**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, 2006





COMMISSION
      FILE NUMBER 0-30106





**PACIFIC
      CONTINENTAL CORPORATION**


(Exact
      name of registrant as specified in its charter)





**OREGON
      93-1269184**


(State
      of
      Incorporation) (IRS Employer Identification No)





**111
      West 7th Avenue**


**Eugene,
      Oregon 97401**


(Address
      of principal executive offices)





**(541)
      686-8685**


(Registrant’s
      telephone number)





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





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


**No
      Par Value Common Stock**





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act Yes __   No X





Indicate
      by check mark if the registrant is not required to file report pursuant to
      Section 13 or Section 15(d) of the Act Yes __   No X





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





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





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


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





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





The
      aggregate market value of the voting stock held by non-affiliates of the
      Registrant at June 30, 2006 (the last business day of the most recent second
      quarter) was $173,926,000 based on the closing price as quoted on the NASDAQ
      National Market on that date.





The
      number of shares outstanding of each of the registrant’s classes of common
      stock, as of March 9, 2007, was 10,720,384 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 2007 annual meeting of shareholders.








**PACIFIC
      CONTINENTAL CORPORATION**


**FORM
      10-K**


**ANNUAL
      REPORT**


**TABLE
      OF CONTENTS**




**PART
                    1**
                
                **Page**Item
                    1:
                Business
                3Item
                    1a:
                Risk
                    Factors
                17Item
                    1b:
                Unresolved
                    Staff Comments
                17Item
                    2:
                Properties
                18Item
                    3:
                Legal
                    Proceedings
                18Item
                    4:
                Submission
                    of Matters to a Vote of Security Holders
                19**PART
                    II**Item
                    5:
                Market
                    for Company’s Common Equity, Related
                    Stockholder Matters, and Issuer Purchases of Equity
                    Securities
                19Item
                    6:
                Selected
                    Financial Data
                22Item
                    7:
                Management’s
                    Discussion and Analysis of Financial Condition and Results of
                    Operations
                23Item
                    7a:
                Quantitative
                    and Qualitative Disclosures About Market Risk
                36Item
                    8:
                Financial
                    Statements and Supplementary Data
                38Item
                    9:
                Changes
                    In and Disagreements with Accountants on
                    Accounting and Financial Disclosure
                70Item
                    9a:
                Controls
                    and Procedures
                70Item
                    9b:
                Other
                    Information
                71**PART
                    III**
                (Items
                    10 through 14 are incorporated by reference from
                  Pacific
                    Continental Corporation’s definitive proxy statement for the annual
                    meeting of shareholders scheduled for April 24, 2007)Item
                    10:
                Directors,
                    Executive Officers and Corporate Governance
                71Item
                    11:
                Executive
                    Compensation
                71Item
                    12:
                Security
                    Ownership of Certain Beneficial Owners
                    and Management and Related Stockholders Matter
                72Item
                    13:
                Certain
                    Relationships, Related Transactions and Director Independence
                72Item
                    14:
                Principal
                    Accountant Fees and Services
                72**PART
                    IV**Item
                    15:
                Exhibits
                    and Financial Statement Schedules
                72**SIGNATURES**
                
                74**CERTIFICATIONS**
                
                75





**PART
      I**





**Item
      1.*****Business***


**General**





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





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





On
      November 30, 2005, the Company acquired NWB Financial Corporation (“NWBF”) for a
      combination of stock and cash and entered the metropolitan Seattle market in
      the
      State of Washington. Combined, the stock and cash transaction was valued at
      approximately $40.4 million. The acquisition was accounted for under the
      purchase method of accounting and, accordingly, the results of operations of
      NWBF have been included in the consolidated financial statements only since
      the
      date of acquisition. For more information regarding the Company’s acquisition of
      NWBF see “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations” and “Financial Statements and Supplementary Data” in
      Items 7 and 8 of this Form 10-K.





With
      the
      acquisition of NWBF, the Bank now operates in three primary markets: Portland,
      Oregon / Southwest Washington market; Seattle, Washington market; and Lane
      County, Oregon market. The Bank opened its fifth full-service office in the
      Portland / Southwest Washington market in Vancouver, Washington during the
      second quarter 2006. At December 31, 2006, the Bank operated fourteen
      full-service offices and two consumer finance lending offices in seven Oregon
      and two Washington cities. During the fourth quarter 2006, the Bank lost the
      use
      of its office in Bellevue, Washington due to an accident at a nearby
      construction site, which severely damaged the Bank’s facility. The Bank expects
      to open a temporary office in the Bellevue market during first quarter 2007
      and
      will use a temporary facility until the original office location is repaired,
      which is expected during third quarter 2007. The Bank has not lost any clients
      due to the temporary closure of the Bellevue office and is fully insured for
      any
      damage to its facility.





Subsequent
      to December 31, 2006, the Bank announced it would close its existing Tualatin,
      Oregon office and relocate to a new highly visible site on I-5, approximately
      one mile from the current office location. Construction of the new Tualatin,
      Oregon office is expected to be completed during the fourth quarter
      2007.





**Results**





For
      the
      year ended December 31, 2006, the consolidated net income of the Company was
      $12.7 million or $1.18 per diluted share. At December 31, 2006, the consolidated
      equity of the Company was $95.7 million with 10.6 million shares outstanding
      and
      a book value of $8.99 per share. Total assets were $885.4 million. Loans,
      including loans held for sale, net of allowance for loan losses, were $761.0
      million at December 31, 2006 and represented 86% of total assets. Deposits
      totaled $641.3 million at year-end 2006. For more information regarding the
      Company’s financial condition and results of operations, see “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations” and
“Financial Statements and Supplementary Data” in sections 7 and 8 of this Form
      10-K.








3








**THE
      BANK**




**General**





The
      Bank
      commenced operations on August 15, 1972. At December 31, 2006, the Bank operated
      fourteen banking offices and two consumer finance lending offices in Oregon
      and
      Washington. The primary business strategy of the Bank is to provide
      comprehensive banking and related services tailored to community-based business,
      not-for-profits, professional service providers and private banking services
      for
      business owners and executives. The Bank emphasizes the diversity of its product
      lines, high levels of personal service, and through technology, offers
      convenient access typically associated with larger financial institutions,
      while
      maintaining local decision-making authority and market knowledge, typical of
      a
      local community bank. More information on the Bank and its banking services
      can
      be found on its website www.therightbank.com. The Bank operates under the
      banking laws of the State of Oregon, State of Washington and the rules and
      regulations of the FDIC and the Federal Reserve Bank of San Francisco.





**Primary
      Market Area**





The
      Bank’s primary markets consist of the metropolitan Portland, which includes
      Southwest Washington, and Eugene areas in the State of Oregon and the
      metropolitan Seattle area in the State of Washington. The Bank has five
      full-service banking offices in the metropolitan Portland and Southwest
      Washington area, seven full-service banking offices in the metropolitan Eugene
      area, and two full-service offices in the metropolitan Seattle area. In
      addition, the Bank operates consumer finance lending offices in the Oregon
      cities of Eugene and Coos Bay. The Bank has its headquarters and administrative
      office in the city of Eugene.





**Competition**





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





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







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






4


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







**Services
      Provided**





**Lending
      Activities**





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





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





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





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





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





The
      Bank
      offers credit card services to its business customers and uses an outside vendor
      for credit card processing. In addition, the Bank provides merchant bankcard
      processing services, through an outside processor, for its business
      customers.





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





The
      Bank
      has a Consumer Finance Division which operates under the business name Pacific
      Continental Finance. At December 31, 2006, this Division had approximately
      $11.1
      million in outstanding loans which are primarily secured loans to individuals
      for various purposes including automobiles, mobile homes, boats, and home
      improvements or home equity loans. At December 31, 2006, approximately 84%
      of
      Consumer Finance loans were secured by real estate. 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.





5


**Deposit
      Services**





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





The
      Bank
      has invested continuously in image technology since 1994 for the processing
      of
      checks. The Bank was the first financial institution in Lane, Multnomah,
      Clackamas, and Washington Counties to offer this service. In addition, the
      Bank
      provides on-line banking services to businesses and consumers and allows 24-hour
      customer access to deposit and loan information via telephone and on-line cash
      management products.





**Merchant
      Card Services**





The
      Bank
      provides merchant card services to its clients, which includes processing of
      credit card transactions and issuance of business credit cards. This service
      is
      an integral part of the Bank’s business focus to market to community-based
      business, not-for-profits, and service providers. During 2006, the Company
      processed approximately $150 million in credit card transactions for its
      merchant clients.





**Other
      Services**





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





**Employees**





At
      December 31, 2006, the Bank employed 257 full-time equivalent employees with
      226
      in Oregon and 31 in Washington. None of these employees are represented by
      labor
      unions, and management believes that the Company’s relationship with employees
      is good. The Company emphasizes a positive work environment for its employees,
      which is validated by recognition from independent third parties. The Bank
      was
      recognized for the fifth consecutive year by *Oregon
      Business Magazine* as one
      of *Oregon’s
      Best 100 Companies* for
      which
      to work. In addition, in 2004, the Bank was named as the number one small
      company (employees under 250) to work for in the State of Oregon by Oregon
      Business Magazine. Management continually strives to retain and attract top
      talent as well as provide career development opportunities to enhance skill
      levels. A number of benefit programs are available to eligible employees,
      including group medical plans, paid sick leave, paid vacation, group life
      insurance, 401(k) plans, and equity compensation plans.





**Supervision
      and Regulation**





*General*





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







6




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





*Federal
      Bank Holding Company Regulation*





General .
      The
      Company is a bank holding company as defined in the Bank Holding Company Act
      of
      1956, as amended (“BHCA”), and is therefore subject to regulation, supervision
      and examination by the Federal Reserve. In general, the BHCA limits the business
      of bank holding companies to owning or controlling banks and engaging in other
      activities closely related to banking. The Company must file reports with and
      provide the Federal Reserve with such additional information as it may require.





Holding
      Company Bank Ownership .
      The
      BHCA 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 .
      The
      Company is 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.








7








*Federal
      and State Regulation of Pacific Continental Bank*





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





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





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, and
      follow credit underwriting procedures that are at least as stringent, as those
      prevailing at the time for comparable transactions with persons not covered
      above and who are not employees; and (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 certain non-capital safety and soundness standards upon banks.
      These
      standards cover internal controls, information systems and internal audit
      systems, loan documentation, credit underwriting, interest rate exposure, asset
      growth, compensation, fees and benefits, such other operational and managerial
      standards as the agency determines to be appropriate, and standards for asset
      quality, earnings and stock valuation. An institution that fails to meet these
      standards must develop a plan acceptable to its regulators, specifying the
      steps
      that the institution will take to meet the standards. Failure to submit or
      implement such a plan may subject the institution to regulatory sanctions.





*Interstate
      Banking And Branching*





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





8


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





*Deposit
      Insurance*





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




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





*Dividends*





The
      principal source of the Company’s cash reserves is dividends received from the
      Bank and the payment of these dividends is subject to government regulation.
      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%.





9




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





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





In
      2006,
      the federal banking agencies, including the FDIC and the Federal Reserve,
      provided notice of proposed rulemaking that would change the existing risk-based
      capital framework by enhancing its risk sensitivity. Whether such revisions
      are
      implemented or what effect they might have on the Company or the Bank cannot
      be
      predicted at this time, but we do not expect our operations to be significantly
      impacted.





*Corporate
      Governance and Accounting Legislation*





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





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





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







*Anti-terrorism
      Legislation*





USA
      Patriot Act of 2001 .
      The
      Uniting and Strengthening America by Providing Appropriate Tools Required to
      Intercept and Obstruct Terrorism Act of 2001, intended to combat terrorism,
      was
      renewed with certain amendments in 2006 (the “Patriot Act”). Certain provisions
      of the Patriot Act were made permanent and other sections are now subject to
      extended “sunset” provisions. The Patriot Act, in relevant part, (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 includes provisions providing the government with power
      to
      investigate terrorism, including expanded government access to bank account
      records. While the Patriot Act has had minimal affect on our record keeping
      and
      reporting expenses, we do not believe that the renewal and amendment will have
      a
      material adverse effect on our business or operations.





10




*Financial
      Services Modernization*





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





*Recent
      Legislation*





Financial
      Services Regulator Relief Act of 2006. In
      October 2006, the President signed the Financial Services Regulatory Relief
      Act
      of 2006 into law (the “Relief Act”). The Relief Act amends several existing
      banking laws and regulations. It eliminates some unnecessary and overly
      burdensome regulations of depository institutions and clarifies several existing
      regulations. The Relief Act, among other things, (i) authorizes the Federal
      Reserve Board to set reserve ratios; (ii) amends national bank regulations
      relating to shareholder voting and granting of dividends; (iii) amends several
      provisions relating to such issues as loans to insiders, regulatory
      applications, privacy notices, and golden parachute payments; and (iv) expands
      and clarifies the enforcement authority of federal banking regulators. It is
      too
      early to predict the impact this legislation may have on us, but we do not
      expect our business, expenses, or operations will be significantly
      impacted.





*Effects
      Of Government Monetary Policy*





Our
      earnings and growth are affected not only by general economic conditions, but
      also by the fiscal and monetary policies of the federal government, particularly
      the Federal Reserve. The Federal Reserve implements national monetary policy
      for
      such purposes as curbing inflation and combating recession, 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.







11




**Statistical
      Information**





*Selected
      Quarterly Information*





The
      following chart contains data for the last eight quarters ending December 31,
      2006. All data, except per share data, is in thousands of dollars.





**YEAR**
                
                
                
                
                
                **2006**
                
                
                
                
                
                **2005****QUARTER**
                
                **Fourth**
                
                **Third**
                
                **Second**
                
                **First**
                
                **Fourth**
                
                **Third**
                
                **Second**
                
                **First**Interest
                    income
                
                $
                16,743
                
                $
                16,062
                
                $
                15,165
                
                $
                14,002
                
                $
                11,697
                
                $
                9,791
                
                $
                9,432
                
                $
                8,673Interest
                    expense
                
                
                6,139
                
                
                5,865
                
                
                5,269
                
                
                4,642
                
                
                3,150
                
                
                2,323
                
                
                2,111
                
                
                1,769Net
                    interest income
                
                
                10,604
                
                
                10,197
                
                
                9,896
                
                
                9,360
                
                
                8,547
                
                
                7,468
                
                
                7,321
                
                
                6,904Provision
                    for loan loss
                
                
                -
                
                
                150
                
                
                200
                
                
                250
                
                
                300
                
                
                250
                
                
                325
                
                
                225Noninterest
                    income
                
                
                1,033
                
                
                1,354
                
                
                1,056
                
                
                957
                
                
                970
                
                
                1,050
                
                
                1,091
                
                
                972Noninterest
                    expense
                
                
                6,590
                
                
                6,109
                
                
                5,704
                
                
                5,389
                
                
                5,191
                
                
                4,253
                
                
                4,360
                
                
                4,330Net
                    income
                
                
                3,093
                
                
                3,441
                
                
                3,188
                
                
                2,932
                
                
                2,754
                
                
                2,469
                
                
                2,305
                
                
                2,050PER
                    COMMONSHARE
                    DATANet
                    income (basic)
                
                $
                0.29
                
                $
                0.32
                
                $
                0.30
                
                $
                0.28
                
                $
                0.30
                
                $
                0.28
                
                $
                0.26
                
                $
                0.24Net
                    income (diluted)
                
                $
                0.29
                
                $
                0.32
                
                $
                0.30
                
                $
                0.28
                
                $
                0.29
                
                $
                0.27
                
                $
                0.26
                
                $
                0.23Cash
                    dividends
                
                $
                0.08
                
                $
                0.08
                
                $
                0.08
                
                $
                0.08
                
                $
                0.07
                
                $
                0.07
                
                $
                0.07
                
                $
                0.07WEIGHTED
                    AVERAGE SHARES OUTSTANDINGBasic
                
                
                10,630,313
                
                
                10,592,960
                
                
                10,525,387
                
                
                10,379,908
                
                
                9,307,691
                
                
                8,782,476
                
                
                8,747,028
                
                
                8,697,517Diluted
                
                
                10,833,801
                
                
                10,703,864
                
                
                10,710,295
                
                
                10,566,140
                
                
                9,591,642
                
                
                9,002,313
                
                
                8,990,960
                
                
                8,955,573





**Investment
      Portfolio**





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






**INVESTMENT
      PORTFOLIO**


**ESTIMATED
      FAIR VALUE**


(dollars
      in
      thousands)


**December
                31,****2006**
            
            
            **2005**
            
            
            **2004**US
                Treasury, US Government agencies and corporations, andagency
                mortgagebacked securities
            
            $
            14,501
            
            $
            16,757
            
            $
            6,390Obligations
                of states and political subdivisions
            
            
            5,596
            
            
            4,820
            
            
            3,059Other
                mortgage-backed securities
            
            
            18,686
            
            
            17,768
            
            
            18,109Total
            
            $
            38,783
            
            $
            39,345
            
            $
            27,558








12








The
      following chart presents the fair value of each investment category by maturity
      date and includes a weighted average yield for each period. Mortgage-backed
      securities have been classified based on their December 31, 2006 projected
      average life.





**SECURITIES
        AVAILABLE-FOR-SALE**
 (dollars
        in thousands)
  Within
                    One Year
                
                
                
                After
                    One Year But Within five Years
                
                
                
                After
                    Five Years But Within Ten Years
                
                
                
                After
                    Ten YearsAmount
                
                
                Yield
                
                
                Amount
                
                
                Yield
                
                
                Amount
                
                
                Yield
                
                
                Amount
                
                
                YieldUS
                    Treasury, US Governmentagencies
                    and agency mortgage-backed
                    securities
                
                $
                4,593
                
                
                5.27
                %
                $
                26,072
                
                
                5.25
                %
                $
                497
                
                
                5.29
                %
                $
                2,026
                
                
                5.49
                %Obligations
                    of states and politicalsubdivisions
                
                
                476
                
                
                5.43
                %
                
                997
                
                
                5.20
                %
                
                3,225
                
                
                4.04
                %
                
                897
                
                
                3.93
                %Total
                
                $
                5,069
                
                
                5.29
                %
                $
                27,069
                
                
                5.25
                %
                $
                3,722
                
                
                4.20
                %
                $
                2,923
                
                
                5.01
                %




**Loan
      Portfolio**





Loans
      represent a significant portion of the Company’s total assets. Average balance
      and average rates paid by category of loan is included in Table I, “Average
      Balance Analysis of Net Interest Earnings”, on page 29 of the Company’s
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” included later in this report. The following tables contain
      information related to the Company’s loan portfolio, including loans held for
      sale, for the five-year period ended December 31, 2006.





**LOAN
        PORTFOLIO**
 (dollars
        in
        thousands)
 **December
                  31,**
              ****
              ****
              ****
              ****
              ********
              ****
              ****
              **2006**
              ****
              ****
              **2005**
              ****
              ****
              **2004**
              ****
              ****
              **2003**
              ****
              ****
              **2002**Commercial
                  Loans
              
              $
              169,566
              
              $
              160,988
              
              $
              107,538
              
              $
              89,127
              
              $
              94,345Real
                  Estate Loans
              
              
              590,855
              
              
              507,479
              
              
              341,111
              
              
              255,150
              
              
              222,727Loans
                  held for sale
              
              
              2,140
              
              
              642
              
              
              2,072
              
              
              1,958
              
              
              5,546Consumer
                  Loans
              
              
              9,168
              
              
              12,463
              
              
              10,380
              
              
              11,424
              
              
              9,579771,729
              
              
              681,572
              
              
              461,101
              
              
              357,659
              
              
              332,197Deferred
                  loan origination fees
              
              
              (2,489
              )
              
              (2,609
              )
              
              (2,061
              )
              
              (1,582
              )
              
              (1,394
              )769,240
              
              
              678,963
              
              
              459,040
              
              
              356,077
              
              
              330,803Allowance
                  for loan losses
              
              
              (8,284
              )
              
              (7,792
              )
              
              (5,224
              )
              
              (5,225
              )
              
              (4,403
              )$
              760,956
              
              $
              671,171
              
              $
              453,816
              
              $
              350,852
              
              $
              326,400


13








The
      following table presents loan portfolio information by loan category related
      to
      maturity and repricing sensitivity. Variable rate loans are included in the
      time
      frame in which the interest rate on the loan could be first adjusted. Loans
      held
      for sale of $2,140 are included in the Real Estate category.





**MATURITY
        AND REPRICING DATA FOR LOANS**
 (dollars
        in thousands)
 **Commercial**
              ****
              **Real
                  Estate**
              ****
              **Consumer**
              ****
              **Total**Three
                  months or less
              
              $
              101,367
              
              $
              261,139
              
              $
              5,748
              
              $
              368,254Over
                  three months through 12 months
              
              
              8,273
              
              
              38,618
              
              
              478
              
              
              47,369Over
                  1 year through 3 years
              
              
              13,474
              
              
              114,851
              
              
              1,023
              
              
              129,348Over
                  3 years through 5 years
              
              
              32,167
              
              
              119,039
              
              
              852
              
              
              152,058Over
                  5 years through 15 years
              
              
              14,285
              
              
              59,348
              
              
              1,067
              
              
              74,700Total
                  loans
              
              $
              169,566
              
              $
              592,995
              
              $
              9,168
              
              $
              771,729




**Loan
      Concentrations**





At
      December 31, 2006, residential construction loans totaled $100,996 and
      represented 13.1% of outstanding loans. In addition, at December 31, 2006,
      unfunded loan commitments for residential construction totaled approximately
      $59,642. 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 77% 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.





Within
      the loan portfolio, loans in the hotel/motel industry account for 3.3% of the
      total loan portfolio at December 31, 2006. There were no foreclosed or
      non-accrual hotel/motel properties as of year end December 31, 2006. All
      hotel/motel loans are performing according to their contractual terms. In view
      of the uncertainties in this industry, the Company continues to carefully
      monitor loans made by the Bank in this industry.




**NONPERFORMING
        ASSETS**
 (dollars
        in thousands)
 **December
                  31,**
              ****
              ****
              ****
              ****
              ****
              ****
              ********
              ****
              ****
              **2006**
              ****
              ****
              **2005**
              ****
              ****
              **2004**
              ****
              ****
              **2003**
              ****
              ****
              **2002**Nonaccrual
                  loans
              
              $
              -
              
              $
              180
              
              $
              1,004
              
              $
              1,506
              
              $
              6,17690
                  or more days past due and still accruing
              
              
              -
              
              
              -
              
              
              213
              
              
              545
              
              
              359Total
                  nonperforming loans
              
              
              -
              
              
              180
              
              
              1,217
              
              
              2,051
              
              
              6,535Government
                  guarantees
              
              
              -
              
              
              (28
              )
              
              (101
              )
              
              (233
              )
              
              (1,563
              )Net
                  nonperforming loans
              
              
              -
              
              
              152
              
              
              1,116
              
              
              1,818
              
              
              4,972Foreclosed
                  assets
              
              
              -
              
              
              131
              
              
              262
              
              
              411
              
              
              864Total
                  nonperforming assets
              
              $
              -
              
              $
              283
              
              $
              1,378
              
              $
              2,229
              
              $
              5,836Nonperforming
                  assets as a percentage ofof
                  total assets
              
              
              0.00
              %
              
              0.04
              %
              
              0.27
              %
              
              0.52
              %
              
              1.54
              %




If
      interest on nonaccrual loans had been accrued, such income would have been
      approximately $14, $89, and $98, respectively, for years 2006, 2005 and 2004.








14


**Allowance
      for Loan Loss**





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





**ALLOWANCE
        FOR LOAN LOSS**
 (dollars
        in
        thousands)
  **December
                  31,**
              ****
              ****
              ****
              ****
              ****
              ****
              ********
              ****
              ****
              **2006**
              ****
              ****
              **2005**
              ****
              ****
              **2004**
              ****
              ****
              **2003**
              ****
              ****
              **2002**Balance
                  at beginning of year
              
              $
              7,792
              
              $
              5,224
              
              $
              5,225
              
              $
              4,403
              
              $
              3,418Charges
                  to the allowanceReal
                  estate loans
              
              
              -
              
              
              (214
              )
              
              (79
              )
              
              (843
              )
              
              (4,138
              )Consumer
                  loans
              
              
              (71
              )
              
              (106
              )
              
              (269
              )
              
              (104
              )
              
              (123
              )Commercial
              
              
              (152
              )
              
              (316
              )
              
              (168
              )
              
              (238
              )
              
              (542
              )Total
                  charges to the allowance
              
              
              (223
              )
              
              (636
              )
              
              (516
              )
              
              (1,185
              )
              
              (4,803
              )Recoveries
                  against the allowanceReal
                  estate loans
              
              
              4
              
              
              37
              
              
              73
              
              
              799
              
              
              49Consumer
                  loans
              
              
              20
              
              
              56
              
              
              54
              
              
              15
              
              
              10Commercial
              
              
              91
              
              
              31
              
              
              70
              
              
              103
              
              
              69Total
                  recoveries against the allowance
              
              
              115
              
              
              124
              
              
              197
              
              
              917
              
              
              128Acquisition
              
              
              -
              
              
              2,014
              
              
              -
              
              
              190
              
              
              -Provisions
              
              
              600
              
              
              1,100
              
              
              500
              
              
              900
              
              
              5,660Unfunded
                  commitments *
              
              
              -
              
              
              (34
              )
              
              (182
              )
              
              -
              
              
              -Balance
                  at end of the year
              
              $
              8,284
              
              $
              7,792
              
              $
              5,224
              
              $
              5,225
              
              $
              4,403Net
                  charge offs as a percentage of totalaverage
                  loans
              
              
              0.01
              %
              
              0.10
              %
              
              0.08
              %
              
              0.08
              %
              
              1.62
              %




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





The
      following table sets forth the allowance for loan losses allocated by loan
      type
      at December 31, 2006:




Real
                  estate loans
              
              $
              5,749Consumer
                  loans
              
              
              149Commercial
              
              
              2,306Unallocated
              
              
              80Allowance
                  for loan losses
              
              $
              8,284


During
      2006, the Bank recorded a provision for loan losses of $600 compared to $1,100
      for the year 2005. The decrease in the loan loss provision reflected improvement
      in credit quality throughout the year 2006 and is reflective of the fact that
      at
      December 31, 2006, the Bank has no nonperforming loans or assets. At December
      31, 2006, the recorded investment in certain loans totaling $496 was considered
      impaired. Impaired loans at December 31, 2006 consist of two loans to a single
      borrower totaling $496 that are performing under revised terms. A specific
      reserve of $109 is provided for these loans and is included in the $8,284
      allowance for loan losses at December 31, 2006.








15





**Deposits**





Deposits
      represent a significant portion of the Company’s liabilities. Average balance
      and average rates paid by category of deposit is included in 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 on page 30 of this report. The chart below details the Company’s time
      deposits at December 31, 2006. 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
                  Deposits****of
                  $100,000**
              
              **of
                  less than**
              
              **Total****Or
                  more**
              
              **$100,000**
              
              **Time
                  Deposits**Three
                  months or less
              
              $
              24,782
              
              $
              23,909
              
              $
              48,691Over
                  three months through twelve months
              
              
              17,281
              
              
              20,446
              
              
              37,727Over
                  one year through three years
              
              
              6,365
              
              
              3,904
              
              
              10,269Over
                  three years
              
              
              448
              
              
              440
              
              
              888$
              48,876
              
              $
              48,699
              
              $
              97,575




**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, 2006,
      the
      Bank had unsecured and secured borrowing lines totaling approximately $370,000.
      At December 31, 2006, available unsecured borrowing lines with various
      correspondent banks and a secured line with the Federal Reserve Bank of San
      Francisco was approximately $104,000. The Federal Home Loan Bank of Seattle
      (FHLB) also provides a secured borrowing line using a blanket pledge of
      commercial real estate loans. The Bank’s FHLB borrowing limit at December 31,
      2006 was 30% of assets or $266,000, subject to sufficient collateral and stock
      investment.





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




In
      addition to these borrowings at December 31, 2006, the Bank had other FHLB
      borrowings in the amount of $36,804 with a weighted average remaining maturity
      of 2 years.





**Long-term
      Borrowings**





The
      Company acquired $8,248 in junior subordinated debentures on November 28, 2005,
      due on January 7, 2036, to help fund the acquisition of NWBF. These debentures
      are priced at 6.265% for five years and then convert to a floating rate
      instrument at 135 basis points over the 3-month LIBOR.








16








ITEM
      1ARisk
      Factors





*Our
      business exposes us to certain risks. The following is a discussion of the
      most
      significant risks and uncertainties that may affect our business, financial
      condition and future results.*





**Fluctuating
      interest rates can adversely affect our profitability**





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





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





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





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





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





ITEM
      1BUnresolved
      Staff Comments





*None*








17








ITEM
      2Properties





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





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





2)
            Building
                with approximately 4,000 square feet located on West 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 approximately 5,900 square feet
                on the
                second floor and leases out, or is seeking to lease out, the remaining
                space.





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





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





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





The
      Bank
      leases facilities for branch offices in Seattle, Washington, Bellevue,
      Washington, Portland, Oregon, Vancouver, Washington, 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 use. The Bank is presently investigating
      additional space in Eugene, Oregon to house various Bank administrative
      departments.





During
      the fourth quarter 2006, the Bank lost the use of its office in Bellevue,
      Washington due to an accident at a nearby construction site, which severely
      damaged the Bank’s facility. The Bank expects to open a temporary office in the
      Bellevue market during first quarter 2007 and will use the temporary facility
      until the original office location is repaired, which is expected during third
      quarter 2007. The Bank has not lost any clients due to the temporary closure
      of
      the Bellevue office and is fully insured for any damage to its facility.





Subsequent
      to December 31, 2006, the Bank announced it would close its existing Tualatin,
      Oregon office and relocate to a new highly visible site on I-5, approximately
      one mile from the current office location. Construction of the new Tualatin,
      Oregon office is expected to be completed during the fourth quarter
      2007.





ITEM
      3Legal
      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.








18








ITEM
      4Submissions
      of
      Matters to a Vote of Security Holders





There
      were no matters submitted to a vote of security holders during the fourth
      quarter of 2006.





**PART
      II**





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





*Issuer
      Purchases of Securities*





The
      Company did not repurchase any shares of its common stock during the fourth
      quarter of 2006. The Company had no sales of securities during the past three
      years, other than those issued pursuant to its stock option plans.





*Dividends*





The
      Company pays cash dividends on a quarterly basis, typically in March, June,
      September and December of each year. The Board of Directors considers the
      dividend amount quarterly and takes a broad perspective in its dividend
      deliberations including a review of recent operating performance, capital
      levels, and growth projections. The Board also considers dividend payout ratios,
      dividend yield, and other financial metrics in setting the quarterly dividend.
      The Company declared and paid cash dividends of $0.32 per share for the year
      2006. That compares to cash dividends of $0.28 per share paid for the year
      2005.





*Equity
      Compensation Plan Information*





**Year
                Ended December 31, 2006****Number
                of Shares to be Issued Upon Exercise of Outstanding Options, Warrants
                and
                Rights****(2)(3)**
            **Weighted-Average
                Exercise Price of Outstanding Options, Warrants and Rights****(3)**
            **Number
                of Shares Remaining Available for Future Issuance Under Equity
                Compensation Plans****(2)****Equity
                compensation plans approved by security holders****(1)**
            780,932
            $
                13.56
            404,950**Equity
                compensation plans not approved by security
                holders**
            0
            $0
            0





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





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





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


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





*Market
      Information*





The
      Company’s common stock trades on the NASDAQ Global Market under the symbol PCBK.
      At March 9, 2007, the Company had 10,720,384 shares of common stock outstanding
      held by approximately 669 shareholders.





The
      high,
      low and closing sales prices (based on daily closing price) for the last eight
      quarters are shown in the table below.











19


**YEAR**
            ****
            **2006**
            ****
            ****
            ****
            ****
            **2005**
            ****
            ******QUARTER**
            **Fourth**
            **Third**
            **Second**
            **First**
            ****
            **Fourth**
            **Third**
            **Second**
            **First**Market
                value:High
            $19.60
            $18.25
            $17.35
            $17.50
            
            $16.20
            $16.30
            $16.25
            $16.25Low
            18.08
            15.75
            16.01
            15.50
            
            15.10
            13.75
            15.00
            15.45Close
            19.45
            18.24
            16.50
            16.70
            
            15.89
            15.75
            15.20
            15.75





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





**STOCK
      PERFORMANCE GRAPH**












20


The
      above
      graph and following table compares the total cumulative shareholder return
      on
      the Company’s Common Stock, based on reinvestment of all dividends, to the
      cumulative total returns of the Russell 2000 Index and SNL Securities $500
      to $1
      Billion Bank Asset Size Index. The graph assumes $100 invested on December
      31,
      2001, in the Company’s Common Stock and each of the indices.





Period
                  EndingIndex
              
              12/31/01
              
              12/31/02
              
              12/31/03
              
              12/31/04
              
              12/30/05
              
              12/31/06Pacific
                  Continental Corporation
              
              
              100.00
              
              
              117.16
              
              
              175.00
              
              
              221.05
              
              
              226.95
              
              
              282.91Russell
                  2000
              
              
              100.00
              
              
              79.52
              
              
              117.09
              
              
              138.55
              
              
              144.86
              
              
              171.47SNL
                  $500M-$1B Bank Index
              
              
              100.00
              
              
              127.67
              
              
              184.09
              
              
              208.62
              
              
              217.57
              
              
              247.44








21


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)




**2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002**For
                  the yearNet
                  interest income
              
              $
              40,057
              
              $
              30,240
              
              $
              24,952
              
              $
              22,220
              
              $
              19,689Provision
                  for loan losses
              
              $
              600
              
              $
              1,100
              
              $
              500
              
              $
              900
              
              $
              5,660Noninterest
                  income
              
              $
              4,401
              
              $
              4,083
              
              $
              4,463
              
              $
              4,946
              
              $
              4,200Noninterest
                  expense
              
              $
              23,791
              
              $
              18,134
              
              $
              16,041
              
              $
              15,202
              
              $
              12,594Income
                  taxes
              
              $
              7,412
              
              $
              5,510
              
              $
              4,925
              
              $
              4,233
              
              $
              2,181Net
                  income
              
              $
              12,655
              
              $
              9,578
              
              $
              7,948
              
              $
              6,831
              
              $
              3,454Cash
                  dividends
              
              $
              3,381
              
              $
              2,556
              
              $
              2,164
              
              $
              1,841
              
              $
              1,610Per
                  common share data (1)Net
                  income:Basic
              
              $
              1.20
              
              $
              1.08
              
              $
              0.93
              
              $
              0.81
              
              $
              0.41Diluted
              
              $
              1.18
              
              $
              1.05
              
              $
              0.90
              
              $
              0.79
              
              $
              0.41Cash
                  dividends
              
              $
              0.32
              
              $
              0.28
              
              $
              0.25
              
              $
              0.22
              
              $
              0.19Market
                  value, end of year
              
              $
              19.45
              
              $
              15.89
              
              $
              15.75
              
              $
              12.71
              
              $
              8.70At
                  year endAssets
              
              $
              885,351
              
              $
              791,794
              
              $
              516,630
              
              $
              425,799
              
              $
              379,846Loans,
                  less allowance for loan loss (2)
              
              $
              760,957
              
              $
              671,171
              
              $
              453,817
              
              $
              350,852
              
              $
              326,400Deposits
              
              $
              641,272
              
              $
              604,271
              
              $
              403,791
              
              $
              356,099
              
              $
              309,909Shareholders'
                  equity
              
              $
              95,735
              
              $
              81,412
              
              $
              49,392
              
              $
              42,234
              
              $
              36,698Average
                  for the yearAssets
              
              $
              825,671
              
              $
              573,717
              
              $
              463,509
              
              $
              402,195
              
              $
              337,258Earning
                  assets
              
              $
              755,680
              
              $
              533,930
              
              $
              431,374
              
              $
              369,574
              
              $
              305,763Loans,
                  less allowance for loan losses
              
              $
              712,563
              
              $
              501,541
              
              $
              398,739
              
              $
              342,192
              
              $
              284,614Deposits
              
              $
              605,814
              
              $
              461,013
              
              $
              379,618
              
              $
              329,157
              
              $
              271,765Interest-paying
                  liabilities
              
              $
              567,708
              
              $
              372,880
              
              $
              290,569
              
              $
              256,441
              
              $
              211,745Shareholders'
                  equity
              
              $
              90,238
              
              $
              54,528
              
              $
              46,043
              
              $
              39,758
              
              $
              36,117Financial
                  ratiosReturn
                  on average:Assets
              
              
              1.53
              %
              
              1.67
              %
              
              1.71
              %
              
              1.70
              %
              
              1.02
              %Equity
              
              
              14.02
              %
              
              17.57
              %
              
              17.26
              %
              
              17.18
              %
              
              9.56
              %Avg
                  shareholders' equity / avg assets
              
              
              10.93
              %
              
              9.50
              %
              
              9.93
              %
              
              9.89
              %
              
              10.71
              %Dividend
                  payout ratio
              
              
              26.72
              %
              
              26.69
              %
              
              27.23
              %
              
              26.95
              %
              
              46.61
              %Risk-based
                  capital:Tier
                  I capital
              
              
              9.93
              %
              
              9.32
              %
              
              10.19
              %
              
              10.95
              %
              
              10.23
              %Tier
                  II capital
              
              
              10.98
              %
              
              10.48
              %
              
              11.29
              %
              
              12.20
              %
              
              11.47
              %(1)
                  Per common share data is retroactively adjusted to reflect the
                  5-for-4
                  stock split, and 4-for-3 stock split of
                  2004 and 2003, respectively.(2)
                  Outstanding loans include loans held for sale.




22


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
      "forward-looking statements" within the meaning of the Private Securities
      Litigation Reform Act of 1995 ("PSLRA"). Such forward-looking statements are
      subject to risks and uncertainties that may cause actual results to differ
      materially from those projected, including but not limited to the following:
      the
      concentration of loans of the company's banking subsidiary, particularly with
      respect to commercial and residential real estate lending; changes in the
      regulatory environment and increases in associated costs, particularly ongoing
      compliance expenses and resource allocation needs in response to the
      Sarbanes-Oxley Act and related rules and regulations; vendor quality and
      efficiency; employee recruitment and retention, specifically in the Bank's
      Portland and Seattle markets; the company's ability to control risks associated
      with rapidly changing technology both from an internal perspective as well
      as
      for external providers; increased competition among financial institutions;
      fluctuating interest rate environments; and similar matters. Regarding the
      acquisition of Northwest Business Bank, completed on November 30, 2005, the
      combined company may fail to realize the projected cost savings, revenue
      enhancement, and accretive earnings. Readers are cautioned not to place undue
      reliance on the forward-looking statements. Pacific Continental Corporation
      undertakes no obligation to publicly revise or update the forward-looking
      statements to reflect events or circumstances that arise after the date of
      this
      release. Readers should carefully review any risk factors described in Pacific
      Continental’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and
      other documents, including any Current Reports on Form 8-K furnished to or
      filed
      from time to time with the Securities Exchange Commission. This statement is
      included for the express purpose of invoking PSLRA's safe harbor
      provisions.








**HIGHLIGHTS**





**2006**(2)
            
            **2005**(2)
            
            **%
                Change**
              **2006
                vs. 2005**
            
            **2004**
            
            **%
                Change**
              **2005
                vs. 2004**Operating
                revenue(1)
            
            $
            44,458
            
            $
            34,323
            
            
            30
            %
            $
            29,415
            
            
            17
            %Net
                income
            
            $
            12,655
            
            $
            9,578
            
            
            32
            %
            $
            7,948
            
            
            21
            %Earnings
                per share(3)Basic
            
            $
            1.20
            
            $
            1.08
            
            
            11
            %
            $
            0.93
            
            
            16
            %Diluted
            
            $
            1.18
            
            $
            1.05
            
            
            12
            %
            $
            0.90
            
            
            17
            %Assets,
                period-end
            
            $
            885,351
            
            $
            791,794
            
            
            12
            %
            $
            516,630
            
            
            53
            %Deposits,
                period-end
            
            $
            641,272
            
            $
            604,271
            
            
            6
            %
            $
            403,791
            
            
            50
            %Return
                on assets
            
            
            1.53
            %
            
            1.67
            %
            
            
            
            
            1.71
            %Return
                on equity
            
            
            14.02
            %
            
            17.57
            %
            
            
            
            
            17.26
            %Return
                on tangible equity(4)
            
            
            19.12
            %
            
            18.25
            %
            
            
            
            
            17.26
            %





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





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





(3)
            Per
                share data for 2004 was retroactively adjusted to reflect the 5-for
                4
                stock split declared in September
                2004.





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





23


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





When
      comparing 2006 and 2005 results, it is also fair to consider the effects of
      several unusual transactions and the adoption of new accounting standards.
      Effective January 1, 2006, the Company implemented FAS 123(R), *”
      Share-Based Payment,”* which
      requires the expensing of stock-based compensation. The Company elected to
      implement FAS 123(R) using the modified prospective method, meaning there was
      no
      restatement of prior periods. For the year ended December 31, 2006, the Company
      recognized $586 in stock-based compensation expense within the income statement.
      Had the accounting principle been effective in 2005, the Company would have
      recognized $515 in stock-based compensation expense which would have reduced
      full year 2005 diluted earnings per share by $0.06. Also during 2005 the Oregon
      legislature, as required in the Oregon Constitution, refunded to the Company
      a
      state income tax “kicker” reducing 2005 state income taxes by $241 which was
      recognized by the Company in the fourth quarter, increasing diluted earnings
      per
      share for the year 2005 by $0.02.




During
      the third quarter 2006, the Company sold two rental properties that the Bank
      had
      purchased in 1988 and held for possible office expansion. The sale resulted
      in a
      pretax non-interest income gain of $335. In addition, during the third quarter
      2006, the Bank expensed the remaining unamortized loan premium of $101 from
      its
      2003 purchase of the Coos Bay consumer finance office. The net after-tax gain
      associated with these two unusual transactions resulted in a $0.01 per diluted
      share contribution to full year 2006 earnings.




The
      Company earned $9,578 in 2005 compared to $7,948 in 2004. Growth in operating
      revenue was primarily responsible for the increased earnings in 2005 over 2004.
      Operating revenues in 2005 grew by $4,908 or 17% over 2004. Operating revenue
      growth was driven by a 24% increase in average earning assets resulting in
      a 21%
      increase in net interest income. The increase in net interest income was
      partially offset by a 9% decline in noninterest income due to lower service
      charges on deposit accounts, other deposit related service fees, and income
      from
      the origination of residential mortgages.





Period-end
      assets at December 31, 2006 were $885,351, compared to $791,794 at December
      31,
      2005. Core deposits, which are defined as demand deposits, interest checking,
      money market accounts, and local time deposits (including local time deposits
      over $100 thousand) constitute 90% of December 31, 2006 outstanding deposits.
      Demand deposits were $187,834 or 29% of total deposits at year-end December
      31,
      2006.





During
      2007, the Company believes the following factors could impact reported financial
      results:





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





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





§
            The
                ability to grow core deposits, to fund expected loan growth during
                2007.





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





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





24


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





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





§
            The
                performance of new and relocated offices in the metropolitan Portland
                area.





§
            The
                performance and growth of loans and deposits in the metropolitan
                Seattle
                area.





**SUMMARY
      OF CRITICAL ACCOUNTING POLICIES**





The
      SEC
      defines “critical accounting policies” as those that require the application of
      management’s most difficult, subjective, or complex judgments, often as a result
      of the need to make estimates about the effect of matters that are inherently
      uncertain and may change in future periods. Significant accounting policies
      are
      described in Note 1 of the *Notes
      to Consolidated Financial Statements* for the
      year ended December 31, 2006 in Item 8 of this report. Management believes
      that
      the following policies and those disclosed in the *Notes
      to Consolidated Financial Statements* should
      be considered critical under the SEC definition:





***Allowance
      for Loan Losses and Reserve for Unfunded Commitments***





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





***Goodwill
      and Intangible Assets***





At
      December 31, 2006, the Company had $23,626 in goodwill and other intangible
      assets. In accordance with Financial Accounting Standard 142, *Goodwill
      and Other Intangible Assets* ,
      assets
      with indefinite lives are no longer amortized, but instead are periodically
      tested for impairment. Management performs an impairment analysis of the
      intangible assets with indefinite lives at least annually and has determined
      that there was no impairment as of December 31, 2006 and 2005.





***Share-based
      Compensation***





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued FAS
      123(R), *Share
      Based Payment* ,
      a
      revision to the previously issued guidance on accounting for stock options
      and
      other forms of equity-based forms of compensation issued to employees. This
      standard became effective in the first quarter of 2006.





The
      method for determining the grant date fair value of equity based payments under
      FAS 123(R) is the same as the method used by the Company to calculate the pro
      forma impact on 2005 and 2004 net income and earnings per share as presented
      in
      Note 1 of the Notes to Consolidated Financial Statements in Item 8 below.





25


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





***Recent
      Accounting Pronouncements*** ****





Recent
      accounting pronouncement are discussed in Note 1 of the Notes to the
      Consolidated Financial Statements for the year ended December 31, 2006 in item
      8
      of this report. None of these pronouncements are expected to have a significant
      effect on the Company’s financial condition or results of
      operations.





**RESULTS
      OF OPERATIONS**





***Net
      Interest Income***





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





Two
      tables follow which analyze the changes in net interest income for 2006, 2005,
      and 2004. 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.





***2006
      Compared to 2005***





Net
      interest income for 2006 was $40,057, an increase of $9,817 over 2005 net
      interest income of $30,240. The growth in net interest income in 2006 over
      2005
      was attributable to a $221,750 or 42% increase in earning assets. The
      acquisition of NWBF in November 30, 2005 was accounted for under the purchase
      method of accounting, thus the assets acquired and liabilities assumed have
      been
      included in the balance sheet only since the date of acquisition. The earning
      assets acquired in this transaction accounted for approximately $145,000 of
      the
      growth in earning assets in 2006 when compared to 2005. For the year 2006,
      the
      net interest income as a percentage of earning assets decreased by 36 basis
      points from 5.66% to 5.30%. Much of the decline in the net interest margin
      in
      2006 when compared to 2005 can be attributed to the acquisition of NWBF, which
      had a much lower net interest margin at 4.20% than the Bank’s net interest
      margin of approximately 5.68% prior to the acquisition. The Bank’s net interest
      margin when adjusted for the unusual accelerated amortization of the Coos Bay
      loan premium (described in the “Highlights” above) was very stable and improved
      throughout the year as evidenced by sequential margins beginning with first
      quarter 2006 of 5.25%, and increasing each quarter to 5.28%, 5.34%, and 5.35%,
      respectively. This improvement in the quarterly net interest margin can be
      attributed to core deposit growth, which accelerated during the last nine months
      of the year.





For
      2006,
      interest and fees earned on earning assets increased by $22,379 over 2005.
      Referring to Table II, total interest income and fees improved by $16,566 due
      to
      increased earning asset volumes and improved $5,813 due to higher yields on
      earning assets. Average earning assets for 2006 were $755,681, a 42% increase
      over 2005 average earning assets. Growth in earning assets was primarily
      attributable to loan growth as average loans, net of the allowance for loan
      losses for the year 2006, were up $211,022 or 42% over 2005. The acquisition
      of
      NWBF increased average loans by approximately $145,000 in 2006 when compared
      to
      2005. Referring to Table I, earning asset yields increased by 78 basis points,
      from 7.42% in 2005 to 8.20% in 2006. The improvement in earning asset yield
      was
      primarily due to increased loan yields, which were up 78 basis points in 2006
      over 2005. The increase in loan yields is reflective of the consistent increase
      in the prime-lending rate throughout the first six months of 2006.





26


Interest
      expense on interest-bearing liabilities during 2006 increased by $12,562 or
      over
      2005. Referring to Table I, overall average interest-bearing liabilities in
      2006
      increased by $194,828 over 2005, while the average rate paid on interest-bearing
      liabilities increased by 135 basis points from 2.51% to 3.86%. The acquisition
      of NWBF accounted for a substantial portion of the growth in interest-bearing
      deposits in addition to the organic growth from the two Oregon markets.
      Referring to Table II, interest expense increased by $5,874 due to the change
      in
      the mix and increased volumes of interest-bearing liabilities. Table II also
      indicates that interest expense for the year increased an additional $6,688
      due
      to higher rates, a direct result of the increase in short-term market interest
      rates during the first six months of 2006. Table II shows the increase in the
      average volumes of money market and NOW accounts, time deposits, and FHLB
      borrowings, were primarily responsible for the increase in interest expense
      due
      to higher volumes for 2006 when compared to 2005. The increase in interest
      expense for the year 2006 over 2005 resulting from higher rates was primarily
      due to increased volumes and higher rates paid on money market and NOW accounts,
      time deposits, and FHLB borrowings. Table I shows the 2006 average volume of
      money market and NOW accounts increased $87,073 or 40%, and average time deposit
      volume increased $38,360 or 51% over 2005 average volumes, while the rate on
      these deposits increased 124 basis points and 132 basis points, respectively.
      Tables I and II shows that the increase in the average volume of FHLB term
      borrowings increased $59,654 and accounted for $2,244 or 38% of the total
      increase in interest expense for the year 2006 over 2005 that was related to
      volume. The average volume of trust preferred securities increased by $7,480
      in
      2006 over 2005, which resulted in $462 additional interest expense in 2006
      over
      2005. The Trust preferred securities were issued in conjunction with the
      acquisition of NWBF and thus were only included in the 2005 average balance
      sheet since the date of acquisition on November 30, 2005.





The
      Company’s 2006 net interest margin benefited from growth in noninterest-bearing
      deposits. For the year 2006, average noninterest-bearing deposits grew by
      $19,958 or 14% over 2005. Average noninterest-bearing deposits funded 20% of
      total average assets for the year 2006.





During
      the first six months of 2006, the Federal Reserve increased short-term rates
      by
      100 basis points in a continuation of rising interest rates that began in June
      2004. Since June 29, 2006, the Federal Reserve has held short-term market
      interest rates steady with the overnight Fed Funds rate at approximately 5.25%
      and the prime-lending rate at 8.25%. Although the Bank is asset sensitive,
      meaning the net interest margin should improve during a rising rate environment,
      the increases in market interest rates during 2005 and 2006 had little positive
      effect on the net interest margin. This was primarily the result of two factors.
      First, a flat and inverted yield curve, where long-term rates rose at a much
      slower pace than short-term rates kept the yields on fixed rate loans low,
      thus
      narrowing the spread between the Bank’s borrowing and core deposit costs and the
      yield on its new and existing fixed rate loan portfolio. Second, consistently
      throughout the first six months of 2006, there was a timing lag between the
      increases in short-term money market rates, which moved borrowing costs and
      deposit rates up in advance of the Bank’s prime-lending rate also creating
      margin compression.





Looking
      forward to the first quarter 2007, the Company expects the net interest margin
      to be flat to down slightly from the 5.35% net interest margin recorded for
      the
      fourth quarter 2006. Historically, the Bank’s Oregon market experiences flat to
      negative growth in its core deposit base during the first quarter of each year,
      while loan activity remains strong. This would potentially decrease the Bank’s
      net interest margin as the reduction in core deposits typically occurs in lower
      cost demand and commercial money market accounts.





The
      Company believes there are opportunities during 2007 to improve the net interest
      margin through core deposit growth. Steady growth is expected in the Bank’s Lane
      County market, while growth in the Seattle area is expected to markedly improve.
      In addition, the relatively new Vancouver, Washington office and the relocation
      of the Tualatin office in the Bank’s Portland market is expected to contribute
      to core deposit growth in Oregon during 2007. However, any improvement the
      Bank’s net interest margin during 2007 is highly dependent upon core deposit
      growth.





27





***2005
      Compared to 2004***





Net
      interest income for 2005 was $30,240, an increase of $5,288 over 2004 net
      interest income of $24,952. For the year 2005, the net interest income as a
      percentage of earning assets decreased by 12 basis points from 5.78% to 5.66%.
      Generally, the decline in the net interest margin in 2005 when compared to
      2004
      can be attributed to the Bank’s cost of funds rising faster than the yield on
      its loan portfolio.





For
      the
      year 2005, interest and fees earned on earning assets increased by $10,168
      or
      35% over 2004. Referring to Table II, total interest income and fees improved
      by
      $7,329 due to increased earning asset volumes and improved $2,839 due to higher
      yields on earning assets. Average earning assets for 2005 were $533,930, a
      24%
      increase over 2004 average earning assets. Growth in earning assets was
      primarily attributable to loan growth as average loans, net of the allowance
      for
      loan losses for the year 2005, were up $102,802 or 26% over 2004. Referring
      to
      Table I, earning asset yields increased by 60 basis points, from 6.82% in 2004
      to 7.42% in 2005. The improvement in earning asset yield was primarily due
      to
      increased loan yields, which were up 55 basis points in 2005 over 2004. The
      increase in loan yields is reflective of the consistent increase in the
      prime-lending rate throughout the year 2005.





Interest
      expense on interest-bearing liabilities during 2005 increased by $4,880 or
      109%
      over 2004. Referring to Table I, overall average interest-bearing liabilities
      in
      2005 increased by $82,311 or 28% over 2004, while the average rate paid on
      interest-bearing liabilities increased by 97 basis points from 1.54% to 2.51%.
      Referring to Table II, interest expense increased by $1,901 due to the change
      in
      the mix and increased volumes of interest-bearing liabilities. Table II also
      indicates that interest expense for the year increased an additional $2,979
      due
      to higher rates, a direct result of the increase in short-term market interest
      rates throughout the year 2005. Table II shows the increase in the average
      volumes of money market and NOW accounts, time deposits, and FHLB borrowings,
      were primarily responsible for the increase in interest expense due to higher
      volumes for 2005 when compared to 2004. Again referring to Table II, the
      increase in interest expense for the year 2005 over 2004 resulting from higher
      rates was primarily due to increased rates paid on money market and NOW accounts
      and time deposits. Table I shows the 2005 average volume of money market and
      NOW
      accounts increased $41,166 or 23% and average time deposit volume increased
      $20,584 or 38% over 2004 average volumes, while the rate on these deposits
      increased 110 basis points and 97 basis points, respectively. The increase
      in
      time deposit volume primarily involved local market time deposits in excess
      of
      $100, national time deposits, and public deposits. Table II shows that the
      increase in the average volume of FHLB term borrowings accounted for $1,084
      or
      57% of the total increase in interest expense for the year 2005 over 2004 that
      was related to volume. However, lower rates paid on FHLB advances during the
      year 2005 when compared to 2004 mitigated a portion of the increase in interest
      expense from the higher usage of FHLB advances.





The
      Company’s 2005 net interest margin benefited from growth in noninterest-bearing
      deposits. For the year 2005, average noninterest-bearing deposits grew by
      $16,962 or 14% over 2004. Average noninterest-bearing deposits funded 25% of
      total average assets for the year 2005.





During
      2005, the Federal Reserve increased short-term rates as they did during the
      last
      six months of 2004. From January 2005 through December 2005, the Federal Reserve
      increased short-term interest rates by 200 basis points on top of the 125 basis
      point increase in short-term rates during the last six months of 2004. The
      increase in market interest rates during 2005 increased the Bank’s prime-lending
      rate from 5.25% at the beginning of the year to 7.25% at year end 2005. Although
      the Bank was asset sensitive, meaning the net interest margin would improve
      during a rising rate environment, the increases in market interest rates during
      2005 had little positive effect on the net interest margin. This was primarily
      the result of two factors. First, a flattening yield curve, where long-term
      rates rose at a much slower pace than short-term rates keeping the yields on
      fixed rate loans low, thus narrowing the spread between the Bank’s borrowing and
      core deposit costs and the yield on its fixed rate loan portfolio. Second,
      consistently throughout the year 2005, there was a timing lag between the
      increases in short-term money market rates, which moved borrowing costs and
      deposit rates up in advance of the Bank’s prime-lending rate also creating
      margin compression.








28







**Table
      I**


**Average
      Balance Analysis of Net Interest Earnings**


**(dollars
      in thousands)**


**2006**
              
              
              
              
              
              
              
              
              **2005**
              
              
              
              
              
              
              
              
              **2004****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 interest-bearing
                  deposits in banks
              
              $
              960
              
              $
              44
              
              
              4.62
              %
              $
              1,002
              
              $
              26
              
              
              2.62
              %
              $
              1,248
              
              $
              15
              
              
              1.24
              %Securities
                  available for sale:Taxable
                  (1)
              
              
              38,855
              
              
              1,546
              
              
              3.98
              %
              
              29,142
              
              
              965
              
              
              3.31
              %
              
              30,009
              
              
              936
              
              
              3.12
              %Tax-exempt
              
              
              3,302
              
              
              125
              
              
              3.79
              %
              
              2,245
              
              
              82
              
              
              3.64
              %
              
              1,378
              
              
              50
              
              
              3.61
              %Loans,
                  net of allowance for loanlosses(2)(3)(4)
              
              
              712,563
              
              
              60,257
              
              
              8.46
              %
              
              501,541
              
              
              38,520
              
              
              7.68
              %
              
              398,739
              
              
              28,424
              
              
              7.13
              %Total
                  interest earning assets
              
              
              755,680
              
              
              61,972
              
              
              8.20
              %
              
              533,930
              
              
              39,593
              
              
              7.42
              %
              
              431,374
              
              
              29,425
              
              
              6.82
              %**Non
                  Earning Assets**Cash
                  and due from banks
              
              
              23,272
              
              
              
              
              
              
              
              
              19,324
              
              
              
              
              
              
              
              
              16,523Premises
                  and equipment
              
              
              17,694
              
              
              
              
              
              
              
              
              14,923
              
              
              
              
              
              
              
              
              12,898Interest
                  receivable and other
              
              
              29,025
              
              
              
              
              
              
              
              
              5,540
              
              
              
              
              
              
              
              
              2,714Total
                  non interest earning assets
              
              
              69,991
              
              
              
              
              
              
              
              
              39,787
              
              
              
              
              
              
              
              
              32,135Total
                  assets
              
              $
              825,671
              
              
              
              
              
              
              
              $
              573,717
              
              
              
              
              
              
              
              $
              463,509**Interest-Bearing
                  Liabilities**Money
                  market and NOW accounts
              
              $
              307,054
              
              $
              (10,551
              )
              
              -3.44
              %
              $
              219,981
              
              $
              (4,840
              )
              
              -2.20
              %
              $
              178,815
              
              $
              (1,960
              )
              
              -1.10
              %Savings
                  deposits
              
              
              23,559
              
              
              (360
              )
              
              -1.53
              %
              
              24,148
              
              
              (222
              )
              
              -0.92
              %
              
              21,465
              
              
              (130
              )
              
              -0.61
              %Time
                  deposits
              
              
              112,943
              
              
              (4,970
              )
              
              -4.40
              %
              
              74,583
              
              
              (2,299
              )
              
              -3.08
              %
              
              53,999
              
              
              (1,142
              )
              
              -2.11
              %Federal
                  funds purchased
              
              
              7,580
              
              
              (380
              )
              
              -5.01
              %
              
              4,730
              
              
              (113
              )
              
              -2.39
              %
              
              12,596
              
              
              (213
              )
              
              -1.69
              %FHLB
                  borrowings
              
              
              108,324
              
              
              (5,144
              )
              
              -4.75
              %
              
              48,670
              
              
              (1,831
              )
              
              -3.76
              %
              
              23,694
              
              
              (1,028
              )
              
              -4.34
              %Trust
                  preferred
              
              
              8,248
              
              
              (510
              )
              
              -6.18
              %
              
              768
              
              
              (48
              )
              
              -6.27
              %
              
              -
              
              
              -Total
                  interest-bearing liabilities
              
              
              567,708
              
              
              (21,915
              )
              
              -3.86
              %
              
              372,880
              
              
              (9,353
              )
              
              -2.51
              %
              
              290,569
              
              
              (4,473
              )
              
              -1.54
              %**Noninterest-Bearing
                  Liabilities**Demand
                  deposits
              
              
              162,259
              
              
              
              
              
              
              
              
              142,301
              
              
              
              
              
              
              
              
              125,339Interest
                  payable and other
              
              
              5,466
              
              
              
              
              
              
              
              
              4,008
              
              
              
              
              
              
              
              
              1,558Total
                  noninterest-bearing liabilities
              
              
              167,725
              
              
              
              
              
              
              
              
              146,309
              
              
              
              
              
              
              
              
              126,897Total
                  liabilities
              
              
              735,433
              
              
              
              
              
              
              
              
              519,189
              
              
              
              
              
              
              
              
              417,466Stockholders'
                  equity
              
              
              90,238
              
              
              
              
              
              
              
              
              54,528
              
              
              
              
              
              
              
              
              46,043Total
                  liabilities and stockholders' equity
              
              $
              825,671
              
              
              
              
              
              
              
              $
              573,717
              
              
              
              
              
              
              
              $
              463,509**Net
                  Interest Income**
              
              
              
              
              $
              40,057
              
              
              
              
              
              
              
              $
              30,240
              
              
              
              
              
              
              
              $
              24,952**Net
                  Interest Income as a Percent of****Earning
                  Assets**
              
              
              
              
              
              5.30
              %
              
              
              
              
              
              
              
              5.66
              %
              
              
              
              
              
              
              
              5.78
              %(1)
                  Federal Home Loan Bank stock is included in securities available
                  for
                  sale.(2)
                  Nonaccrual loans have been included in average balance
                  totals.(3)
                  Interest income includes recognized loan origination fees of $2,099,
                  $1,642 and $1,295 for the years ended 2006, 2005, and 2004,
                  respectively.(4)
                  Total includes loans held for sale.





29


**Table
      II**


**Analysis
      of Change in Interest Income and Interest Expense**


**(dollars
      in thousands)**


**2006
                  compared to 2005**
                **Increase
                  (decrease) due to**
              
              
              
              
              
              
              
              
              **2005
                  compared to 2004**
                **Increase
                    (decrease) due to****Volume**
              
              
              **Rate**
              
              
              **Net**
              
              
              **Volume**
              
              
              **Rate**
              
              
              **Net****Interest
                  earned on:**Federal
                  funds sold and interestbearing
                  deposits in banks
              
              $
              (1
              )
              $
              19
              
              $
              18
              
              $
              (3
              )
              $
              13
              
              $
              10Securities
                  available-for-sale:Taxable
              
              
              322
              
              
              259
              
              
              581
              
              
              (27
              )
              
              57
              
              
              30Tax-exempt
              
              
              38
              
              
              5
              
              
              43
              
              
              31
              
              
              1
              
              
              32Loans,
                  net of allowance for loanlosses
              
              
              16,207
              
              
              5,530
              
              
              21,737
              
              
              7,328
              
              
              2,768
              
              
              10,096Total
                  interest income
              
              
              16,566
              
              
              5,813
              
              
              22,379
              
              
              7,329
              
              
              2,839
              
              
              10,168**Interest
                  paid on:**Money
                  market and NOW accounts
              
              
              (1,915
              )
              
              (3,796
              )
              
              (5,711
              )
              
              (451
              )
              
              (2,429
              )
              
              (2,880
              )Savings
                  deposits
              
              
              5
              
              
              (142
              )
              
              (137
              )
              
              (16
              )
              
              (76
              )
              
              (92
              )Time
                  deposits
              
              
              (1,183
              )
              
              (1,489
              )
              
              (2,672
              )
              
              (435
              )
              
              (722
              )
              
              (1,157
              )Federal
                  funds purchased
              
              
              (68
              )
              
              (236
              )
              
              (304
              )
              
              133
              
              
              (33
              )
              
              100FHLB
                  borrowings
              
              
              (2,244
              )
              
              (1,032
              )
              
              (3,276
              )
              
              (1,084
              )
              
              281
              
              
              (803
              )Trust
                  preferred
              
              
              (469
              )
              
              7
              
              
              (462
              )
              
              (48
              )
              
              -
              
              
              (48
              )Total
                  interest expense
              
              
              (5,874
              )
              
              (6,688
              )
              
              (12,562
              )
              
              (1,901
              )
              
              (2,979
              )
              
              (4,880
              )Net
                  interest income
              
              $
              10,692
              
              $
              (875
              )
              $
              9,817
              
              $
              5,428
              
              $
              (140
              )
              $
              5,288




***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 $600 in 2006, $1,100 in 2005, and $500 in
      2004. The lower provision for 2006 when compared to 2005 resulted from
      improvement in credit quality throughout the year 2006. The higher provision
      for
      2005 over 2004 reflected growth in the Bank’s outstanding loans during the year.





At
      December 31, 2006, the Bank had no nonperforming assets, nonaccrual loans,
      loans
      90 days or more past due and still accruing interest, or foreclosed property.
      That compares to $283 of nonperforming assets at December 31, 2005 or 0.04%
      of
      year-end assets.





The
      allowance for loan losses at December 31, 2006 was $8,284 (1.08% of outstanding
      loans) compared to $7,792 (1.15% of loans) and $5,224 (1.14% of loans) at years
      end 2005 and 2004, respectively. The December 31, 2005 allowance for loan losses
      included $2,014 in allowance added through the acquisition of NWBF. At December
      31, 2006, the Bank also has reserved $151 for possible losses on unfunded loan
      commitments, which is classified in other liabilities. The 2006 ending allowance
      includes $109 in specific allowance for $496 in impaired loans consisting of
      two
      loans to a single borrower that are both performing under revised terms. At
      December 31, 2005, the Company had $676 of impaired loans (net of government
      guarantees) with a specific allowance assigned of $238.





30


Net
      loan
      charge offs were $108 in 2006 compared to $512 in 2005, and $319 in 2004. Net
      charge offs as a percentage of average loans were 0.01%, 0.10%, and 0.08% for
      2006, 2005, and 2004, respectively.





Looking
      forward, the 2007 provision for loans losses will be contingent on current
      economic and market conditions, and overall loan growth, as there is virtually
      no benefit available from further improvement in the loan portfolio credit
      statistics.





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





***Noninterest
      Income***





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





**2006
      Compared to 2005**





Noninterest
      income in 2006 was $4,401, up $318 or 8% from 2005. Excluding the nonrecurring
      gain on the sale of property of $335, noninterest income was down $17 from
      2005.
      Total noninterest income through December 31, 2006 included approximately $70
      of
      revenues from the Seattle market not included in 2005 results. The decrease
      in
      noninterest income (excluding the nonrecurring gain on sale of property) was
      primarily due to lower account service charges, mortgage banking revenues,
      and
      loan servicing income. Account service charges were down $44 or 3% from last
      year as the increased earnings credit on analyzed business accounts lowered
      fee
      income. Mortgage banking revenues were down $118 or 13% from 2005 as higher
      long-term interest rates slowed the level of mortgage loan originations and
      the
      service release premium on loans sold. Loan servicing income was down $43 or
      29%
      from 2005 as the average volume of loans serviced declined in 2006 from 2005.
      Declines in these categories of noninterest income was partially offset by
      $110
      increase in merchant bankcard fee income and a $67 increase in the other income
      category. The increase in merchant bankcard revenues resulted from an 83%
      increase in sales transaction volume. The increase in the other income category
      was due to lockbox fees and sundry recoveries.




**2005
      Compared to 2004**





Noninterest
      income in 2005 was $4,083, a decrease of $380 or 9% from 2004. The decline
      in
      noninterest income was primarily due to five categories: account service
      charges; NSF/OD fees; residential mortgage revenues; merchant bankcard fees;
      and
      loan servicing fees. Account service charges were down $168 or 24% from 2004
      as
      the increase in the 91-day Treasury bill rate increased the earnings credit
      on
      analyzed business demand accounts, which lowered fee income on these accounts.
      NSF/OD fees in 2005 dropped $92 or 14% from 2004 due to lower transaction
      volume. Revenues from the origination of residential mortgages were down $79
      or
      8% from 2004 as a result of higher long-term interest rates during the year
      that
      slowed loan originations. The merchant bankcard division achieved a 14% growth
      in sales transaction volume in 2005 over 2004. However, competitive pricing
      pressures resulted in a lower profit margin, thus reducing noninterest income
      from this division by $58 or 5% from 2004. Loan servicing fees in 2005 declined
      by $31 or 17% from 2004 due to a decline in the level of loans serviced for
      and
      participated to other financial institutions. Other revenue sources accounted
      for a $48 increase in noninterest revenue compared to 2004.








31




***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.





**2006
      Compared to 2005**


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





During
      2006, the Company made significant investments in people and facilities in
      all
      markets, establishing a foundation for growth in 2007. During 2007, the Company
      expects noninterest expense growth to abate from the 2006 growth rate. In
      addition, on a sequential quarter or linked quarter basis in 2007, relatively
      small increases in expenses are expected. The Company does expect certain
      expense categories to increase in 2007 over 2006, such as the new FDIC insurance
      assessment, which is expected to add approximately $300 to noninterest expense
      in 2007 when compared to 2006.





**2005
      Compared to 2004**





Noninterest
      expense in 2005 was $18,134, up $2,093 or 13% over 2004. The acquisition of
      NWBF
      accounted for approximately $133 of the total expense increase. In addition,
      the
      Bank incurred approximately $35 in merger related expenses that was ultimately
      eliminated following the systems conversion in the first quarter 2006. The
      increase in expenses in 2005 over 2004 resulted primarily from increased
      personnel expense, premises and equipment expense, advertising, and various
      other expenses. Personnel expenses were up $1,234 or 12% in 2005 over 2004
      reflecting increased staffing, increased accruals for incentive compensation,
      and higher group insurance costs. Group insurance expense accounted for $179
      of
      the total increase in personnel cost for the year 2005. Occupancy and equipment
      expense in 2005 was up $273 or 15% over 2004 reflecting remodeling costs of
      the
      Bank’s Olive Street office in Eugene, Oregon, elimination of rental income from
      the Bank’s Olive Street office, and rent expense for the Seattle market offices.
      The increase in business development expense of $246 in 2005 over 2004 was
      primarily the result of a planned increase in advertising expense related to
      production costs of new media campaigns and increased media and specialty
      advertising in the Portland market. Various other expense categories, primarily
      sundry losses, travel, and subscription expenses, accounted for the increase
      in
      the other expense category.








32


**BALANCE
      SHEET**





***Loans***





At
      December 31, 2006 outstanding loans, net of deferred loan fees and excluding
      loans held for sale, were $767,100, up $88,779 over outstanding loans of
      $678,321 at December 31, 2005. A summary of loan growth by market for the year
      2006 follows:




Outstanding
                    loans January 1, 2006
                
                $
                678,321Portland
                
                
                84,534Lane
                    County
                
                
                922Seattle
                
                
                3,323Outstanding
                    loans December 31, 2006
                
                $
                767,100





Loan
      growth rates in 2006 over 2005 for Portland, Lane County, and Seattle were
      29%,
      0%, and 2%, respectively. More information on the loan portfolio can be found
      in
      statistical information in Item 1 and in Note 4 of the *Notes
      to Consolidated Financial Statements* in Item
      8 below.





***Goodwill
      and Intangible Assets***





At
      December 31, 2006, the Company had a recorded balance of $22,306 goodwill of
      which $22,031 is from the November 30, 2005 acquisition of NWBF and $275
      from the 2003 acquisition of the Coos Bay consumer finance office. In addition,
      at December 31, 2006 the Company had $1,320 core deposit intangible assets
      resulting from the acquisition of NWBF. The core deposit intangible was
      determined to have an expected life of approximately seven years and is being
      amortized over that period using the straight-line method. During 2006, the
      Company amortized $223 of the core deposit intangible. In accordance with
      Financial Accounting Standard (“FAS”) 142, *Goodwill
      and Other Intangible Assets* ,
      the
      Company does not amortize goodwill or other intangible assets with indefinite
      lives, but instead periodically tests these assets for impairment. Management
      did perform an impairment analysis at December 31, 2006 and determined there
      was
      no impairment of the goodwill at the time of the analysis.




***Deposits***





Outstanding
      deposits at December 31, 2006 were $641,272, an increase of $37,001 over
      outstanding deposits of $604,271 at December 31, 2005. Core deposits, which
      are
      defined by the Company as demand, interest checking, money market, savings,
      and
      local time deposits, including local time deposits in excess of $100 thousand,
      were $580,210 and $529,794 at December 31, 2006 and 2005, respectively, and
      represented 90% and 88% of total deposits, respectively. A summary of deposit
      growth by market for the year 2006 follows:


Outstanding
                  deposits January 1, 2006
              
              $
              604,271Portland
              
              
              41,301Lane
                  County
              
              
              13,951Seattle
              
              
              (4,836
              )Wholesale
                  deposits
              
              
              (13,415
              )Outstanding
                  deposits December 31, 2006
              
              $
              641,272





Core
      deposit growth rates for Portland, Lane County, and Seattle markets were 50%,
      4%, and (7%), respectively.








33








***Junior
      Subordinated Debentures***





The
      Company had $8,248 in junior subordinated debentures at December 31, 2006,
      which
      were issued in conjunction with the acquisition of NWBF. At December 31, 2006,
      the entire $8,248 in junior subordinated debentures had an interest rate of
      6.265% that is fixed for a five year period. As of December 31, 2006, the entire
      balance of the junior subordinated debentures qualified as Tier 1 capital under
      regulatory capital purposes. Additional information regarding the terms of
      the
      junior subordinated debentures, including maturity/repricing dates and interest
      rate, is included in Note 12 of the *Notes
      to Consolidated Financial Statements* in Item
      8 below.





**CAPITAL
      RESOURCES**





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





Shareholders’
      equity at December 31, 2006 was $95,735, an increase of $14,323 or 18% from
      December 31, 2005. The increase in shareholders’ equity during 2006 was
      principally due to the retention of approximately $9,273 net income for the
      year
      and the exercise of stock options and the related tax benefit accounted for
      another $3,547.





The
      Federal Reserve Board and the FDIC has in place guidelines for risk-based
      capital requirements applicable to U.S. banks and bank holding companies. These
      risk-based capital guidelines take into consideration risk factors, as defined
      by regulation, associated with various categories of assets, both on and
      off-balance sheet. Under the guidelines, capital strength is measured in two
      tiers, which are used in conjunction with risk-adjusted assets to determine
      the
      risk-based capital ratios. These guidelines require a minimum of 8% total
      risk-based capital ratio, of which 4% must be Tier I capital. The regulations
      also specify that a 10% total risk-based capital ratio is required to be
      designated “well-capitalized” (the highest FDIC capital rating) by the FDIC. The
      Company’s Tier I capital, which consists of shareholders’ equity and qualifying
      trust preferred securities, less other comprehensive income, goodwill, and
      deposit-based intangibles, totaled $80,058 at December 31, 2006. Tier II capital
      components include all, or a portion of the allowance for loan losses and the
      portion of trust preferred securities in excess of Tier I statutory limits.
      The
      total of Tier I and Tier II capital components is referred to as Total
      Risk-Based Capital, and was $88,493 at December 31, 2006. The Company’s total
      risk-based capital ratio was 10.98%, compared to 10.48% at December 31,
      2005.





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.
      The Company declared and paid cash dividends of $0.32 per share for the year
      2006. That compares to cash dividends of $0.28 paid during 2005.





The
      Board
      of Directors, at its February 13, 2007 meeting, approved a dividend of $0.09
      per
      share for shareholders of record as of February 28, 2007.





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





**OFF-BALANCE
      SHEET ARRANGEMENTS AND COMMITMENTS**





In
      the
      normal course of business, the Bank commits to extensions of credit and issues
      letters of credit. The Bank uses the same credit policies in making commitments
      to lend funds and conditional obligations as it does for other credit products.
      In the event of nonperformance by the customer, the Bank’s exposure to credit
      loss is represented by the contractual amount of the instruments. Commitments
      to
      extend credit are agreements to lend to a customer as long as there is no
      violation of any condition established by the contract. Since some commitments
      may expire without being drawn upon, the total commitment amounts do not
      necessarily represent future cash requirements. At December 31, 2006, the Bank
      had $196,033 in commitments to extend credit.





34




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, 2006, the Bank had $6,720 in letters of credit and financial
      guarantees written.





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





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





**Contractual
                  Obligations**(dollars
                  in thousands)
              
              
              **Total**
              
              
              **Less
                  than One Year**
              
              
              **1
                  - 3 Years**
              
              
              **3
                  - 5 Years**
              
              
              **More
                  than 5 Years**Junior
                  subordinated debenture
              
              $
              8,248
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              8,248FHLB
                  borrowings
              
              
              131,804
              
              
              109,804
              
              
              15,500
              
              
              4,500
              
              
              2,000Time
                  Deposits
              
              
              97,575
              
              
              86,418
              
              
              10,270
              
              
              887
              
              
              -Operating
                  lease obligations
              
              
              2,898
              
              
              646
              
              
              1,096
              
              
              721
              
              
              435$
              240,525
              
              $
              196,868
              
              $
              26,866
              
              $
              6,108
              
              $
              10,683




**LIQUIDITY**





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





Core
      deposits at December 31, 2006 were 90% of total deposits compared to 88% at
      December 31, 2005. Core deposit growth of $50,416 in all markets funded 57%
      of
      loan growth during the year 2006. The remainder of loan growth was funded
      through alternative funding sources, including overnight borrowed funds, Federal
      Home Loan Bank term advances, public deposits available from the State of
      Oregon, State of Washington, and national market time deposits.




The
      Company has deposit relationships with several large clients, which are closely
      monitored by Bank officers. At December 31, 2006, thirteen large deposit
      relationships with the Bank account for $152,461 or 24% of total deposits.
      The
      single largest client represented 6% of total deposits at December 31, 2006.
      The
      loss of this deposit relationship or other large deposit relationships could
      cause an adverse effect on short-term liquidity. The Company expects to maintain
      these relationships and believes it has sufficient sources of liquidity to
      mitigate the loss of one or more of these clients.





Borrowing
      lines have been established at various correspondent banks, the Federal Home
      Loan Bank of Seattle and with the Federal Reserve Bank of San Francisco. At
      December 31, 2006, the Bank had secured and unsecured borrowing lines totaling
      approximately $370,000 consisting of $266,000 with the Federal Home Loan Bank
      of
      Seattle, $98,000 with various correspondent banks, and $6,000 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, 2006, the Bank
      had
      approximately $277,000 in commercial real estate loans pledged as collateral
      (discounted collateral value of $157,500) for this line. The $6,000 borrowing
      line with the Federal Reserve Bank of San Francisco is also secured. The $98,000
      in borrowing lines with correspondent banks is unsecured. At December 31, 2006,
      the Bank had $131,804 in borrowings outstanding all from the FHLB of Seattle
      and
      $4,410 outstanding on its overnight correspondent bank lines. In addition,
      the
      Bank is part of the State of Oregon and State of Washington community bank
      time
      deposit program and at December 31, 2006 had $4,500 available from these
      sources. The Bank’s loan portfolio also contains approximately $29,138 in
      guaranteed government loans, which can be sold on the secondary market.





35


**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. Although permitted by
      its funds management policy, the Company does not presently use derivatives
      such
      as forward and futures contracts, options, or interest rate swaps to manage
      interest rate risk. Other types of market risk such as foreign currency exchange
      rate risk and commodity price risk do not arise in the normal course of the
      Company’s business activities.





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





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





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





36


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
      2006, the model indicated that the Company continued to be asset sensitive
      and
      projects rising margins in a rising rate environment and declining margins
      in a
      falling rate environment. However, like many banks showing an asset sensitive
      position, the Bank’s net interest margin did not materially improve during 2006
      despite the increase in short-term interest rates as a result of the flat and
      inverted yield curve that existed throughout the year. The
      following table shows the estimated impact of interest rate changes plus 300
      basis point and minus 300 basis points on net interest income in 100 basis
      point
      increments. The table indicates that the Bank’s net interest income does not
      materially change in rapidly rising or falling interest rate environments,
      thus
      indicating a relatively balanced interest rate risk position. The base figure
      of
      $40,057 used in the analysis represents actual net interest income for the
      year
      2006. Due to the various assumptions used for this modeling, no assurance can
      be
      given that projections will reflect actual results.





**Interest
      Rate Shock Analysis**


**Net
      Interest Income and Market Value Performance**


($
      in
      thousands)





Projected
            
            Net
                Interest IncomeInterest
            
            Estimated
            $
                Change
            %
                ChangeRate
                Change
            
            Value
            From
                Base
            From
                Base+300
            
            $
                42,553
            $
                2,496
            6.23%+200
            
            41,896
            1,839
            4.59%+100
            
            41,030
            973
            2.43%Base
            
            40,057
            0
            0.00%-100
            
            39,204
            (853)
            (2.13)%-200
            
            38,563
            (1,494)
            (3.73)%-300
            
            37,930
            (2,127)
            (5.31)%








37


ITEM
      8Financial
      Statements and Supplementary Data














**Report
      of Independent Registered Public Accounting Firm**








To
      the
      Board of Directors and Stockholders


Pacific
      Continental Corporation and Subsidiary








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





We
      conducted our audit in accordance with auditing standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement and whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit of the financial statements included examining, on a test
      basis, evidence supporting the amounts and disclosures in the financial
      statements, assessing the accounting principles used and significant estimates
      made by management, and evaluating the overall financial statement presentation.
      Our audit of internal control over financial reporting included obtaining an
      understanding of internal control over financial reporting, 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.





The
      Company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. The Company’s internal control
      over financial reporting includes those policies and procedures that (1) pertain
      to the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the Company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the Company are
      being made










38







Report
      of
      Independent Registered Public Accounting Firm - Page Two







only
      in
      accordance with authorizations of management and Directors of the Company;
      and
      (3) provide reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of the Company's assets that
      could
      have a material effect on the financial statements.





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





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











Portland,
      Oregon


March
      12,
      2007




















39


**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.





40


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


41


**Pacific
      Continental Corporation and Subsidiaries**


**Consolidated
      Balance Sheets**





**December
                  31****2006**
              
              **2005****ASSETS**Cash
                  and due from banks
              
              $
              32,322,704
              
              $
              27,519,763Interest-bearing
                  deposits with banks
              
              
              405,759
              
              
              500,000Federal
                  funds sold
              
              
              49,520
              
              
              3,823,583Total
                  cash and cash equivalents
              
              
              32,777,983
              
              
              31,843,346Securities
                  available-for-sale, at fair value
              
              
              38,783,063
              
              
              39,344,924Loans
                  held for sale
              
              
              2,140,417
              
              
              642,180Loans,
                  less allowance for loan losses and unearned fees
              
              
              758,816,132
              
              
              670,529,157Interest
                  receivable
              
              
              3,998,139
              
              
              3,343,920Federal
                  Home Loan Bank stock
              
              
              3,479,900
              
              
              3,479,900Property,
                  net of accumulated depreciation and amortization
              
              
              18,591,317
              
              
              17,002,931Goodwill
                  and other intangible assets
              
              
              23,625,699
              
              
              24,201,458Other
                  assets
              
              
              3,138,058
              
              
              1,406,366Total
                  assets
              
              $
              885,350,708
              
              $
              791,794,182**LIABILITIES
                  and STOCKHOLDERS' EQUITY**Liabilities:Deposits:Noninterest-bearing
              
              $
              187,833,848
              
              $
              164,625,571Savings
                  and interest-bearing demand
              
              
              355,863,095
              
              
              311,308,780Time,
                  $100,000 and over
              
              
              48,875,678
              
              
              65,122,341Other
                  time
              
              
              48,699,403
              
              
              63,213,928641,272,024
              
              
              604,270,620Federal
                  funds purchased
              
              
              4,410,000
              
              
              -Federal
                  Home Loan Bank borrowings
              
              
              131,803,763
              
              
              80,803,763Junior
                  subordinated debentures
              
              
              8,248,000
              
              
              8,248,000Accrued
                  merger consideration liability
              
              
              256,360
              
              
              13,005,313Accrued
                  interest and other liabilities
              
              
              3,625,780
              
              
              4,054,492Total
                  liabilities
              
              
              789,615,927
              
              
              710,382,188Commitments
                  and contingencies (Notes 6, 17 and 19)Stockholders'
                  equity:Common
                  stock, no par value; 25,000,000 sharesauthorized;
                  10,647,264 and 10,233,580 sharesoutstanding
                  in 2006 and 2005, respectively
              
              
              58,254,777
              
              
              53,318,970Retained
                  earnings
              
              
              37,725,453
              
              
              28,452,155Accumulated
                  other comprehensive loss
              
              
              (245,449
              )
              
              (359,131
              )Total
                  stockholders' equity
              
              
              95,734,781
              
              
              81,411,994Total
                  liabilities and stockholders' equity
              
              $
              885,350,708
              
              $
              791,794,182The
                  accompanying notes are an integral part of these consolidated financial
                  statements.




42


**Pacific
      Continental Corporation and Subsidiaries**


**Consolidated
      Statements of Income**





**Year
                  Ended December 31****2006**
              
              **2005**
              
              **2004**Interest
                  income:Loans
              
              $
              60,256,669
              
              $
              38,519,936
              
              $
              28,423,964Investment
                  securities
              
              
              1,667,468
              
              
              1,058,761
              
              
              892,503Federal
                  funds sold and FHLB stock dividends
              
              
              47,822
              
              
              14,599
              
              
              108,48661,971,959
              
              
              39,593,296
              
              
              29,424,953Interest
                  expense:Deposits
              
              
              15,881,357
              
              
              7,361,230
              
              
              3,232,397Federal
                  Home Loan Bank borrowings
              
              
              5,144,325
              
              
              1,830,984
              
              
              1,027,525Federal
                  funds purchased and junior subordinated debentures
              
              
              889,436
              
              
              161,002
              
              
              213,17421,915,118
              
              
              9,353,216
              
              
              4,473,096Net
                  interest income
              
              
              40,056,841
              
              
              30,240,080
              
              
              24,951,857Provision
                  for loan losses
              
              
              600,000
              
              
              1,100,000
              
              
              500,000Net
                  interest income after provision forloan
                  losses
              
              
              39,456,841
              
              
              29,140,080
              
              
              24,451,857Noninterest
                  income:Service
                  charges on deposit accounts
              
              
              1,333,421
              
              
              1,377,695
              
              
              1,603,440Other
                  fee income, principally bankcard processing
              
              
              1,494,764
              
              
              1,384,728
              
              
              1,409,283Loan
                  servicing
              
              
              108,644
              
              
              151,878
              
              
              183,267Mortgage
                  banking income and gains on salesof
                  loans
              
              
              805,234
              
              
              922,991
              
              
              1,006,920Losses
                  on sales of securities
              
              
              -
              
              
              (10,674
              )
              
              (12,820
              )Gain
                  on sale of property
              
              
              335,341
              
              
              -
              
              
              -Other
              
              
              323,295
              
              
              256,214
              
              
              272,5794,400,699
              
              
              4,082,832
              
              
              4,462,669Noninterest
                  expense:Salaries
                  and employee benefits
              
              
              14,577,938
              
              
              11,197,445
              
              
              9,963,554Premises
                  and equipment
              
              
              3,064,930
              
              
              2,153,967
              
              
              1,881,202Bankcard
                  processing
              
              
              509,461
              
              
              485,327
              
              
              475,639Business
                  development
              
              
              1,444,176
              
              
              1,263,467
              
              
              1,017,214Other
              
              
              4,194,229
              
              
              3,033,931
              
              
              2,703,16323,790,734
              
              
              18,134,137
              
              
              16,040,772Income
                  before income taxes
              
              
              20,066,806
              
              
              15,088,774
              
              
              12,873,753Provision
                  for income taxes
              
              
              7,412,288
              
              
              5,510,475
              
              
              4,925,000Net
                  income
              
              $
              12,654,518
              
              $
              9,578,299
              
              $
              7,948,752Earnings
                  per share:Basic
              
              $
              1.20
              
              $
              1.08
              
              $
              .93Diluted
              
              $
              1.18
              
              $
              1.05
              
              $
              .90The
                  accompanying notes are an integral part of these consolidated financial
                  statements.







43


**Pacific
      Continental Corporation and Subsidiaries**


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


**For
      the Years Ended December 31, 2006, 2005, and 2004**


**Accumulated****Other****Number**
              
              **Common**
              
              **Retained**
              
              **Comprehensive****of
                  Shares**
              
              **Stock**
              
              **Earnings**
              
              **Income
                  (Loss)**
              
              **Total**Balance,
                  January 1, 2004
              
              
              6,789,787
              
              $
              26,619,206
              
              $
              15,644,669
              
              $
              (30,025
              )
              $
              42,233,850Net
                  income
              
              
              
              
              
              
              
              
              7,948,752
              
              
              
              
              
              7,948,752Other
                  comprehensive loss:Unrealized
                  losses on securities
              
              
              
              
              
              
              
              
              
              
              
              (148,568
              )Reclassification
                  of net losses realized
              
              
              
              
              
              
              
              
              
              
              
              12,820Deferred
                  income taxes
              
              
              
              
              
              
              
              
              
              
              
              52,072Other
                  comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              (83,676
              )
              
              (83,676
              )Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7,865,076Stock
                  options exercised and relatedtax
                  benefit
              
              
              141,360
              
              
              1,459,879
              
              
              
              
              
              
              
              
              1,459,879Stock
                  split (5 shares for 4)
              
              
              1,724,586Cash
                  dividends
              
              
              
              
              
              
              
              
              (2,163,788
              )
              
              
              
              
              (2,163,788
              )Shares
                  repurchased and retired
              
              
              (198
              )
              
              (2,960
              )
              
              
              
              
              
              
              
              (2,960
              )Balance,
                  December 31, 2004
              
              
              8,655,535
              
              
              28,076,125
              
              
              21,429,633
              
              
              (113,701
              )
              
              49,392,057Net
                  income
              
              
              
              
              
              
              
              
              9,578,299
              
              
              
              
              
              9,578,299Other
                  comprehensive loss:Unrealized
                  losses on securities
              
              
              
              
              
              
              
              
              
              
              
              (408,817
              )Reclassification
                  of net losses realized
              
              
              
              
              
              
              
              
              
              
              
              10,674Deferred
                  income taxes
              
              
              
              
              
              
              
              
              
              
              
              152,713Other
                  comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              (245,430
              )
              
              (245,430
              )Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,332,869Stock
                  options exercised and relatedtax
                  benefit
              
              
              166,615
              
              
              1,363,033
              
              
              
              
              
              
              
              
              1,363,033Stock
                  issued in NWBF acquisition
              
              
              1,411,430
              
              
              23,879,812
              
              
              
              
              
              
              
              
              23,879,812Cash
                  dividends
              
              
              
              
              
              
              
              
              (2,555,777
              )
              
              
              
              
              (2,555,777
              )Balance,
                  December 31, 2005
              
              
              10,233,580
              
              
              53,318,970
              
              
              28,452,155
              
              
              (359,131
              )
              
              81,411,994Net
                  income
              
              
              
              
              
              
              
              
              12,654,518
              
              
              
              
              
              12,654,518Other
                  comprehensive loss:Unrealized
                  losses on securities
              
              
              
              
              
              
              
              
              
              
              
              184,430Deferred
                  income taxes
              
              
              
              
              
              
              
              
              
              
              
              (70,748
              )Other
                  comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              113,682
              
              
              113,682Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              12,768,200Stock
                  options exercised and relatedtax
                  benefit
              
              
              413,684
              
              
              4,349,887
              
              
              
              
              
              
              
              
              4,349,887Stock-based
                  compensation
              
              
              
              
              
              585,920
              
              
              
              
              
              
              
              
              585,920Cash
                  dividends
              
              
              
              
              
              
              
              
              (3,381,220
              )
              
              
              
              
              (3,381,220
              )Balance,
                  December 31, 2006
              
              
              10,647,264
              
              $
              58,254,777
              
              $
              37,725,453
              
              $
              (245,449
              )
              $
              95,734,781The
                  accompanying notes are an integral part of these consolidated financial
                  statements.


44




**Pacific
      Continental Corporation and Subsidiaries**


**Consolidated
      Statements of Cash Flows**


**Years
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**Cash
                  flows from operating activities:Net
                  income
              
              $
              12,654,518
              
              $
              9,578,299
              
              $
              7,948,752Adjustments
                  to reconcile net income to net cashfrom
                  operating activities:Depreciation
                  and amortization
              
              
              1,673,173
              
              
              1,169,809
              
              
              1,348,101Gain
                  on sale of property
              
              
              (335,341
              )
              
              -
              
              
              -Loss
                  on sale or write-down of property and equipment
              
              
              5,641
              
              
              -
              
              
              -Provision
                  for loan losses
              
              
              600,000
              
              
              1,100,000
              
              
              500,000(Gains)
                  losses on foreclosed assets
              
              
              (42,091
              )
              
              (60,391
              )
              
              1,643Deferred
                  income taxes
              
              
              (1,049,000
              )
              
              33,000
              
              
              44,000Losses
                  on sale of securities
              
              
              -
              
              
              10,674
              
              
              12,820Federal
                  Home Loan Bank stock dividend
              
              
              -
              
              
              (11,200
              )
              
              (91,900
              )Shared-based
                  compensation
              
              
              585,920
              
              
              -
              
              
              -Excess
                  tax benefit of stock options exercised
              
              
              (272,000
              )
              
              -
              
              
              -Change
                  in:Interest
                  receivable
              
              
              (654,219
              )
              
              (620,238
              )
              
              (383,226
              )Deferred
                  loan fees
              
              
              (120,525
              )
              
              548,177
              
              
              478,454Capitalized
                  loan servicing rights
              
              
              4,714
              
              
              23,098
              
              
              50,633Production
                  of mortgage loans held-for-sale
              
              
              (31,988,422
              )
              
              (36,719,062
              )
              
              (41,630,720
              )Proceeds
                  from the sale of mortgage loans held-for-sale
              
              
              30,490,185
              
              
              38,149,233
              
              
              41,516,039Accrued
                  interest payable and other liabilities
              
              
              (1,157,061
              )
              
              167,955
              
              
              242,401Income
                  taxes payable
              
              
              890,707
              
              
              (39,288
              )
              
              1,167,680Other
                  assets
              
              
              (231,731
              )
              
              (212,046
              )
              
              23,040Net
                  cash provided by operating activities
              
              
              11,054,468
              
              
              13,118,020
              
              
              11,227,717Cash
                  flow from investing activities:Proceeds
                  from sales and maturities of investment securities
              
              
              6,685,618
              
              
              8,148,608
              
              
              8,126,633Purchase
                  of investment securities
              
              
              (6,166,764
              )
              
              (10,092,408
              )
              
              (6,193,678
              )Loans
                  made net of principal collections received
              
              
              (86,667,223
              )
              
              (72,806,087
              )
              
              (103,131,306
              )Proceeds
                  from sales of loans
              
              
              4,232,122
              
              
              -
              
              
              595,153Purchase
                  of loans
              
              
              (6,314,912
              )
              
              (7,715,383
              )
              
              (1,372,313
              )Cash
                  paid for acquisitions
              
              
              (12,748,953
              )
              
              3,003,468
              
              
              -Purchase
                  of property
              
              
              (2,905,826
              )
              
              (4,208,717
              )
              
              (1,058,764
              )Proceeds
                  from sale of property
              
              
              403,007Proceeds
                  on sale of foreclosed assets
              
              
              194,405
              
              
              880,281
              
              
              409,118Purchase
                  of equity investments
              
              
              -
              
              
              (258,000
              )
              
              -Net
                  cash provided by investing activities
              
              
              (103,288,526
              )
              
              (83,048,238
              )
              
              (102,625,157
              )Cash
                  flow from financing activities:Change
                  in deposits
              
              
              37,321,028
              
              
              76,663,834
              
              
              47,692,238Change
                  in federal funds purchased and FHLB CMA
              
              
              28,410,000
              
              
              (10,290,000
              )
              
              31,790,000Proceeds
                  from FHLB term advances originated
              
              
              489,002,006
              
              
              60,088,197
              
              
              16,502,004FHLB
                  term advances paid-off
              
              
              (462,002,006
              )
              
              (47,502,005
              )
              
              (13,002,004
              )Change
                  in junior subordinated debentures
              
              
              -
              
              
              8,248,000
              
              
              -Proceeds
                  from stock options exercised
              
              
              3,546,887
              
              
              1,039,033
              
              
              1,127,879Excess
                  tax benefit of stock options exercised
              
              
              272,000
              
              
              -
              
              
              -Dividends
                  paid
              
              
              (3,381,220
              )
              
              (2,555,777
              )
              
              (2,163,789
              )Repurchase
                  of Company shares
              
              
              -
              
              
              -
              
              
              (2,960
              )Net
                  cash provided by financing activities
              
              
              93,168,695
              
              
              85,691,282
              
              
              81,943,368Net
                  increase (decrease) in cash and cash equivalents
              
              
              934,636
              
              
              15,761,064
              
              
              (9,454,072
              )Cash
                  and cash equivalents, beginning of year
              
              
              31,843,346
              
              
              16,082,282
              
              
              25,536,354Cash
                  and cash equivalents, end of year
              
              $
              32,777,982
              
              $
              31,843,346
              
              $
              16,082,282Supplemental
                  information:Noncash
                  investing and financing activities:Transfers
                  of loans to foreclosed assets
              
              $
              21,557
              
              $
              508,501
              
              $
              262,071Change
                  in unrealized gain on securities, net of deferred income
                  taxes
              
              
              (113,682
              )
              
              245,430
              
              
              83,676Adjustment
                  to goodwill resulting from NWBF acquisition
              
              
              (353,007
              )Cash
                  paid during the year for:Income
                  taxes
              
              $
              7,324,581
              
              $
              5,429,003
              
              $
              3,713,320Interest
              
              $
              21,792,827
              
              $
              9,005,443
              
              $
              4,468,436Acquisitions:Assets
                  acquired
              
              
              
              
              $
              (177,072,077
              )Goodwill
                  and core deposit intangible
              
              
              
              
              
              23,944,489Liabilities
                  assumed
              
              
              
              
              
              142,085,273Compensation
                  due NWBF shareholders, deferred taxes , other liab.
              
              
              
              
              
              14,045,783Net
                  cash received (paid)
              
              
              
              
              $
              3,003,468The
                  accompanying notes are an integral part of these consolidated financial
                  statements.


45


**Pacific
      Continental Corporation and Subsidiaries**


**Notes
      to Consolidated Financial Statements**














1. **Summary
      of Significant Accounting Policies** :





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





In
      November 2005, the Company formed a wholly-owned Delaware statutory business
      trust subsidiary, Pacific Continental Corporation Capital Trust (the “Trust”),
      which issued $8,248,000 of guaranteed undivided beneficial interests in the
      Pacific Continental’s Junior Subordinated Deferrable Interest Debentures (“Trust
      Preferred Securities”). Pacific Continental has not consolidated the accounts of
      the Trust in its consolidated financial statements in accordance with FASB
      FIN
      46R, *Consolidation
      of Variable Interest Entities.* As a
      result, the junior subordinated debentures issued by Pacific Continental to
      the
      issuer trust, totaling $8,248,000, are reflected on Pacific Continental’s
      consolidated balance sheet at December 31, 2006, under the caption, “Junior
      Subordinated Debentures”. Pacific Continental also recognized its $248,000
      investment in the Trust, which is recorded among “Other Assets” in its
      consolidated balance sheet at December 31, 2006.





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





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





The
      Bank
      is required to maintain certain reserves as defined by regulation. Such reserves
      totaling $1,411,000 and $1,616,000 were maintained in cash at December 31,
      2006
      and 2005, respectively.





**Securities
      Available-for-Sale** -
      Securities available-for-sale are held for indefinite periods of time and may
      be
      sold in response to movements in market interest rates, changes in the maturity
      or mix of Bank assets and liabilities or demand for liquidity. Although
      management determines the appropriate classification of securities at the time
      of purchase, the Bank classified all securities as available-for-sale throughout
      2006 and 2005. Securities classified as available-for-sale are reported at
      estimated fair value. The difference between estimated fair value and amortized
      cost is recorded as a separate component of stockholders’ equity (accumulated
      other comprehensive income). Fair values for these investment securities are
      based on available market prices. Gains and losses on the sale of
      available-for-sale securities are determined using the specific-identification
      method. Interest income on securities available-for-sale is included in income
      using the level yield method.





Declines
      in fair value of individual available-for-sale securities below their cost
      that
      are other than temporary would result in write-downs of the individual
      securities to their fair value. The related write-downs would be included in
      earnings as realized losses. Management believes that all unrealized losses
      on
      investment securities at December 31, 2006 and 2005 are temporary.




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





46


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





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





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





**Federal
      Home Loan Bank Stock** - The
      investment in Federal Home Loan Bank (“FHLB”) stock is carried at par value,
      which approximates its fair value. As a member of the FHLB system, the Bank
      is
      required to maintain a minimum level of investment in FHLB stock based on
      specific percentages of its outstanding mortgages, total assets or FHLB
      advances. As of December 31, 2006, the minimum required investment was approximately
      $3,479,900 .
      The
      Bank may request redemption at par value of any stock in excess of the amount
      the Bank is required to hold. Stock redemptions are at the discretion of the
      FHLB.





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





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





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





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




**Goodwill
      and Other Intangible Assets-** Goodwill
      represents the excess of cost over the fair value of net assets acquired in
      business combinations. Under Statement of Financial Accounting Standard (SFAS)
      No. 142, *Goodwill
      and Other Intangible Assets* ,
      the
      Bank does not amortize the balance of goodwill, but completes periodic
      assessments of goodwill impairment. Goodwill impairment is deemed to exist
      if
      the net book value of a reporting unit giving rise to the recognition of
      goodwill exceeds estimated fair value. The Bank’s assessments have not
      identified impairment of goodwill such that the net book value of the applicable
      reporting unit exceeded its estimated fair value as of December 31, 2006 and
      2005.







47


**Advertising** -
      Advertising costs are charged to expense during the year in which they are
      incurred. Advertising expenses were $845,136 and $780,033 and $621,419 for
      the
      years ended December 31, 2006, 2005 and 2004, respectively.





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





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





Weighted
      average shares outstanding at December 31 are as follows:




**2006**
              
              **2005**
              
              **2004**Basic
              
              
              10,532,995
              
              
              8,885,181
              
              
              8,572,526Common
                  stock equivalents attributableto
                  stock-based compensation plans
              
              
              164,436
              
              
              255,576
              
              
              235,623Diluted
              
              
              10,697,431
              
              
              9,140,757
              
              
              8,808,149





As
      of
      December 31, 2006, 315,405 outstanding options to purchase stock were excluded
      from the dilutive shares calculation because of the current anti-dilutive nature
      of these options. No material effect on diluted earnings per share was
      recognized as a result of anti-dilutive options during 2005 and
      2004.





**Share-Based
      Payment Plans** -
      Prior
      to 2006, the Company applied 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 was 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 Company adopted FASB Statement
      No. 123(R), “Share-Based Payment” (“FAS 123R”), effective January 1, 2006. The
      Company applies the recognition and measurement principles of this statement
      in
      accounting for its various equity compensation plans. The following table
      illustrates the effects on net income and earnings per share if the Company
      had
      applied “FAS123R” to stock-based employee compensation in years prior to
      2006.





48




**Year
                  Ended December 31****2006**
              
              **2005**
              
              **2004**Net
                  income - as reported
              
              $
              12,654,518
              
              $
              9,578,299
              
              $
              7,948,752Deduct
                  total stock-basedemployee
                  compensationexpense
                  determined underfair
                  value method for allawards,
                  net of related taxeffects
              
              
              -
              
              
              (514,866
              )
              
              (429,832
              )Net
                  income - pro forma
              
              $
              12,654,518
              
              $
              9,063,433
              
              $
              7,518,920Earnings
                  per share:Basic
                  - as reported
              
              
              1.20
              
              
              1.08
              
              
              0.93Basic
                  - pro forma
              
              
              -
              
              
              1.02
              
              
              0.88Diluted
                  - as reported
              
              
              1.18
              
              
              1.05
              
              
              0.90Diluted
                  - pro forma
              
              
              -
              
              
              0.99
              
              
              0.85







**Recently
      Issued Accounting Pronouncements** - In
      February 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement No. 155, *Accounting
      for Certain Hybrid Financial Instruments.* This
      Statement amends FASB Statements No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      and No.
      140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities* . FAS
      155,
      which is effective for the Company beginning in 2007, addresses hybrid financial
      instruments with embedded derivatives, securitized financial assets, and
      qualifying special-purpose entities holding derivative financial instruments.
      Implementation of this Statement is not expected to have a significant impact
      on
      the Company’s consolidated financial condition or results of
      operations.





In
      March
      2006, the Financial Accounting Standards Board (“FASB”) issued Statement No.
      156, *Accounting
      for Servicing of Financial Assets - An Amendment of FASB Statement No. 140.* This
      Statement amends FASB Statement No. 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities,* with
      respect to the accounting for separately recognized servicing assets and
      servicing liabilities. FAS 156
      is effective for the Company beginning in 2007. This
      Statement is not expected to have a significant impact on the Company’s
      consolidated financial condition or results of operations.





In
      early
      July 2006, the Financial
      Accounting Standards Board (“FASB”) issued
      FASB Interpretation (FIN) No. 48, *Accounting
      for Uncertainty in Income Taxes—an Interpretation of Statement No.
      109.* FIN 48
      establishes a recognition threshold and measurement for income tax positions
      recognized in an enterprise’s financial statements in accordance with FASB
      Statement No. 109, *Accounting
      for Income Taxes* .
      FIN 48
      also prescribes a two-step evaluation process for tax positions. The first
      step
      is recognition and the second is measurement. For recognition, an enterprise
      judgmentally determines whether it is more-likely-than-not that a tax position
      will be sustained upon examination based on the technical merits of the
      position. If the tax position meets the more-likely-than-not recognition
      threshold, it is measured and recognized in the financial statements. If a
      tax
      position does not meet the more-likely-than-not recognition threshold, the
      benefit of that position is not recognized in the financial statements. Tax
      positions that meet the more-likely-than-not recognition threshold at the
      effective date of FIN 48 may be recognized or, continue to be recognized, upon
      adoption of this Interpretation. The cumulative effect of applying the
      provisions of FIN 48 shall be reported as an adjustment to the opening balance
      of retained earnings for that fiscal year. FIN 48 is effective for the Company
      beginning in 2007. The Company is evaluating the impact of adoption of FIN
      48
      and at this time does not believe it will have a material impact on the
      Company’s consolidated financial condition or results of
      operations.





In
      September 2006, the Financial
      Accounting Standards Board (“FASB”) issued
      Statement 157, “ *Fair
      Value Measurement.”* Defining
      fair value, establishing a framework for measuring fair value in generally
      accepted accounting principles, and expanding disclosures about fair value
      measurements. FAS 157 is effective for the Company beginning in 2008, The
      Company is currently evaluating the impact of the adoption of SFAS No. 157.





49


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





**Reclassifications** -
      Certain amounts contained in the 2005 and 2004 consolidated financial statements
      have been reclassified where appropriate to conform with the financial statement
      presentation used in 2006. These reclassifications had no effect on previously
      reported net income.


50


2. **Acquisition
      NWB Financial Corporation:**





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





The
      fair
      values of the NWB Financial Corporation assets acquired and liabilities assumed
      as of November 30, 2005 were recorded as follows:





AssetsCash
                  and due from banks
              
              $
              5,446,721Investment
                  securities
              
              
              11,122,138Loans,
                  net of allowance for loan losses
              
              
              140,566,274Property
                  and equipment
              
              
              554,233Goodwill
                  and core deposit intangible
              
              
              23,944,489Other
                  assets
              
              
              884,942Total
                  assets acquired
              
              $
              182,518,797LiabilitiesDeposits
              
              $
              123,815,478Borrowings
              
              
              17,217,571Other
                  liabilities
              
              
              1,052,223Total
                  liabilities assumed
              
              
              142,085,272Net
                  assets acquired
              
              
              40,433,525Total
                  liabilities assumed and net assets acquired
              
              $
              182,518,797The
                  acquisition cost of the net assets acquired are summarized as
                  follows:Fair
                  value of common stock issued to
              
              $
              22,230,023NWBF
                  shareholdersFair
                  value of stock options
              
              
              1,760,737Cash
                  paid to NWBF shareholders
              
              
              2,467,051Cash
                  payable to NWBF shareholders
              
              
              13,005,313Direct
                  transaction costs incurred
              
              
              404,360Restructuring
                  charges in the form ofseverance
                  and other payments
              
              
              566,041Total
                  acquisition cost
              
              $
              40,433,525





Goodwill
      of $22,383,545 was originally recognized at the time of acquisition but was
      adjusted to a balance of $22,030,538 during 2006. The adjustment of $353,007
      is
      the result of derecognition of estimated liabilities recorded as of the
      acquisition date.


51


The
      following information presents unaudited pro forma results of operations for
      the
      years ended December 31, 2005 and 2004, as though the NWB Financial Corporation
      acquisition had occurred on January 1, 2004. The pro forma results do not
      necessarily indicate the results that would have been obtained had the
      acquisition actually occurred on January 1, 2004.





**Years
                  Ended December 31****2005**
              
              
              **2004**Total
                  interest income and noninterest income
              
              $
              44,100,000
              
              $
              37,450,000Net
                  income
              
              $
              11,774,700
              
              $
              10,007,00026.70
              %Basic
                  earnings per share
              
              $
              1.16
              
              $
              1.00Diluted
                  earnings per share
              
              $
              1.12
              
              $
              0.97Basic
                  shares outstanding
              
              
              10,172,869
              
              
              9,980,789Diluted
                  shares outstanding
              
              
              10,529,280
              
              
              10,323,607




The
      following table summarizes activity in the Company’s accrued restructuring
      charges:





**Years
                  Ended December 31****2006**
              
              
              **2005**Restructuring
                  charge liability balance, beginning of year
              
              $
              453,745
              
              $
              566,041Payments
                  made for restructuring charges
              
              
              (420,362
              )
              
              (112,296
              )Adjustment
                  to goodwill
              
              
              (33,383
              )
              
              -Restructuring
                  charge liability balance, end of year
              
              $
              -
              
              $
              453,745





52


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





The
      amortized cost and estimated fair values of securities available-for-sale at
      December 31, 2006 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****Unrealized
                    Loss Positions**
              
              
              **Cost**
              
              
              **Gains**
              
              
              **Losses**
              
              
              **Value**
              
              
              **12
                  Months**
              
              
              **or
                  Longer**Obligations
                  of U.S.Government
                  agencies
              
              $
              14,693,191
              
              $
              -
              
              $
              191,895
              
              $
              14,501,296
              
              $
              338,079
              
              $
              14,163,218Obligations
                  of states andpolitical
                  subdivisions
              
              
              4,760,396
              
              
              -
              
              
              85,575
              
              
              4,674,821
              
              
              -
              
              
              4,674,821Mortgage-backed
                  securities
              
              
              15,162,279
              
              
              -
              
              
              201,765
              
              
              14,960,514
              
              
              3,257,680
              
              
              11,702,833$
              34,615,866
              
              $
              -
              
              $
              479,235
              
              $
              34,136,631
              
              $
              3,595,759
              
              $
              30,540,872**Unrealized
                  Gain Positions**Obligations
                  of U.S.Government
                  agencies
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Obligations
                  of states andpolitical
                  subdivisions
              
              
              858,271
              
              
              62,562
              
              
              -
              
              
              920,833Mortgage-backed
                  securities
              
              
              3,707,123
              
              
              18,476
              
              
              -
              
              
              3,725,5994,565,394
              
              
              81,038
              
              
              -
              
              
              4,646,432$
              39,181,260
              
              $
              81,038
              
              $
              479,235
              
              $
              38,783,063




At
      December 31, 2006, there were 69 investment securities in unrealized loss
      positions. The decline in value of these securities has resulted from increases
      in market interest rates subsequent to the purchase of the securities. The
      projected average life of the securities portfolio is approximately three years.
      Although yields on these securities may be below market rates during that
      period, no loss of principal is expected.





The
      amortized cost and estimated fair values of securities available-for-sale at
      December 31, 2005 are as follows:


**Gross**
              
              
              **Gross**
              
              
              **Estimated****Amortized**
              
              
              **Unrealized**
              
              
              **Unrealized**
              
              
              **Fair****Cost**
              
              
              **Gains**
              
              
              **Losses**
              
              
              **Value**Obligations
                  of U.SGovernment
                  agencies
              
              $
              16,967,208
              
              $
              368
              
              $
              210,374
              
              $
              16,757,202Obligation
                  of states andpolitical
                  subdivisions
              
              
              4,957,016
              
              
              -
              
              
              136,731
              
              $
              4,820,285Mortgage-backed
                  securities
              
              
              18,003,289
              
              
              6,191
              
              
              242,043
              
              
              17,767,437$
              39,927,513
              
              $
              6,559
              
              $
              589,148
              
              $
              39,344,924


53


The
      amortized cost and estimated fair value of securities at December 31, 2006
      and
      2005 by contractual maturity, are shown below. Expected maturities will differ
      from contractual maturities because issuers may have the right to call or prepay
      obligations.





**2006**
              
              
              
              
              
              **2005****Estimated**
              
              
              
              
              
              **Estimated****Amortized**
              
              
              **Fair**
              
              
              **Amortized**
              
              
              **Fair****Cost**
              
              
              **Value**
              
              
              **Cost**
              
              
              **Value**Due
                  in one year or less
              
              $
              4,476,088
              
              $
              4,431,025
              
              $
              1,871,416
              
              $
              1,871,058Due
                  after one year through 5 years
              
              
              11,739,692
              
              
              11,543,625
              
              
              16,606,177
              
              
              16,342,251Due
                  after 5 years through 10 years
              
              
              3,192,889
              
              
              3,224,696
              
              
              1,163,280
              
              
              1,140,967Due
                  after 10 years
              
              
              903,189
              
              
              897,605
              
              
              2,283,351
              
              
              2,223,211Mortgage-backed
                  securities
              
              
              18,869,402
              
              
              18,686,112
              
              
              18,003,289
              
              
              17,767,437$
              39,181,260
              
              $
              38,783,063
              
              $
              39,927,513
              
              $
              39,344,924




No
      securities were sold in 2006. Gross realized losses on the sale of investment
      securities were $10,674 in 2005 and $12,820 in 2004.




At
      December 31, 2006, securities with amortized costs of $9,580,104 (estimated
      market values of $9,422,607) were pledged to secure certain Treasury and public
      deposits as required by law.








4. **Loans** :





Major
      classifications of loans at December 31 are as follows:





**2006**
              
              
              **2005**Commercial
                  loans
              
              $
              169,565,740
              
              $
              160,988,179Real
                  estate loans
              
              
              590,854,899
              
              
              507,479,398Consumer
                  loans
              
              
              9,167,936
              
              
              12,462,830769,588,575
              
              
              680,930,407Deferred
                  loan origination fees
              
              
              (2,488,600
              )
              
              (2,609,125
              )767,099,975
              
              
              678,321,282Allowance
                  for loan losses
              
              
              (8,283,843
              )
              
              (7,792,125
              )$
              758,816,132
              
              $
              670,529,157




Scheduled
      maturities or repricing, if earlier, of loans at December 31, 2006 are as
      follows:





Three
                  months or less
              
              $
              366,113,263Three
                  months to one year
              
              
              47,369,207One
                  year to three years
              
              
              129,348,480Three
                  years to five years
              
              
              152,057,873Thereafter
              
              
              74,699,752$
              769,588,575




54





**Allowance
      for Loan Losses** :





**2006**
              
              
              **2005**
              
              
              **2004**Balance,
                  beginning of year
              
              $
              7,792,125
              
              $
              5,223,979
              
              $
              5,225,331Provision
                  charged to income
              
              
              600,000
              
              
              1,100,000
              
              
              500,000Loans
                  charged against the allowance
              
              
              (222,802
              )
              
              (636,267
              )
              
              (516,071
              )Recoveries
                  credited to allowance
              
              
              114,520
              
              
              123,789
              
              
              196,719Reclassify
                  unfunded loan commitments
              
              
              -
              
              
              (34,000
              )
              
              (182,000
              )Additional
                  allowance resulting from acquisition
              
              
              -
              
              
              2,014,624
              
              
              -Balance,
                  end of year
              
              $
              8,283,843
              
              $
              7,792,125
              
              $
              5,223,979




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





Restructured
      and other loans considered impaired, including all nonaccrual loans, totaled
      $495,843, $675,714, and $2,799,762 at December 31, 2006, 2005, and 2004,
      respectively. At December 31, 2006 there were no nonaccrual loans included
      in
      impaired loans. Impaired loans at December 31, 2006 represented two loans to
      a
      single borrower which are both performing under revised terms. The specific
      valuation allowance for loan losses related to these impaired loans was
      approximately $109,000, $238,000, and $510,000 at December 31, 2006, 2005,
      and 2004, respectively. The average recorded investment in impaired loans was
      approximately $637,000, $1,218,000, and $3,206,000 in 2006, 2005, and 2004,
      respectively. Interest income recognized on impaired loans during 2006, 2005,
      and 2004 was approximately $72,000, $103,000, and $120,000, respectively.
      Additional interest income which would have been realized on nonaccrual and
      impaired loans if they had remained current and still accruing interest would
      have been approximately $14,000, $89,000, and $98,000 in 2006, 2005 and 2004,
      respectively. There were no loans 90 days contractually past due and continuing
      to accrue interest as of December 31, 2006, and 2005, respectively. Loans
      contractually past due 90 days or more on which interest continued to accrue
      totaled approximately $213,000 at December 31, 2004.





A
      substantial portion of the loan portfolio is collateralized by real estate
      and
      is, therefore, susceptible to changes in local market conditions. However,
      management believes that the loan portfolio is diversified among industry
      groups. At December 31, 2006, outstanding residential construction loans totaled
      approximately $100,996,000 and represented 13.1% of total outstanding loans.
      In
      addition, at December 31, 2006, unfunded loan commitments for residential
      construction totaled approximately $59,642,000. At year end there were no
      nonaccrual or impaired residential construction loans. There are no other
      industry concentrations in excess of 10% of the total loan portfolio.








5. **Loan
      Participations and**  **Servicing** :





In
      the
      normal course of business, the Bank has sold portions of loans to other
      institutions in order to extend the Bank’s lending capacity or to mitigate risk.
      Servicing rights are retained for these loan participations and are recognized
      in income as earned. The unpaid principal balances of these serviced loans
      at
      December 31, 2006 and 2005 were $20,515,848 and $17,807,942, 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 $45 and $4,759 at December 31, 2006 and 2005,
      respectively.







55


6. **Property** :





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




**2006**
              
              
              **2005**Land
              
              $
              3,833,651
              
              $
              3,898,164Buildings
                  and improvements
              
              
              15,049,848
              
              
              13,537,177Furniture
                  and equipment
              
              
              8,804,058
              
              
              7,502,53727,687,557
              
              
              24,937,878Less
                  accumulated depreciation & amortization
              
              
              9,096,240
              
              
              7,934,947$
              18,591,317
              
              $
              17,002,931




**Lease
      Commitments** - The
      Bank leases certain facilities for office locations under noncancellable
      operating lease agreements expiring through 2020. Rent expense related to these
      leases totaled $711,703, $387,562, and $366,716 in 2006, 2005 and 2004,
      respectively.





**Property
      Leased to Others** - The
      Bank leases approximately 59% of its Springfield Gateway building to others
      under noncancellable operating lease agreements extending through
      2012.





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





**Property****Lease**
              
              
              **Leased****Commitments**
              
              
              **to
                  Others**2007
              
              $
              645,546
              
              $
              319,0792008
              
              
              568,128
              
              
              300,2242009
              
              
              527,649
              
              
              264,4182010
              
              
              425,111
              
              
              254,6012011
              
              
              296,265
              
              
              193,844Thereafter
              
              
              435,294
              
              
              150,590$
              2,897,993
              
              $
              1,482,756




Depreciation
      expense was $1,244,134, $942,426 and $936,319 for the years ended December
      31,
      2006, 2005 and 2004, respectively.




The
      Bank
      capitalized $36,853 and $10,110 of interest expense related to property
      additions during 2006 and 2005, respectively. No interest expense was
      capitalized during 2004.







56







**7.
      Goodwill and Core Deposit Intangibles:**





The
      following table summarizes the changes in the Company’s goodwill and core
      deposit intangible asset for the year ended December 31, 2006.


**Core****Deposit**
              
              
              **Total****Goodwill**
              
              
              **Intangible**
              
              
              **Intangibles**Balance,
                  December 31, 2004
              
              $
              275,552
              
              **$**
              **-**
              
              $
              275,552Acquisitions
              
              
              22,383,545
              
              
              1,560,944
              
              
              23,944,489Amortization
              
              
              
              
              
              (18,583
              )
              
              (18,583
              )Balance,
                  December 31, 2005
              
              $
              22,659,097
              
              $
              1,542,361
              
              $
              24,201,458Adjustment
              
              
              (353,007
              )
              
              -
              
              
              (353,007
              )Amortization
              
              
              -
              
              
              (222,752
              )
              
              (222,752
              )Balance,
                  December 31, 2006
              
              $
              22,306,090
              
              $
              1,319,609
              
              $
              23,625,699




The
      goodwill and core deposit intangible asset additions in 2005 were related to
      the
      NWBF acquisition which is more fully described in Note 2. The adjustment to
      goodwill in 2006 is also described more fully in Note 2. In accordance with
      SFAS
      No. 142, *Goodwill
      and Other Intangible Assets* ,
      the
      Company does not recognize amortization expense related to its goodwill but
      completes periodic assessments of goodwill impairment. Impairment, if deemed
      to
      exist, would be charged to noninterest expense in the period
      identified.





Forecasted
      amortization expense is $222,752 per year from 2007 through 2012 for the core
      deposit intangible assets acquired during 2005.





8. **Other
      Assets:**





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




**2006**
              
              
              **2005**Foreclosed
                  assets
              
              $
              -
              
              $
              130,758Servicing
                  asset
              
              
              45
              
              
              4,759Deferred
                  taxes
              
              
              1,652,276
              
              
              -Prepaid
                  expenses and other
              
              
              1,485,737
              
              
              1,270,849$
              3,138,058
              
              $
              1,406,366





57




9. **Deposits** :





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





**2006**
              
              
              **2005**Less
                  than three months
              
              $
              48,690,728
              
              $
              52,366,906Three
                  months to one year
              
              
              37,727,414
              
              
              48,256,863One
                  to three years
              
              
              10,269,412
              
              
              21,324,757Thereafter
              
              
              887,527
              
              
              6,387,743$
              97,575,081
              
              $
              128,336,269




10. **Federal
      Funds Purchased:**





The
      Bank
      has unsecured federal funds borrowing lines with correspondent banks totaling
      $98,000,000 at December 31, 2006 of which $4,410,000 was outstanding as of
      December 31, 2006. The outstanding balance of these overnight funds was due
      January 2, 2007 and carried an interest rate of 5.75%. There were no borrowings
      against these lines at December 31, 2005.





The
      Bank
      also has a secured federal funds borrowing line with the Federal Reserve Bank
      totaling $6,000,000 at December 31, 2006. No balance was outstanding against
      this line as of December 31, 2006 or December 31, 2005.





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





The
      Bank
      has a borrowing limit with the FHLB equal to 30% of total assets, subject to
      discounted collateral. At December 31, 2006, the borrowing line was
      approximately $266,000,000. At December 31, 2006, there was $131,803,763
      borrowed on this line, including an overnight $48,000,000 Cash Management
      Advance and $83,803,763 in term advances. FHLB stock, funds on deposit with
      FHLB, and loans are pledged as collateral for borrowings from FHLB. At
      December 31, 2006, the Bank had pledged approximately $277,000,000 in real
      estate loans to the FHLB ($157,000,000 in discounted pledged collateral).





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





**Rate**
              
              
              **2006**
              
              
              **2005**Cash
                  Management Advance
              
              
              5.625
              
              $
              48,000,000
              
              $
              24,000,0002006
              
              
              2.56
                  - 4.70
              %
              
              -
              
              
              23,500,0002007
              
              
              2.91
                  - 5.48
              %
              
              61,803,763
              
              
              11,303,7632008
              
              
              2.99
                  - 3.94
              %
              
              9,500,000
              
              
              10,500,0002009
              
              
              3.78
                  - 4.04
              %
              
              6,000,000
              
              
              7,000,0002010
              
              
              4.12
                  - 4.96
              %
              
              4,500,000
              
              
              4,500,0002016
              
              
              5.05
                  - 5.05
              %
              
              2,000,000
              
              
              -$
              131,803,763
              
              $
              80,803,763





12. **Junior
      Subordinated Debentures:**





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




58


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




In
      accordance with provision of FIN 46R, the Trust has not been consolidated in
      these financial statements. As a result, the junior subordinated debentures,
      totaling $8,248,000, are reflected on the Company’s consolidated balance sheet
      at December 31, 2006, under the caption, “Junior Subordinated Debentures”. The
      Company’s $248,000 investment in the Trust is recorded in “Other Assets” in its
      consolidated balance sheet at December 31, 2006.





13. **Income
      Taxes** :





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





**2006**
              
              
              **2005**
              
              
              **2004**Currently
                  payable:Federal
              
              $
              7,626,000
              
              $
              4,862,000
              
              $
              4,033,000State
              
              
              835,000
              
              
              615,000
              
              
              848,0008,461,000
              
              
              5,477,000
              
              
              4,881,000Deferred:Federal
              
              
              (905,000
              )
              
              29,000
              
              
              36,000State
              
              
              (144,000
              )
              
              4,000
              
              
              8,000(1,049,000
              )
              
              33,000
              
              
              44,000Total
                  provision for income taxes
              
              $
              7,412,000
              
              $
              5,510,000
              
              $
              4,925,000





59


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
      31
      are as follows:





**2006**
              
              
              **2005**
              
              
              **2004**Loan
                  fees and other loan basis adjustmentdifferences
                  between financialstatement
                  and tax purposes
              
              $
              142,184
              
              $
              192,242
              
              $
              92,618Loan
                  loss deduction for tax purposesmore
                  (less) than provision for financialreporting
                  purposes
              
              
              (1,132,008
              )
              
              (255,356
              )
              
              (89,962
              )Depreciation
                  deduction differencesbetween
                  financial statement andtax
                  purposes
              
              
              (14,917
              )
              
              (16,637
              )
              
              8,878Federal
                  Home Loan Bank stock dividends
              
              
              -
              
              
              4,322
              
              
              35,249Reserve
                  for self-funded health insurance
              
              
              3,094
              
              
              (44,270
              )
              
              (28,350
              )Prepaid
                  expenses
              
              
              34,174
              
              
              127,070
              
              
              -Nonqualified
                  stock options benefit
              
              
              (37,326
              )Other
              
              
              (44,201
              )
              
              25,629
              
              
              25,567$
              (1,049,000
              )
              $
              33,000
              
              $
              44,000


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:





**2006**
              
              
              
              
              
              **2005**
              
              
              
              
              
              **2004**Expected
                  federal incometax
                  provision at 34%
              
              $
              7,023,000
              
              
              35.00
              %
              $
              5,130,000
              
              
              34.00
              %
              $
              4,377,000
              
              
              34.00
              %State
                  income tax, net offederal
                  income tax effect
              
              
              726,000
              
              
              3.62
              %
              
              402,000
              
              
              2.66
              %
              
              521,000
              
              
              4.05
              %Municipal
                  securities tax benefit
              
              
              (42,000
              )
              
              -0.21
              %
              
              (32,000
              )
              
              -0.21
              %
              
              (14,000
              )
              
              -0.11
              %ISO
                  expense
              
              
              184,000
              
              
              0.92
              %
              
              -
              
              
              
              
              
              -Benefit
                  of purchased tax credits
              
              
              (231,000
              )
              
              -1.15
              %
              
              (42,000
              )
              
              -0.28
              %
              
              -Deferred
                  tax rate adjustmentsand
                  other
              
              
              (248,000
              )
              
              -1.24
              %
              
              52,000
              
              
              0.35
              %
              
              41,000
              
              
              0.32
              %Provision
                  for income taxes
              
              $
              7,412,000
              
              
              36.94
              %
              $
              5,510,000
              
              
              36.52
              %
              $
              4,925,000
              
              
              38.26
              %




The
      tax
      benefit associated with stock option plans reduced taxes payable by $803,000,
      $324,000 and $332,000 at December 31, 2006, 2005 and 2004, respectively. Such
      benefit is credited to additional paid-in capital.








60





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


**2006**
              
              
              **2005**
              
              
              **2004**Assets:Allowance
                  for loan losses
              
              $
              2,810,785
              
              $
              2,027,720
              
              $
              1,390,044Basis
                  adjustments on loans
              
              
              200,390
              
              
              47,579
              
              
              59,310Reserve
                  for self-funded insurance
              
              
              70,216
              
              
              71,568
              
              
              28,350Oregon
                  purchased tax credits
              
              
              886,992
              
              
              104,131Nonqualified
                  stock options
              
              
              37,326
              
              
              -
              
              
              -Net
                  unrealized losses on securities
              
              
              152,748
              
              
              223,496
              
              
              70,758Other
              
              
              -
              
              
              -
              
              
              5,626Total
                  deferred tax assets
              
              
              4,158,457
              
              
              2,474,494
              
              
              1,554,088Liabilities:Federal
                  Home Loan Bank stock dividends
              
              
              597,483
              
              
              579,329
              
              
              575,033Excess
                  tax over book depreciation
              
              
              329,944
              
              
              339,222
              
              
              352,905Prepaid
                  expenses
              
              
              179,226
              
              
              127,070
              
              
              -NWBF
                  acquisition adjustments
              
              
              571,965
              
              
              587,439
              
              
              -Other,
                  principally loan orig. costs and deferred fees
              
              
              827,563
              
              
              950,433
              
              
              368,336Total
                  deferred tax liabilities
              
              
              2,506,181
              
              
              2,583,493
              
              
              1,296,274Net
                  deferred tax assets/(liabilities)
              
              $
              1,652,276
              
              $
              (108,999
              )
              $
              257,814






The
        Company has unused purchased energy tax credits of $886,992 as of December
        31,
        2006. These tax credits are expected to provide state income tax benefits
        of
        $350,632, $185,729, $185,729 and $164,902 in years 2007, 2008, 2009 and 2010,
        respectively. Based on the Company's historical performance, these energy
        tax
        credits will be realized in the normal course of operations and, accordingly,
        Management has not reduced these deferred tax assets by a valuation allowance.
        Management also believes that all other net deferred tax assets will be
        recognized in the normal course of operations and, accordingly, they have
        not
        been reduced by a valuation allowance.


14. **Retirement
      Plan** :





The
      Bank
      has a 401(k) profit sharing plan covering substantially all employees. The
      plan
      provides for employee and employer contributions. The total plan expenses,
      including employer contributions, were $747,748, $532,251 and $503,586 in 2006,
      2005 and 2004, respectively.





15. **Stock
      Option Plans** :





Pursuant
      to the Company’s 1999 Employees’ Stock Option Plan, as amended (the “1999 ESOP
      Plan”), either incentive stock option or non-qualified option awards have been
      granted to employees. Subsequent to the annual shareholders’ meeting in April
      2006, all shares available for future grants under this plan have been
      deregistered and are no longer available for future grants. Stock options in
      the
      past have been granted at exercise prices not less than 100% of the fair market
      value of our common stock at the grant date. The Compensation Committee or
      the
      Board of Directors determined vesting provisions when stock options were
      granted, and stock options granted generally vested over three or four years.
      The maximum life of stock options granted under this plan was ten years from
      the
      grant date. For the year ended December 31, 2006, the Company recognized
      $447,533 of compensation expense (included in salaries and employee benefits)
      from stock options vesting during the period, with no associated income tax
      benefits. Although compensation expense related to stock options granted to
      employees was not directly recognized in the results of operations during years
      ended December 31, 2005 and 2004, respectively, it was disclosed in a pro forma
      presentation as previously required by FAS 123.





61


Pursuant
      to the Company’s 1999 Directors’ Stock Option Plan, as amended (the “1999 DSOP
      Plan”), non-qualified options awards have been granted to directors. Subsequent
      to the annual shareholders’ meeting in April 2006, all shares available for
      future grants under this plan have been deregistered and are no longer available
      for future grants. Stock options had been granted at exercise prices of not
      less
      than 100% of the fair market value of our common stock at the grant date. The
      maximum life of options granted under this plan was ten years from the grant
      date. The options granted over the last two years have vesting schedules of
      two
      to three years. Prior to those grants, the options vested immediately upon
      grant. For the year ended December 31, 2006, the Company recognized $67,017
      of
      compensation expense (included in salaries and employee benefits) from stock
      options vesting during the period, with an associated income tax benefit of
      $25,705. Although compensation expense related to stock options granted to
      directors was not directly recognized in the results of operations during years
      ended December 31, 2005 and 2004, respectively, it was disclosed in a pro forma
      presentation as previously required by FAS 123.





At
      the
      annual shareholders’ meeting in April 2006, shareholders approved the 2006 Stock
      Option and Equity Compensation Plan (the “2006 SOEC Plan”). Pursuant to this
      approval, incentive stock options, nonqualified stock options, restricted stock,
      restricted stock units, or stock appreciation rights may be awarded to attract
      and retain the best available personnel for positions of responsibility with
      the
      corporation and its subsidiaries. The exercise price for shares of common stock
      subject to an option shall not be less than 100% of the fair market value of
      a
      share of common stock as of the date of grant of the option; provided, however,
      that in the case of an incentive stock option granted to an employee who
      immediately before the grant of such incentive stock option is a
      shareholder-employee, the incentive stock option exercise price shall be at
      least 110% of the fair value of the common stock as of the date of grant of
      the
      incentive stock option. The Compensation Committee of the Board of Directors
      may
      impose any terms and conditions on the vesting of an award that it determines
      to
      be appropriate. The Company issued 59,950 incentive stock options to selected
      employees during the third and fourth quarters of 2006, which resulted in the
      recognition of $19,609 in compensation expense, with no associated income tax
      benefit, for the year ended December 31, 2006.





Pursuant
      to the Company’s 2006 SOEC Plan, stock appreciation rights (SARs) may be granted
      to employees. The stock appreciation rights may be settled in cash or cash
      and
      common stock as determined at the date of issuance. The Compensation Committee
      or the Board of Directors determines vesting provisions when awards are granted,
      and the awards granted generally vest over three or four years and have a
      maximum life of ten years. SARs settled in stock are recognized as equity-based
      awards while SARs settled in cash are recognized on the balance sheet as
      liability-based awards, both of which are granted at the fair market value
      of
      our common stock at the grant date. The grant-date fair value of the liability
      based awards vesting in the current period, along with the change in fair value
      of the awards during the period, are recognized as compensation expense and
      as
      an adjustment to the recorded liability. On September 19, 2006, 122,690 SARs
      were issued at a fair value of $4.27 per unit. Of the 122,690 SARs issued,
      54,830 are to be settled in cash, while 67,860 are to be settled in stock.
      The
      conversion of SARs, to be settled in stock, is estimated to be one share of
      common stock for every 4.27 SARs. Therefore, we expect to issue 15,900 shares
      of
      common stock if all 67,860 SARs are settled. During 2006, the Company recognized
      $23,328 of compensation expense, with an associated income tax benefit of
      approximately $8,600 for the liability based awards. The Company also recognized
      $23,834 in compensation expense, with no income tax benefit, during 2006 related
      to the issuance of SARs settled in stock.





Also,
      pursuant to the Company’s 2006 SOEC Plan, non-qualified options awards have been
      granted to directors. Stock options have been granted at exercise prices of
      not
      less than 100% of the fair market value of our common stock at the grant date.
      The maximum life of options granted under this plan is ten years from the grant
      date. For the year ending December 31, 2006, the Company recognized $4,599
      of
      compensation expense (included in salary and employee benefits) from stock
      options vesting during the periods, with associated income tax benefits of
      $1,702.





The
      Company exchanged option grants issued pursuant to the NWBF Employee and
      Nonemployee Director Stock Option Plans with options under the Company’s plans
      as a result of the NWBF acquisition. All outstanding options became 100% vested
      as of the merger date, November 30, 2005.





**Stock
      Options -**


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





62




Year
                Ended December 31,2006
              
              
              2005
              
              
              2004Expected
                  life in years (1)
              
              
              5.26
              
              
              4.00
              
              
              4.00Volatility
                  (1)
              
              
              17.97
              %
              
              19.20
              %
              
              22.57
              %Interest
                  Rate (2)
              
              
              4.70
              %
              
              4.22
              %
              
              3.23
              %Yield
                  Rate (3)
              
              
              1.77
              %
              
              1.77
              %
              
              1.92
              %Average
                  Fair-Value
              
              $
              3.78
              
              $
              2.90
              
              $
              2.86







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


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


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





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








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





Total
                  Stock Options
              
              
              **Shares**
              
              
              **Average
                  Price Per Share**
              
              
              **Weighted-Average
                  Remaining Contractual Life**
              
              
              **Aggregate
                  Intrinsic Value**Outstanding
                  at December 31, 2005
              
              
              1,114,232
              
              $
              10.82Granted
              
              
              87,150
              
              
              17.93Exercised
              
              
              (413,670
              )
              
              8.48Forfeited
                  or expired
              
              
              (22,680
              )
              
              12.64**Outstanding
                  at December 31, 2006**
              
              
              765,032
              
              $
              12.85
              
              
              3.13
              
              $
              5,050,996**Exercisable
                  at December 31, 2006**
              
              
              481,923
              
              $
              11.17
              
              
              2.43
              
              $
              3,989,518




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





**Year
                Ended December 31**2006
              
              
              2005
              
              
              2004Total
                  intrinsic value ofstock
                  options exercised
              
              $
              2,883,349
              
              $
              1,572,657
              
              $
              1,090,008





**Stock
      Appreciation Rights -**


The
      following table provides the weighted-average fair values for stock appreciation
      rights (SARs) to be settled in stock. These are considered to be equity-based
      awards. No activity was recognized during the years ended 2005 and 2004,
      respectively, because this type of award was first introduced in 2006. The
      values were estimated using the Black-Scholes option valuation model with the
      following weighted-average assumptions:





63


2006Expected
                  life in years (1)
              
              
              6.00Volatility
                  (1)
              
              
              19.51
              %Interest
                  Rate (2)
              
              
              4.72
              %Yield
                  Rate (3)
              
              
              1.78
              %Average
                  Fair-Value
              
              $
              4.27





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


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


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





For
      any
      future grants, as required by FAS 123R, the Company will estimate the impact
      of
      forfeitures based on our historical experience with previously granted stock
      options, and consider the impact of the forfeitures when determining the amount
      of expense to record. The Company will generally issue new shares of common
      stock as these stock appreciation rights are exercised.





A
      summary
      of SAR - stock awards activity during the current fiscal year is presented
      below:





**Total
                  SAR - Stock Awards**
              
              
              **Awards**
              
              
              **Average
                  Price Per Award**
              
              
              **Weighted-Average
                  Remaining Contractual Life**
              
              
              **Aggregate
                  Intrinsic Value**Outstanding
                  at December 31, 2005
              
              
              -
              
              $
              -Granted
              
              
              67,860
              
              
              17.97Exercised
              
              
              -
              
              
              -Forfeited
                  or expired
              
              
              -
              
              
              -**Outstanding
                  at December 31, 2006**
              
              
              67,860
              
              $
              17.97
              
              
              9.72
              
              $
              100,433**Exercisable
                  at December 31, 2006**
              
              
              -
              
              $
              17.97
              
              
              9.72
              
              $
              -





The
      stock
      appreciation rights (SARs) to be settled in cash awarded September 19, 2006
      have
      the same weighted -average fair values as the SARs settled in stock mentioned
      above because the Black-Scholes option valuation model weighted-average
      assumptions were the same. The SARs settled in cash are considered to be
      liability- based awards. No activity is recognized in 2005 and 2004,
      respectively, because this type of award was first introduced in 2006.





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





64


A
      summary
      of SAR - cash awards activity during the current fiscal year is presented
      below:





**Total
                  SAR - Cash Awards**
              
              
              **Shares**
              
              
              **Average
                  Price Per Share**
              
              
              **Weighted-Average
                  Remaining Contractual Life**
              
              
              **Aggregate
                  Intrinsic Value**Outstanding
                  at December 31, 2005
              
              
              -
              
              $
              -Granted
              
              
              54,830
              
              
              17.97Exercised
              
              
              -
              
              
              -Forfeited
                  or expired
              
              
              -
              
              
              -**Outstanding
                  at December 31, 2006**
              
              
              54,830
              
              $
              17.97
              
              
              9.73
              
              $
              81,148**Exercisable
                  at December 31, 2006**
              
              
              -
              
              $
              17.97
              
              
              9.73
              
              $
              -





At
      December 31, 2006, the Company has estimated unrecognized compensation expense
      of $734,000, $212,000 and $172,000 for unvested stock options, SAR - stock
      awards and SAR - cash awards, respectively. These amounts are based on
      forfeiture rates of 10%, 20% and 20% for stock option, SAR - stock and SAR
      -
      cash awards, respectively. The weighted-average period of time the unrecognized
      compensation expense will be recognized for the unvested stock options, SAR
      -
      stock awards and SAR - cash awards is approximately 2.5, 3.7 and 3.7 years,
      respectively.








16. **Transactions
      with Related Parties** :





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





**2006**
              
              
              **2005**Balance,
                  beginning of year
              
              $
              771,001
              
              $
              710,346Additions
                  or renewals
              
              
              1,696,178
              
              
              122,430Amounts
                  collected
              
              
              (225,985
              )
              
              (61,775
              )Balance,
                  end of year
              
              $
              2,241,194
              
              $
              771,001





In
      addition, there were $208,815 in commitments to extend credit to directors
      and
      officers at December 31, 2006, which are included among loan commitments
      disclosed Note 17.





Real
      estate management fees of $3,287 and $24,956 were paid to a director, during
      2005 and 2004, respectively. There were no similar fees paid to the director
      in
      2006.





65


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





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





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





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:







**2006**
              
              
              **2005**Commitments
                  to extend credit (principallyvariable
                  rate)
              
              $
              196,033,000
              
              $
              175,922,000Letters
                  of credit and financial guarantees written
              
              
              6,720,000
              
              
              6,168,000




18. **Fair
      Value Disclosures of Financial Instruments** :





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





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





**2006**
              
              
              
              
              
              **2005****Carrying
                Amount**
              
              
              **Fair
                  Value**
              
              
              **Carrying
                  Amount**
              
              
              **Fair
                  Value**Financial
                  assets:Cash
                  and cash equivalents
              
              $
              32,777,983
              
              $
              32,777,983
              
              $
              31,843,346
              
              $
              31,843,346Securities
              
              
              38,783,063
              
              
              38,783,063
              
              
              39,344,924
              
              
              39,344,924Loans
                  held for sale
              
              
              2,140,417
              
              
              2,140,417
              
              
              642,180
              
              
              642,180Loans,
                  net of allowancefor
                  loan losses
              
              
              758,816,132
              
              
              748,030,182
              
              
              670,529,157
              
              
              662,446,824Interest
                  receivable
              
              
              3,998,139
              
              
              3,998,139
              
              
              3,343,920
              
              
              3,343,920Federal
                  Home LoanBank
                  stock
              
              
              3,479,900
              
              
              3,479,900
              
              
              3,479,900
              
              
              3,479,900Financial
                  liabilities:Deposits
              
              
              641,272,024
              
              
              640,583,922
              
              
              604,270,620
              
              
              603,200,365Federal
                  funds purchased
              
              
              4,410,000
              
              
              4,410,000
              
              
              -
              
              
              -Federal
                  Home LoanBank
                  borrowings
              
              
              131,803,763
              
              
              131,049,652
              
              
              80,803,763
              
              
              79,822,626Junior
                  subordinated debentures
              
              
              8,248,000
              
              
              8,152,162
              
              
              8,248,000
              
              
              8,248,000Accrued
                  interest payable
              
              
              551,976
              
              
              551,976
              
              
              1,062,828
              
              
              1,062,828









66




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




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





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





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





*Long
      Term Debt* - The
      fair values of the Company’s long term debt is estimated using discounted cash
      flow analyses based on the Company’s current incremental borrowing rate for
      similar type of borrowing arrangements.





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





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





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





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





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





19. **Commitments
      and**  **Legal
      Contingencies** :





The
      Company has entered into employment agreements with three key executive
      officers. The employment agreements provide for minimum aggregate annual base
      salaries of $615,000, plus performance adjustments, life insurance coverage,
      and
      other perquisites commonly found in such agreements. One agreement expires
      in
      2007, while the other two employee agreements expire in 2009 unless extended
      or
      terminated earlier.





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





20. **Regulatory
      Matters** :





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








67





Quantitative
        measures established by regulation to ensure capital adequacy require the
        Company and the Bank to maintain minimum amounts and ratios of Total and
        Tier I
        capital to risk-weighted assets, and of Tier I capital to leverage assets.
        Management believes, as of December 31, 2006, that the Company and the Bank
        meet
        all capital adequacy requirements to which they are subject.


As
      of
      December 31, 2006 and according to FDIC guidelines, the Bank is considered
      to be
      well capitalized. To be categorized as well capitalized, the Bank must maintain
      minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios as
      set
      forth in the following table. There are no conditions or events since that
      notification that management believes have changed the institution’s
      category.





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**
              ****
              ****
              
              ********
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              **Prompt
                  Corrective**
              ****
              ****
              
              ********
              ****
              **Actual**
              ****
              ****
              ****
              ****
              ****
              **Adequacy
                  Purposes**
              ****
              ****
              ****
              ****
              ****
              **Action
                  Provision**
              ****
              ****
              
              ********
              ****
              **Amount**
              ****
              ****
              **Ratio**
              ****
              ****
              **Amount**
              ****
              ****
              **Ratio**
              ****
              ****
              **Amount**
              
              
              **Ratio**As
                  of December 31, 2006:Total
                  capital (to riskweighted
                  assets)
              
              $
              88,493,000
              
              
              10.98
              %
              $
              64,471,280
              
              
              8
              %
              $
              80,589,100
              
              
              10
              %Tier
                  I capital (to riskweighted
                  assets)
              
              
              80,058,000
              
              
              9.93
              %
              
              32,235,640
              
              
              4
              %
              
              48,353,460
              
              
              6
              %Tier
                  I capital (to leverageassets)
              
              
              80,058,000
              
              
              9.56
              %
              
              33,503,480
              
              
              4
              %
              
              41,879,350
              
              
              5
              %As
                  of December 31, 2005:Total
                  capital (to riskweighted
                  assets)
              
              $
              73,050,575
              
              
              10.48
              %
              $
              55,744,800
              
              
              8
              %
              $
              69,681,000
              
              
              10
              %Tier
                  I capital (to riskweighted
                  assets)
              
              
              64,957,450
              
              
              9.32
              %
              
              27,872,400
              
              
              4
              %
              
              41,808,600
              
              
              6
              %Tier
                  I capital (to leverageassets)
              
              
              64,957,450
              
              
              10.32
              %
              
              25,188,400
              
              
              4
              %
              
              31,485,500
              
              
              5
              %














68




21. **Parent
      Company Financial Information** :





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





**BALANCE
      SHEETS**


December
      31


**2006**
              
              
              **2005**Assets:Cash
                  deposited with the Bank
              
              $
              414,565
              
              $
              660,335Prepaid
                  expenses
              
              
              4,324
              
              
              -Deferred
                  income taxes
              
              
              -
              
              
              -Equity
                  in Trust
              
              
              248,000
              
              
              248,000Investment
                  in the Bank, at cost plus equityin
                  earnings
              
              
              103,439,335
              
              
              88,799,776$
              104,106,224
              
              $
              89,708,111Liabilities
                  and stockholders' equity:Liabilities
              
              $
              123,443
              
              $
              48,117Junior
                  subordinated debentures
              
              
              8,248,000
              
              
              8,248,000Stockholders'
                  equity
              
              
              95,734,781
              
              
              81,411,994$
              104,106,224
              
              $
              89,708,111





**STATEMENTS
      OF INCOME**


For
      the
      Periods Ended December 31





**2006**
              
              
              **2005**
              
              
              **2004**Income:Cash
                  dividends from the Bank
              
              $
              -
              
              $
              2,495,000
              
              $
              1,280,000-
              
              
              2,495,000
              
              
              1,280,000Expenses:Interest
                  expense
              
              
              509,699
              
              
              48,117
              
              
              -Investor
                  relations
              
              
              84,760
              
              
              86,381
              
              
              61,937Legal,
                  registration expense, and other
              
              
              80,114
              
              
              55,009
              
              
              71,549Personnel
                  costs paid to Bank
              
              
              95,327
              
              
              267,698
              
              
              63,781769,900
              
              
              457,205
              
              
              197,267Income
                  before income tax benefitand
                  equity in undistributedearnings
                  of the Bank
              
              
              (769,900
              )
              
              2,037,795
              
              
              1,082,733Income
                  tax benefit
              
              
              -
              
              
              -
              
              
              77,000Equity
                  in undistributed earnings of the Bank
              
              
              13,424,418
              
              
              7,540,504
              
              
              6,789,019Net
                  income
              
              $
              12,654,518
              
              $
              9,578,299
              
              $
              7,948,752


69


**STATEMENTS
      OF CASH FLOWS**


For
      the
      Periods Ended December 31


**2006**
              
              
              **2005**
              
              
              **2004**Cash
                  flows from operating activities:Net
                  income
              
              $
              12,654,518
              
              $
              9,578,299
              
              $
              7,948,752Adjustments
                  to reconcile net incometo
                  net cash provided by operatingactivities:Equity
                  in undistributed earnings of
              
              
              (13,424,418
              )
              
              (7,540,504
              )
              
              (6,789,069
              )the
                  BankOther,
                  net
              
              
              358,463
              
              
              (154,572
              )
              
              (77,000
              )Net
                  cash provided by operating activities
              
              
              (411,437
              )
              
              1,883,223
              
              
              1,082,683Cash
                  flows from investing activities:Dividend
                  received from bank subsidiary
              
              
              -
              
              
              2,495,000
              
              
              -Cash
                  paid to shareholders of NWBF
              
              
              -
              
              
              (2,467,051
              )
              
              -Investment
                  in subsidiary
              
              
              -
              
              
              (8,000,000
              )
              
              -Investment
                  in Trust
              
              
              -
              
              
              (248,000
              )
              
              -Net
                  cash used in investing activities
              
              
              -
              
              
              (8,220,051
              )
              
              -Cash
                  flows from financing activities:Proceeds
                  from stock options exercised
              
              
              3,546,887
              
              
              1,039,033
              
              
              1,127,879Dividends
                  paid
              
              
              (3,381,220
              )
              
              (2,555,777
              )
              
              (2,163,789
              )Issuance
                  of trust preferreds
              
              
              -
              
              
              8,248,000Shares
                  repurchased and retired
              
              
              -
              
              
              -
              
              
              (2,960
              )Net
                  cash provided (used in) financing activities
              
              
              165,667
              
              
              6,731,256
              
              
              (1,038,870
              )Net
                  (decrease) increase in cash
              
              
              (245,770
              )
              
              394,428
              
              
              43,813Cash,
                  beginning of period
              
              
              660,335
              
              
              265,907
              
              
              222,094Cash,
                  end of period
              
              $
              414,565
              
              $
              660,335
              
              $
              265,907






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





None





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, 2006 that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.





70


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





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





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





The
      management of Pacific Continental Corporation has assessed the effectiveness
      of
      its internal control over financial reporting at December 31, 2006. 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, 2005, the
      internal control system over financial reporting met those
      criteria.





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





ITEM
      9b.Other
      Information





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 for Director and Continuing Directors,” “MANAGEMENT” and
“COMPLIANCE WITH SECTION 16(a) FILING REQUIREMENTS” of the Company’s 2007 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 of Directors” in the Company’s
      Proxy Statement and is incorporated by reference.





In
      September of 2003, consistent with the requirements of The Sarbanes-Oxley Act,
      the Company adopted a Code of Ethics applicable to senior financial officers
      including the principal executive officer. There have been no changes in the
      Code of Ethics since that time. The Code of Ethics 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 “COMPENSATION DISCUSSION AND ANALYSIS,” “EXECUTIVE
      COMPENSATION” and “DIRECTOR COMPENSATION” of the Proxy
      Statement.


71





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 section entitled “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 “AUDITORS - Fees Paid to Independent Accountants” in
      the Company’s Proxy Statement, which is incorporated by reference.





ITEM
      15Exhibits
      and Financial Statement Schedules





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





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





(a)(2)  Exhibit
      Index





Exhibit


3.1
            Amended
                Articles of Incorporation (1)


3.2
            Amended
                and Restated Bylaws (2)


10.1
      1999
      Employee Stock Option Plan (3)


10.2
      1999
      Director’s Stock Option Plan (3)


10.3
      2006
      Stock Option and Equity Compensation Plan (4)


10.4
      Form
      of Restricted Stock Award Agreement (4)


10.5
      Form
      of Stock Option Award Agreement (4)


10.6
      Form
      of Restricted Stock Unit Agreement (4)


10.7
      Form
      of Stock Appreciation Rights Agreement (4)


10.8  Executive
      Severance/Change of Control Agreement for Mitch Hagstrom (2)


10.9  Executive
      Severance/Change of Control Agreement for Daniel Hempy (2)


10.10  Executive
      Severance/Change of Control Agreement for Michael Reynolds (2)


10.11  Executive
      Employment Agreement for Roger Busse


10.12
      Executive Employment Agreement for Hal Brown (5)


10.13
      Director Fee Schedule, Effective January 1, 2005 (2)


10.14
      NWB
      Financial Corporation Employee Stock Option Plan (6)


10.15
      NWB
      Financial Corporation Director Stock Option Plan (6)


10.16  Director
      Fee Schedule, Effective January 1, 2007


14 Code
      of
      Ethics for Senior Financial Officers and


Principal
      Executive Officer (7)


23.1
      Accountants Consent of Moss Adams L.L.P.


23.2
      Accountants Consent of Isler CPA successor to Zirkle Long Trigueiro & Ward
      L.L.C.


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


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


Chief
      Financial Officer


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





72


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





(2)
            Incorporated
                by reference to Exhibit 3.1, 10.1, 10.2, 10.3, 10.4, and 10.5 of
                the
                Company’s Quarterly


Report
      on
      10-Q for the Quarter ended March 31, 2005.





(3)
            Incorporated
                by reference to Exhibits 99.1 - 99.4 of the Company’s S-8 Registration
                Statement (File No. 333-109501).





(4)
            Incorporated
                by reference to Exhibits 91.1 - 91.5 of the Company’s S-8 Registration
                Statement (File No. 333-134702).





(5)
            Incorporated
                by reference to Exhibit 10.8 of the Company’s Annual Report on Form 10-K
                for the year ended December 31,
                2002.





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





(7)
            Incorporated
                by reference to Exhibit 14 of the Company’s Annual Report on 10-K for the
                year ended December 31, 2003.





(a)(3)
            Financial
                Statement Schedules








- -
 73





**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 12, 2007.





**PACIFIC
      CONTINENTAL CORPORATION**


(Company)








By:  /s/
      Hal M. 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 12th day of March, 2007.





**Principal
                  Executive Officer**By/s/
                  Hal M. Brown
              President
                  and Chief Executive OfficerHal
                  Brown
              and
                  Director**Principal
                  Financial and Accounting Officer**By/s/
                  Michael A. Reynolds
              Executive
                  Vice President andMichael
                  A. Reynolds
              Chief
                  Financial Officer
  **Remaining
                    Directors**By/s/
                    Robert A. Ballin
                Chairman
                    of the BoardRobert
                  A. BallinBy/s/
                    Donald G. Montgomery
                Vice
                    Chairman
                By/s/
                    Michael D. Holzgang
                DirectorDonald
                  G. Montgomery
                
                Michael
                  D. HolzgangBy/s/
                    Larry G. Campbell
                Director
                By
                    /s/
                    Donald L. Krahmer, Jr.
                DirectorLarry
                  G.
                  Campbell
                
                Donald
                  L. Krahmer, Jr.By/s/
                    Cathi Hatch
                Director
                By/s/
                    John H. Rickman
                DirectorCathi
                  Hatch
                
                John
                  H. RickmanBy/s/
                    Michael S. Holcomb
                Director
                By/s/
                    R. Jay Tejera
                DirectorMichael
                    S. Holcomb
                
                R. Jay TejeraBy/s/
                    Michael E. Heijer
                DirectorMichael
                    E.
                    Heijer


74


**CERTIFICATION**




I,
      Hal
      Brown, certify that:


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



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



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



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



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




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




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




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




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


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


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





Date:
                March 12, 2007
            /s/
                Hal BrownHal
                Brown, President & CEO





75








**CERTIFICATION**




I,
      Michael A. Reynolds, certify that:


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



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



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



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



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




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




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




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




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


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


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





Date:
      March 12, 2007     /s/
      Michael A. Reynolds


Michael
      A. Reynolds,
      Executive Vice President & CFO





-75-


**CERTIFICATION
      PURSUANT TO**


**18
      U.S.C. SECTION 1350,**


**AS
      ADOPTED PURSUANT TO**


**SECTION
      906 OF THE SARBANES-OXLEY ACT OF 2002**











In
      connection with the Annual Report of Pacific Continental Corporation (the
“Company”) on Form 10-K for the period ending December 31, 2006 as filed with
      the Securities and Exchange Commission on the date hereof (the “Report”), we,
      Hal M. Brown, Chief Executive Officer, and Michael A. Reynolds, Chief Financial
      Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002, that:





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




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







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





Dated:
      March 12, 2007





77