
    
    
    
    
    2,072,351
    
    
    1,957,670Loans,
      less allowance for loan losses
    
    
    
    
    
    451,744,165
    
    
    348,894,225Interest
      receivable
    
    
    
    
    
    1,969,181
    
    
    1,585,955Federal
      Home Loan Bank stock
    
    
    
    
    
    2,807,600
    
    
    2,738,000Property,
      net of accumulated depreciation
    
    
    
    
    
    13,182,407
    
    
    13,059,962Other
      assets
    
    
    
    
    
    1,214,655
    
    
    1,997,734Total
      assets
    
    
    
    
    $
    516,630,372
    
    $
    425,798,636**LIABILITIES
      and STOCKHOLDERS' EQUITY**Liabilities:Deposits:Noninterest-bearing
    
    
    
    
    $
    132,249,496
    
    $
    125,575,941Savings
      and interest-bearing demand
    
    
    
    
    
    219,681,434
    
    
    176,015,427Time,
      $100,000 and over
    
    
    
    
    
    31,114,564
    
    
    27,961,396Other
      time
    
    
    
    
    
    20,745,813
    
    
    26,546,306403,791,306
    
    
    356,099,070Federal
      funds purchased
    
    
    
    
    
    10,290,000
    
    
    -Federal
      Home Loan Bank borrowings
    
    
    
    
    
    51,000,000
    
    
    26,000,000Accrued
      interest and other liabilities
    
    
    
    
    
    2,157,009
    
    
    1,465,716Total
      liabilities
    
    
    
    
    
    467,238,315
    
    
    383,564,786Commitments
      and contingencies (Notes 5, 14 and 16)Stockholders'
      equity:Common
      stock, no par value; 25,000,000 sharesauthorized;
      8,655,535 and 8,487,234 sharesoutstanding
      in 2004 and 2003, respectively
    
    
    
    
    
    28,076,125
    
    
    26,619,206Retained
      earnings
    
    
    
    
    
    21,429,633
    
    
    15,644,669Accumulated
      other comprehensive income (loss)
    
    
    
    
    
    (113,701
    )
    
    (30,025
    )Total
      stockholders' equity
    
    
    
    
    
    49,392,057
    
    
    42,233,850Total
      liabilities and stockholders' equity
    
    
    
    
    $
    516,630,372
    
    $
    425,798,636The
      accompanying notes are an integral part of these consolidated financial
      statements.











**Pacific
Continental Corporation and Subsidiaries**


**Consolidated
Statements of Income**


Year
      Ended December 31**2004**
    
    
    **2003**
    
    
    **2002**Interest
      income:Loans
    
    $
    28,423,964
    
    $
    25,873,514
    
    $
    23,255,130Securities
    
    
    892,503
    
    
    450,394
    
    
    750,841Dividends
      on Federal Home Loan Bank stock
    
    
    92,959
    
    
    125,723
    
    
    151,924Federal
      funds sold
    
    
    15,527
    
    
    79,218
    
    
    67,71729,424,953
    
    
    26,528,849
    
    
    24,225,612Interest
      expense:Deposits
    
    
    3,232,397
    
    
    2,993,536
    
    
    3,122,561Federal
      Home Loan Bank borrowings
    
    
    1,027,525
    
    
    1,250,700
    
    
    1,339,723Federal
      funds purchased
    
    
    213,174
    
    
    64,665
    
    
    74,7534,473,096
    
    
    4,308,901
    
    
    4,537,037Net
      interest income
    
    
    24,951,857
    
    
    22,219,948
    
    
    19,688,575Provision
      for loan losses
    
    
    500,000
    
    
    900,000
    
    
    5,660,000Net
      interest income after provision forloan
      losses
    
    
    24,451,857
    
    
    21,319,948
    
    
    14,028,575Noninterest
      income:Service
      charges on deposit accounts
    
    
    1,603,440
    
    
    1,568,588
    
    
    1,319,391Other
      fee income, principally bankcard processing
    
    
    1,409,283
    
    
    1,250,400
    
    
    1,206,873Loan
      servicing
    
    
    183,267
    
    
    241,416
    
    
    342,889Mortgage
      banking income and gains on salesof
      loans
    
    
    1,006,920
    
    
    1,624,847
    
    
    924,166Gains
      (losses) on sales of securities
    
    
    (12,820
    )
    
    -
    
    
    149,390Other
    
    
    272,579
    
    
    261,091
    
    
    258,0514,462,669
    
    
    4,946,342
    
    
    4,200,760Noninterest
      expense:Salaries
      and employee benefits
    
    
    9,963,554
    
    
    8,853,739
    
    
    7,528,777Premises
      and equipment
    
    
    1,881,202
    
    
    1,800,442
    
    
    1,441,393Bankcard
      processing
    
    
    475,639
    
    
    365,709
    
    
    487,585Business
      development
    
    
    1,017,214
    
    
    823,273
    
    
    807,550Other
    
    
    2,703,163
    
    
    3,359,460
    
    
    2,328,61116,040,772
    
    
    15,202,623
    
    
    12,593,916Income
      before income taxes
    
    
    12,873,753
    
    
    11,063,667
    
    
    5,635,419Provision
      for income taxes
    
    
    4,925,000
    
    
    4,233,000
    
    
    2,181,000Net
      income
    
    $
    7,948,752
    
    $
    6,830,666
    
    $
    3,454,419Earnings
      per share:Basic
    
    $
    .93
    
    $
    .81
    
    $
    .41Diluted
    
    $
    .90
    
    $
    .79
    
    $
    .41The
      accompanying notes are an integral part of these consolidated financial
      statements.











**Pacific
Continental Corporation and Subsidiaries**


**Consolidated
Statements of Changes in Stockholders’ Equity**


For the
Years Ended December 31, 2004, 2003, and 2002




**Accumulated******
    
    
    
    
    
    
    
    
    
    
    
    **Other****Number**
    
    
    **Common**
    
    
    **Retained**
    
    
    **Comprehensive******
    
    
    **ofShares**
    
    
    **Stock**
    
    
    **Earnings**
    
    
    **Income
      (Loss**
    **)**
    
    **Total**Balance,
      January 1, 2002
    
    
    5,066,290
    
    $
    25,772,809
    
    $
    9,541,959
    
    $
    289,614
    
    $
    35,604,382Net
      income
    
    
    
    
    
    
    
    
    3,454,419
    
    
    
    
    
    3,454,419Other
      comprehensive income:Unrealized
      losses on securities
    
    
    
    
    
    
    
    
    
    
    
    (197,643
    )Reclassification
      of net gains realized
    
    
    
    
    
    
    
    
    
    
    
    (149,390
    )Deferred
      income taxes
    
    
    
    
    
    
    
    
    
    
    
    133,122Other
      comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    (213,911
    )
    
    (213,911
    )Comprehensive
      income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,240,508Stock
      options exercised and related tax benefit
    
    
    76,563
    
    
    715,132
    
    
    
    
    
    
    
    
    715,132Cash
      dividends
    
    
    
    
    
    
    
    
    (1,610,219
    )
    
    
    
    
    (1,610,219
    )Shares
      repurchased and retired
    
    
    (102,405
    )
    
    (520,550
    )
    
    (730,719
    )
    
    
    
    
    (1,251,269
    )Balance,
      December 31, 2002
    
    
    5,040,448
    
    
    25,967,391
    
    
    10,655,440
    
    
    75,703
    
    
    36,698,534Net
      income
    
    
    
    
    
    
    
    
    6,830,667
    
    
    
    
    
    6,830,667Other
      comprehensive income:Unrealized
      losses on securities
    
    
    
    
    
    
    
    
    
    
    
    (171,525
    )Deferred
      income taxes
    
    
    
    
    
    
    
    
    
    
    
    65,797Other
      comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    (105,728
    )
    
    (105,728
    )Comprehensive
      income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,724,939Stock
      options exercised and related tax benefit
    
    
    56,876
    
    
    655,515
    
    
    
    
    
    
    
    
    655,515Stock
      split (4 shares for 3)
    
    
    1,692,738Cash
      dividends
    
    
    
    
    
    
    
    
    (1,841,438
    )
    
    
    
    
    (1,841,438
    )Shares
      repurchased and retired
    
    
    (275
    )
    
    (3,700
    )
    
    
    
    
    
    
    
    (3,700
    )Balance,
      December 31, 2003
    
    
    6,789,787
    
    
    26,619,206
    
    
    15,644,669
    
    
    (30,025
    )
    
    42,233,850Net
      income
    
    
    
    
    
    
    
    
    7,948,752
    
    
    
    
    
    7,948,752Other
      comprehensive income:Unrealized
      losses on securities
    
    
    
    
    
    
    
    
    
    
    
    (148,568
    )Reclassification
      of net losses realized
    
    
    
    
    
    
    
    
    
    
    
    12,820Deferred
      income taxes
    
    
    
    
    
    
    
    
    
    
    
    52,073Other
      comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    (83,675
    )
    
    (83,675
    )Comprehensive
      income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,865,077Stock
      options exercised and related tax benefit
    
    
    141,360
    
    
    1,459,879
    
    
    
    
    
    
    
    
    1,459,879Stock
      split (5 shares for 4)
    
    
    1,724,586Cash
      dividends
    
    
    
    
    
    
    
    
    (2,163,789
    )
    
    
    
    
    (2,163,789
    )Shares
      repurchased and retired
    
    
    (198
    )
    
    (2,960
    )
    
    
    
    
    
    
    
    (2,960
    )Balance,
      December 31, 2004
    
    
    8,655,535
    
    
    28,076,125
    
    
    21,429,632
    
    
    (113,700
    )
    
    49,392,057The
      accompanying notes are an integral part of these consolidated financial
      statements.





















**Pacific
Continental Corporation and Subsidiaries**




**Consolidated
Statements of Cash Flows**





****
    
    
    Year
      Ended December 31**2004**
    
    
    **2003**
    
    
    **2002**Cash
      flows from operating activities:Net
      income
    
    $
    7,948,752
    
    $
    6,830,667
    
    $
    3,454,419Adjustments
      to reconcile net income to net cashprovided
      by operating activities:Depreciation
    
    
    936,319
    
    
    928,818
    
    
    863,152Amortization
    
    
    411,782
    
    
    340,861
    
    
    48,450Provision
      for loan losses
    
    
    500,000
    
    
    900,000
    
    
    5,660,000Losses
      of foreclosed assets
    
    
    1,643
    
    
    613,966
    
    
    -Deferred
      income taxes
    
    
    44,000
    
    
    (70,000
    )
    
    327,000Gains
      on sales of loans
    
    
    -
    
    
    (129,950
    )
    
    -(Gains)
      losses on sales of securities
    
    
    12,820
    
    
    -
    
    
    (149,390
    )Stock
      dividends from Federal Home Loan Bank
    
    
    (91,900
    )
    
    (125,500
    )
    
    (151,700
    )Change
      in:Interest
      receivable
    
    
    (383,226
    )
    
    61,653
    
    
    (237,786
    )Deferred
      loan fees
    
    
    478,454
    
    
    188,894
    
    
    282,907Capitalized
      loan servicing rights
    
    
    50,633
    
    
    (13,854
    )
    
    19,039Loans
      held for sale
    
    
    (114,681
    )
    
    2,110,182
    
    
    (3,622,965
    )Accrued
      interest and other liabilities
    
    
    242,401
    
    
    226,673
    
    
    (157,699
    )Income
      taxes payable
    
    
    1,167,680
    
    
    (132,629
    )
    
    (485,594
    )Other
      assets
    
    
    23,040
    
    
    (30,724
    )
    
    (3,503
    )Net
      cash provided by operating activities
    
    
    11,227,717
    
    
    11,699,057
    
    
    5,846,330Cash
      flows from investing activities:Proceeds
      from sales and maturities of securities
    
    
    8,126,633
    
    
    10,749,973
    
    
    16,447,917Purchase
      of securities
    
    
    (6,193,678
    )
    
    (30,445,782
    )
    
    (7,412,561
    )Loans
      made net of principal collections received
    
    
    (103,131,306
    )
    
    (32,233,581
    )
    
    (88,882,993
    )Proceeds
      from sales of loans
    
    
    595,153
    
    
    8,064,258
    
    
    3,242,465Purchase
      of loans
    
    
    (1,372,313
    )
    
    (107,729
    )
    
    (4,047,504
    )Acquisition
    
    
    -
    
    
    (6,863,160
    )
    
    -Purchase
      of property
    
    
    (1,058,764
    )
    
    (746,980
    )
    
    (799,217
    )Proceeds
      on sale of foreclosed assets
    
    
    409,118
    
    
    3,182,775
    
    
    -Improvements
      to foreclosed assets
    
    
    -
    
    
    -
    
    
    (212,371
    )Net
      cash provided by investing activities
    
    
    (102,625,157
    )
    
    (48,400,226
    )
    
    (81,664,264
    )Cash
      flows from financing activities:Net
      increase in deposits
    
    
    47,692,238
    
    
    46,190,374
    
    
    61,580,016Change
      in federal funds purchased
    
    
    31,790,000
    
    
    (9,000,000
    )
    
    9,000,000Change
      in Federal Home Loan Bank term borrowings
    
    
    3,500,000
    
    
    3,000,000
    
    
    (1,000,000
    )Proceeds
      from stock options exercised
    
    
    1,127,879
    
    
    540,515
    
    
    661,132Dividends
      paid
    
    
    (2,163,789
    )
    
    (1,841,438
    )
    
    (1,610,219
    )Repurchase
      of Company shares
    
    
    (2,960
    )
    
    (3,700
    )
    
    (1,251,269
    )Net
      cash provided by financing activities
    
    
    81,943,368
    
    
    38,885,751
    
    
    67,379,660Net
      increase (decrease) in cash and cash equivalents
    
    
    (9,454,072
    )
    
    2,184,582
    
    
    (8,438,274
    )Cash
      and cash equivalents, beginning of year
    
    
    25,536,354
    
    
    23,351,772
    
    
    31,790,046Cash
      and cash equivalents, end of year
    
    $
    16,082,282
    
    $
    25,536,354
    
    $
    23,351,772Supplemental
      information:Noncash
      investing and financing activities:Transfers
      of loans to foreclosed assets
    
    $
    262,071
    
    $
    3,343,866
    
    $
    651,266Transfers
      of loans held for sale
    
    
    -
    
    
    1,478,871
    
    
    11,077,383Change
      in unrealized gain on securities, net ofdeferred
      income taxes
    
    
    83,675
    
    
    105,728
    
    
    (213,911
    )Cash
      paid during the year for:Income
      taxes
    
    
    3,713,320
    
    
    4,436,000
    
    
    2,339,594Interest
    
    
    4,468,436
    
    
    4,325,229
    
    
    4,580,973











**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) and PCB Loan Services Corporation (which owns and operates certain
repossessed or foreclosed collateral). The Bank provides commercial banking,
financing, mortgage lending and other services in Western Oregon and Southwest
Washington. All significant intercompany accounts and transactions have been
eliminated in consolidation.





**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 the calculation of the allowance for loan
losses.





**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 $1,213,000 were maintained in cash at December 31, 2004.





**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
mix of bank assets and liabilities or demand on liquidity. The Bank classified
all securities as available-for-sale throughout 2004 and 2003. Securities
classified as available-for-sale are reported at estimated fair value, net of
deferred taxes. The difference between estimated fair value and amortized cost
is a separate component of stockholders’ equity (accumulated other comprehensive
income). Fair values for these investment securities are based on market prices.
Gains and losses on the sale of available-for-sale securities are determined
using the specific-identification method. Management determines the appropriate
classification of securities at the time of purchase.





Interest
income on debt securities is included in income using the level yield method.
Gains and losses on sales of securities are recognized on the specific
identification basis.




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, 2004 and 2003 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. Loans held for sale are carried at the lower
of cost or market. Market value is determined on an aggregate loan
basis.





**Loans
and Income Recognition** - Loans
are stated at the amount of unpaid principal, reduced by 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. Loan origination fees 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 the 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.
Interest income is subsequently recognized only to the extent cash payments are
received.





**Servicing** -
Servicing assets are recognized as separate assets when rights are retained on
sales of loans. Capitalized servicing rights are reported in other assets and
are amortized into noninterest income in proportion to, and over the period of,
the estimated future net servicing income of the underlying loans. Servicing
assets are evaluated for impairment based upon the fair value of the rights as
compared to amortized cost. Fair value is determined based upon discounted cash
flows using market-based assumptions. Servicing rights are not retained on
residential real estate loans originated for sale.





**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. For 2004, the minimum required investment was approximately
$2,212,600. The Bank may request redemption at par value of any stock in excess
of the amount the Bank is required to hold.





**Foreclosed
Assets** - Assets
acquired through foreclosure, or deeds in lieu of foreclosure, are initially
recorded at fair value 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 are carried at 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
expense.





**Property** -
Property is stated at cost, net of accumulated depreciation. 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
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 lease term for leasehold
improvements.












**Goodwill
-** Goodwill
represents the excess of cost over the fair value of net assets acquired in a
2003 business combination. Goodwill is not subject to amortization but is tested
annually for impairment.







**Advertising** -
Advertising costs are charged to expense during the year in which they are
incurred.





**Income
Taxes** -
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.





**Stockholders’
Equity and 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 12. Weighted shares outstanding are
adjusted retroactively for the effect of stock dividends.





Weighted
average shares outstanding at December 31 are as follows:




**2004**
    
    **2003**
    
    **2002**Basic
    
    
    8,572,526
    
    
    8,437,431
    
    
    8,391,108Common
      stock equivalentsattributable
      to stock options
    
    
    235,623
    
    
    173,665
    
    
    74,280Diluted
    
    
    8,808,149
    
    
    8,611,096
    
    
    8,465,388


The
Company repurchased and retired 102,405 shares of common stock costing
$1,251,269 in 2002. The repurchase plan expired in 2002. During 2003 and 2004
only fractional shares have been repurchased.




**Stock
Option Plans** - The
Company applies the recognition and measurement principles of APB Opinion No.
25, *Accounting
for Stock Issued to Employees* , and
related Interpretations in accounting for its stock option plans. No stock-based
employee compensation expense is reflected in net income as all option grants
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
optional fair value recognition provisions of FASB Statement No. 123 *,
Accounting for Stock-Based Compensation* , to
stock-based employee compensation.







**Year
      Ended December 31****2004**
    
    
    **2003**
    
    
    **2002**Net
      income - as reported
    
    $
    7,948,752
    
    $
    6,830,667
    
    $
    3,454,419Deduct
      total stock-basedemployee
      compensationexpense
      determined underfair
      value method for allawards,
      net of related taxeffects
    
    
    (429,832
    )
    
    (380,542
    )
    
    (320,021
    )Net
      income - pro forma
    
    $
    7,518,920
    
    $
    6,450,125
    
    $
    3,134,398Earnings
      per share:Basic
      - as reported
    
    
    0.93
    
    
    0.81
    
    
    0.41Basic
      - pro forma
    
    
    0.88
    
    
    0.76
    
    
    0.37Diluted
      - as reported
    
    
    0.90
    
    
    0.79
    
    
    0.41Diluted
      - pro forma
    
    
    0.85
    
    
    0.75
    
    
    0.37









The fair
value of each option grant ($2.86, $2.86 and $2.42 in 2004, 2003 and 2002,
respectively) is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted average
assumptions:







**2004**
    
    
    **2003**
    
    
    **2002**Dividend
      yield
    
    
    1.91
    %
    
    2.81
    %
    
    3.09
    %Risk-free
      interest rate
    
    
    3.23
    %
    
    4.00
    %
    
    3.98
    %Expected
      life
    
    
    4
      years
    
    
    4
      years
    
    
    4.93
      yearsExpected
      volatility
    
    
    22.57
    %
    
    33.90
    %
    
    40.54
    %




**Recently
Issued Accounting Pronouncements** - In
December 2004, the FASB issued a statement, *Shared-Based
Payment* ,
Statement 123(R), that addresses the accounting for share-based payment
transactions (for example, stock options) in which an employer receives
employee-services in exchange for equity securities of the company or
liabilities that are based on the fair value of the company’s equity securities.
This statement eliminates the use of the intrinsic value method of APB 25 and
generally requires that such transactions be accounted for using a fair-value
based method for recording compensation expense. The statement substantially
amends SFAS No. 123. The statement is effective for interim periods beginning
after June 15, 2005. When adopted in the third quarter of 2005, the Company
expects to restate prior periods for comparability. Such adjustments should not
differ significantly from the pro forma amounts reported in Note 1.





In March
2004, the FASB ratified the consensus reached by the Emerging Issues Task Force
regarding issue 03-1, *The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments* (“EITF
03-01”). The consensus provided guidance for determining when an investment is
other-than-temporarily-impaired. The guidance was effective for periods
beginning after June 15, 2004. On September 30, 2004, the FASB deferred the
implementations of the recognition criteria of EITF 03-01 until the fourth
quarter of 2004. Adoption of this standard did not affect the Company’s 2004
consolidated financial statements.





In
December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 46 (“FIN 46”), *Consolidation of Variable Interest Entities* , that
addresses the consolidation rules to be applied to “variable interest entities”.
The interpretation is effective for entities created after December 31, 2003.
Adoption of this Interpretation did not affect the consolidated financial
statements.











**Reclassifications** - The
2003 and 2002 figures have been reclassified where appropriate to conform with
the financial statement presentation used in 2004. These reclassifications had
no effect on previously reported net income.














2. **Securities
Available-for-Sale** :





The
amortized cost and estimated fair values of securities available-for-sale at
December 31, 2004 are as follows:


**Securities
      in**
    
    **Securities
      in****Continuous**
    
    **Continuous****Unrealized**
    
    
    **Unrealized****Loss**
    
    
    **Loss****Gross**
    
    
    **Gross**
    
    
    **Estimated**
    
    
    **Position
      for**
    
    
    **Position
      For****Amortized**
    
    
    **Unrealized**
    
    
    **Unrealized**
    
    
    **Fair**
    
    
    **Less
      Than**
    
    
    **12
      Months****Cost**
    
    
    **Gains**
    
    
    **Losses**
    
    
    **Value**
    
    
    **12
      Months**
    
    
    **or
      Longer****Unrealized
      Loss Positions**Obligations
      of U.S. Governmentagencies
    
    $
    5,485,975
    
    $
    -
    
    $
    65,960
    
    $
    5,420,015
    
    $
    5,420,015
    
    $
    -Obligations
      of states andpolitical
      subdivisions
    
    
    2,910,592
    
    
    -
    
    
    54,169
    
    
    2,856,423
    
    
    2,426,182
    
    
    430,241Mortgage-backed
      securities
    
    
    12,575,482
    
    
    -
    
    
    99,105
    
    
    12,476,377
    
    
    10,085,599
    
    
    2,390,77820,972,049
    
    
    -
    
    
    219,234
    
    
    20,752,815
    
    $
    17,931,796
    
    $
    2,821,019**Unrealized
      Gain Positions**Obligations
      of U.S. Governmentagencies
    
    
    961,876
    
    
    7,814
    
    
    -
    
    
    969,690Obligations
      of states andpolitical
      subdivisions
    
    
    203,000
    
    
    -
    
    
    -
    
    
    203,000Mortgage-backed
      securities
    
    
    5,605,269
    
    
    26,957
    
    
    -
    
    
    5,632,2266,770,145
    
    
    34,771
    
    
    -
    
    
    6,804,916$
    27,742,194
    
    $
    34,771
    
    $
    219,234
    
    $
    27,557,731




At
December 31, 2004, 31 investment securities were in unrealized loss positions.
The decline in value of these securities has resulted from increases in market
interest rates during the second half of 2004. The projected average life of the
securities portfolio is approximately four 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, 2003 are as follows:





****
    
    
    
    
    
    **Gross**
    
    
    **Gross**
    
    
    **Estimated******
    
    
    **Amortized**
    
    
    **Unrealized**
    
    
    **Unrealized**
    
    
    **Fair****Cost**
    
    
    **Gains**
    
    
    **Losses**
    
    
    **Value**Obligations
      of U.S. Government agencies
    
    $
    6,501,178
    
    $
    5,737
    
    $
    29,453
    
    $
    6,477,462Obligations
      of states and political subdivisions
    
    
    3,018,186
    
    
    17,618
    
    
    42,985
    
    $
    2,992,819Mortgage-backed
      securities
    
    
    20,558,083
    
    
    95,049
    
    
    94,677
    
    
    20,558,455$
    30,077,447
    
    $
    118,404
    
    $
    167,115
    
    $
    30,028,736














The
amortized cost and estimated fair value of securities at December 31, 2004 and
2003 by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because issuers may have the right to call or prepay
obligations.





**2004**
    
    
    
    
    
    **2003****Estimated**
    
    
    
    
    
    **Estimated****Amortized**
    
    
    **Fair**
    
    
    **Amortized**
    
    
    **Fair****Cost**
    
    
    **Value**
    
    
    **Cost**
    
    
    **Value**Due
      in one year or less
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    -Due
      after one year through 5 years
    
    
    7,946,427
    
    
    7,860,637
    
    
    6,941,014
    
    
    6,915,521Due
      after 5 years through 15 years
    
    
    1,615,016
    
    
    1,588,488
    
    
    2,578,350
    
    
    2,554,760Mortgage-backed
      securities
    
    
    18,180,751
    
    
    18,108,609
    
    
    20,558,083
    
    
    20,558,455$
    27,742,194
    
    $
    27,557,734
    
    $
    30,077,447
    
    $
    30,028,736


Gross
realized losses were $12,820 in 2004. No securities were sold in 2003. Gross
realized gains and losses were $151,098 and $1,708, respectively, in 2002.




At
December 31, 2004, mortgage-backed securities with amortized costs of $7,092,884
(estimated market values of $7,053,130) were pledged to secure certain Treasury
and public deposits as required by law.








3. **Loans** :





Major
classifications of loans at December 31 are as follows:





**2004**
    
    **2003**Commercial
      loans
    
    $
    107,537,680
    
    $
    89,128,212Real
      estate loans
    
    
    341,110,848
    
    
    255,149,823Consumer
      loans
    
    
    10,380,565
    
    
    11,424,015459,029,093
    
    
    355,702,050Deferred
      loan origination fees
    
    
    (2,060,949
    )
    
    (1,582,494
    )456,968,144
    
    
    354,119,556Allowance
      for loan losses
    
    
    (5,223,979
    )
    
    (5,225,331
    )$
    451,744,165
    
    $
    348,894,225


Scheduled
maturities or repricing, if earlier, of loans at December 31, 2004 are as
follows:





Three
      months or less
    
    $
    218,956,729Three
      months to one year
    
    
    8,180,447One
      year to three years
    
    
    70,249,094Three
      years to five years
    
    
    62,279,522Thereafter
    
    
    99,363,301$
    459,029,093











**Allowance
for Loan Losses** :





**2004**
    
    **2003**
    
    **2002**Balance,
      beginning of year
    
    $
    5,225,331
    
    $
    4,403,161
    
    $
    3,418,029Provision
      charged to income
    
    
    500,000
    
    
    900,000
    
    
    5,660,000Loans
      charged against the allowance
    
    
    (516,071
    )
    
    (1,185,426
    )
    
    (4,802,741
    )Recoveries
      credited to allowance
    
    
    196,719
    
    
    917,796
    
    
    127,873Reclassify
      unfunded loan commitments
    
    
    (182,000
    )
    
    -
    
    
    -Acquisition
    
    
    -
    
    
    189,800
    
    
    -Balance,
      end of year
    
    $
    5,223,979
    
    $
    5,225,331
    
    $
    4,403,161


Restructured
and other loans considered impaired, including all nonaccrual loans, totaled
$2,799,762, $3,168,458, and $6,509,336 at December 31, 2004 2003, and 2002
respectively. The specific valuation allowance for loan losses related to these
impaired loans was approximately $510,000, $628,000 and $454,000 at
December 31, 2004, 2003, and 2002 respectively. The average recorded
investment in impaired loans was approximately $3,206,000, $4,594,000, and
$5,870,000 in 2004, 2003, and 2002 respectively. Interest income recognized on
impaired loans during 2004, 2003, and 2002 was approximately $120,000, $264,000,
and $292,000 respectively. Additional interest income which would have been
realized on nonaccrual loans if they had remained current and still accruing was
approximately $98,000, $159,000 and $446,000 in 2004, 2003 and 2002,
respectively. Loans contractually past due 90 days or more on which interest
continued to accrue totaled approximately $213,000, $545,000, and $359,000 at
December 31, 2004, 2003, and 2002 respectively.





A
substantial portion of the loan portfolio is collateralized by real estate and
is, therefore, susceptible to changes in local market conditions. Management
believes that the loan portfolio is diversified among industry groups. At
December 31, 2004, outstanding residential construction loans totaled
approximately $67,938,000 and represented 14.7% of total outstanding loans. In
addition, at December 31, 2004, unfunded loan commitments for residential
construction totaled approximately $19,008,000. At year end there were no
nonaccrual loans and no impaired loans in this industry. There are no other
industry concentrations in excess of 8%. 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.








4. **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 capability or to mitigate
risk. Servicing rights are retained for these loan participations. The unpaid
principal balances of these serviced loans at December 31, 2004 and 2003 were
$22,317,357 and $24,483,424, respectively. These loans are not included in the
accompanying consolidated balance sheets.




The
balance of capitalized loan servicing rights, net of valuation allowances,
included in other assets was $27,856 and $78,490 at December 31, 2004 and 2003,
respectively.
















5. **Property** :





Property
at December 31 consists of the following:





**2004**
    
    
    **2003**Land
    
    $
    2,480,664
    
    $
    2,053,664Buildings
      and improvements
    
    
    11,616,582
    
    
    11,455,861Furniture
      and equipment
    
    
    6,068,397
    
    
    5,617,73720,165,643
    
    
    19,127,263Less
      accumulated depreciation
    
    
    6,983,237
    
    
    6,067,300$
    13,182,407
    
    $
    13,059,962


**Subsequent
Event -** During
January 2005, the Bank entered into a definitive agreement to purchase a
building and land in Portland, Oregon for a new office location. This purchase
is expected to close prior to the end of the first quarter at a total price of
$1,750. The building will require substantial remodeling, and the new office is
expected to open during the third quarter 2005.





**Lease
Commitments** - The
Bank leases certain facilities for office locations under noncancelable
operating lease agreements expiring through 2020. Rent expense related to these
leases totaled $366,716, $372,357 and $262,901 in 2004, 2003 and 2002,
respectively.





**Property
Leased to Others** - The
Bank leases approximately 82% of its Springfield Gateway building to others
under noncancelable operating lease agreements extending through
2011.





Future
minimum payments required under these leases are:





**Property****Lease**
    
    **Leased****Commitments**
    
    **to
      Others**2005
    
    $
    302,519
    
    $
    384,4832006
    
    
    281,283
    
    
    340,2732007
    
    
    206,546
    
    
    184,4042008
    
    
    113,053
    
    
    164,2752009
    
    
    106,793
    
    
    127,181Thereafter
    
    
    514,398
    
    
    123,628$
    1,524,592
    
    $
    1,324,244










6. **Other
Assets:**





**2004**
    
    **2003**Foreclosed
      assets
    
    
    262,071
    
    
    410,761Servicing
      asset
    
    
    27,857
    
    
    78,490Deferred
      taxes
    
    
    257,814
    
    
    249,740Income
      tax deposits
    
    
    -
    
    
    568,788Goodwill
    
    
    275,552
    
    
    275,552Prepaid
      expenses and other
    
    
    391,362
    
    
    414,403$
    1,214,656
    
    $
    1,997,734


**Acquisition**





In April,
2003, the Bank acquired, for cash, the Coos Bay consumer finance office of
CitiFinancial for $6,863,160. This office has been combined with Pacific
Continental Finance, a division of the Bank. The allocation of the purchase
price resulted in goodwill of $275,552, which is expected to be deductible over
15 years for income tax purposes. The acquisition was accounted for under the
purchase method of accounting and, accordingly, the results of operations of the
Coos Bay office have been included in the consolidated financial statements
since the date of acquisition. Had this acquisition occurred on January 1, 2002,
consolidated interest income and net income would not have been significantly
different from the reported amounts for 2003 and 2002.








7. **Deposits** :





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







**2004**
    
    **2003**Less
      than three months
    
    $
    17,279,958
    
    $
    15,331,192Three
      months to one year
    
    
    18,372,317
    
    
    28,409,102One
      to three years
    
    
    8,524,511
    
    
    9,497,715Thereafter
    
    
    7,683,591
    
    
    1,269,693$
    51,860,377
    
    $
    54,507,702


8. **Federal
Funds Purchased:**





The Bank
has unsecured federal funds borrowing lines with correspondent banks totaling
$57,000,000 at December 31, 2004 of which $10,290,000 (average interest rate of
2.75%) were borrowed against leaving $46,710,000 available. There were no
borrowings against these lines at December 31, 2003.

















9. **Federal
Home Loan Bank Borrowings** :





Federal
Home Loan Bank borrowings at December 31 are as follows:





**2004**
    
    **2003**Cash
      Management Advance, 2.35%
    
    $
    21,500,000
    
    $
    -Due
      April 2004, 5.07%
    
    
    -
    
    
    3,000,000Due
      May 2004, 5.35%
    
    
    -
    
    
    2,000,000Due
      June 2004, 4.98%
    
    
    -
    
    
    5,000,000Due
      July 2004, 5.16%
    
    
    -
    
    
    3,000,000Due
      May 2005, 5.67%
    
    
    1,000,000
    
    
    1,000,000Due
      June 2005, 5.26%
    
    
    1,000,000
    
    
    1,000,000Due
      January 2006, 2.56%
    
    
    1,000,000
    
    
    1,000,000Due
      December 2006, 3.28%
    
    
    500,000
    
    
    -Due
      June 2007, 4.88%
    
    
    4,000,000
    
    
    4,000,000Due
      July 2007, 4.45%
    
    
    3,000,000
    
    
    3,000,000Due
      August 2007, 3.27%
    
    
    5,000,000
    
    
    -Due
      September 2007, 3.23%
    
    
    1,500,000
    
    
    -Due
      December 2007, 3.61%
    
    
    1,000,000
    
    
    1,000,000Due
      February 2008, 3.26%
    
    
    1,500,000
    
    
    1,500,000Due
      March 2008, 2.99%
    
    
    500,000
    
    
    500,000Due
      August 2008, 3.75%
    
    
    3,000,000
    
    
    -Due
      September 2008, 3.59%
    
    
    1,500,000
    
    
    -Due
      December 2008, 3.69%
    
    
    500,000
    
    
    -Due
      August 2009, 3.96 %
    
    
    1,000,000
    
    
    -Due
      September 2009, 3.87%
    
    
    2,500,000
    
    
    -Due
      December 2009, 3.96%
    
    
    1,000,000
    
    
    -$
    51,000,000
    
    $
    26,000,000


The Bank
has a borrowing limit with the FHLB equal to 25% of total assets. At December
31, 2004, the borrowing line was approximately $129,100,000. At December 31,
2004, there was $51,000,000 borrowed on this line, including a $21,500,000 Cash
Management Advance and $29,500,000 in term advances. The FHLB borrowing line is
limited to discounted pledged collateral. FHLB stock, funds


on
deposit with FHLB, and loans are pledged as collateral for borrowings from FHLB.
At December 31, 2004, the Bank had pledged approximately $132,000,000 in
real estate loans to the FHLB ($105,000,000 in discounted pledged collateral).








10. **Income
Taxes** :





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





**2004**
    
    **2003**
    
    **2002**Currently payable
    
    :Federal
    
    
    
    
    
    $
      4,033,000
    
    $
      3,567,000
    
    $
      1,533,000State
    
    
    
    
    
    848,000
    
    736,000
    
    321,0004,881,000
    
    
    4,303,000
    
    
    1,854,000Deferred:Federal
    
    
    
    
    
    
    
    
    36,000
    
    
    (57,000
    )
    
    271,000State
    
    
    
    
    
    
    
    
    8,000
    
    
    (13,000
    )
    
    56,00044,000
    
    
    (70,000
    )
    
    327,000Total
      provision for income taxes
    
    
    
    
    
    
    
    $
    4,925,000
    
    $
    4,233,000
    
    $
    2,181,000


The
provision for deferred income taxes results from timing differences in the
recognition of revenue and expenses for financial statement and tax purposes.
The nature and tax effect of these differences for the years ended December
31are as follows:


**2004**
    
    **2003**
    
    **2002**Loan
      fees and other loan basis adjustmentdifferences
      between financialstatement
      and tax purposes
    
    $
    92,618
    
    $
    52,827
    
    $
    133,511Loan
      loss deduction for tax purposesmore
      (less) than provision for financialreporting
      purposes
    
    
    (89,962
    )
    
    (206,842
    )
    
    35,254Depreciation
      deduction differencesbetween
      financial statement andtax
      purposes
    
    
    8,878
    
    
    61,355
    
    
    47,291Federal
      Home Loan Bank stock dividends
    
    
    35,249
    
    
    39,544
    
    
    47,912Reserve
      for self-funded health insurance
    
    
    (28,350
    )
    
    -
    
    
    -Other
    
    
    25,567
    
    
    (16,884
    )
    
    63,032$
    44,000
    
    $
    (70,000
    )
    $
    327,000




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:





**2004**
    
    **2003**
    
    **2002**Expected
      federal income tax provisionat
      34%
    
    $
    4,377,000
    
    $
    3,762,000
    
    $
    1,916,000State
      income tax, net of federal incometax
      effect
    
    
    521,000
    
    
    478,000
    
    
    249,000Deferred
      tax rate adjustments and other
    
    
    27,000
    
    
    (7,000
    )
    
    16,000Provision
      for income taxes
    
    $
    4,925,000
    
    $
    4,233,000
    
    $
    2,181,000


The tax
benefit associated with stock option plans reduced taxes payable by $332,000,
$115,000 and $54,000 at December 31, 2004, 2003 and 2002, respectively. Such
benefit is credited to additional paid-in capital.








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


**2004**
    
    **2003**
    
    **2002**Assets:Allowance
      for loan losses
    
    $
    1,390,044
    
    $
    1,301,122
    
    $
    1,045,096Basis
      adjustments on loans
    
    
    59,310
    
    
    42,652
    
    
    75,104Reserve
      for self-funded insurance
    
    
    28,350
    
    
    -
    
    
    -Other
    
    
    5,626
    
    
    15,372
    
    
    12,714Net
      unrealized losses on securities
    
    
    70,758
    
    
    18,684
    
    
    -Total
      deferred tax assets
    
    
    1,554,088
    
    
    1,377,830
    
    
    1,132,914Liabilities:Federal
      Home Loan Bank stock dividends
    
    
    575,033
    
    
    539,784
    
    
    492,031Excess
      tax over book depreciation
    
    
    352,905
    
    
    332,744
    
    
    255,740Net
      unrealized gains on securities
    
    
    -
    
    
    -
    
    
    47,111Other,
      principally loan origination costs
    
    
    368,336
    
    
    255,562
    
    
    224,088Total
      deferred tax liabilities
    
    
    1,296,274
    
    
    1,128,090
    
    
    1,018,970Net
      deferred tax assets
    
    $
    257,814
    
    $
    249,740
    
    $
    113,944




Management
believes that net deferred taxes will be recognized in the normal course of
operations and, accordingly, net deferred tax assets have not been reduced by a
valuation allowance.








11. **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 $503,586 $435,706 and $241,785 in 2004,
2003 and 2002, respectively.








12. **Stock
Option Plans** :





The
Company has Employee and Nonemployee Director Stock Option Plans that reserve
shares of stock for issuance to employees and directors. Under the plans, the
exercise price of each option must equal the greater of market price or net book
value of the Company’s stock on the date of the grant, and the option’s maximum
term is ten years. Vesting occurs over three- and four-year periods. Information
with respect to options granted under the stock option plans, adjusted for stock
splits and dividends, is as follows:





**2004**
    
    
    
    **2003**
    
    
    
    **2002******
    
    
    
    
    
    **Average**
    
    
    
    
    
    **Average**
    
    
    
    
    
    **Average******
    
    
    **Options**
    
    
    **Price**
    
    
    **Options**
    
    
    **Price**
    
    
    **Options**
    
    
    **Price******
    
    
    **Outstanding**
    
    
    **Per
      Share**
    
    
    **Outstanding**
    
    
    **Per
      Share**
    
    
    **Outstanding**
    
    
    **Per
      Share**Balance,
      beginning of year
    
    
    1,006,646
    
    $
    8.04
    
    
    930,567
    
    $
    7.04
    
    
    768,310
    
    $
    6.56Grants:Employees
    
    
    223,299
    
    
    15.91
    
    
    240,095
    
    
    11.39
    
    
    306,000
    
    
    7.65Directors
    
    
    45,000
    
    
    12.24
    
    
    6,666
    
    
    11.28
    
    
    53,333
    
    
    8.31Exercised
    
    
    (167,975
    )
    
    6.71
    
    
    (86,833
    )
    
    6.22
    
    
    (127,605
    )
    
    5.18Expired
    
    
    (100,428
    )
    
    
    
    
    (83,849
    )
    
    
    
    
    (69,472
    )Balance,
      end of year
    
    
    1,006,542
    
    $
    10.37
    
    
    1,006,646
    
    $
    8.04
    
    
    930,567
    
    $
    7.04Options
      exercisableat
      end of year
    
    
    444,938
    
    
    
    
    
    409,771
    
    
    
    
    
    356,832Options
      available forgrant
      at end of year
    
    
    776,401
    
    
    
    
    
    954,980
    
    
    
    
    
    130,000








Outstanding
options at December 31, 2004 are as follows:










**Shares**
    
    
    
    
    
    **Price******
    
    
    **Exercisable**
    
    
    **Total**
    
    
    **Per
      Share**
    
    
    **Expiration**91,966
    
    
    91,966
    
    $
    5.05
    
    
    September
      2005127,060
    
    
    167,575
    
    $
    7.66
    
    
    August
      20064,583
    
    
    9,166
    
    $
    7.66
    
    
    September
      200622,222
    
    
    33,334
    
    $
    7.02
    
    
    June
      20128,333
    
    
    16,666
    
    $
    7.80
    
    
    September
      2012125,844
    
    
    213,762
    
    $
    8.31
    
    
    December
      2007-
    
    
    
    
    
    10,000
    
    $
    9.09
    
    
    March
      20082,803
    
    
    10,929
    
    $
    9.15
    
    
    June
      20086,666
    
    
    6,666
    
    $
    11.28
    
    
    October
      200844,211
    
    
    178,179
    
    $
    11.82
    
    
    November
      200811,250
    
    
    45,000
    
    $
    12.24
    
    
    January
      2009-
    
    
    
    
    
    12,500
    
    $
    12.44
    
    
    April
      2009-
    
    
    
    
    
    8,294
    
    $
    12.06
    
    
    May
      2009-
    
    
    
    
    
    2,500
    
    $
    15.08
    
    
    October
      2009-
    
    
    
    
    
    200,005
    
    $
    15.30
    
    
    December
      2009444,938
    
    
    1,006,542













13. **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:





**2004**
    
    **2003**Balance,
      beginning of year
    
    $
    784,304
    
    $
    1,040,914Additions
      or renewals
    
    
    63,000
    
    
    27,204Amounts
      collected or renewed
    
    
    (136,958
    )
    
    (283,814
    )Balance,
      end of year
    
    $
    710,346
    
    $
    784,304


In
addition, there were $170,552 in commitments to extend credit to directors and
officers at December 31, 2004, which are included as part of commitments in
Note 14.





Real
estate management fees of $24,956 and $31,786 were paid to director, Larry
Campbell, during 2004 and 2003, respectively.








14. **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.





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:





**2004**
    
    
    **2003**Commitments
      to extend credit (principallyvariable
      rate)
    
    $
    130,808,454
    
    $
    101,033,184Letters
      of credit and financial guarantees written
    
    
    3,686,695
    
    
    4,150,017














15. **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:





**2004**
    
    
    
    **2003******
    
    
    **Carrying**
    
    
    
    
    
    **Carrying****Amount**
    
    
    **Fair
      Value**
    
    
    **Amount**
    
    
    **Fair
      Value**Financial
      assets:Cash
      and cash equivalents
    
    $
    16,082,282
    
    $
    16,082,282
    
    $
    25,536,354
    
    $
    25,536,354Securities
    
    
    27,557,731
    
    
    27,557,731
    
    
    30,028,736
    
    
    30,028,736Loans
      held for sale
    
    
    2,072,351
    
    
    2,109,351
    
    
    1,957,670
    
    
    1,984,321Loans,
      net of allowancefor
      loan losses
    
    
    451,744,165
    
    
    451,731,286
    
    
    348,894,225
    
    
    353,009,737Interest
      receivable
    
    
    1,969,181
    
    
    1,969,181
    
    
    1,585,955
    
    
    1,585,955Federal
      Home LoanBank
      stock
    
    
    2,807,600
    
    
    2,807,600
    
    
    2,738,000
    
    
    2,738,000Financial
      liabilities:Deposits
    
    
    403,791,306
    
    
    403,739,404
    
    
    356,099,070
    
    
    356,321,070Federal
      funds purchased
    
    
    10,290,000
    
    
    10,290,000
    
    
    -
    
    
    -Federal
      Home LoanBank
      borrowings
    
    
    51,000,000
    
    
    51,029,583
    
    
    26,000,000
    
    
    26,722,000Accrued
      interest payable
    
    
    117,457
    
    
    117,457
    
    
    112,797
    
    
    112,797


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





Securities
- Fair value is based on quoted market prices. If a quoted market price is not
available, fair value is estimated using quoted market prices from similar
securities.





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





Loans -
Fair value of fixed-rate loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.





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 the deposits of similar
remaining maturities. In accordance with provisions of SFAS No. 107, the
estimated fair values of deposits do not take into account the benefit that
results from low-cost funding such deposits provide.





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.





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














16. **Commitments
and**  **Legal
Contingencies** :





The
Company has entered into employment agreements with two key executives, Hal
Brown and Daniel Hempy. The employment agreements provide for minimum aggregate
annual base salaries of $330,000, plus performance adjustments, life insurance
coverage, and other perquisites commonly found in such agreements. During 2004,
Mr. Brown’s employment agreement was extended one year and expires in 2007. Mr.
Hempy’s employment agreement expires in 2005.





Various
legal claims arise from time to time in the normal course of business which, in
the opinion of management, will have no material effect on the Company’s
consolidated financial statements.








17. **Regulatory
Matters** :





The Bank
is subject to the regulations of certain federal and state agencies and receives
periodic examinations by those regulatory authorities. In addition, the Bank is
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
Bank’s 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 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 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, 2004, that the Bank meets all capital adequacy
requirements to which it is subject.





As of
December 31, 2004, the most recent notification from the FDIC categorized the
Bank as 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.





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 Well******
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **Capitalized
    Under******
    
    
    
    
    
    
    
    
    For Capital
    
    
    
    
    
    **Prompt
      Corrective******
    
    
    Actual
    
    
    
    
    
    **Adequacy
      Purposes**
    
    
    
    
    
    **Action
      Provisions******
    
    
    Amount
    
    
    **Ratio**
    
    
    **Amount**
    
    
    **Ratio**
    
    
    **Amount**
    
    
    **Ratio**As
      of December 31, 2004:Total
      capital (to riskweighted
      assets)
    
    $
    53,861,279
    
    
    11.29
    %
    $
    38,166,400
    
    
    8
    %
    $
    47,708,000
    
    
    10
    %Tier
      I capital (to riskweighted
      assets)
    
    
    48,637,300
    
    
    10.19
    %
    
    19,083,200
    
    
    4
    %
    
    28,624,800
    
    
    6
    %Tier
      I capital (to leverageassets)
    
    
    48,637,300
    
    
    9.71
    %
    
    20,034,440
    
    
    4
    %
    
    25,043,050
    
    
    5
    %As
      of December 31, 2003:Total
      capital (to riskweighted
      assets)
    
    $
    46,260,473
    
    
    12.20
    %
    $
    30,363,200
    
    
    8
    %
    $
    37,954,000
    
    
    10
    %Tier
      I capital (to riskweighted
      assets)
    
    
    41,516,223
    
    
    10.95
    %
    
    15,181,600
    
    
    4
    %
    
    22,772,400
    
    
    6
    %Tier
      I capital (to leverageassets)
    
    
    41,516,223
    
    
    9.82
    %
    
    16,903,360
    
    
    4
    %
    
    21,129,200
    
    
    5
    %








18. **Parent
Company Financial Information** :





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





**BALANCE
SHEETS**


December
31





**2004**
    
    
    **2003**Assets:Cash
      deposited with the Bank
    
    $
    265,907
    
    $
    222,094Prepaid
      expenses
    
    
    4,000
    
    
    4,000Deferred
      income taxes
    
    
    323,000
    
    
    246,000Investment
      in the Bank, at cost plus equityin
      earnings
    
    
    48,799,150
    
    
    41,761,756$
    49,392,057
    
    $
    42,233,850Liabilities
      and stockholders' equity:Liabilities
    
    $
    -
    
    $
    -Stockholders'
      equity
    
    
    49,392,057
    
    
    42,233,850$
    49,392,057
    
    $
    42,233,850





**STATEMENTS
OF INCOME**


For the
Periods Ended December 31





**2004**
    
    **2003**
    
    **2002**Income:Cash
      dividends from the Bank
    
    $
    1,280,000
    
    $
    1,625,000
    
    $
    1,405,000Interest
      income
    
    
    -
    
    
    -
    
    
    5,7981,280,000
    
    
    1,625,000
    
    
    1,410,798Expenses:Investor
      relations
    
    
    61,937
    
    
    65,596
    
    
    81,005Legal
      and registration expense
    
    
    71,549
    
    
    70,958
    
    
    42,435Personnel
      costs paid to Bank
    
    
    63,781
    
    
    50,585
    
    
    32,483197,267
    
    
    187,139
    
    
    155,923Income
      before income tax benefitand
      equity in undistributedearnings
      of the Bank
    
    
    1,082,733
    
    
    1,437,861
    
    
    1,254,875Income
      tax benefit
    
    
    77,000
    
    
    72,000
    
    
    58,000Equity
      in undistributed earnings of the Bank
    
    
    6,789,019
    
    
    5,320,806
    
    
    2,141,544Net
      income
    
    $
    7,948,752
    
    $
    6,830,667
    
    $
    3,454,419











**STATEMENTS
OF CASH FLOWS**


For the
Periods Ended December 31







**2004**
    
    **2003**
    
    **2002**Cash
      flows from operating activities:Net
      income
    
    $
    7,948,752
    
    $
    6,830,667
    
    $
    3,454,419Adjustments
      to reconcile net incometo
      net cash provided by operatingactivities:Equity
      in undistributed earnings of
    
    
    (6,789,069
    )
    
    (5,320,806
    )
    
    (2,141,544
    )the
      BankPrepaid
      expenses
    
    
    -
    
    
    -
    
    
    (1,500
    )Deferred
      income taxes
    
    
    (77,000
    )
    
    (72,000
    )
    
    (58,000
    )Net
      cash provided by operatingactivities
    
    
    1,082,683
    
    
    1,437,861
    
    
    1,253,375Cash
      flows from financing activities:Proceeds
      from stock options exercised
    
    
    1,127,879
    
    
    540,515
    
    
    661,132Dividends
      paid
    
    
    (2,163,789
    )
    
    (1,841,438
    )
    
    (1,610,219
    )Shares
      repurchased and retired
    
    
    (2,960
    )
    
    (3,700
    )
    
    (1,251,269
    )Net
      cash used in financingactivities
    
    
    (1,038,870
    )
    
    (1,304,623
    )
    
    (2,200,356
    )Net
      increase (decrease) in cash
    
    
    43,813
    
    
    133,238
    
    
    (946,981
    )Cash,
      beginning of period
    
    
    222,094
    
    
    88,856
    
    
    1,035,837Cash,
      end of period
    
    $
    265,907
    
    $
    222,094
    
    $
    88,856





ITEM
9Changes
In and Disagreements with Accountants on Accounting and FinancialDisclosure







The Audit
Committee of the Board of Directors of the Company approved a change in
auditors. At a meeting of the Audit Committee held on November 9, 2004, the
Audit Committee appointed Moss Adams LLP to serve as the Company’s independent
public accountants, effective January 1, 2005. Moss Adams LLP will replace
Zirkle, Long, Trigueiro, & Ward, L.L.C. (“ZLT & W”). Pursuant to written
notice dated November 8, 2004, ZLT & W declined to stand for re-appointment
after completion of the current audit. ZLT & W completed the audit of the
Company’s consolidated financial statements for the fiscal year ending December
31, 2004.






ZLT &
W performed audits of the consolidated financial statements for the two years
ended December 31, 2003 and 2002. Their reports did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope, or accounting principles.






During
the two years ended December 31, 2003 and 2002 and from December 31,
2003 through November 8, 2004, the effective date of ZLT & W’s notice
that it has declined to stand for re-appointment, there have been no
disagreements between the Company and ZLT & W on any matter of accounting
principles or practice, financial statement disclosure, or auditing scope of
procedure, which disagreements would have caused ZLT & W to make reference
to the subject matter of such disagreements in connection with its report.















During
the two years ended December 31, 2003 and 2002, and from December 31, 2003
through November 8, 2004, the effective date of ZLT & W’s notice that
it has declined to stand for re-appointment, ZLT & W did not advise the
Company of any of the following matters:











1.
    
    That
      the internal controls necessary for the Company to develop reliable
      financial statements did not exist;2.
    
    That
      information had come to ZLT & W’s attention that had led it to no
      longer be able to rely on management’s representations, or that had made
      it unwilling to be associated with the financial statements prepared by
      management;3.
    
    That
      there was a need to expand significantly the scope of the audit of the
      Company, or that information had come to ZLT & W’s attention during
      the two years ended December 31, 2003 and 2002, and from December 31,
      2003 through November 8, 2004, that if further investigated: (i) may
      materially impact the fairness or reliability of either: a
      previously-issued audit report or underlying financial statements; or the
      financial statements issued or to be issued covering the fiscal periods
      subsequent to the date of the most recent financial statements covered by
      an audit report (including information that may prevent it from rendering
      an unqualified audit report on those financial statements), or (ii) may
      cause it to be unwilling to rely on management’s representations or be
      associated with the Company’s financial statements and that, due to its
      determination to not stand for re-appointment, or for any other reason,
      ZLT & W did not so expand the scope of its audit or conduct such
      further investigation; or4.
    
    That
      information had come to ZLT & W’s attention that it had concluded
      materially impacted the fairness or reliability of either: (i) a
      previously issued audit report or the underlying financial statements, or
      (ii) the financial statements issued or to be issued covering the
      fiscal period subsequent to the date of the most recent financial
      statements covered by an audit report (including information that, unless
      resolved to the accountant’s satisfaction, would prevent it from rendering
      an unqualified audit report on those financial statements), and that, due
      to ZLT & W’s determination to not stand for re-appointment, or for any
      other reason, the issue has not been resolved to ZLT & W’s
      satisfaction prior to its determination to not stand for
      re-appointment.











ZLT &
W has furnished a letter to the SEC dated November 8, 2004 stating that it
agrees with the above statements.




During
the two years ended December 31, 2003 and 2002 and from January 1, 2004
through November 9, 2004, the date on which Moss Adams LLP was engaged to be the
Company’s independent accountant, neither the Company nor anyone on its behalf
had consulted Moss Adams LLP with respect to any accounting or auditing issues
involving the Company. In particular, there was no discussion with the Company
regarding the application of accounting principles to a specified transaction,
the type of audit opinion that might be rendered on the financial statements, or
any related item.








ITEM
9AControls
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, 2004 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.








*Management’s
Report on Internal Control Over Financial Reporting*





The
management of the Company 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 its
internal control over financial reporting at December 31, 2004. 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, 2004, the
internal control system over financial reporting met those
criteria.





The
Company’s independent auditors, Zirkle,
Long, Trigueiro, & Ward, L.L.C, have issued an attestation report on the
Company’s internal control over financial reporting. The attestation report can
be found on pages 31 and 32 of this document.








ITEM
9b.Other
Information





None





**PART
III**





ITEM
10Directors
and Executive Officers of the Company





The
information regarding “Directors and Executive Officers of the Registrant” of
the Bank is incorporated by reference from the sections entitled “ELECTION OF
DIRECTORS—Nominees and Continuing Directors,” “SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT” and “COMPLIANCE WITH SECTION 16(a) FILING
REQUIREMENTS” of the Company’s 2005 Annual Meeting Proxy Statement (the “Proxy
Statement”).





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” in the Company’s Proxy Statement
and is incorporated by reference.





In
September of 2003, consistent with the requirements of Sarbannes-Oxley, 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 was filed as Exhibit 14 to
the Company’s Annual Report on Form 10-K for the year-end December 31, 2003. The
Code of Ethics can also be accessed electronically by visiting the Company’s
website at www.therightbank.com .











ITEM
11Executive
Compensation





The
information regarding “Executive Compensation” is incorporated by reference from
the sections entitled “INFORMATION REGARDING THE BOARD OF DIRECTORS AND ITS
COMMITTEES—Compensation of Directors,” and “EXECUTIVE COMPENSATION” of the Proxy
Statement.





ITEM
12Security
Ownership of Certain Beneficial Owners and Management





The
information regarding “Security Ownership of Certain Beneficial Owners and
Management” is incorporated by reference from the sections entitled “ELECTION OF
DIRECTORS—Nominees and Continuing Directors,” and “SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT” of the Proxy Statement.








ITEM
13Certain
Relationships and Related Transactions





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








ITEM
14Principal
Accountant Fees and Services





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








ITEM
15Exhibits
and Financial Statement Schedules





(a)(2)   Financial
Statement Schedules





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)(3)   Exhibit
Index





Exhibit


3.1
    Amended
      Articles of Incorporation (1)


3.2
    Amended
      Bylaws (1)


10.2
    1995
      Incentive Stock Option Plan (2)


10.3
    1999
      Employee Stock Option Plan (2)


10.4
    1995
      Director’s Stock Option Plan (2)


10.5 1999
Director’s Stock Option Plan (2)


10.6
    Form
      of Executive Severance Agreement for Messrs. Hagstrom, Reynolds, and
      Hansen (2)


10.7  Executive
Employment Agreement for Daniel J. Hempy (2)


10.8  Executive
Employment Agreement for Hal Brown (3)


10.9  Executive
Severance Agreement for Roger Busse (4)


14 Code of
Ethics for Senior Financial Officers and


Principal
Executive Officer (5)


23.1
Accountants Consent of Zirkle, Long, Triguiero, & Ward, L.L.C.


31.1  302
Certification, Hal Brown, President and Chief Executive Officer


31.2  302
Certification, Michael A. Reynolds, Senior Vice President and


Chief
Financial Officer


32
Certifications Pursuant to 18 U.S.C. Section 1350























(1)
    Incorporated
      by reference to Exhibits 3.1 and 3.2 of the Company’s Quarterly Report on
      10-Q for the Quarter ended March 31, 2004.





(2)
    Incorporated
      by reference to Exhibits 10.2, 10.3, 10.4, 10.5, and 10.6 of the Company’s
      Quarterly Report on 10-Q for the Quarter ended June 30,
    1999.





(3)
    Incorporated
      by reference to Exhibit 10.1 of the Company’s Quarterly Report on 10-Q for
      the Quarter ended September 30, 2002.





(4)
    Incorporated
      by reference to Exhibit 10.8 of the Company’s Annual Report on 10-K for
      the year ended December 31, 2002.





(5)
    Incorporated
      by reference to Exhibit 14 of the Company’s Annual Report on 10-K for the
      year ended December 31, 2003.











****













**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 4, 2005.





**PACIFIC
CONTINENTAL CORPORATION**


(Company)











By:  /s/
Hal Brown


Hal
Brown


President
and 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 4th day of March, 2005.





**Principal
Executive Officer**











By  /s/
Hal Brown    President
and 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. Ballin    Director
and


Robert A.
Ballin    Chairman
of the Board











By  /s/
Donald G. Montgomery    Director  By  /s/
Michael D. Holzgang   Director


Donald G.
Montgomery    Vice
Chairman   Michael
D. Holzgang











By  /s/
Donald A. Bick    Director  By  /s/
Ronald F. Taylor   Director


Donald A.
Bick      Ronald F.
Taylor











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


Larry G.
Campbell      Donald L.
Krahmer, Jr.








By  /s/
Michael Holcomb    Director  By /s/
John H. Rickman   Director


Michael
Holcomb      John H.
Rickman