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, 2008





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 section 12(b) of the Act:


Title of Each
Class                                                                           Name
of Each Exchange on Which Registered





Common
Stock, No par value per
share                                                                                                           Nasdaq
Global Select Market





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


None





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.    (  )





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.


Large
accelerated
filer   __                                                                          Accelerated
filer   X    Non-accelerated
filer   __    Smaller Reporting
Company  __





Indicate
by check mark whether the 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, 2008 (the last business day of the most recent second
quarter) was $154,698,279 based on the closing price as quoted on the NASDAQ
Global Market on that date.





The
number of shares outstanding of each of the registrant’s classes of common
stock, as of March 6, 2009, was 12,862,691 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 2009 annual meeting of shareholders.








PACIFIC
CONTINENTAL CORPORATION


FORM
10-K


ANNUAL
REPORT


TABLE OF
CONTENTS


PART 1
              
              PageItem 1:
              Business
              3Item 1a:
              Risk Factors
              18Item 1b:
              Unresolved Staff
Comments
              21Item 2:
              Properties
              21Item 3:
              Legal Proceedings
              22Item 4:
              Submission of Matters to a Vote of
      Security Holders
              22PART IIItem 5:
              Market for Company’s Common Equity,
      Related
              22Stockholder Matters, and Issuer
      Purchases of Equity SecuritiesItem 6:
              Selected Financial
    Data
              25Item 7:
              Management’s Discussion and
      Analysis of Financial
              26Condition and Results of
      OperationsItem 7a:
              Quantitative and Qualitative
      Disclosures About Market Risk
              41Item 8:
              Financial Statements and Supplementary
      Data
              44Item 9:
              Changes In and Disagreements with
      Accountants
              75on Accounting and Financial
      DisclosureItem 9a:
              Controls and
      Procedures
              75Item 9b:
              Other Information
              75PART III
              (Items
      10 through 14 are incorporated by reference fromPacific
      Continental Corporation’s definitive proxy statement for
    theannual
      meeting of shareholders scheduled for April 20, 2009)Item 10:
              Directors, Executive Officers and
      Corporate Governance
              75Item 11:
              Executive Compensation
              76Item 12:
              Security Ownership of Certain Beneficial
      Owners
              76and Management and Related Stockholder
      MattersItem 13:
              Certain Relationships, Related
      Transactions and Director Independence
              76Item 14:
              Principal Accounting Fees and
      Services
              76PART IVItem 15:
              Exhibits and Financial Statement
      Schedules
              77SIGNATURES
              
              78CERTIFICATIONS
              
              79





PART
I





Item
1.                      Business


General





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





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





The Bank
operates in three primary markets: Portland, Oregon / Southwest Washington;
Seattle, Washington; and Eugene, Oregon.  At December 31, 2008, the
Bank operated fourteen full-service offices in six Oregon and three Washington
cities.





Results





For the
year ended December 31, 2008, the consolidated net income of the Company was
$12.9 million or $1.08 per diluted share.  At December 31, 2008, the
consolidated equity of the Company was $116.2 million with 12.1 million shares
outstanding and a book value of $9.62 per share.  Total assets were
$1,090.8 million.  Loans, including loans held for sale, net of
allowance for loan losses and unearned fees, were $945.8 million at December 31,
2008 and represented 87% of total assets.  Deposits totaled $722.4
million at year-end 2008 with core deposits representing 85% or $615.8 of total
deposits.  At December 31, 2008, the Company had a total risk-based
capital ratio of 11.11% and was rated as “well-capitalized” under FDIC
guidelines.  Subsequent to the end of the year, the company raised
approximately $9.7 million in additional capital through a private equity
placement that is expected to increase the total risk-based capital ratio to
more than 12%.  In addition, in December 2008, the Company received
preliminary approval to receive up to $30 million in capital in the form of
preferred stock through the Federal Government’s Troubled Asset Relief
Program.  In January 2009, the Company announced that it had
determined not to participate in this program.  For more information
regarding the Company’s financial condition and results of operations, see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Financial Statements and Supplementary Data” in sections 7 and
8 of this Form 10-K.





THE
BANK





General





The Bank
commenced operations on August 15, 1972.  At December 31, 2008, the
Bank operated fourteen banking offices in Oregon and Washington.  The
primary business strategy of the Bank is to provide comprehensive banking and
related services tailored to community-based business, not-for-profits,
professional service providers and private banking services for business owners
and executives.  The Bank emphasizes the diversity of its product
lines, high levels of personal service, and through technology, offers
convenient access typically associated with larger financial institutions, while
maintaining local decision-making authority and market knowledge, typical of a
local community bank.  More information on the Bank and its banking
services can be found on its Website.  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 metropolitan Portland, which includes
Southwest Washington, and metropolitan Eugene in the State of Oregon and
metropolitan Seattle in the State of Washington.  The Bank has five
full-service banking offices in the metropolitan Portland and Southwest
Washington area, seven full-service banking offices in the metropolitan Eugene
area, and two full-service offices in the metropolitan Seattle
area.  The Bank has its headquarters and administrative office in
Eugene, Oregon.





-3-




Competition





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





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





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





The
financial services industry has experienced widespread consolidation over the
last decade.  The Company anticipates that consolidation among financial
institutions in its market area will continue.  In particular, the current
economic conditions suggest a number of bank failures are possible in the
Company’s market areas that will lead to additional consolidation in the
industry.  The Company seeks acquisition opportunities, including FDIC
assisted takeovers, from time to time, in its existing markets and in new
markets of strategic importance.  However, other financial institutions
aggressively compete against the Bank in the acquisition market.  
Some of these institutions may have greater access to capital markets, larger
cash reserves, and stock for use in acquisitions that is more liquid and more
highly valued by the market.





Services
Provided





Lending
Activities





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





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





-4-




Within
its primary markets, the Bank also concentrates on permanent and construction
loan financing for commercial facilities and for pre-sold, custom, and
speculative home construction.  The major thrust of residential
construction lending is smaller in-fill construction projects consisting of
single-family residences.  However, in fourth quarter 2007, due to the
rapid deterioration in the national and regional housing market, the Bank
severely restricted lending on speculative home construction and significantly
reduced its exposure to residential construction lending.  The Bank
also finances requests for multi-family residences.





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





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





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





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





Deposit
Services





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





Subsequent
to the end of the year, as a result of a financial institution failure in the
State of Washington, the Bank was assessed $9 thousand for uninsured public
deposits at the failed institution.  The assessment was based upon the
Bank’s pro rata share of public deposits as of December 31, 2008, which amounted
to less than one-tenth of one percent.  However, due to the increased risk
of future bank failures in Washington, the Bank chose to exit the public deposit
pool in order to minimize its exposure to possible assessments for uninsured
deposits.  The Bank will continue to have a potential liability for
uninsured deposits for a period of one year following its exit from the state
public deposit pool.





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





Merchant
Card Services





The Bank
provides merchant card services to its clients, which includes processing of
credit card transactions and issuance of business credit cards.  This
service is an integral part of the Bank’s strategy to focus on marketing to
community-based business, not-for-profits, and service
providers.  During 2008, the Company processed approximately $190
million in credit card transactions for its merchant clients.





-5-




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, 2008, the Bank employed 255 full-time equivalent  (FTE)
employees with 29 FTE’s in the Seattle market, 49 FTE’s in the Portland market,
83 FTE’s in the Eugene market, and 94 FTE’s in administrative functions located
in Eugene, Oregon.  None of these employees are represented by labor
unions, and management believes that the Company’s relationship with employees
is good.  The Company emphasizes a positive work environment for its
employees, which is validated by recognition from independent third
parties.  In December 2008, the Bank was recognized for the second
consecutive year as one of Oregon’s ten most admired companies in the Portland Business Journal’sMost Admired Companies survey.  During 2008, the Bank was also
recognized for the seventh consecutive year by Oregon Business Magazine as
one of Oregon’s Best 100
Companiesfor which to work, and was the highest rated financial
institution in the state.  In addition, in 2004, the Bank was named as
the number one small company (employees under 250) to work for in the State of
Oregon by Oregon Business
Magazine.  The Bank and its employees have also been recognized
for their involvement in the community.  Management continually
strives to retain and attract top talent as well as provide career development
opportunities to enhance skill levels.  A number of benefit programs
are available to eligible employees, including group medical plans, paid sick
leave, paid vacation, group life insurance, 401(k) plans, and equity
compensation plans.





Supervision
and Regulation





General





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





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





Federal
Bank Holding Company Regulation





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





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





-6-




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





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





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





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





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





Federal
and State Regulation of Pacific Continental Bank





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





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





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





-7-




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





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





State Assessments.
Washington state banks and out of state banks with branches in Oregon that hold
public funds are considered public depositories and are subject to pro rata
assessments for the loss of public deposits held at a failed Washington or
Oregon bank, respectively, that exceed federal deposit insurance limits and
other coverage. Due to the current economic climate it is anticipated that there
will be bank failures nationwide, and we may face increased costs if a
Washington or Oregon state public depository bank fails and we are assessed for
a net losses of such public deposits held at the failed
institution.





Interstate
Banking and Branching





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





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





Dividends





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





-8-


Capital
Adequacy





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





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





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





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





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





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





Regulatory
Oversight and Examination





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





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





-9-




Recent
Legislation





Emergency Economic
Stabilization Act of 2008.  In response to the recent financial
crisis, the United States government passed the Emergency Economic Stabilization
Act of 2008 (the “EESA”) on October 3, 2008, which provides the United
States Department of the Treasury (the “Treasury”) with broad authority to
implement certain actions intended to help restore stability and liquidity to
the U.S. financial markets.





Insurance of Deposit
Accounts.The EESA included a
provision for a temporary increase from $100,000 to $250,000 per depositor in
deposit insurance effective October 3, 2008 through December 31, 2009.
After December 31, 2009, deposit accounts are expected to again be insured by
the FDIC, generally up to a maximum of $100,000 per separately insured depositor
and up to a maximum of $250,000 for self-directed retirement
accounts.





The FDIC
imposes an assessment against institutions for deposit insurance. This
assessment is based on the risk category of the institution and ranges from 5 to
43 basis points of the institution’s deposits. In December, 2008, the FDIC
adopted a rule that raises the current deposit insurance assessment rates
uniformly for all institutions by 7 basis points (to a range from 12 to 50 basis
points) for the first quarter of 2009. The rule also gives the FDIC the
authority to alter the way it calculates federal deposit insurance assessment
rates beginning in the second quarter of 2009 and thereafter, and as necessary,
to implement emergency special assessments to maintain the deposit insurance
fund.





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





Troubled Asset Relief
Program.Pursuant to the EESA, the Treasury has the ability to purchase
or insure up to $700 billion in troubled assets held by financial
institutions under the Troubled Asset Relief Program (“TARP”). On
October 14, 2008, the Treasury announced it would initially purchase equity
stakes in financial institutions under a Capital Purchase Program (the “CPP”) of
up to $350 billion of the $700 billion authorized under the TARP
legislation. The CPP provides direct equity investment of perpetual preferred
stock by the Treasury in qualified financial institutions, as well as a warrant
to purchase common stock. The Company has decided not to participate in the CPP
in light of its strong capital position in part due to a successful common stock
offering during the first week of January 2009.





Temporary Liquidity
Guarantee Program.   In October 2008, the FDIC announced
the Temporary Liquidity Guarantee Program, which has two components--the Debt
Guarantee Program and the Transaction Account Guarantee Program. Under the
Transaction Account Guarantee Program any participating depository institution
is able to provide full deposit insurance coverage for non-interest bearing
transaction accounts, regardless of the dollar amount. Under the program,
effective November 14, 2008, insured depository institutions that have not opted
out of the FDIC Temporary Liquidity Guarantee Program will be subject to a 0.10%
surcharge applied to non-interest bearing transaction deposit account balances
in excess of $250,000, which surcharge will be added to the institution’s
existing risk-based deposit insurance assessments. Under the Debt Guarantee
Program, qualifying unsecured senior debt issued by a participating institution
can be guaranteed by the FDIC. The Company and the Bank chose to participate in
both components of the FDIC Temporary Liquidity Guaranty Program.





American Recovery and
Reinvestment Act of 2009.   On February 17, 2009, the
American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law.
ARRA is intended to help stimulate the economy and is a combination of tax cuts
and spending provisions applicable to a broad range of areas with an estimated
cost of $787 billion. The impact that ARRA may have on the US economy, the
Company and the Bank cannot be predicted with certainty.





-10-


Proposed
Legislation





As of
early 2009, additional legislation has been promulgated or is pending under EESA
which is intended to provide among other things, an injection of more capital
from Treasury into financial institutions through the Capital Assistance
Program, establishment of a public-private investment fund for the purchase of
troubled assets and expansion of the Term Asset-Backed Securities Loan Facility
to include commercial mortgage backed-securities.





Proposed
legislation is introduced in almost every legislative session that would
dramatically affect the regulation of the banking industry. In light of the 2008
financial crisis and a new administration in the Executive Branch of the federal
government, it is anticipated that legislation reshaping the regulatory
landscape could be proposed in 2009. We cannot predict if any such legislation
will be adopted or if it is adopted how it would affect the business of the
Company or the Bank. Past history has demonstrated that new legislation or
changes to existing laws or regulations usually results in a greater compliance
burden and therefore generally increases the cost of doing
business.





Corporate
Governance and Accounting Legislation





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





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





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





Anti-terrorism
Legislation





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





-11-


Financial
Services Modernization





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





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





Effects
of Government Monetary Policy





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





-12-


Statistical
Information





Selected
Quarterly Information





The
following chart contains data for the last eight quarters ending December 31,
2008. All data, except number of shares and per share data, is in thousands of
dollars.





YEAR
              
              2008
              
              
              
              
              
              
              
              
              
              
              
              2007QUARTER
              
              Fourth
              
              
              Third
              
              
              Second
              
              
              First
              
              
              Fourth
              
              
              Third
              
              
              Second
              
              
              FirstInterest
      income
              
              $
              16,544
              
              
              $
              16,680
              
              
              $
              16,215
              
              
              $
              16,506
              
              
              $
              17,350
              
              
              $
              17,419
              
              
              $
              17,751
              
              
              $
              16,647Interest
      expense
              
              
              3,350
              
              
              
              4,377
              
              
              
              4,057
              
              
              
              4,890
              
              
              
              6,157
              
              
              
              6,441
              
              
              
              6,813
              
              
              
              6,329Net
      interest income
              
              
              13,194
              
              
              
              12,203
              
              
              
              12,158
              
              
              
              11,616
              
              
              
              11,193
              
              
              
              10,978
              
              
              
              10,938
              
              
              
              10,318Provision
      for loan loss
              
              
              1,050
              
              
              
              1,050
              
              
              
              925
              
              
              
              575
              
              
              
              275
              
              
              
              125
              
              
              
              125
              
              
              
              200Noninterest
      income
              
              
              1,042
              
              
              
              1,047
              
              
              
              1,163
              
              
              
              1,017
              
              
              
              1,030
              
              
              
              997
              
              
              
              949
              
              
              
              948Noninterest
      expense
              
              
              7,435
              
              
              
              7,497
              
              
              
              7,463
              
              
              
              7,167
              
              
              
              6,591
              
              
              
              6,399
              
              
              
              6,513
              
              
              
              6,358Net
      income
              
              
              3,833
              
              
              
              3,020
              
              
              
              3,007
              
              
              
              3,079
              
              
              
              3,307
              
              
              
              3,421
              
              
              
              3,211
              
              
              
              2,996PER
      COMMONSHARE
      DATA (1)Net
      income (basic)
              
              $
              0.32
              
              
              $
              0.25
              
              
              $
              0.25
              
              
              $
              0.26
              
              
              $
              0.28
              
              
              $
              0.29
              
              
              $
              0.26
              
              
              $
              0.25Net
      income (diluted)
              
              $
              0.32
              
              
              $
              0.25
              
              
              $
              0.25
              
              
              $
              0.26
              
              
              $
              0.28
              
              
              $
              0.29
              
              
              $
              0.26
              
              
              $
              0.25Cash
      dividends
              
              $
              0.10
              
              
              $
              0.10
              
              
              $
              0.10
              
              
              $
              0.10
              
              
              $
              0.09
              
              
              $
              0.09
              
              
              $
              0.09
              
              
              $
              0.08WEIGHTED AVERAGE
      SHARES OUTSTANDINGBasic
              
              
              12,039,081
              
              
              
              11,978,460
              
              
              
              11,962,560
              
              
              
              11,940,064
              
              
              
              11,896,187
              
              
              
              11,848,059
              
              
              
              11,814,931
              
              
              
              11,761,039Diluted
              
              
              12,095,066
              
              
              
              12,033,898
              
              
              
              12,030,063
              
              
              
              12,005,710
              
              
              
              11,995,087
              
              
              
              11,981,303
              
              
              
              11,971,279
              
              
              
              11,967,135(1)
      All prior year per share data has been retroactively adjusted for the 10%
      stock dividend paid in June 2007.


Investment
Portfolio





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




INVESTMENT
      PORTFOLIOESTIMATED
      FAIR VALUEDecember
      31,2008
              
              
              2007
              
              
              2006(dollars
      in thousands)US
      Treasury, US Government agencies and corporations
              
              $
              2,029
              
              
              $
              10,541
              
              
              $
              14,501Obligations
      of states and political subdivisions
              
              
              7,485
              
              
              
              7,514
              
              
              
              5,596Other
      mortgage-backed securities
              
              
              45,419
              
              
              
              35,939
              
              
              
              18,686Total
              
              $
              54,933
              
              
              $
              53,994
              
              
              $
              38,783


-13-


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, 2008 projected average life.


SECURITIES
AVAILABLE-FOR-SALE
 After
      One
              
              
              After
      FiveYear
      But
              
              
              Years
      ButWithin
              
              
              Within
              
              
              Within
              
              
              After
      TenOne
      Year
              
              
              Five
      Years
              
              
              Ten
      Years
              
              
              YearsAmount
              
              
              Yield
              
              
              Amount
              
              
              Yield
              
              
              Amount
              
              
              Yield
              
              
              Amount
              
              
              Yield(dollars
      in thousands)US
      Treasury, US Governmentagencies
      and agencymortgage-backed
      securities
              
              $
              16,984
              
              
              
              4.19
              %
              
              $
              27,875
              
              
              
              6.32
              %
              
              $
              1,691
              
              
              
              5.52
              %
              
              $
              898
              
              
              
              6.29
              %Obligations
      of states andpolitical
      subdivisions
              
              
              1,026
              
              
              
              3.39
              %
              
              
              1,498
              
              
              
              4.34
              %
              
              
              4,961
              
              
              
              3.87
              %
              
              
              -Total
              
              $
              18,010
              
              
              
              4.15
              %
              
              $
              29,373
              
              
              
              6.21
              %
              
              $
              6,652
              
              
              
              4.29
              %
              
              $
              898
              
              
              
              6.29
              %


Loan
Portfolio





Loans
represent a significant portion of the Company’s total
assets.  Average balance and average rates paid by category of loan
for the fourth quarter and full year 2008 is included in the Company’s
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included later in this report.  The following tables
contain information related to the Company’s loan portfolio, including loans
held for sale, for the five-year period ended December 31, 2008.





LOAN
      PORTFOLIODecember
      31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004(dollars
      in thousands)Commercial
      loans
              
              $
              233,513
              
              
              $
              188,940
              
              
              $
              169,566
              
              
              $
              160,988
              
              
              $
              107,538Real
      estate loans
              
              
              717,119
              
              
              
              627,140
              
              
              
              590,855
              
              
              
              507,479
              
              
              
              341,111Real
      estate loans held for sale
              
              
              410
              
              
              
              -
              
              
              
              2,140
              
              
              
              642
              
              
              
              2,072Consumer
      loans
              
              
              7,455
              
              
              
              8,226
              
              
              
              9,168
              
              
              
              12,463
              
              
              
              10,380958,497
              
              
              
              824,306
              
              
              
              771,729
              
              
              
              681,572
              
              
              
              461,101Deferred
      loan origination fees, net
              
              
              (1,730
              )
              
              
              (1,984
              )
              
              
              (2,489
              )
              
              
              (2,609
              )
              
              
              (2,061
              )956,767
              
              
              
              822,322
              
              
              
              769,240
              
              
              
              678,963
              
              
              
              459,040Allowance
      for loan losses
              
              
              (10,980
              )
              
              
              (8,675
              )
              
              
              (8,284
              )
              
              
              (7,792
              )
              
              
              (5,224
              )$
              945,787
              
              
              $
              813,647
              
              
              $
              760,956
              
              
              $
              671,171
              
              
              $
              453,816


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.  At December 31, 2008, the Bank had approximately $280,000
of variable rate loans at their floors that are included in the below
analysis.  Real Estate loans include Loans Held for Sale




-14-
  MATURITY
      AND REPRICING DATA FOR LOANSCommercial
              
              
              Real
      Estate
              
              
              Consumer
              
              
              Total(dollars
      in thousands)Three
      months or less
              
              $
              88,576
              
              
              $
              306,399
              
              
              $
              5,143
              
              
              $
              400,118Over
      three months through 12 months
              
              
              3,518
              
              
              
              46,267
              
              
              
              432
              
              
              
              50,217Over
      1 year through 3 years
              
              
              27,758
              
              
              
              128,628
              
              
              
              489
              
              
              
              156,875Over
      3 years through 5 years
              
              
              49,594
              
              
              
              166,595
              
              
              
              818
              
              
              
              217,007Over
      5 years through 15 years
              
              
              62,177
              
              
              
              53,672
              
              
              
              476
              
              
              
              116,325Thereafter
              
              
              1,890
              
              
              
              15,968
              
              
              
              97
              
              
              
              17,955Total
      loans
              
              $
              233,513
              
              
              $
              717,529
              
              
              $
              7,455
              
              
              $
              958,497


Loan
Concentrations





At
December 31, 2008, loans to dental professionals totaled $122,205 and
represented 12.8% of outstanding loans.  At December 31, 2008,
residential construction loans totaled $74,532 and represented 7.8% of
outstanding loans.  In addition, at December 31, 2008, unfunded loan
commitments for residential construction totaled
$19,818.  Approximately 75.0% of the Bank’s loans are secured by real
estate.    Management believes the granular nature of the
portfolio, from industry mix, geographic location and loan size, continues to
disperse risk concentration to some degree.





Nonperforming
Assets





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





NONPERFORMING  ASSETS
 December
      31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004(dollars
      in thousands)Nonaccrual
      loans
              
              $
              4,137
              
              
              $
              4,122
              
              
              $
              -
              
              
              $
              180
              
              
              $
              1,00490
      or more days past due and still accruing
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              213Total
      nonperforming loans
              
              
              4,137
              
              
              
              4,122
              
              
              
              -
              
              
              
              180
              
              
              
              1,217Government
      guarantees
              
              
              (239
              )
              
              
              (451
              )
              
              
              -
              
              
              
              (28
              )
              
              
              (101
              )Net
      nonperforming loans
              
              
              3,898
              
              
              
              3,671
              
              
              
              -
              
              
              
              152
              
              
              
              1,116Foreclosed
      assets
              
              
              3,806
              
              
              
              423
              
              
              
              -
              
              
              
              131
              
              
              
              262Total
      nonperforming assets
              
              $
              7,704
              
              
              $
              4,094
              
              
              $
              -
              
              
              $
              283
              
              
              $
              1,378Nonperforming
      assets as a percentage ofof
      total assets
              
              
              0.71
              %
              
              
              0.43
              %
              
              
              0.00
              %
              
              
              0.04
              %
              
              
              0.27
              %


If
interest on nonaccrual loans had been accrued, such income would have been
approximately $173, $140, and $14, respectively, for years 2008, 2007 and
2006.  The above table does not include $2,234 of impaired loans less
than 90 days past due and still accruing interest as of December 31,
2008.





Allowance
for Loan Loss





The
following chart presents information about the Company’s allowances for loan
losses.  Management and the Board of Directors evaluate the allowance
monthly and consider the amount to be adequate to absorb possible loan
losses.


-15-
  ALLOWANCE
      FOR LOAN LOSSDecember
      31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004(dollars
      in thousands)Balance
      at beginning of year
              
              $
              8,675
              
              
              $
              8,284
              
              
              $
              7,792
              
              
              $
              5,224
              
              
              $
              5,225Charges
      to the allowanceReal
      estate loans
              
              
              (1,235
              )
              
              
              -
              
              
              
              -
              
              
              
              (214
              )
              
              
              (79
              )Consumer
      loans
              
              
              (118
              )
              
              
              (46
              )
              
              
              (71
              )
              
              
              (106
              )
              
              
              (269
              )Commercial
              
              
              (124
              )
              
              
              (350
              )
              
              
              (152
              )
              
              
              (316
              )
              
              
              (168
              )Total
      charges to the allowance
              
              
              (1,477
              )
              
              
              (396
              )
              
              
              (223
              )
              
              
              (636
              )
              
              
              (516
              )Recoveries
      against the allowanceReal
      estate loans
              
              
              128
              
              
              
              15
              
              
              
              4
              
              
              
              37
              
              
              
              73Consumer
      loans
              
              
              23
              
              
              
              27
              
              
              
              20
              
              
              
              56
              
              
              
              54Commercial
              
              
              31
              
              
              
              20
              
              
              
              91
              
              
              
              31
              
              
              
              70Total
      recoveries against the allowance
              
              
              182
              
              
              
              62
              
              
              
              115
              
              
              
              124
              
              
              
              197Acquisition
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,014
              
              
              
              -Provisions
              
              
              3,600
              
              
              
              725
              
              
              
              600
              
              
              
              1,100
              
              
              
              500Unfunded
      commitments *
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (34
              )
              
              
              (182
              )Balance
      at end of the year
              
              $
              10,980
              
              
              $
              8,675
              
              
              $
              8,284
              
              
              $
              7,792
              
              
              $
              5,224Net
      charge offs as a percentage of  totalaverage
      loans
              
              
              0.15
              %
              
              
              0.04
              %
              
              
              0.01
              %
              
              
              0.10
              %
              
              
              0.08
              %







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





The
following table sets forth the allowance for loan losses allocated by loan type
at December 31, 2008:


Real
      estate loans
              
              $
              7,586Consumer
      loans
              
              
              63Commercial
              
              
              2,253Unallocated
              
              
              1,078Allowance
      for loan losses
              
              $
              10,980


During
2008, the Bank recorded a provision for loan losses of $3,600 compared to $725
for the year 2007.  The increase in the loan loss provision was
related to loan growth and moderate deterioration in the overall credit quality
of the loan portfolio during 2008.  At December 31, 2008, the recorded
investment in certain loans totaling $6,132, net of government guarantees, was
considered impaired.  A specific reserve of $887 is provided for these
loans and is included in the $10,980 allowance for loan losses at December 31,
2008.





Deposits





Deposits
represent a significant portion of the Company’s liabilities.  Average
balance and average rates paid by category of deposit is included in the
Company’s “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” of this report.  The chart below details the
Company’s time deposits at December 31, 2008.  The Company does not
have any foreign deposits.  Variable rate deposits are listed by first
repricing opportunity.





-16-


TIME
      DEPOSITSTime
      Deposits
                
                
                Time
      Depositsof
      $100,000
                
                
                of
      less than
                
                
                TotalOr
      more
                
                
                $
                100,000
                
                
                Time
      Deposits(dollars
      in thousands)Three
      months or less
                
                $
                45,558
                
                
                $
                43,940
                
                
                $
                89,498Over
      three months through twelve months
                
                
                8,153
                
                
                
                25,521
                
                
                
                33,674Over
      one year through three years
                
                
                9,596
                
                
                
                11,886
                
                
                
                21,482Over
      three years
                
                
                3,788
                
                
                
                2,103
                
                
                
                5,891$
                67,095
                
                
                $
                83,450
                
                
                $
                150,545
   Short-term
Borrowings





The
Company uses short-term borrowings to fund fluctuations in deposits and loan
demand.  The Company’s subsidiary, Pacific Continental Bank, has
access to both secured and unsecured overnight borrowing lines.  At
December 31, 2008, the Bank had lines totaling approximately
$495,188.  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, 2008 was 30%
of assets or $327,253, subject to sufficient collateral and stock
investment.  At December 31, 2008, available unsecured borrowing lines
with various correspondent banks and a secured line with the Federal Reserve
Bank of San Francisco was approximately $167,935.





SHORT-TERM
      BORROWINGS2008
              
              
              2007
              
              
              2006
              
              
              2005(dollars
      in thousands)Federal
      Funds Purchased, FHLB CMA, Federal Reserve,&
      Short Term AdvancesAverage
      interest rateAt
      year end
              
              
              0.48
              %
              
              
              4.39
              %
              
              
              5.55
              %
              
              
              4.33
              %For
      the year
              
              
              2.25
              %
              
              
              5.25
              %
              
              
              5.31
              %
              
              
              3.35
              %Average
      amount outstanding for the year
              
              $
              182,301
              
              
              $
              93,733
              
              
              $
              73,171
              
              
              $
              17,693Maximum
      amount outstanding at any month end
              
              $
              213,225
              
              
              $
              151,360
              
              
              $
              99,410
              
              
              $
              34,825Amount
      outstanding at year end
              
              $
              193,000
              
              
              $
              151,360
              
              
              $
              99,410
              
              
              $
              24,000
   Long-term
Borrowings





In
addition to the short-term borrowings, at December 31, 2008, the Bank had other
FHLB borrowings totaling $45,500 with a weighted average interest rate of 4.14%
and a remaining average maturity of approximately 2.3 years.





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





-17-


ITEM
1A                      Risk
Factors





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





We
cannot predict the effect of the national economic situation on our future
results of operations or stock trading price.





The
national economy and the financial services sector in particular, are currently
facing challenges of a scope unprecedented in recent history.  No one
can predict the severity or duration of this national downturn, which has
adversely impacted the markets we serve.  Any further deterioration in
our markets would have an adverse effect on our business, financial condition,
results of operations and prospects, and could also cause the trading price of
our stock to decline.





We
cannot predict the effect of recent and pending federal
legislation.





On
October 3, 2008, Congress enacted the Emergency Economic Stabilization Act of
2008 (“EESA”), which provides the United States Treasury Department (“Treasury”)
with broad authority to implement action intended to help restore stability and
liquidity to the US financial markets.  The EESA also increases the
amount of deposit account insurance coverage from $100,000 to $250,000 effective
until December 31, 2009.





As of
early 2009, additional legislation has been promulgated or is pending under EESA
which is intended to provide, among other things, an injection of capital from
the Treasury into financial institutions through the Capital Assistance Program,
establishment of a public-private investment fund for the purchase of troubled
assets, and the expansion of the Term Asset-Backed Securities Loan Facility to
include commercial mortgage backed-securities.





The full
effect of the broad legislation already enacted and related legislation expected
to be enacted in the near future on the national economy and financial
institutions, particularly on mid-sized institutions like us, cannot now be
predicted.





Our
ability to access markets for funding and acquire and retain customers could be
adversely affected to the extent the financial service industry’s reputation is
damaged.





Reputation
risk is the risk to liquidity, earnings and capital arising from negative
publicity regarding the financial services industry.  The financial
services industry continues to be featured in negative headlines about the
global and national credit crisis and the resulting stabilization legislation
enacted by the U.S. federal government.  These reports can be damaging
to the industry’s image and potentially erode consumer confidence in insured
financial institutions, such as our banking subsidiary.





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.  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.





The
current 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.





-18-




The
inability of borrowers to repay loans can erode our
earnings.  Substantially all of our loans are to businesses and
individuals in Washington and Oregon, and a continuing decline in the economy of
these market areas could impact us adversely.  Recently, a series of
large Puget Sound-based businesses, including Microsoft, Starbucks, and Boeing,
have announced or began to implement substantial employee layoffs and scaled
back plans for future growth.  Additionally, the recent acquisition of
Washington Mutual by JPMorgan Chase & Co. has also resulted in substantial
employee layoffs, and is expected to result in a substantial increase in office
space availability in downtown Seattle.  Oregon has also seen a
similar pattern of large lay offs in major metropolitan areas, a continued
decline in housing prices, and a significant increase in the state’s
unemployment rate.  A further deterioration in economic conditions in the
market areas we serve could result in the following consequences, any of which
could have an adverse impact on our prospects, results of operations and
financial condition:





·
            loan
      delinquencies may increase further, migrating into our substantial
      commercial real estate and business lending
  portfolios;




·
            collateral
      for loans made may decline further in value, in turn reducing customers’
      borrowing power, reducing the value of assets and collateral associated
      with existing loans;




·
            demand
      for banking products and services may decline;
  and




·
            low
      cost or non-interest bearing deposits may
  decrease.







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





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





Concentration
in real estate market





We have a
high concentration of loans secured by real estate.  While the Pacific
Northwest typically lags the national economy, the affects of the economic
deterioration are now significantly impacting our market area.  Our
business activities and credit exposure are concentrated in loans secured by
real estate.  Further decline in the real estate markets that we serve
could negatively affect our business because the collateral securing those loans
may decrease in value.  A continued downturn in the local economy
could have a material adverse effect both on the borrowers’ ability to repay
these loans, as well as the value of the real property held as
collateral.  Our ability to recover on defaulted loans by foreclosing
and selling the real estate collateral would then be diminished and we be would
more likely to suffer losses on defaulted loans.





Tightening
of credit markets and liquidity risk





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


-19-





If
the goodwill we have recorded in connection with acquisitions becomes impaired,
it could have an adverse impact on our earnings and capital.




Accounting
standards require that we account for acquisitions using the purchase method of
accounting.  Under purchase accounting, if the purchase price of an
acquired company exceeds the fair value of its net assets, the excess is carried
on the acquirer’s balance sheet as goodwill.  At December 31, 2008, we
had approximately $22,031 of goodwill on our balance sheet.  In
accordance with generally accepted accounting principles, our goodwill is not
amortized but rather evaluated for impairment on an annual basis or more
frequently if events or circumstances indicate that a potential impairment
exists.  Such evaluation is based on a variety of factors, including
the quoted price of our common stock, market prices of common stocks of other
banking organizations, common stock trading multiples, discounted cash flows,
and data from comparable acquisitions.  There can be no assurance that
future evaluations of goodwill will not result in findings of impairment and
write-downs, which could be material.




We
may be required in the future to recognize an impairment with respect to
investment securities, including the FHLB stock we hold.




Under the
current economic downturn, investment portfolios continue to record significant
unrecognized losses.  The Company’s current securities portfolio contains
credit risk associated with whole loan private mortgage-backed securities. 
The Company may continue to observe declines in the fair market value of these
securities.  The company evaluates the securities portfolio for any other
than temporary impairment under EITF 03-1 on a monthly basis, and as of December
31, 2008, we did not recognize any securities as other than temporarily
impaired.  There can be no assurance, however, that future evaluations of
the securities portfolio will not require us to recognize an impairment charge
with respect to such holdings.





In
addition, as a condition to membership in the Federal Home Loan Bank of Seattle
(“FHLB”), we are required to purchase and hold a certain amount of FHLB
stock.  Our stock purchase requirement is based, in part, upon the
outstanding principal balance of advances from the FHLB.  The FHLB
stock held by the Company is carried at cost and is subject to recoverability
testing under applicable accounting standards.  The FHLB recently
reported that due to ongoing turmoil in the capital and mortgage markets, it
will likely report a risk-based capital deficiency as of December 31,
2008.  The FHLB has indicated that it believes that it has adequate
capital to cover the risks reflected on its balance
sheet.  Accordingly, as of December 31, 2008, we did not recognize an
impairment charge related to our FHLB stock holdings.  There can be no
assurance, however, that future negative changes to the financial condition of
the FHLB may not require us to recognize an impairment charge with respect to
such holdings.





The
FDIC has increased insurance premiums to rebuild and maintain the federal
deposit insurance fund and we may separately incur state statutory assessments
in the future.




Based on
recent events and the state of the economy, the FDIC has increased federal
deposit insurance premiums by 7 basis points for the first quarter of
2009.  The increase of these premiums will add to our cost of
operations and could have a significant impact on the Company.  New
rules governing deposit insurance premiums are expected to go into effect on
April 1, 2009. These new rules are intended to make assessments more balanced by
requiring riskier institutions to pay a larger share.





On
February 27, 2009, the FDIC adopted an interim rule imposing an emergency
special assessment of 20 basis points on insured institutions, and granting the
FDIC the authority to impose an additional emergency special assessment after
June 30, 2009 of up to 10 basis points if necessary.  The assessment
will be calculated on June 30, 2009 deposit balances and collected on September
30, 2009.  Based on the Company’s December 31, 2008 deposits subject
to FDIC insurance assessments, the special assessment will be approximately $1.5
million.  Depending on any future losses that the FDIC insurance fund
may suffer due to failed institutions, there can be no assurance that there will
not be additional significant premium increases or special assessments in order
to replenish the fund.





-20-


Further,
under Oregon and Washington state laws, the Company may incur additional costs
if one or more Oregon or Washington state banks that hold public deposits fail,
since, as a public depositary, we are subject to Oregon and Washington statutory
pro-rata assessments to cover any net losses in public deposits not otherwise
covered by federal deposit insurance or other means.





We
operate in a highly regulated environment and may be adversely affected by
changes in federal state and local laws and regulations.




We are
subject to extensive regulation, supervision and examination by federal and
state banking authorities.  Any change in applicable regulations or
federal, state or local legislation could have a substantial impact on us and
our operations.  Additional legislation and regulations that could
significantly affect our powers, authority and operations may be enacted or
adopted in the future, which could have a material adverse effect on our
financial condition and results of operations.  Further, regulators
have significant discretion and authority to prevent or remedy unsafe or unsound
practices or violations of laws or regulations by financial institutions and
holding companies in the performance of their supervisory and enforcement
duties.  These powers recently have been utilized more frequently due
to the serious national, regional and local economic conditions we are
facing.  The exercise of regulatory authority may have a negative
impact on our financial condition and results of operations.





ITEM
1B                      Unresolved Staff
Comments





None





ITEM  2                      Properties





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





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





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





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





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





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





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





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





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





The Bank
leases facilities for branch offices in Downtown Seattle, Washington, Downtown
Bellevue, Washington, Downtown Portland, Oregon, and Vancouver,
Washington.  During 2008, the Bank expanded its leased facilities in
Downtown Bellevue and Downtown Portland.  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.





-21-


ITEM
3                      Legal
Proceedings





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





ITEM
4                      Submissions of Matters to a
Vote of Security Holders





There
were no matters submitted to a vote of security holders during the fourth
quarter of 2008.





PART II





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


Equity
Securities





Issuer
Purchases of Securities





The
Company did not repurchase any shares of its common stock during the fourth
quarter of 2008.  The Company had no sales of securities during the
past three years, other than those issued pursuant to its stock option
plans.





Dividends





The
Company pays cash dividends on a quarterly basis, typically in March, June,
September and December of each year.  The Board of Directors considers
the dividend amount quarterly and takes a broad perspective in its dividend
deliberations including a review of recent operating performance, capital
levels, and loan concentrations as a percentage of capital, and growth
projections.  The Board also considers dividend payout ratios,
dividend yield, and other financial metrics in setting the quarterly
dividend.   The Company declared and paid cash dividends of $0.40
per share for the year 2008.  That compares to cash dividends of $0.35
per share paid for the year 2007, when adjusted for the 10% stock dividend paid
in June 2007.





Equity
Compensation Plan Information





Year
      Ended December 31, 2008Number
      of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and
      Rights (2)
            Weighted-Average
      Exercise Price of Outstanding Options, Warrants and Rights (2)
            Number
      of Shares Remaining Available for Future Issuance Under Equity
      Compensation Plans (2)Equity
      compensation plans approved by security holders(1)
            895,095
            $
      14.24
            174,906Equity
      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.





-22-


Market
Information





The
Company’s common stock trades on the NASDAQ Global Market under the symbol
PCBK.  At March 6, 2009, the Company had 12,862,691 shares of common
stock outstanding held by approximately 1,000 shareholders.





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





YEAR
            
            2008
            
            
            
            
            2007QUARTER
            Fourth
            Third
            Second
            First
            
            Fourth
            Third
            Second
            FirstMarket
      value:High
            $15.00
            $15.22
            $14.93
            $14.44
            
            $16.00
            $16.41
            $17.27
            $18.95Low
            11.58
            9.26
            10.99
            13.75
            
            12.00
            14.32
            15.18
            16.86Close
            14.97
            14.64
            10.99
            13.90
            
            12.52
            15.57
            16.20
            17.03





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







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
   -23-
 Index and
SNL Securities $500 to $1 Billion Bank Asset Size Index.  The graph
assumes $100 invested on December 31, 2003, in the Company’s Common Stock and
each of the indices.
  Period
      EndingIndex
                  12/31/03
                  12/31/04
                  12/31/05
                  12/31/06
                  12/31/07
                  12/31/08Pacific
      Continental Corporation
                  100.00
                  126.31
                  129.69
                  161.66
                  117.02
                  144.10Russell
      2000
                  100.00
                  118.33
                  123.72
                  146.44
                  144.15
                  95.44SNL
      Bank $500M-$1B Index
                  100.00
                  123.42
                  121.31
                  140.38
                  102.26
                  84.81
  -24-
   ITEM
6                                Selected Financial
Data





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


($ in
thousands, except for per share data)


2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004For
      the yearNet
      interest income
              
              $
              49,271
              
              
              $
              43,426
              
              
              $
              40,057
              
              
              $
              30,240
              
              
              $
              24,952Provision
      for loan losses
              
              $
              3,600
              
              
              $
              725
              
              
              $
              600
              
              
              $
              1,100
              
              
              $
              500Noninterest
      income
              
              $
              4,269
              
              
              $
              3,925
              
              
              $
              4,401
              
              
              $
              4,083
              
              
              $
              4,463Noninterest
      expense
              
              $
              29,562
              
              
              $
              25,861
              
              
              $
              23,791
              
              
              $
              18,134
              
              
              $
              16,041Income
      taxes
              
              $
              7,439
              
              
              $
              7,830
              
              
              $
              7,412
              
              
              $
              5,510
              
              
              $
              4,925Net
      income
              
              $
              12,939
              
              
              $
              12,935
              
              
              $
              12,655
              
              
              $
              9,578
              
              
              $
              7,948Cash
      dividends
              
              $
              4,797
              
              
              $
              4,175
              
              
              $
              3,381
              
              
              $
              2,556
              
              
              $
              2,164Per
      common share data (1)Net
      income:Basic
              
              $
              1.08
              
              
              $
              1.09
              
              
              $
              1.09
              
              
              $
              0.98
              
              
              $
              0.84Diluted
              
              $
              1.08
              
              
              $
              1.08
              
              
              $
              1.08
              
              
              $
              0.95
              
              
              $
              0.82Cash
      dividends
              
              $
              0.40
              
              
              $
              0.35
              
              
              $
              0.29
              
              
              $
              0.25
              
              
              $
              0.23Market
      value, end of year
              
              $
              14.97
              
              
              $
              12.52
              
              
              $
              17.68
              
              
              $
              14.45
              
              
              $
              14.32At
      year endAssets
              
              $
              1,090,843
              
              
              $
              949,271
              
              
              $
              885,351
              
              
              $
              791,794
              
              
              $
              516,630Loans,
      less allowance for loan loss (2)
              
              $
              945,787
              
              
              $
              813,647
              
              
              $
              760,957
              
              
              $
              671,171
              
              
              $
              453,817Core
      deposits
              
              $
              615,832
              
              
              $
              615,892
              
              
              $
              580,210
              
              
              $
              529,794
              
              
              $
              381,601Total
      deposits
              
              $
              722,437
              
              
              $
              644,424
              
              
              $
              641,272
              
              
              $
              604,271
              
              
              $
              403,791Shareholders'
      equity
              
              $
              116,165
              
              
              $
              107,509
              
              
              $
              95,735
              
              
              $
              81,412
              
              
              $
              49,392Tangible
      Equity (3)
              
              $
              93,261
              
              
              $
              84,382
              
              
              $
              72,109
              
              
              $
              57,211
              
              
              $
              49,116Average
      for the yearAssets
              
              $
              1,019,040
              
              
              $
              903,932
              
              
              $
              825,671
              
              
              $
              573,717
              
              
              $
              463,509Earning
      assets
              
              $
              945,856
              
              
              $
              832,451
              
              
              $
              755,680
              
              
              $
              533,930
              
              
              $
              431,374Loans,
      less allowance for loan losses
              
              $
              882,742
              
              
              $
              785,132
              
              
              $
              712,563
              
              
              $
              501,541
              
              
              $
              398,739Core
      deposits
              
              $
              613,244
              
              
              $
              590,714
              
              
              $
              533,861
              
              
              $
              425,716
              
              
              $
              352,693Total
      deposits
              
              $
              669,624
              
              
              $
              654,631
              
              
              $
              605,814
              
              
              $
              461,013
              
              
              $
              379,618Interest-paying
      liabilities
              
              $
              732,466
              
              
              $
              627,569
              
              
              $
              567,708
              
              
              $
              372,880
              
              
              $
              290,569Shareholders'
      equity
              
              $
              111,868
              
              
              $
              103,089
              
              
              $
              90,238
              
              
              $
              54,528
              
              
              $
              46,043Financial
      ratiosReturn
      on average:Assets
              
              
              1.27
              %
              
              
              1.43
              %
              
              
              1.53
              %
              
              
              1.67
              %
              
              
              1.71
              %Equity
              
              
              11.57
              %
              
              
              12.55
              %
              
              
              14.02
              %
              
              
              17.57
              %
              
              
              17.26
              %Tangible
      Equity (3)
              
              
              14.56
              %
              
              
              16.23
              %
              
              
              19.12
              %
              
              
              18.25
              %
              
              
              17.26
              %Avg
      shareholders' equity / avg assets
              
              
              10.98
              %
              
              
              11.40
              %
              
              
              10.93
              %
              
              
              9.50
              %
              
              
              9.93
              %Dividend
      payout ratio
              
              
              37.07
              %
              
              
              32.28
              %
              
              
              26.72
              %
              
              
              26.69
              %
              
              
              27.23
              %Risk-based
      capital:Tier
      I capital
              
              
              10.02
              %
              
              
              10.01
              %
              
              
              9.93
              %
              
              
              9.32
              %
              
              
              10.19
              %Total
      capital
              
              
              11.11
              %
              
              
              10.97
              %
              
              
              10.98
              %
              
              
              10.48
              %
              
              
              11.29
              %(1)
      Per common share data is retroactively adjusted to reflect the 10% stock
      dividend
                and
      5-for-4 stock split of 2007 and 2004, respectively.(2) Outstanding
      loans include loans held for sale.(3)
      Tangible equity excludes goodwill and core deposit intangible related to
      acquisitions.
  -25-


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





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





In
addition to historical information, this report may contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995.  These forward-looking statements include, but are not limited
to, statements about management’s plans, objectives, expectations and intentions
that are not historical facts, and other statements identified by words such as
“expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,”
“seeks,” “estimates” or words of similar meaning. These forward-looking
statements are based on current beliefs and expectations of management and are
inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company’s control.
In addition, these forward-looking statements are subject to assumptions with
respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ
materially from the anticipated results or other expectations in the
forward-looking statements, including those set forth in this report, or the
documents incorporated by reference:





o
            the
      risks associated with lending and potential adverse changes in credit
      quality;


o
            increased
      loan delinquency rates;


o
            the
      risks presented by a continued economic slowdown, which could adversely
      affect credit quality, loan collateral values, investment values,
      liquidity levels, and loan
originations;


o
            changes
      in market interest rates, which could adversely affect our net interest
      income and profitability;


o
            legislative
      or regulatory changes that adversely affect our business or our ability to
      complete pending or prospective future
  acquisitions;


o
            reduced
      demand for banking products and
services;


o
            the
      risks presented by public stock market volatility, which could adversely
      affect the Company’s stock value and the ability to raise capital in the
      future;


o
            competition
      from other financial services companies in our markets;
  and


o
            the
      Company’s success in managing risks involved in the
    foregoing.





Additional
factors that could cause actual results to differ materially from those
expressed in the forward-looking statements are discussed in Risk Factors in
Item 1A. Please take into account that forward-looking statements speak only as
of the date of this report or documents incorporated by reference. The Company
does not undertake any obligation to publicly correct or update any
forward-looking statement if we later become aware that it is not likely to be
achieved.





-26-


HIGHLIGHTS


%
      Change
              
              
              
              
              
              %
      Change2008
              
              
              2007
              
              
              2008 vs. 2007
              
              
              2006
              
              
              2007 vs. 2006Operating
      revenue (1)
              
              $
              53,540
              
              
              $
              47,351
              
              
              
              13
              %
              
              $
              44,458
              
              
              
              7
              %Net
      income
              
              $
              12,939
              
              
              $
              12,935
              
              
              
              0
              %
              
              $
              12,655
              
              
              
              2
              %Earnings
      per share (2)Basic
              
              $
              1.08
              
              
              $
              1.09
              
              
              
              -1
              %
              
              $
              1.09
              
              
              
              0
              %Diluted
              
              $
              1.08
              
              
              $
              1.08
              
              
              
              0
              %
              
              $
              1.08
              
              
              
              0
              %Assets,
      period-end
              
              $
              1,090,843
              
              
              $
              949,271
              
              
              
              15
              %
              
              $
              885,351
              
              
              
              7
              %Deposits,
      period-end
              
              $
              722,437
              
              
              $
              644,424
              
              
              
              12
              %
              
              $
              641,272
              
              
              
              0
              %Return
      on assets
              
              
              1.27
              %
              
              
              1.43
              %
              
              
              
              
              
              
              1.53
              %Return
      on equity
              
              
              11.57
              %
              
              
              12.55
              %
              
              
              
              
              
              
              14.02
              %Return
      on tangible equity (3)
              
              
              14.56
              %
              
              
              16.23
              %
              
              
              
              
              
              
              19.12
              %(1)
      Operating
      income is defined as net interest income plus noninterest
      income.(2)Per share data for
      2006 was retroactively adjusted to reflect the 10% stock dividend paid in
      June 2007.(3)Tangible equity
      excludes goodwill and core deposit intangible related to
      acquisitions.
   Net
income for the year 2008 was $12,939, an increase of $4 over the $12,935
reported for the year 2007.  Net income improvement in 2008 over 2007
was modest due to a significant increase in the provision for loan losses, plus
growth in noninterest expenses, which offset increased operating
revenues.  Operating revenue for the year 2008 was up 13% over the
year 2007 and was primarily driven by growth in net interest income, which
accounted for 92% of total operating revenue in 2008.  The improvement
in 2008 net interest income was the result of 14% growth in average earning
assets combined with a stable net interest margin.





The
Company earned $12,935 in 2007 compared to $12,655 in 2006.  Growth in
operating revenue was primarily responsible for the increased earnings in 2007
over 2006. Operating revenues were $47,351 in 2007, up $2,893 or 7% over
2006.  Growth in operating revenues resulted from increased net
interest income, which accounted for 92% of total operating revenue in
2007.  While average earning assets increased 10% in 2007 over 2006,
growth in net interest income in 2007 was slowed by an 8 basis point compression
in the net interest margin.





Period-end
assets at December 31, 2008 were $1,090,843, compared to $949,271 at December
31, 2007.  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 85% of December 31, 2008
outstanding deposits.  Non-interest bearing deposits were $178,957 or
25% of total deposits at year-end December 31, 2008.





During
2009, the Company believes the following factors could impact reported financial
results:





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





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





-27-


§
            The
      ability to grow core deposits during 2009 in a highly competitive
      environment where many financial institutions are experiencing liquidity
      problems.





§
            The
      availability of alternative funding sources due to disruption in the
      financial and capital markets flowing from the significant downturn in the
      housing industry





§
            The
      ability to manage noninterest expense growth in light of anticipated
      significant increases in regulatory
costs.





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





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, 2008 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, 2008, the Company had $22,904 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,
2008, 2007, and 2006.





Share-based
Compensation





In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS
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 Company uses the Black-Scholes option pricing model to
measure fair value under SFAS 123(R) which is further discussed in Note 1 of the
Notes to Consolidated Financial Statements in Item 8 below.





The
Company adopted SFAS 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, 2007, and 2008 were recorded as compensation expense.





-28-


Recent Accounting
Pronouncements





Recent
accounting pronouncements are discussed in Note 1 of the Notes to the
Consolidated Financial Statements for the year ended December 31, 2008 in item 8
of this report.  None of these pronouncements are expected to have a
significant effect on the Company’s financial condition or results of
operations.





RESULTS
OF OPERATIONS





Net
Interest Income





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





4th Quarter
2008 Compared to 4th Quarter
2007





Two
tables follow which analyze the changes in net interest income for the fourth
quarter 2008 and fourth quarter 2007.  Table I “Average Balance
Analysis of Net Interest Earnings”, provides information with regard to average
balances of assets and liabilities, as well as associated dollar amounts of
interest income and interest expense, relevant average yields or rates, and net
interest income as a percent of average earning assets.  Table II
“Analysis of Changes in Interest Income and Interest Expense”, shows the
increase (decrease) in the dollar amount of interest income and interest expense
and the differences attributable to changes in either volume or
rates.





The
Bank’s net interest margin for the fourth quarter 2008 was 5.28% compared to
5.15% for the fourth quarter 2007.   Table I shows that earning
asset yields for the fourth quarter 2008 of 6.63% were down 135 basis points
from fourth quarter 2007 earning asset yields due primarily to a 144 basis point
decline in the yield on net loans.  The decline in loan yields was due
to the rapid decline in market interest rates during 2008, which lowered yields
on the Bank’s variable rate loan portfolio.  However, the Bank’s
practice of including floors on most of its variable rate loans mitigated
additional declines in loan yields during this falling rate
environment.  During the third and fourth quarters 2008, loan yields
stabilized due to the activation of interest rate floors on approximately
$280,000 of the Bank’s variable rate loan portfolio, thus protecting the net
interest margin.





Table I
shows that the rates paid on interest-bearing core deposits moved down faster
than yields on earning assets as evidenced by the 168 basis point decline from
3.24% to 1.56%.  In addition, the cost of alternative funding has
moved down at a faster rate than core deposits, down 296 basis points from 4.88%
to 1.92%.  This rapid fall in the cost of alternative funding was due
to a planned strategy to maintain a relatively short maturity structure on the
Bank’s alternative funding, which permitted the Bank to refinance this funding
at consistently lower rates during a rapidly declining interest rate
environment.  Overall, the cost of interest-bearing liabilities of the
Bank, which includes both core deposits and alternative funding, has fallen by
205 basis points in fourth quarter 2008 from fourth quarter 2007.





Table I
also shows the difference between the cost of interest-bearing core deposits and
alternative funding.  Overall, interest-bearing core deposits have a
rate of 1.56% or 36 basis points lower than alternative funding costs at
1.92%.  However, this spread between core deposit rates and
alternative funding rates has compressed significantly during the last half of
2008 when compared to the first half of the year when this spread ranged between
140 and 150 basis points.  This narrowing spread is again the result
of the relatively short maturity structure of the Bank’s alternative funding,
Federal Reserve actions to lower rates during the fourth quarter 2008, and the
relatively high cost of core deposits in a very competitive rate
environment.





Table II
shows the changes in net interest income due to rate and volume for the quarter
ended December 31, 2008.  Interest income including loan fees for the
fourth quarter 2008 declined by $806 from the same period last
year.  Higher volumes of earning assets increased interest income by
$2,605, while lower yields on earning assets, primarily loans, decreased
interest income by $3,411.  The rate/volume analysis shows that
interest expense for the quarter ended December 31, 2008 decreased by $2,807
from last year, as






-29-


changes
in mix and higher volumes caused interest expense to increase by $1,496, which
was more than offset by a decrease in interest expense of $4,303 due to lower
rates.  Most of the decline in interest expense was due to lower rates
and was in the Bank’s core deposit base, which illustrates the Bank’s ability to
quickly reprice its core deposits.  In addition, the Bank also
benefited from the short maturity structure of its alternative funding, which
permitted refinancing at lower rates in a rapidly falling interest rate
environment.







-30-




Table
I


Average
Balance Analysis of Net Interest Earnings
 (dollars
in thousands)


Quarter
      Ended
            
            
            
            
            
            
            
            
            Quarter
      EndedDecember 31, 2008
            
            
            
            
            
            
            
            
            December 31, 2007Interest
            
            
            Average
            
            
            
            
            
            Interest
            
            
            AverageAverage
            
            
            Income
      or
            
            
            Yields
      or
            
            
            Average
            
            
            Income
      or
            
            
            Yields
      orBalance
            
            
            Expense
            
            
            Rates
            
            
            Balance
            
            
            Expense
            
            
            RatesInterest
      Earning AssetsFederal
      funds sold and interest-bearing
      deposits in banks
            
            $
            497
            
            
            $
            2
            
            
            
            1.60
            %
            
            $
            809
            
            
            $
            10
            
            
            
            4.90
            %Securities
      available for sale:Taxable
      (1)
            
            
            57,972
            
            
            
            627
            
            
            
            4.30
            %
            
            
            52,756
            
            
            
            622
            
            
            
            4.68
            %Tax-exempt
            
            
            5,187
            
            
            
            49
            
            
            
            3.76
            %
            
            
            5,247
            
            
            
            49
            
            
            
            3.71
            %Loans,
      net of allowancefor
      loan losses(2)(3)(4)
            
            
            929,522
            
            
            
            15,866
            
            
            
            6.79
            %
            
            
            803,999
            
            
            
            16,669
            
            
            
            8.23
            %Total
      interest earning assets
            
            
            993,178
            
            
            
            16,544
            
            
            
            6.63
            %
            
            
            862,811
            
            
            
            17,350
            
            
            
            7.98
            %Non
      Earning AssetsCash
      and due from banks
            
            
            17,928
            
            
            
            
            
            
            
            
            
            
            
            19,623Premises
      and equipment
            
            
            20,892
            
            
            
            
            
            
            
            
            
            
            
            20,856Goodwill
      & other intangibles
            
            
            22,935
            
            
            
            
            
            
            
            
            
            
            
            23,159Interest
      receivable and other
            
            
            14,845
            
            
            
            
            
            
            
            
            
            
            
            6,925Total
      non interest assets
            
            
            76,600
            
            
            
            
            
            
            
            
            
            
            
            70,563Total
      assets
            
            $
            1,069,778
            
            
            
            
            
            
            
            
            
            
            $
            933,374Interest-Bearing
      LiabilitiesMoney
      market and NOW accounts
            
            $
            382,144
            
            
            $
            (1,367
            )
            
            
            -1.42
            %
            
            $
            378,845
            
            
            $
            (3,066
            )
            
            
            -3.21
            %Savings
      deposits
            
            
            21,058
            
            
            
            (39
            )
            
            
            -0.74
            %
            
            
            20,650
            
            
            
            (82
            )
            
            
            -1.58
            %Time
      deposits - core (5)
            
            
            44,776
            
            
            
            (355
            )
            
            
            -3.15
            %
            
            
            38,313
            
            
            
            (424
            )
            
            
            -4.39
            %Total
      interest-bearing core deposits
            
            
            447,978
            
            
            
            (1,761
            )
            
            
            -1.56
            %
            
            
            437,808
            
            
            
            (3,572
            )
            
            
            -3.24
            %Time
      deposits - non-core
            
            
            72,052
            
            
            
            (536
            )
            
            
            -2.96
            %
            
            
            49,588
            
            
            
            (651
            )
            
            
            -5.21
            %Federal
      funds purchased
            
            
            9,005
            
            
            
            (24
            )
            
            
            -1.06
            %
            
            
            16,579
            
            
            
            (212
            )
            
            
            -5.07
            %FHLB
      & FRB borrowings
            
            
            239,599
            
            
            
            (904
            )
            
            
            -1.50
            %
            
            
            135,748
            
            
            
            (1,594
            )
            
            
            -4.66
            %Junior
      subordinated debentures
            
            
            8,248
            
            
            
            (125
            )
            
            
            -6.03
            %
            
            
            8,248
            
            
            
            (128
            )
            
            
            -6.16
            %Total
      interest-bearing alternative funding
            
            
            328,904
            
            
            
            (1,589
            )
            
            
            -1.92
            %
            
            
            210,163
            
            
            
            (2,585
            )
            
            
            -4.88
            %Total
      interest-bearing liabilities
            
            
            776,882
            
            
            
            (3,350
            )
            
            
            -1.72
            %
            
            
            647,971
            
            
            
            (6,157
            )
            
            
            -3.77
            %Noninterest-Bearing
      LiabilitiesDemand
      deposits
            
            
            170,897
            
            
            
            
            
            
            
            
            
            
            
            173,706Interest
      payable and other
            
            
            7,040
            
            
            
            
            
            
            
            
            
            
            
            4,326Total
      noninterest liabilities
            
            
            177,937
            
            
            
            
            
            
            
            
            
            
            
            178,032Total
      liabilities
            
            
            954,819
            
            
            
            
            
            
            
            
            
            
            
            826,003Stockholders'
      equity
            
            
            114,959
            
            
            
            
            
            
            
            
            
            
            
            107,371Total
      liabilities and stockholders' equity
            
            $
            1,069,778
            
            
            
            
            
            
            
            
            
            
            $
            933,374Net
      Interest Income
            
            
            
            
            
            $
            13,194
            
            
            
            
            
            
            
            
            
            
            $
            11,193Net
      Interest Income as a Percent of Earning Assets
            
            
            
            5.28
            %
            
            
            
            
            
            
            
            
            
            
            5.15
            %(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 $224 and $447
      for the three months endedDecember
      31, 2008 and 2007, respectively.(4)
      Total includes loans held for sale.(5)
      Core time deposits include all non-public time deposits, including
      non-public time deposits over $100.





-31-





Table
II
 Analysis
of Changes in Interest Income and Interest Expense
 (dollars
in thousands)
   Three
      Months Ended
                December
      31, 2008 compared to December 31, 2007Increase (decrease) due toVolume
              
              
              Rate
              
              
              NetInterest
      earned on:Federal
      funds sold and interestbearing
      deposits in banks
              
              $
              (4
              )
              
              $
              (4
              )
              
              $
              (8
              )Securities
      available-for-sale:Taxable
              
              
              60
              
              
              
              (55
              )
              
              
              5Tax-exempt
              
              
              (1
              )
              
              
              1
              
              
              
              -Loans,
      net of allowance for loan losses
              
              
              2,550
              
              
              
              (3,353
              )
              
              
              (803
              )Total
      interest income
              
              $
              2,605
              
              
              $
              (3,411
              )
              
              $
              (806
              )Interest
      paid on:Money
      market and NOW accounts
              
              
              (18
              )
              
              
              1,717
              
              
              
              1,699Savings
      deposits
              
              
              (1
              )
              
              
              44
              
              
              
              43Time
      deposits - core
              
              
              (70
              )
              
              
              139
              
              
              
              69Total
      interest-bearing core deposits
              
              
              (89
              )
              
              
              1,900
              
              
              
              1,811Time
      deposits - non-core
              
              
              (292
              )
              
              
              407
              
              
              
              115Federal
      funds purchased
              
              
              97
              
              
              
              91
              
              
              
              188FHLB
      & FRB borrowings
              
              
              (1,212
              )
              
              
              1,902
              
              
              
              690Junior
      subordinated debentures
              
              
              -
              
              
              
              3
              
              
              
              3Total
      interest-bearing alternative funding
              
              
              (1,407
              )
              
              
              2,403
              
              
              
              996Total
      interest expense
              
              $
              (1,496
              )
              
              $
              4,303
              
              
              $
              2,807Net
      interest income
              
              $
              1,109
              
              
              $
              892
              
              
              $
              2,001


2008
Compared to 2007





Two
tables follow which analyze the changes in net interest income for the years
2008, 2007, and 2006.  Table III “Average Balance Analysis of Net
Interest Earnings”, provides information with regard to average balances of
assets and liabilities, as well as associated dollar amounts of interest income
and interest expense, relevant average yields or rates, and net interest income
as a percent of average earning assets.  Table IV, “Analysis of
Changes in Interest Income and Interest Expense”, shows the increase (decrease)
in the dollar amount of interest income and interest expense and the differences
attributable to changes in either volume or rates.





The net
interest margin for the full year 2008 was 5.21%, a decline of 1 basis point
from the 5.22% net interest margin reported for the year 2007.  Table
III shows that earning asset yields declined by 134 basis points for the year
2008 when compared to 2007 from 8.31% to 6.97%.  The decline in
earning assets yields was due primarily to the 141 basis point drop in yields on
loans, which resulted from the rapidly declining interest rate environment
experienced throughout 2008 that lowered yields on the Bank’s variable rate loan
portfolio.  As noted above, the Bank’s use of interest rate floors on
its variable rate loan portfolio mitigated further decline in loan yields during
the last half of 2008.





Table III
also shows the overall cost of interest-bearing liabilities for the year 2007
was down 182 basis points from 4.10% in 2007 to 2.28% in 2008.  This
decline can be also be attributed to the falling rate environment during 2008,
plus the relatively short-maturity structure of the Bank’s alternative funding,
which permitted rapid refinancing of funding at much lower rates throughout the
year.  Table III also illustrates the difference between the cost of
interest-bearing core deposits for the year 2008 as compared to the cost of
interest-bearing alternative funding.  The cost of interest-bearing
core deposits was 1.85% or 108 basis points less than the 2.93% cost of
alternative funding.





-32-


The
year-to-date December 31, 2008 rate/volume analysis shows that interest income
including loan fees declined by $3,221 from last year.  Higher volumes
of earning assets increased interest income by $9,047 and lower yields on loans
decreased interest income by $12,268.  The rate/volume analysis shows
that interest expense for the year 2008 decreased by $9,066 from last year, as
higher volumes on all deposit categories caused interest expense to increase by
$5,045, which was more than offset by lower rates, which decreased interest
expense by $14,111.





2007
Compared to 2006





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





The
year-to-date December 31, 2007 rate/volume analysis shows that interest income,
including loan fees, improved by $7,194 over last year.  Higher
volumes of earning assets increased interest income by $6,301 and higher yields
on loans increased interest income by $893.  The rate/volume analysis
shows that interest expense for the year 2007 increased by $3,825 over last
year, as higher volumes on all deposit categories caused interest expense to
increase by $2,157, combined with higher rates, which increased interest expense
by $1,668.











-33-




Table
III


Average
Balance Analysis of Net Interest Earnings





2008
            
            
            
            
            
            
            
            
            2007
            
            
            
            
            
            
            
            
            2006Average
            
            
            Interest
            
            
            Average
            
            
            Average
            
            
            Interest
            
            
            Average
            
            
            Average
            
            
            Interest
            
            
            AverageBalance
            
            
            Income/(Expense)
            
            
            Yield/(Cost)
            
            
            Balance
            
            
            Income/(Expense)
            
            
            Yield/(Cost)
            
            
            Balance
            
            
            Income/(Expense)
            
            
            Yield/(Cost)(dollars
      in thousands)
            
            
            (dollars
      in thousands)
            
            
            (dollars
      in thousands)Interest
      Earning AssetsFederal
      funds sold and interest-bearing
      deposits in banks
            
            $
            554
            
            
            $
            20
            
            
            
            3.61
            %
            
            $
            981
            
            
            $
            51
            
            
            
            5.20
            %
            
            $
            960
            
            
            $
            44
            
            
            
            4.58
            %Securities
      available for sale:Taxable
      (1)
            
            
            57,260
            
            
            
            2,682
            
            
            
            4.68
            %
            
            
            41,112
            
            
            
            1,837
            
            
            
            4.47
            %
            
            
            38,855
            
            
            
            1,546
            
            
            
            3.98
            %Tax-exempt
            
            
            5,300
            
            
            
            196
            
            
            
            3.70
            %
            
            
            5,226
            
            
            
            156
            
            
            
            2.99
            %
            
            
            3,302
            
            
            
            125
            
            
            
            3.79
            %Loans,
      net of allowance for loanlosses(2)(3)(4)
            
            
            882,742
            
            
            
            63,047
            
            
            
            7.14
            %
            
            
            785,132
            
            
            
            67,122
            
            
            
            8.55
            %
            
            
            712,563
            
            
            
            60,257
            
            
            
            8.46
            %Total
      interest earning assets
            
            
            945,856
            
            
            
            65,945
            
            
            
            6.97
            %
            
            
            832,451
            
            
            
            69,166
            
            
            
            8.31
            %
            
            
            755,680
            
            
            
            61,972
            
            
            
            8.20
            %Non
      Earning AssetsCash
      and due from banks
            
            
            18,241
            
            
            
            
            
            
            
            
            
            
            
            21,662
            
            
            
            
            
            
            
            
            
            
            
            23,272Premises
      and equipment
            
            
            20,955
            
            
            
            
            
            
            
            
            
            
            
            19,755
            
            
            
            
            
            
            
            
            
            
            
            17,694Goodwill
      & other intangibles
            
            
            23,018
            
            
            
            
            
            
            
            
            
            
            
            23,376
            
            
            
            
            
            
            
            
            
            
            
            24,057Interest
      receivable and other
            
            
            10,970
            
            
            
            
            
            
            
            
            
            
            
            6,688
            
            
            
            
            
            
            
            
            
            
            
            4,968Total
      non interest earning assets
            
            
            73,184
            
            
            
            
            
            
            
            
            
            
            
            71,481
            
            
            
            
            
            
            
            
            
            
            
            69,991Total
      assets
            
            $
            1,019,040
            
            
            
            
            
            
            
            
            
            
            $
            903,932
            
            
            
            
            
            
            
            
            
            
            $
            825,671Interest-Bearing
      LiabilitiesMoney
      market and NOW accounts
            
            $
            379,657
            
            
            $
            (6,584
            )
            
            
            -1.73
            %
            
            $
            364,780
            
            
            $
            (13,358
            )
            
            
            -3.66
            %
            
            $
            307,054
            
            
            $
            (10,551
            )
            
            
            -3.44
            %Savings
      deposits
            
            
            21,228
            
            
            
            (183
            )
            
            
            -0.86
            %
            
            
            24,309
            
            
            
            (486
            )
            
            
            -2.00
            %
            
            
            23,559
            
            
            
            (360
            )
            
            
            -1.53
            %Time
      deposits - core
            
            
            42,566
            
            
            
            (1,427
            )
            
            
            -3.35
            %
            
            
            32,589
            
            
            
            (1,381
            )
            
            
            -4.24
            %
            
            
            40,989
            
            
            
            (1,466
            )
            
            
            -3.58
            %Total
      interest-bearing core deposits
            
            
            443,451
            
            
            
            (8,194
            )
            
            
            -1.85
            %
            
            
            421,678
            
            
            
            (15,225
            )
            
            
            -3.61
            %
            
            
            371,602
            
            
            
            (12,377
            )
            
            
            -3.33
            %Time
      deposits - non-core
            
            
            56,380
            
            
            
            (1,948
            )
            
            
            -3.46
            %
            
            
            63,918
            
            
            
            (3,347
            )
            
            
            -5.24
            %
            
            
            71,954
            
            
            
            (3,504
            )
            
            
            -4.87
            %Federal
      funds purchased
            
            
            22,094
            
            
            
            (578
            )
            
            
            -2.62
            %
            
            
            10,128
            
            
            
            (539
            )
            
            
            -5.32
            %
            
            
            7,580
            
            
            
            (380
            )
            
            
            -5.01
            %FHLB
      & FRB borrowings
            
            
            202,293
            
            
            
            (5,456
            )
            
            
            -2.70
            %
            
            
            123,597
            
            
            
            (6,121
            )
            
            
            -4.95
            %
            
            
            108,324
            
            
            
            (5,144
            )
            
            
            -4.75
            %Trust
      preferred
            
            
            8,248
            
            
            
            (498
            )
            
            
            -6.04
            %
            
            
            8,248
            
            
            
            (508
            )
            
            
            -6.16
            %
            
            
            8,248
            
            
            
            (510
            )
            
            
            -6.18
            %Total
      interest-bearing alternative funding
            
            
            289,015
            
            
            
            (8,480
            )
            
            
            -2.93
            %
            
            
            205,891
            
            
            
            (10,515
            )
            
            
            -5.11
            %
            
            
            196,106
            
            
            
            (9,538
            )
            
            
            -4.86
            %Total
      interest-bearing liabilities
            
            
            732,466
            
            
            
            (16,674
            )
            
            
            -2.28
            %
            
            
            627,569
            
            
            
            (25,740
            )
            
            
            -4.10
            %
            
            
            567,708
            
            
            
            (21,915
            )
            
            
            -3.86
            %Noninterest-Bearing
      LiabilitiesDemand
      deposits
            
            
            169,792
            
            
            
            
            
            
            
            
            
            
            
            169,035
            
            
            
            
            
            
            
            
            
            
            
            162,259Interest
      payable and other
            
            
            4,914
            
            
            
            
            
            
            
            
            
            
            
            4,239
            
            
            
            
            
            
            
            
            
            
            
            5,466Total
      noninterest-bearing liabilities
            
            
            174,706
            
            
            
            
            
            
            
            
            
            
            
            173,274
            
            
            
            
            
            
            
            
            
            
            
            167,725Total
      liabilities
            
            
            907,172
            
            
            
            
            
            
            
            
            
            
            
            800,843
            
            
            
            
            
            
            
            
            
            
            
            735,433Stockholders'
      equity
            
            
            111,868
            
            
            
            
            
            
            
            
            
            
            
            103,089
            
            
            
            
            
            
            
            
            
            
            
            90,238Total
      liabilities and stockholders' equity
            
            $
            1,019,040
            
            
            
            
            
            
            
            
            
            
            $
            903,932
            
            
            
            
            
            
            
            
            
            
            $
            825,671Net
      Interest Income
            
            
            
            
            
            $
            49,271
            
            
            
            
            
            
            
            
            
            
            $
            43,426
            
            
            
            
            
            
            
            
            
            
            $
            40,057Net
      Interest Income as a Percent ofEarning
      Assets
            
            
            
            
            
            
            5.21
            %
            
            
            
            
            
            
            
            
            
            
            5.22
            %
            
            
            
            
            
            
            
            
            
            
            5.30
            %(1)
      Federal Home Loan Bank stock is included in securities available for
      sale.(2)
      Nonaccrual loans have been included in average balance
    totals.(3)
      Interest income includes recognized loan origination fees of $1,843,
      $2,065 and $2,099 for the years ended 2008, 2007, and 2006,
      respectively.(4)
      Total includes loans held for sale.(5)
      Core time deposits include all local time deposits, including local time
      deposits over $100.





-34-





Table
IV


Analysis
of Changes in Interest Income and Interest Expense


2008
      compared to 2007
              Increase
      (decrease) due to
            
            
            2007
      compared to 2006Increase
      (decrease) due toVolume
            
            
            Rate
            
            
            Net
            
            
            Volume
            
            
            Rate
            
            
            Net(dollars
      in thousands)Interest
      earned on:Federal
      funds sold and interestbearing
      deposits in banks
            
            $
            (22
            )
            
            $
            (9
            )
            
            $
            (31
            )
            
            $
            1
            
            
            $
            6
            
            
            $
            7Securities
      available-for-sale:Taxable
            
            
            722
            
            
            
            123
            
            
            
            845
            
            
            
            90
            
            
            
            201
            
            
            
            291Tax-exempt
            
            
            2
            
            
            
            38
            
            
            
            40
            
            
            
            73
            
            
            
            (42
            )
            
            
            31Loans,
      net of allowance for loanlosses
            
            
            8,345
            
            
            
            (12,420
            )
            
            
            (4,075
            )
            
            
            6,137
            
            
            
            728
            
            
            
            6,865Total
      interest income
            
            $
            9,047
            
            
            $
            (12,268
            )
            
            $
            (3,221
            )
            
            $
            6,301
            
            
            $
            893
            
            
            $
            7,194Interest
      paid on:Money
      market and NOW accounts
            
            
            (545
            )
            
            
            7,319
            
            
            
            6,774
            
            
            
            (1,984
            )
            
            
            (823
            )
            
            
            (2,807
            )Savings
      deposits
            
            
            62
            
            
            
            241
            
            
            
            303
            
            
            
            (11
            )
            
            
            (115
            )
            
            
            (126
            )Time
      deposits
            
            
            (423
            )
            
            
            377
            
            
            
            (46
            )
            
            
            300
            
            
            
            (215
            )
            
            
            85Total
      interest-bearing core deposits
            
            
            (906
            )
            
            
            7,937
            
            
            
            7,031
            
            
            
            (1,695
            )
            
            
            (1,153
            )
            
            
            (2,848
            )Time
      deposits - non-core
            
            
            395
            
            
            
            1,004
            
            
            
            1,399
            
            
            
            391
            
            
            
            (234
            )
            
            
            157Federal
      funds purchased
            
            
            (637
            )
            
            
            598
            
            
            
            (39
            )
            
            
            (128
            )
            
            
            (31
            )
            
            
            (159
            )FHLB
      borrowings
            
            
            (3,897
            )
            
            
            4,562
            
            
            
            665
            
            
            
            (725
            )
            
            
            (252
            )
            
            
            (977
            )Trust
      preferred
            
            
            -
            
            
            
            10
            
            
            
            10
            
            
            
            -
            
            
            
            2
            
            
            
            2Total
      interest-bearing alternative funding
            
            
            (4,139
            )
            
            
            6,174
            
            
            
            2,035
            
            
            
            (462
            )
            
            
            (515
            )
            
            
            (977
            )Total
      interest expense
            
            $
            (5,045
            )
            
            $
            14,111
            
            
            $
            9,066
            
            
            $
            (2,157
            )
            
            $
            (1,668
            )
            
            $
            (3,825
            )Net
      interest income
            
            $
            4,002
            
            
            $
            1,843
            
            
            $
            5,845
            
            
            $
            4,144
            
            
            $
            (775
            )
            
            $
            3,369


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 $3,600 in 2008, $725 in 2007, and $600 in
2006.  The increase in the provision for 2008 when compared to 2007
was due to loan growth, moderate deterioration in credit quality, and an
increase in unallocated reserves in light of significant economic
uncertainty.  The increase in the provision for 2007 when compared to
2006 was due to loan growth and some increased economic
uncertainty.





At
December 31, 2008, the Bank had $7,704 or 0.71% of total assets in nonperforming
assets, net of government guarantees compared to $4,094 or 0.43% of total assets
at December 31, 2007.  Nonperforming assets at December 31, 2008
consist of $3,898 of nonaccrual loans (net of $239 in government guarantees) and
$3,806 of other real estate owned. Nonperforming assets do not include $2,234 of
impaired loans less than 90 days past due and continuing to accrue interest as
of December 31, 2008.  At December 31, 2008, approximately $1,181 of
the nonaccrual loans were consumer residential construction
loans.  Other real estate owned consisted of 17 completed consumer
construction residential properties and seven individual residential building
lots.  Losses on these or any future nonperforming loans in the
consumer residential construction segment of the loan portfolio are mitigated
due to a cash-secured 20% principal guarantee for each of these loans. In
addition, no special allocation to the allowance for loan losses for these
specific loans is expected.





-35-


The
allowance for loan losses at December 31, 2008 was $10,980 (1.15% of outstanding
loans, net of loans held for sale) compared to $8,675 (1.05% of loans) and
$8,284 (1.08% of loans) at years end 2007 and 2006, respectively.  At
December 31, 2008, the Bank also has reserved $196 for possible losses on
unfunded loan commitments, which is classified in other
liabilities.  The 2008 ending allowance includes $887 in specific
allowance for $6,132 in impaired loans (net of government
guarantees).  At December 31, 2007, the Company had $3,671 of impaired
loans (net of government guarantees) with a specific allowance assigned of
$160.





Net loan
charge offs were $1,295 in 2008 compared to $334 in 2007, and $108 in
2006.  Net charge offs as a percentage of average loans were 0.15%,
0.04%, and 0.01% for 2008, 2007, and 2006, respectively.





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.





2008
Compared to 2007





Noninterest
income in 2008 was $4,269, up $344 or 9% from the $3,925 reported for the year
2007.  The increase in 2008 noninterest income when compared to 2007
was primarily attributable to a $267 increase in service charges on deposit
accounts and a $193 increase in other fee income, principally bankcard
processing fee income.  Service charges on deposit accounts increased
due to lower earnings credit rate, which increased fees on analyzed business
accounts.  Bankcard processing fee income accounted for $114 of this
increase.  Increases in these categories were partially offset by a
$15 decrease in mortgage banking income.  The decline in mortgage
banking income was attributable to a significant slow down in the residential
housing market.  The other income category in 2008 was $330, an $87 or
21% decrease from the $417 reported in the other income category for the year
2007.  The decrease in the other income category was due to collection
of approximately $70 in loan referral fees during the year 2007.





2007
Compared to 2006





Noninterest
income in 2007 was $3,925, down $476 or 11% from the $4,401 reported for the
year 2006.  Excluding the one-time gain of $335 on the sale of
property included in 2006 results, noninterest income in 2007 was down $141 or
3% from 2006.  The following discussion excludes the effect of the
gain on sale of property in 2006.  The $141 decline in 2007
noninterest income when compared to 2006 was primarily due to a $435 decrease in
mortgage banking income.  The decline in mortgage banking income was
attributable to a significant slow down in the residential housing
market.  The decline in mortgage banking income was partially offset
by increases in service charges on deposit accounts, other fee income,
principally bankcard processing fee income, and the other income
category.  Service charges on deposit accounts increased $76 or 6% due
to lower earnings credit rate, which increased fees on analyzed business
accounts.  Other fee income, principally bankcard processing fee
income in 2007 increased $135 or 9% over 2006.  Bankcard processing
fee income accounted for $53 of this increase, while other service charge
income, primarily wire transfer fees accounted for $68 of this
increase.  The other income category in 2007 was $417, a $94 or 29%
increase over the $323 reported in the other income category for the year
2006.  The increase in the other income category was due to collection
of approximately $70 in loan referral fees during the year
2007.


-36-








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.





2008
Compared to 2007





Noninterest
expense for the year 2008 was $29,562, up $3,701 or 14% over the $25,861
reported for the year 2007.  Personnel expense in 2008 was up $2,422
and accounted for 65% of the total increase in noninterest expense in the
year.  Total salary expense was up $1,699 or 16% and benefits and
taxes were up $780 or 16% over last year.  Approximately $442 of the
increase in salary expense was due to lower loan origination costs, which are a
direct offset to salary expense.  Higher benefits and taxes expense in
2008 resulted from increased group insurance, and accruals for officer
incentives.  The other expense category accounted for the majority of
the remaining increase in noninterest expense in 2008 over
2007.  Other expenses were $5,490 in 2008, up $588 or 12% over 2007
other expenses of $4,902.  The increase in the other expense category
can be attributed to the following areas: 1) increased FDIC assessment of $231;
2) increased travel expense of $89; 3) increased other real estate expense of
$125 due to increases in other real estate owned; and 4) increased repossession
and collection expense of $23 related to increases in non-performing
loans.





2007
Compared to 2006





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





BALANCE
SHEET





Loans





At
December 31, 2008, outstanding loans, net of deferred loan fees and excluding
loans held for sale, were $956,357, up $134,035 over outstanding loans of
$822,322 at December 31, 2007.  A summary of loan growth by market for
the year 2008 follows:





Balance
              
              
              Balance
              
              
              $
      Increase
              
              
              %
      IncreaseDec.
      31, 2008
              
              
              Dec.
      31, 2007
              
              
              (Decrease)
              
              
              (Decrease)Eugene
      Market
              
              $
              237,604
              
              
              $
              217,962
              
              
              $
              19,642
              
              
              
              9.01
              %Portland
      Market
              
              
              432,961
              
              
              
              389,053
              
              
              
              43,908
              
              
              
              11.29
              %Seattle
      Market
              
              
              285,792
              
              
              
              215,307
              
              
              
              70,485
              
              
              
              32.74
              %Total
              
              $
              956,357
              
              
              $
              822,322
              
              
              $
              134,035
              
              
              
              16.30
              %
  -37-


The
Seattle market was primarily responsible for the majority of the growth in
outstanding loans for the Company during 2008, but both the Portland and Eugene
markets also showed solid year-over-year loan growth.  The growth in
all three markets can be attributed to increased commercial real estate lending
and loans to dental professionals throughout the year, combined with a lessening
of competition for loans.  Throughout 2008, many financial
institutions experiencing credit quality problems and significantly reduced
their lending activities, thus increasing the opportunity for the Bank to grow
its loan portfolio.  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, 2008, the Company had a recorded balance of $22,031 in goodwill
from the November 30, 2005 acquisition of NWB Financial Corporation and its
wholly-owned subsidiary Northwest Business Bank (NWBF).  In addition,
at December 31, 2008 the Company had $873 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 2008, the Company amortized $223 of the core deposit
intangible.  In accordance with Statement of Financial Accounting
Standard (“SFAS”) 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 performed an impairment analysis at December
31, 2008 and determined there was no impairment of the goodwill at the time of
the analysis.





Deposits





Outstanding
deposits at December 31, 2008 were $722,437, an increase of $78,013 over
outstanding deposits of $644,424 at December 31, 2007.  Core deposits,
which are defined by the Company as demand, interest checking, money market,
savings, and local time deposits, including local time deposits in excess of
$100 thousand, were $615,832, down $60 from outstanding core deposits of
$615,892 at December 31, 2007.  At December 31, 2008 and 2007,
respectively, core deposits represented 85% and 96% of total deposits,
respectively.  A summary of deposit growth by market for the year 2008
follows:


Balance
              
              
              Balance
              
              
              $
      Increase
              
              
              %
      IncreaseDec.
      31, 2008
              
              
              Dec.
      31, 2007
              
              
              (Decrease)
              
              
              (Decrease)Eugene
      Market core deposits
              
              $
              406,098
              
              
              $
              405,351
              
              
              $
              747
              
              
              
              0.18
              %Portland
      Market core deposits
              
              
              110,287
              
              
              
              109,698
              
              
              
              589
              
              
              
              0.54
              %Seattle
      Market core deposits
              
              
              99,447
              
              
              
              100,843
              
              
              
              (1,396
              )
              
              
              -1.38
              %Total
      core deposits
              
              
              615,832
              
              
              
              615,892
              
              
              
              (60
              )
              
              
              -0.01
              %Other
      deposits
              
              
              106,605
              
              
              
              28,532
              
              
              
              78,073
              
              
              
              273.63
              %Total
              
              $
              722,437
              
              
              $
              644,424
              
              
              $
              78,013
              
              
              
              12.11
              %




Outstanding
core deposits at December 31, 2008 in all three markets were virtually flat from
one year ago primarily due to the highly competitive environment for these
deposits with other financial institutions in all three of the Bank’s primary
markets.  This increased competition for core deposits, primarily
based on price, was driven by liquidity problems experienced by the entire
industry during the last six months of 2008 as financial markets experienced
significant disruption.  In addition, core deposit growth was affected
by a deterioration in economic conditions in all three markets that negatively
impacted the cash flow, and thus the deposit levels of many of the Bank’s
existing clients.  As a result of no growth in core deposits, the Bank
experienced growth of more than $78,000 in other deposits, which consisted
primarily of brokered and public time deposits.





-38-


Junior
Subordinated Debentures





The
Company had $8,248 in junior subordinated debentures at December 31, 2008, which
were issued in conjunction with the acquisition of NWBF.  At December
31, 2008, the entire $8,248 in junior subordinated debentures had an interest
rate of 6.265% that is fixed through November 2010.  As of December
31, 2008, 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 stockholders’ 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.





Stockholders’
equity at December 31, 2008 was $116,165, an increase of $8,656 or 8% from
December 31, 2007.  The increase in stockholders’ equity during
2008 was due to the retention of approximately $8,142 net income for the year
and the exercise of stock options and the related tax benefit accounted for
another $1,504.





The
Federal Reserve Board and the FDIC have in place guidelines for risk-based
capital requirements applicable to U.S. banks and bank holding
companies.  These risk-based capital guidelines take into
consideration risk factors, as defined by regulation, associated with various
categories of assets, both on and off-balance sheet.  Under the
guidelines, capital strength is measured in two tiers, which are used in
conjunction with risk-adjusted assets to determine the risk-based capital
ratios.  These guidelines require a minimum of 8% total risk-based
capital ratio, of which 4% must be Tier I capital.  The regulations
also specify that a 10% total risk-based capital ratio is required to be
designated “well-capitalized” (the highest FDIC capital rating) by the
FDIC.  The Company’s Tier I capital, which consists of stockholders’
equity and qualifying trust preferred securities, less other comprehensive
income, goodwill (net of the deferred tax associated with goodwill), and
deposit-based intangibles, totaled $102,424 at December 31,
2008.  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 $113,600
at December 31, 2008.  The Bank’s total risk-based capital ratio was
11.11%, at December 31, 2008 compared to 10.97% at December 31,
2007.





Subsequent
to year-end December 31, 2008, the Company raised approximately $9,700 of
additional capital through a private equity placement of 750 thousand shares of
stock at $13.50 per share.  This additional capital is expected to
increase the Company’s total risk-based capital ratio to more than 12% at the
end of first quarter 2009.  In addition, during December 2008, the
Company was granted preliminary approval under TARP by the Treasury to receive
$30 million of additional capital in the form of preferred stock.  In
January 2009, the Company announced it had determined not to participate in this
program.





The
Company pays cash dividends on a quarterly basis, typically in March, June,
September and December of each year.  The Board of Directors considers
the dividend amount quarterly and takes a broad perspective in its dividend
deliberations including a review of recent operating performance, capital
levels, and concentrations of loans as a percentage of capital, and growth
projections.  The Board also considers dividend payout ratios,
dividend yield, and other financial metrics in setting the quarterly
dividend.  The Company declared and paid cash dividends of $0.40 per
share for the year 2008.  That compares to dividends of $0.35 per
share for the year 2007 when adjusted for the 10% stock dividend paid in June
2007.





The Board
of Directors, at its February 17, 2009 meeting, approved a dividend of $0.10 per
share for stockholders of record as of March 3, 2009.  If continued
for each quarter during 2009, this would result in no change in 2009 dividends
over 2008 dividends.





-39-


The
Company projects that earnings retention and existing capital will be sufficient
to fund anticipated organic 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, 2008, the Bank had $182,609 in
commitments to extend credit.





Letters
of credit written are conditional commitments issued by the Bank to guarantee
performance of a customer to a third party.  The credit risk involved
is essentially the same as that involved in extending loan facilities to
customers.  At December 31, 2008, the Bank had $2,298 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, 2008, the Bank had established unused and
uncommitted guidance lines totaling approximately $1,387 compared to unused and
uncommitted guidance lines of $38,321 at December 31, 2007.





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


Contractual
      Obligations(dollars
      in thousands)
              
              Total
              
              
              Less
      than One Year
              
              
              1
      - 3 Years
              
              
              3
      - 5 Years
              
              
              More
      than 5 YearsJunior
      subordinated debenture
              
              $
              8,248
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              8,248FHLB
      borrowings
              
              
              194,500
              
              
              
              159,500
              
              
              
              21,500
              
              
              
              11,500
              
              
              
              2,000Federal
      Reserve borrowings
              
              
              20,000
              
              
              
              20,000
              
              
              
              -
              
              
              
              -
              
              
              
              -Time
      Deposits
              
              
              150,545
              
              
              
              123,172
              
              
              
              21,482
              
              
              
              5,891
              
              
              
              -Operating
      lease obligations
              
              
              6,848
              
              
              
              954
              
              
              
              1,177
              
              
              
              932
              
              
              
              3,785$
              380,141
              
              
              $
              303,626
              
              
              $
              44,159
              
              
              $
              18,323
              
              
              $
              14,033


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.





The
Company uses a number of measurements to monitor its liquidity position on a
daily, weekly, and monthly basis.  During the third and fourth
quarters of 2008 during significant disruption of financial markets that created
liquidity problems for a number of financial institutions, the Company
heightened its liquidity monitoring and also put into place a number of programs
to increase its core deposit base, including deposit promotions in all three
markets.





-40-


Core
deposits at December 31, 2008 were 85% of total deposits compared to 96% at
December 31, 2007.  Core deposits at December 31, 2008 were virtually
flat with one year ago due to increased competition for core deposits by all
financial institutions, combined with deteriorating economic
conditions.  Loan growth was funded primarily through alternative
funding sources, including overnight borrowed funds, Federal Home Loan Bank
advances, Federal Reserve Bank of San Francisco advances, public deposits
available from the State of Oregon and State of Washington, national market time
deposits, and brokered time deposits.





The
Company has deposit relationships with several large clients, which are closely
monitored by Bank officers.  At December 31, 2008, 29 large deposit
relationships with the Bank account for $206,026 or 29% of total
deposits.  The single largest client represented 8% of total deposits
at December 31, 2008.  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, 2008, the Bank had secured and unsecured
borrowing lines totaling approximately $495,188 consisting of $327,253 with the
Federal Home Loan Bank of Seattle, $118,000 with various correspondent banks,
and $49,935 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, 2008, the Bank had collateral pledged to the
FHLB in the form of commercial real estate loans, first and second lien single
family residential loans, multi-family loans, and mortgage-backed securities
that had a discounted collateral value of approximately $273,978 for this
line.  The $49,935 borrowing line with the Federal Reserve Bank of San
Francisco is also secured through the pledging of commercial loans under the
Bank’s Borrower-In-Custody program.  The $118,000 in borrowing lines
with correspondent banks is unsecured.  At December 31, 2008, the Bank
had $194,500 in borrowings outstanding from the FHLB of Seattle and $24,000
outstanding on its overnight correspondent bank lines, and $20,000 outstanding
with the Federal Reserve Bank of San Francisco.  In addition, the Bank
is part of the State of Oregon and State of Washington community bank time
deposit program and at December 31, 2008 had approximately $500 available from
these sources.  The Bank’s loan portfolio also contains approximately
$31,689 in guaranteed government loans, which can be sold on the secondary
market.





Subsequent
to the end of the year, as a result of a financial institution failure in the
State of Washington, the Bank was assessed $9 thousand for uninsured public
deposits at the failed institution.  The assessment was based upon the
Bank’s pro rata share of public deposits as of December 31, 2008, which amounted
to less than one-tenth of one percent.  However, due to the increased risk
of future bank failures in Washington, the Bank chose to exit the public deposit
pool in order to minimize its exposure to possible assessments for uninsured
deposits.  The Bank will continue to have a potential liability for
uninsured deposits for a period of one year following its exit from the state
public deposit pool.





INFLATION





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





ITEM
7A                      Quantitative and Qualitative
Disclosures About Market Risk





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





-41-


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





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





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





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





During
the first six months of 2008, the model indicated that the Company was asset
sensitive and projected rising margins in a rising rate
environment.  However during the last six months of 2008 and at
December 31, 2008, the Profit Star model showed the Company had become liability
sensitive, meaning that in a rising rate environment, the net interest margin
and net interest income would decline.  The change in the Company’s
interest rate risk position was due primarily to the activation of floors on
approximately $280,000 of variable rate loans, combined with the relatively
short maturity structure of the Company’s alternative
funding.    The following table shows the estimated impact
of interest rate changes plus 300 basis points and minus 300 basis points on net
interest income in 100 basis point increments.  The base figure of
$54,940 used in the analysis differs from actual net interest income for 2008
due to instruments being priced at offering rates, factoring in run-off
assumptions. Due to the various assumptions used for this modeling and potential
balance sheet strategies management may implement to mitigate interest rate
risk, no assurance can be given that projections will reflect actual
results.





-42-


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
            
            
            $
            49,100
            
            
            $
            (5,840
            )
            
            
            (10.63
            )%+200
            
            
            
            50,475
            
            
            
            (4,465
            )
            
            
            (8.13
            )%+100
            
            
            
            51,657
            
            
            
            (3,283
            )
            
            
            (5.98
            )%Base
            
            
            
            54,940
            
            
            
            0
            
            
            
            0.00
            %-100
            
            
            
            56,926
            
            
            
            1,986
            
            
            
            3.62
            %-200
            
            
            
            57,574
            
            
            
            2,634
            
            
            
            4.79
            %-300
            
            
            
            57,581
            
            
            
            2,641
            
            
            
            4.81
            %


-43-


ITEM
8                                Financial Statements and
Supplementary Data

























Report
of Independent Registered Public Accounting Firm





To the
Board of Directors and Stockholders


Pacific
Continental Corporation and Subsidiary








We have
audited the accompanying consolidated balance sheets of Pacific Continental
Corporation and Subsidiary (Company) as of December 31, 2008 and 2007, and the
related consolidated statements of income, changes in stockholders’ equity,
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 2008. We also have audited the Company’s internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying Report of Management on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on these financial statements and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.





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





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. 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 and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.





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








-44-












Report
of Independent Registered Public Accounting Firm








Page
Two







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, 2008 and
2007, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, Pacific Continental Corporation and Subsidiary maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2008 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,
2009




















-45-


Pacific
Continental Corporation and Subsidiaries


Consolidated
Balance Sheets





December
      31,
              
              
              December
      31,2008
              
              
              2007ASSETSCash
      and due from banks
              
              $
              20,172
              
              
              $
              23,809Federal
      funds sold
              
              
              69
              
              
              
              1,857Interest-bearing
      deposits with banks
              
              
              214
              
              
              
              410Total
      cash and cash equivalents
              
              
              20,455
              
              
              
              26,076Securities
      available-for-sale
              
              
              54,933
              
              
              
              53,994Loans
      held for sale
              
              
              410
              
              
              
              -Loans,
      less allowance for loan losses and net deferred fees
              
              
              945,377
              
              
              
              813,647Interest
      receivable
              
              
              4,021
              
              
              
              3,652Federal
      Home Loan Bank stock
              
              
              10,652
              
              
              
              3,795Property,
      plant and equipment, net of accumulated depreciation
              
              
              20,763
              
              
              
              20,876Goodwill
      and other intangible assets
              
              
              22,904
              
              
              
              23,127Other
      real estate owned
              
              
              3,806
              
              
              
              423Other
      assets
              
              
              7,522
              
              
              
              3,681Total
      assets
              
              $
              1,090,843
              
              
              $
              949,271LIABILITIES
      AND STOCKHOLDERS' EQUITYDepositsNoninterest-bearing
      demand
              
              $
              178,957
              
              
              $
              175,941Savings
      and interest-bearing checking
              
              
              392,935
              
              
              
              401,714Time
      $100,000 and over
              
              
              67,095
              
              
              
              31,856Other
      time
              
              
              83,450
              
              
              
              34,913Total
      deposits
              
              
              722,437
              
              
              
              644,424Federal
      funds purchased
              
              
              44,000
              
              
              
              5,360Federal
      Home Loan Bank borrowings
              
              
              194,500
              
              
              
              179,500Junior
      subordinated debentures
              
              
              8,248
              
              
              
              8,248Accrued
      interest and other payables
              
              
              5,493
              
              
              
              4,230Total
      liabilities
              
              
              974,678
              
              
              
              841,762Commitments
      and contingencies (Notes 5, 16, and 18)Stockholders'
      equityCommon
      stock, 25,000,000 shares authorized
              
              
              80,019
              
              
              
              77,909issued
      & outstanding:  12,079,691 at December 31,
    2008and
      11,934,866 at December 31, 2007Retained
      earnings
              
              
              37,764
              
              
              
              29,622Accumulated
      other comprehensive loss
              
              
              (1,618
              )
              
              
              (22
              )116,165
              
              
              
              107,509Total
      liabilities and stockholders’ equity
              
              $
              1,090,843
              
              
              $
              949,271See
      accompanying notes.


-46-


Pacific
Continental Corporation and Subsidiaries


Consolidated
Statements of Income


Year
      Ended December 31,2008
              
              
              2007
              
              
              2006Interest
      and dividend incomeLoans
              
              $
              63,047
              
              
              $
              67,122
              
              
              $
              60,257Securities
              
              
              2,787
              
              
              
              1,973
              
              
              
              1,667Dividends
      on Federal Home Loan Bank stock
              
              
              91
              
              
              
              21
              
              
              
              4Federal
      funds sold & Interest-bearing deposits with banks
              
              
              20
              
              
              
              50
              
              
              
              4465,945
              
              
              
              69,166
              
              
              
              61,972Interest
      expenseDeposits
              
              
              10,142
              
              
              
              18,572
              
              
              
              15,881Federal
      Home Loan Bank & Federal Reserve borrowings
              
              
              5,456
              
              
              
              6,160
              
              
              
              5,144Junior
      subordinated debentures
              
              
              498
              
              
              
              508
              
              
              
              510Federal
      funds purchased
              
              
              578
              
              
              
              500
              
              
              
              38016,674
              
              
              
              25,740
              
              
              
              21,915Net
      interest income
              
              
              49,271
              
              
              
              43,426
              
              
              
              40,057Provision
      for loan losses
              
              
              3,600
              
              
              
              725
              
              
              
              600Net
      interest income after provision for loan losses
              
              
              45,671
              
              
              
              42,701
              
              
              
              39,457Noninterest
      incomeService
      charges on deposit accounts
              
              
              1,676
              
              
              
              1,409
              
              
              
              1,333Other
      fee income, principally bankcard
              
              
              1,823
              
              
              
              1,630
              
              
              
              1,495Loan
      servicing fees
              
              
              85
              
              
              
              99
              
              
              
              109Mortgage
      banking income
              
              
              355
              
              
              
              370
              
              
              
              805Other
      noninterest income
              
              
              330
              
              
              
              417
              
              
              
              6594,269
              
              
              
              3,925
              
              
              
              4,401Noninterest
      expenseSalaries
      and employee benefits
              
              
              18,089
              
              
              
              15,667
              
              
              
              14,578Premises
      and equipment
              
              
              3,990
              
              
              
              3,281
              
              
              
              3,065Bankcard
      processing
              
              
              546
              
              
              
              524
              
              
              
              510Business
      development
              
              
              1,447
              
              
              
              1,487
              
              
              
              1,444Other
      noninterest expense
              
              
              5,490
              
              
              
              4,902
              
              
              
              4,19429,562
              
              
              
              25,861
              
              
              
              23,791Income
      before provision for income taxes
              
              
              20,378
              
              
              
              20,765
              
              
              
              20,067Provision
      for income taxes
              
              
              7,439
              
              
              
              7,830
              
              
              
              7,412Net
      income
              
              $
              12,939
              
              
              $
              12,935
              
              
              $
              12,655Earnings
      per shareBasic
              
              $
              1.08
              
              
              $
              1.09
              
              
              $
              1.09Diluted
              
              $
              1.08
              
              
              $
              1.08
              
              
              $
              1.08See
      accompanying notes.


-47-


Pacific
Continental Corporation and Subsidiaries


Consolidated
Statements of Changes in Stockholders’ Equity


For
the Years Ended December 31, 2008, 2007, and 2006


Number
              
              
              Common
              
              
              Retained
              
              
              Accumulated
                Other
                Comprehensiveof
      Shares
              
              
              Stock
              
              
              Earnings
              
              
              Loss
              
              
              TotalBalance,
      January 1, 2006
              
              
              10,233,580
              
              
              $
              53,319
              
              
              $
              28,451
              
              
              $
              (358
              )
              
              $
              81,412Net
      income
              
              
              
              
              
              
              
              
              
              
              12,655
              
              
              
              
              
              
              
              12,655Other
      comprehensive income:Unrealized
      gains on securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              184Deferred
      income taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (71
              )Other
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              113
              
              
              
              113Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              12,768Stock
      options exercised and related tax benefit
              
              
              413,684
              
              
              
              4,350
              
              
              
              
              
              
              
              
              
              
              
              4,350Share-based
      payments
              
              
              
              
              
              
              586
              
              
              
              
              
              
              
              
              
              
              
              586Cash
      dividends
              
              
              
              
              
              
              
              
              
              
              (3,381
              )
              
              
              
              
              
              
              (3,381
              )Balance,
      December 31, 2006
              
              
              10,647,264
              
              
              
              58,255
              
              
              
              37,725
              
              
              
              (245
              )
              
              
              95,735Net
      income
              
              
              
              
              
              
              
              
              
              
              12,935
              
              
              
              
              
              
              
              12,935Other
      comprehensive income:Unrealized
      gains on securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              362Deferred
      income taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (139
              )Other
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              223
              
              
              
              223Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              13,158Stock
      options exercised and related tax benefit
              
              
              212,823
              
              
              
              2,240
              
              
              
              
              
              
              
              
              
              
              
              2,240Stock
      dividend - 10%
              
              
              1,074,779
              
              
              
              16,863
              
              
              
              (16,863
              )Share-based
      payments
              
              
              
              
              
              
              551
              
              
              
              
              
              
              
              
              
              
              
              551Cash
      dividends
              
              
              
              
              
              
              
              
              
              
              (4,175
              )
              
              
              
              
              
              
              (4,175
              )Balance,
      December 31, 2007
              
              
              11,934,866
              
              
              
              77,909
              
              
              
              29,622
              
              
              
              (22
              )
              
              
              107,509Net
      income
              
              
              
              
              
              
              
              
              
              
              12,939
              
              
              
              
              
              
              
              12,939Other
      comprehensive loss:Unrealized
      losses on securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,555
              )Deferred
      income taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              959Other
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,596
              )
              
              
              (1,596
              )Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              11,343Stock
      options exercised and related tax benefit
              
              
              144,825
              
              
              
              1,521
              
              
              
              
              
              
              
              
              
              
              
              1,521Share-based
      payments
              
              
              
              
              
              
              589
              
              
              
              
              
              
              
              
              
              
              
              589Cash
      dividends
              
              
              
              
              
              
              
              
              
              
              (4,797
              )
              
              
              
              
              
              
              (4,797
              )Balance,
      December 31, 2008
              
              
              12,079,691
              
              
              $
              80,019
              
              
              $
              37,764
              
              
              $
              (1,618
              )
              
              $
              116,165See
      accompanying notes.
  -48-




Pacific
Continental Corporation and Subsidiaries


Consolidated
Statements of Cash Flows





Years
      Ended December 31,2008
              
              
              2007
              
              
              2006Cash
      flows from operating activities:Net
      income
              
              $
              12,939
              
              
              $
              12,935
              
              
              $
              12,655Adjustments
      to reconcile net income to net cashfrom
      operating activities:Depreciation
      and amortization, net of accretion
              
              
              1,396
              
              
              
              1,399
              
              
              
              1,673Gain
      on sale of property
              
              
              -
              
              
              
              -
              
              
              
              (335
              )Loss
      on sale or write-down of property and equipment
              
              
              (25
              )
              
              
              -
              
              
              
              6Provision
      for loan losses
              
              
              3,600
              
              
              
              725
              
              
              
              600Losses
      (Gains) on foreclosed assets
              
              
              119
              
              
              
              -
              
              
              
              (42
              )Deferred
      income taxes
              
              
              (1,633
              )
              
              
              (334
              )
              
              
              (1,049
              )Share-based
      compensation
              
              
              626
              
              
              
              577
              
              
              
              586Excess
      tax benefit of stock options exercised
              
              
              (59
              )
              
              
              (201
              )
              
              
              (272
              )Change
      in:Interest
      receivable
              
              
              (369
              )
              
              
              346
              
              
              
              (654
              )Deferred
      loan fees
              
              
              (270
              )
              
              
              (450
              )
              
              
              (121
              )Capitalized
      loan servicing rights
              
              
              -
              
              
              
              -
              
              
              
              5Production
      of mortgage loans held-for-sale
              
              
              (13,103
              )
              
              
              (11,235
              )
              
              
              (31,988
              )Proceeds
      from the sale of mortgage loans held-for-sale
              
              
              12,693
              
              
              
              13,375
              
              
              
              30,490Accrued
      interest payable and other liabilities
              
              
              637
              
              
              
              214
              
              
              
              (1,157
              )Income
      taxes payable
              
              
              (1,258
              )
              
              
              451
              
              
              
              891Other
      assets
              
              
              3,139
              
              
              
              (801
              )
              
              
              (233
              )Net
      cash provided by operating activities
              
              
              18,432
              
              
              
              17,001
              
              
              
              11,055Cash
      flow from investing activities:Proceeds
      from maturities of available for saleinvestment
      securities
              
              
              18,618
              
              
              
              10,868
              
              
              
              6,686Purchase
      of available for sale investment securities
              
              
              (21,923
              )
              
              
              (25,584
              )
              
              
              (6,167
              )Loans
      made net of principal collections received
              
              
              (130,457
              )
              
              
              (92,445
              )
              
              
              (86,667
              )Proceeds
      from sales of loans
              
              
              -
              
              
              
              37,809
              
              
              
              4,232Purchase
      of loans
              
              
              (12,120
              )
              
              
              (118
              )
              
              
              (6,315
              )Cash
      paid for acquisitions
              
              
              (3
              )
              
              
              (15
              )
              
              
              (12,749
              )Purchase
      of property
              
              
              (1,314
              )
              
              
              (3,670
              )
              
              
              (2,906
              )Proceeds
      from sale of property
              
              
              -
              
              
              
              -
              
              
              
              403Proceeds
      on sale of foreclosed assets
              
              
              2,642
              
              
              
              -
              
              
              
              194Purchase
      of energy tax credits
              
              
              (1,000
              )
              
              
              -
              
              
              
              -Purchase
      of FHLB stock
              
              
              (6,857
              )
              
              
              (315
              )
              
              
              -Net
      cash used by investing activities
              
              
              (152,414
              )
              
              
              (73,470
              )
              
              
              (103,289
              )Cash
      flow from financing activities:Change
      in deposits
              
              
              78,014
              
              
              
              3,152
              
              
              
              37,321Change
      in federal funds purchased and FHLBshort-term
      borrowings
              
              
              52,640
              
              
              
              (1,050
              )
              
              
              28,410Proceeds
      from FHLB term advances originated
              
              
              1,744,500
              
              
              
              689,500
              
              
              
              489,002FHLB
      advances paid-off
              
              
              (1,743,500
              )
              
              
              (639,804
              )
              
              
              (462,002
              )Proceeds
      from stock options exercised
              
              
              1,445
              
              
              
              1,943
              
              
              
              3,547Income
      tax benefit for stock options exercised
              
              
              59
              
              
              
              201
              
              
              
              272Dividends
      paid
              
              
              (4,797
              )
              
              
              (4,175
              )
              
              
              (3,381
              )Net
      cash provided by financing activities
              
              
              128,361
              
              
              
              49,767
              
              
              
              93,169Net
      increase (decrease) in cash and cash equivalents
              
              
              (5,621
              )
              
              
              (6,702
              )
              
              
              935Cash
      and cash equivalents, beginning of year
              
              
              26,076
              
              
              
              32,778
              
              
              
              31,843Cash
      and cash equivalents, end of year
              
              $
              20,455
              
              
              $
              26,076
              
              
              $
              32,778Supplemental
      information:Noncash
      investing and financing activities:Transfers
      of loans to foreclosed assets
              
              $
              6,706
              
              
              $
              423
              
              
              $
              22Change
      in unrealized gain (loss) on securities, net ofdeferred
      income taxes
              
              
              (1,596
              )
              
              
              223
              
              
              
              113Adjustment
      to acquired NWBF Goodwill
              
              
              -
              
              
              
              -
              
              
              
              (353
              )Cash
      paid during the year for:Income
      taxes
              
              $
              7,822
              
              
              $
              7,349
              
              
              $
              7,325Interest
              
              $
              16,526
              
              
              $
              25,959
              
              
              $
              21,793See
      accompanying notes.
  -49-


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 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 are reflected
on Pacific Continental’s consolidated balance sheet at December 31, 2008, under
the caption, “Junior Subordinated Debentures”.  Pacific Continental
also recognized its $248 investment in the Trust, which is recorded among “Other
Assets” in its consolidated balance sheet at December 31, 2008.





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 pertaining to financial assets and liabilities,
the calculation of the allowance for loan losses, 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 $1,196 and $3,779 were maintained
within the Bank’s cash balances at December 31, 2008 and 2007,
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 2008 and 2007.  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 or loss).  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.





-50-


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, 2008 and 2007 are
temporary.




Loans Held for Sale and Mortgage
Banking Activities – The Bank originates residential mortgage 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.





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





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





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





Federal Home Loan Bank Stock –
The investment in Federal Home Loan Bank (“FHLB”) stock is carried at par value,
which approximates its fair value.  As a member of the FHLB system,
the Bank is required to maintain a minimum level of investment in FHLB stock
based on specific percentages of its outstanding mortgages, total assets or FHLB
advances.  As of December 31, 2008, the minimum required investment
was approximately $8,570.  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, Plant and Equipment– 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.





-51-


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, 2008 and 2007.







Advertising – Advertising
costs are charged to expense during the year in which they are
incurred.  Advertising expenses were $756, $883 and $845 for the years
ended December 31, 2008, 2007 and 2006, 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.





The
Company adopted the provision of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (“FIN 48) on January 1, 2007.  As a result
of the implementation of FIN 48, the Company recognized no liability for
unrecognized tax benefits.  The Company files tax returns with the
Internal Revenue Service and the Oregon Department of Revenue.  Tax
returns for years subsequent to 2004 remain open to examination by these taxing
jurisdictions.  The Company’s policy with respect to interest and
penalties ensuing from income tax settlements is to recognize them as
noninterest expense.





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:




2008
              
              
              2007
              
              
              2006Basic
              
              
              11,980,211
              
              
              
              11,830,369
              
              
              
              11,586,295Common
      stock equivalents attributableto
      stock-based compensation plans
              
              
              48,102
              
              
              
              110,816
              
              
              
              180,880Diluted
              
              
              12,028,313
              
              
              
              11,941,185
              
              
              
              11,767,175


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





-52-




Fair Value Measurements – SFAS
No. 157, Fair Value Measurements, defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. SFAS
No. 157 establishes a three-level hierarchy for disclosure of assets and
liabilities recorded at fair value. The classification of assets and liabilities
within the hierarchy is based on whether the inputs to the valuation methodology
used for measurement are observable or unobservable. Observable inputs reflect
market-derived or market-based information obtained from independent sources,
while unobservable inputs reflect our estimates about market data. In general,
fair values determined by Level 1 inputs utilize quoted prices for identical
assets or liabilities traded in active markets that the Company has the ability
to access. Fair values determined by Level 2 inputs utilize inputs other than
quoted prices included in Level 1 that are observable for the asset or
liability, either directly or indirectly. Level 2 inputs include quoted prices
for similar assets and liabilities in active markets, and inputs other than
quoted prices that are observable for the asset or liability, such as interest
rates and yield curves that are observable at commonly quoted intervals. Level 3
inputs are unobservable inputs for the asset or liability, and include
situations where there is little, if any, market activity for the asset or
liability. In certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, the
level in the fair value hierarchy within which the fair value measurement in its
entirety falls has been determined based on the lowest level input that is
significant to the fair value measurement in its entirety. The
Company’s assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers factors
specific to the asset or liability.





Recently Issued Accounting
Pronouncements – In December 2007, FASB issued SFAS No. 141
(revised), Business Combinations. SFAS No. 141R establishes principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquired entity and the goodwill acquired.
Furthermore, acquisition-related and other costs will now be expensed rather
than treated as cost components of the acquisition. SFAS No. 141R also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. This statement applies
prospectively to business combinations for which the acquisition date is on or
after January 1, 2009. We do not expect the adoption of SFAS No. 141R
will have a material impact on our consolidated financial statements as related
to business combinations consummated prior to January 1, 2009. We expect
the adoption of SFAS No. 141R will increase the costs charged to operations
for acquisitions consummated on or after January 1, 2009.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interest in
Consolidated Financial Statements, an amendment to ARD No 51. SFAS No. 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The standard also
requires additional disclosures that clearly identify and distinguish between
the interest of the parent’s owners and the interest of the noncontrolling
owners of the subsidiary. This statement is effective on January 1, 2009
for the Company, to be applied prospectively. We do not expect the adoption of
SFAS No. 160 will have a material impact on the Company’s consolidated
financial statements.





In March
2008, FASB issued SFAS No. 161, Disclosures about Derivative Instruments
and Hedging Activities—an amendment of FASB Statement No. 133. SFAS
No. 161 expands the disclosure requirements in SFAS No. 133 about
an entity’s derivative instruments and hedging activities. This includes
enhanced disclosures regarding how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted
for under SFAS 133 and its related interpretations, and how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. Provisions of this statement are to be
applied prospectively, and comparative disclosures for earlier periods are
encouraged. We have adopted the provisions of SFAS 161 for the year ended
December 31, 2008, and the impact was not material to our consolidated
financial statements.





-53-




In May
2008, FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. Under SFAS 162, the U.S. GAAP hierarchy will now reside
in the accounting literature established by the FASB. SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements in conformity
with U.S. GAAP for nongovernmental entities. This statement is effective 60 days
after the U.S. Securities and Exchange Commission approves the Public Company
Accounting Oversight Board’s amendments to AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles. We
do not expect the adoption of SFAS No 162 will have a material impact on the
Company’s consolidated financial statements.





In June
2008, FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. FSP EITF 03-6-1
concludes that nonvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents are participating securities and
shall be included in the computation of EPS pursuant to the two-class method.
This statement is effective for fiscal years beginning after December 15,
2008, to be applied retrospectively. Certain of the Company’s nonvested
restricted stock awards qualify as participating securities as described under
this pronouncement. The adoption of FSP EITF 03-6-1 will reduce both basic and
diluted earnings per common share by $0.01 for the year ended December 31,
2007.





In
October 2008, FASB issued FSP No. 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active. FSP No. 157-3
clarifies the application of SFAS 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. The FSP does not change existing generally accepted accounting
principles. This FSP was effective immediately upon issuance, including prior
periods for which financial statements have not been issued. The impact of
adoption did not have a material impact on the Company’s consolidated financial
statements.





On
January 12, 2009, FASB issued FSP EITF 99-20-1, Amendments to the
Impairment Guidance of EITF Issue No. 99-20. FSP EITF 99-20-1 addresses
certain practice issues in EITF No. 99-20, Recognition of Interest Income
and Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets, by making
its other-than-temporary impairment assessment guidance consistent with SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities.
FSP EITF 99-20-1 removes the reference to the consideration of a market
participant’s estimates of cash flows in EITF 99-20, and instead requires an
assessment of whether it is probable, based on current information and events,
that the holder of the security will be unable to collect all amounts due
according to the contractual terms. If it is probable that there has been an
adverse change in estimated cash flows, an other-than-temporary impairment is
deemed to exist, and a corresponding loss shall be recognized in earnings equal
to the entire difference between the investment’s carrying value and its fair
value at the balance sheet date of the reporting period for which the assessment
is made. This FSP is effective for interim and annual reporting periods ending
after December 15, 2008, and shall be applied prospectively. The impact of
adoption did not have a material impact on the Company’s consolidated financial
statements.





Reclassifications – Certain
amounts contained in the 2007 and 2006 consolidated financial statements have
been reclassified where appropriate to conform to the financial statement
presentation used in 2008.  These reclassifications had no effect on
previously reported net income.


-54-





2.    Securities
Available-for-Sale:





The
amortized cost and estimated fair values of securities available-for-sale at
December 31, 2008 are as follows:




Securities
      in
              
              
              Securities
      inContinuous
              
              
              ContinuousUnrealized
              
              
              UnrealizedLoss
              
              
              LossGross
              
              
              Gross
              
              
              Estimated
              
              
              Position
      for
              
              
              Position
      ForAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              Fair
              
              
              Less
      Than
              
              
              12
      MonthsCost
              
              
              Gains
              
              
              Losses
              
              
              Value
              
              
              12
      Months
              
              
              or
      LongerUnrealized Loss PositionsObligations
      of states andpolitical
      subdivisions
              
              $
              3,573
              
              
              $
              -
              
              
              $
              27
              
              
              $
              3,546
              
              
              $
              3,546
              
              
              $
              -Mortgage-backed
      securities
              
              
              19,710
              
              
              
              -
              
              
              
              3,165
              
              
              
              16,545
              
              
              
              14,400
              
              
              
              2,145$
              23,283
              
              
              $
              -
              
              
              $
              3,192
              
              
              $
              20,091
              
              
              $
              17,946
              
              
              $
              2,145Unrealized Gain PositionsObligations
      of U.S.Government
      agencies
              
              $
              1,994
              
              
              $
              35
              
              
              $
              -
              
              
              $
              2,029Obligations
      of states andpolitical
      subdivisions
              
              
              3,856
              
              
              
              83
              
              
              
              -
              
              
              
              3,939Mortgage-backed
      securities
              
              
              28,390
              
              
              
              484
              
              
              
              -
              
              
              
              28,87434,240
              
              
              
              602
              
              
              
              -
              
              
              
              34,842$
              57,523
              
              
              $
              602
              
              
              $
              3,192
              
              
              $
              54,933


At
December 31, 2008, there were 32 investment securities in unrealized loss
positions.  The unrealized loss associated with the $2,145 in a
continuous unrealized loss position for twelve months or longer was $658 at
December 31, 2008.  In the opinion of management, these securities are
considered only temporarily impaired due to changes in market interest rate or
the widening of market spreads subsequent to the initial purchase of the
securities, and not due to concerns regarding the underlying credit of the
issuers or the underlying collateral.  The decline in value of these
securities has resulted from current economic conditions.  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, 2008 are as follows:





Gross
              
              
              Gross
              
              
              EstimatedAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              FairCost
              
              
              Gains
              
              
              Losses
              
              
              ValueObligations
      of U.S. Government agencies
              
              $
              1,994
              
              
              $
              35
              
              
              $
              -
              
              
              $
              2,029Obligations
      of states and political subdivisions
              
              
              7,429
              
              
              
              83
              
              
              
              27
              
              
              $
              7,485Mortgage-backed
      securities
              
              
              48,100
              
              
              
              484
              
              
              
              3,165
              
              
              
              45,419602$
              57,523
              
              
              $
              1,204
              
              
              $
              3,192
              
              
              $
              54,933


-55-


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





Gross
              
              
              Gross
              
              
              EstimatedAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              FairCost
              
              
              Gains
              
              
              Losses
              
              
              ValueObligations
      of U.S Government agencies
              
              $
              10,532
              
              
              $
              31
              
              
              $
              22
              
              
              $
              10,541Obligation
      of states and political subdivisions
              
              
              7,461
              
              
              
              72
              
              
              
              19
              
              
              
              7,514Mortgage-backed
      securities
              
              
              36,037
              
              
              
              118
              
              
              
              216
              
              
              
              35,939$
              54,030
              
              
              $
              221
              
              
              $
              257
              
              
              $
              53,994




The
amortized cost and estimated fair value of securities at December 31, 2008 and
2007 by contractual maturity are shown below.  Expected maturities
will differ from contractual maturities because issuers may have the right to
call or prepay obligations.





2008
              
              
              
              
              
              2007Estimated
              
              
              
              
              
              EstimatedAmortized
              
              
              Fair
              
              
              Amortized
              
              
              FairCost
              
              
              Value
              
              
              Cost
              
              
              ValueDue
      in one year or less
              
              $
              3,024
              
              
              $
              3,055
              
              
              $
              7,965
              
              
              $
              7,950Due
      after one year through 5 years
              
              
              1,484
              
              
              
              1,498
              
              
              
              4,764
              
              
              
              4,804Due
      after 5 years through 10 years
              
              
              4,916
              
              
              
              4,962
              
              
              
              5,264
              
              
              
              5,301Due
      after 10 years
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Mortgage-backed
      securities
              
              
              48,099
              
              
              
              45,418
              
              
              
              36,037
              
              
              
              35,939$
              57,523
              
              
              $
              54,933
              
              
              $
              54,030
              
              
              $
              53,994


No
securities available for sale were sold in 2008, 2007, or 2006.




At
December 31, 2008, securities with amortized costs of $45,348 (estimated market
values of $43,834) were pledged to secure certain Treasury and public deposits
as required by law, and to secure borrowing lines.





3.    Loans:





Major
classifications of loans, including loans held for sale, at December 31 are as
follows:





2008
              
              
              2007Commercial
      loans
              
              $
              233,513
              
              
              $
              188,940Real
      estate loans
              
              
              717,529
              
              
              
              627,140Consumer
      loans
              
              
              7,455
              
              
              
              8,226958,497
              
              
              
              824,306Deferred
      loan origination fees
              
              
              (1,730
              )
              
              
              (1,984
              )956,767
              
              
              
              822,322Allowance
      for loan losses
              
              
              (10,980
              )
              
              
              (8,675
              )$
              945,787
              
              
              $
              813,647
  -56-




Allowance for Loan
Losses:





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





2008
              
              
              2007
              
              
              2006Balance,
      beginning of year
              
              $
              8,675
              
              
              $
              8,284
              
              
              $
              7,792Provision
      charged to income
              
              
              3,600
              
              
              
              725
              
              
              
              600Loans
      charged against the allowance
              
              
              (1,477
              )
              
              
              (396
              )
              
              
              (223
              )Recoveries
      credited to allowance
              
              
              182
              
              
              
              62
              
              
              
              115Balance,
      end of year
              
              $
              10,980
              
              
              $
              8,675
              
              
              $
              8,284


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.





Loans
considered impaired, net of government guarantees, including all nonaccrual
loans, totaled $6,132, $3,671, and $496 at December 31, 2008, 2007, and 2006,
respectively.  The specific valuation allowance for loan losses
related to these impaired loans was approximately $887, $160, and $109 at
December 31, 2008, 2007, and 2006, respectively.  The average
recorded investment in impaired loans was approximately $5,136, $1,512, and $637
in 2008, 2007, and 2006, respectively.  Interest income recognized on
impaired loans during 2008, 2007, and 2006 was approximately $301, $226, and
$72, 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 $173, $140, and $14 in 2008,
2007 and 2006, respectively.  There were no loans 90 days
contractually past due and continuing to accrue interest as of December 31,
2008, 2007, and 2006, respectively.





At
December 31, 2008, outstanding loans to dental professionals totaled
approximately $122,205 and represented 12.8% of total outstanding
loans.  In addition, 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 by geographic location and among industry
groups.  At December 31, 2008, outstanding residential construction
loans totaled approximately $74,532 and represented 7.8% of total outstanding
loans.  In addition, at December 31, 2008, unfunded loan commitments
for residential construction totaled approximately $19,818.  There are
no other industry concentrations in excess of 10% of the total loan
portfolio.





4.    Loan Participations and Servicing:





In the
normal course of business, the Bank has sold portions of loans to other
institutions in order to extend the Bank’s lending capacity or to mitigate
risk.  The unpaid principal balances of these serviced loans at
December 31, 2008 and 2007 were $36,230 and $28,315,
respectively.  These loans are not included in the accompanying
consolidated balance sheets and the servicing component of these transactions
are not material to the consolidated financial statements.




-57-





5.    Property:





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





2008
              
              
              2007Land
              
              $
              3,834
              
              
              $
              3,834Buildings
      and improvements
              
              
              18,348
              
              
              
              17,994Furniture
      and equipment
              
              
              8,130
              
              
              
              9,31530,312
              
              
              
              31,143Less
      accumulated depreciation & amortization
              
              
              (9,549
              )
              
              
              (10,267
              )$
              20,763
              
              
              $
              20,876


The Bank
leases certain facilities for office locations under noncancelable operating
lease agreements expiring through 2039.  Rent expense related to these
leases totaled $942, $654, and $712 in 2008, 2007 and 2006,
respectively.  The Bank leases approximately 52% of its Springfield
Gateway building to others under noncancelable operating lease agreements
extending through 2012.





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





PropertyLease
              
              
              LeasedCommitments
              
              
              to
      Others2009
              
              $
              954
              
              
              $
              4442010
              
              
              690
              
              
              
              3062011
              
              
              487
              
              
              
              2102012
              
              
              342
              
              
              
              1512013
              
              
              589
              
              
              
              -Thereafter
              
              
              3,785
              
              
              
              -$
              6,847
              
              
              $
              1,111


Depreciation
expense was $1,488, $1,385, and $1,244 for the years ended December 31, 2008,
2007 and 2006, respectively.




The Bank
capitalized $39, and $37 of interest expense related to property additions
during 2007 and 2006, respectively.  No interest was capitalized for
similar property additions in 2008.










-58-










6.    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, 2008.





CoreDeposit
              
              
              TotalGoodwill
              
              
              Intangible
              
              
              IntangiblesBalance,
      December 31, 2006
              
              $
              22,306
              
              
              $
              1,319
              
              
              $
              23,625Sale
      of Consumer Finance Division loans and offices
              
              
              (275
              )
              
              
              -
              
              
              
              (275
              )Amortization
              
              
              -
              
              
              
              (223
              )
              
              
              (223
              )Balance,
      December 31, 2007
              
              $
              22,031
              
              
              $
              1,096
              
              
              $
              23,127Amortization
              
              
              -
              
              
              
              (223
              )
              
              
              (223
              )Balance,
      December 31, 2008
              
              $
              22,031
              
              
              $
              873
              
              
              $
              22,904


The
goodwill and core deposit intangible assets relate primarily to the NWB
Financial Corporation acquisition in November 2005.  During 2007, the
Bank sold the loan portfolio and office locations of its Consumer Finance
Division, thus eliminating goodwill recognized on the 2003 purchase of the Coos
Bay Consumer Finance office.  In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, the Company does not recognize amortization expense related to
its goodwill but completes periodic assessments of goodwill
impairment.  Impairment, if deemed to exist, would be charged to
noninterest expense in the period identified.  Management completed
its annual assessment of goodwill impairment as of December 31, 2008 and
determined no impairment currently exists.





Forecasted
amortization expense is approximately $223 per year from 2009 through 2012 for
the core deposit intangible assets acquired during 2005.





7.    Other Assets:





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





2008
              
              
              2007Deferred
      taxes
              
              $
              4,849
              
              
              $
              2,208Prepaid
      expenses and other assets
              
              
              2,673
              
              
              
              1,473$
              7,522
              
              
              $
              3,681
  -59-


8.    Deposits:





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





2008
              
              
              2007Less
      than three months
              
              $
              89,498
              
              
              $
              37,616Three
      months to one year
              
              
              33,674
              
              
              
              24,689One
      to three years
              
              
              21,482
              
              
              
              3,526Thereafter
              
              
              5,891
              
              
              
              938$
              150,545
              
              
              $
              66,769


9.  Federal Funds
Purchased:





The Bank
has unsecured federal funds borrowing lines with correspondent banks totaling
$118,000 at December 31, 2008 of which $24,000 was outstanding as of December
31, 2008.  The outstanding balance of these overnight funds was due
January 2, 2009 and carried an interest rate of 0.45%.  At December
31, 2007, there was $5,360 borrowed against these lines.





The Bank
also has a secured federal funds borrowing line available from the Federal
Reserve Bank totaling $49,935 at December 31, 2008.  The Federal
Reserve Bank borrowing line is secured through the pledging of approximately
$66,579 of commercial loans under the Bank’s Borrower-In-Custody program. At
December 31, 2008, the outstanding balance was $20,000, consisting of two,
equal, advances.   The first is due January 15, 2009 and carries
an interest rate of 0.28% and the second is due February 26, 2009 and carries an
interest rate of 0.42%.   No balance was outstanding against this
line as of December 31, 2007.





10.  Federal Home Loan Bank
Borrowings:





The Bank
has a borrowing limit with the FHLB equal to 30% of total assets, subject to
discounted collateral and stock holdings.  At December 31, 2008, the
borrowing line was approximately $327,253.  At December 31, 2008,
there was $194,500 borrowed on this line, including an overnight $60,000 Cash
Management Advance and $134,500 in term advances.  FHLB stock, funds
on deposit with FHLB, and loans are pledged as collateral for borrowings from
FHLB.  At December 31, 2008, the Bank had pledged approximately
$441,782 in real estate loans and securities to the FHLB ($273,978 in discounted
pledged collateral).





-60-


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





Rate
              
              
              2008
              
              
              2007Cash
      Management Advance
              
              
              0.63
              %
              
              $
              60,000
              
              
              $
              46,0002008
              
              
              2.99
      - 4.65
              %
              
              
              -
              
              
              
              110,5002009
              
              
              0.50
      - 5.33
              %
              
              
              99,500
              
              
              
              8,0002010
              
              
              3.03
      - 5.28
              %
              
              
              11,500
              
              
              
              8,0002011
              
              
              2.39
      - 5.28
              %
              
              
              10,000
              
              
              
              2,5002012
              
              
              3.66
      - 5.28
              %
              
              
              4,500
              
              
              
              2,5002013
              
              
              2.93
      - 4.27
              %
              
              
              7,0002016
              
              
              5.05
      - 5.05
              %
              
              
              2,000
              
              
              
              2,000$
              194,500
              
              
              $
              179,500


11.  Junior Subordinated
Debentures:





In
connection with the November 2005 acquisition of NWB Financial Corporation, the
Company formed a wholly-owned Delaware statutory business trust subsidiary,
Pacific Continental Corporation Capital Trust (the “Trust”), which issued $8,248
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 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 per capital security.




Pacific
Continental has entered into contractual arrangements which, taken collectively,
fully and unconditionally guarantee payment of: (1) accrued and unpaid
distributions required to be paid on the Trust Preferred Securities, (2) the
redemption price with respect to any Trust Preferred Securities called for
redemption by the Trust, and (3) payments due upon a voluntary or involuntary
dissolution, winding up, or liquidation of the Trust.  The Trust
Preferred Securities are mandatorily redeemable upon maturity of the debentures
on January 7, 2036, or upon earlier redemption as provided in the
indenture.  Pacific Continental has the right to redeem the debentures
purchased by the Trust in whole or in part, on or after, January, 7,
2011.  As specified in the indenture, if the debentures are redeemed
prior to maturity, the redemption price will be the principal amount and any
accrued interest.  For the years ended December 31, 2008, 2007 and
2006, the Company recognized net interest expense of $498, $508 and $510,
respectively, related to the Trust Preferred Securities.







-61-


12.  Income Taxes:





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





2008
              
              
              2007
              
              
              2006Currently
      payable:Federal
              
              $
              8,571
              
              
              $
              7,608
              
              
              $
              7,626State
              
              
              501
              
              
              
              556
              
              
              
              8359,072
              
              
              
              8,164
              
              
              
              8,461Deferred:Federal
              
              
              (1,416
              )
              
              
              (288
              )
              
              
              (905
              )State
              
              
              (217
              )
              
              
              (46
              )
              
              
              (144
              )(1,633
              )
              
              
              (334
              )
              
              
              (1,049
              )Total
      provision for income taxes
              
              $
              7,439
              
              
              $
              7,830
              
              
              $
              7,412


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:







2008
                
                
                
                
                
                2007
                
                
                
                
                
                2006Expected
      federal incometax
      provision
                
                $
                7,132
                
                
                
                35.00
                %
                
                $
                7,268
                
                
                
                35.00
                %
                
                $
                7,023
                
                
                
                35.00
                %State
      income tax, net offederal
      income tax effect
                
                
                660
                
                
                
                3.24
                %
                
                
                733
                
                
                
                3.53
                %
                
                
                726
                
                
                
                3.62
                %Municipal
      securities tax benefit
                
                
                (113
                )
                
                
                -0.55
                %
                
                
                (47
                )
                
                
                -0.23
                %
                
                
                (42
                )
                
                
                -0.21
                %Equity-based
      compensation
                
                
                120
                
                
                
                0.59
                %
                
                
                199
                
                
                
                0.96
                %
                
                
                184
                
                
                
                0.92
                %Benefit
      of purchased tax credits
                
                
                (315
                )
                
                
                -1.55
                %
                
                
                (395
                )
                
                
                -1.90
                %
                
                
                (231
                )
                
                
                -1.15
                %Deferred
      tax rate adjustmentsand
      other
                
                
                (45
                )
                
                
                -0.22
                %
                
                
                72
                
                
                
                0.35
                %
                
                
                (248
                )
                
                
                -1.24
                %Provision
      for income taxes
                
                $
                7,439
                
                
                
                36.51
                %
                
                $
                7,830
                
                
                
                37.71
                %
                
                $
                7,412
                
                
                
                36.94
                %
   The tax
benefit associated with stock option plans reduced taxes payable by $59, $301
and $803 at December 31, 2008, 2007 and 2006, respectively.  Such
benefit is credited to common stock.





-62-


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





2008
              
              
              2007
              
              
              2006Assets:Allowance
      for loan losses
              
              $
              4,280
              
              
              $
              3,052
              
              
              $
              2,811Basis
      adjustments on loans
              
              
              365
              
              
              
              141
              
              
              
              200Reserve
      for self-funded insurance
              
              
              66
              
              
              
              104
              
              
              
              70Oregon
      purchased tax credits
              
              
              1,491
              
              
              
              1,248
              
              
              
              887Nonqualified
      stock options
              
              
              128
              
              
              
              59
              
              
              
              37Net
      unrealized losses on securities
              
              
              973
              
              
              
              14
              
              
              
              153Nonaccrual
      loan interest
              
              
              86
              
              
              
              -
              
              
              
              -Total
      deferred tax assets
              
              
              7,389
              
              
              
              4,618
              
              
              
              4,158Liabilities:Federal
      Home Loan Bank stock dividends
              
              
              582
              
              
              
              582
              
              
              
              597Excess
      tax over book depreciation
              
              
              610
              
              
              
              394
              
              
              
              330Prepaid
      expenses
              
              
              238
              
              
              
              179
              
              
              
              179NWBF
      acquisition adjustments
              
              
              336
              
              
              
              439
              
              
              
              572Other,
      principally loan orig. costs and deferred fees
              
              
              580
              
              
              
              816
              
              
              
              828Total
      deferred tax liabilities
              
              
              2,346
              
              
              
              2,410
              
              
              
              2,506Net
      deferred tax assets/(liabilities)
              
              $
              5,043
              
              
              $
              2,208
              
              
              $
              1,652


Purchased
tax credits of $1,491 will be utilized to offset future state income
taxes.  These credits are recognized over a five year period beginning
in the year of purchase and have an eight year carry forward
period.  If unused, the credits will expire in the following
years:  $614 in 2017, $450 in 2018, $285 in 2019 and $142 in
2020.  It is anticipated that all credits will be fully utilized and,
accordingly, Management has not reduced these deferred tax assets by a valuation
allowance.  Management also believes that all net deferred tax assets
will be recognized in the normal course of operations and, accordingly, deferred
tax assets as of December 31, 2008 have not been reduced by a valuation
allowance.





The
Company adopted the provision of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (“FIN 48) on January 1, 2007.  As a result
of the implementation of FIN 48, the Company recognized no liability for
unrecognized tax benefits.  The Company files tax returns with the
Internal Revenue Service and the Oregon Department of Revenue.  Tax
returns for years subsequent to 2004 remain open to examination by these taxing
jurisdictions.  The Company’s policy with respect to interest and
penalties ensuing from income tax settlements is to recognize them as
noninterest expense.





13.  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 $713, $784 and $748 in 2008, 2007 and 2006,
respectively.





14.  Stock Option
Plans:





Pursuant
to the approval of the 2006 Stock Option and Equity Compensation Plan (the “2006
SOEC Plan”) at the annual stockholders’ meeting in April 2006, incentive stock
options, nonqualified stock options, restricted stock, restricted stock units,
or stock appreciation rights may be awarded to attract and retain the best
available personnel for positions of responsibility with the corporation and its
subsidiaries.  Upon adoption of the 2006 SOEC Plan, the Company’s 1999
Employees’ Stock Option Plan (“1999 ESOP Plan”) and the Directors’ Stock Option
Plan (“1999 DSOP Plan”) were cancelled and no longer available for future
grants.  The exercise price for shares of common stock subject to an
option under the SOEC Plan shall not be less than 100% of the fair market value
of a share of common stock as of the date of grant of the option; provided,
however, that in the case of an incentive stock option granted to an employee
who immediately before the grant of such incentive stock option is a
stockholder-employee, the incentive stock option exercise price shall be at
least 110% of the fair value of the common stock as of the date of grant of the
incentive stock option. The Compensation Committee of the Board of Directors may
impose any terms or conditions on the vesting of an award that it determines to
be appropriate.  For the year ended December 31, 2008, the Company
issued 94 incentive stock options, of which 92, 312 have a fair value of $2.59
per unit and 2,000 have a fair value of $2.40 per unit, to selected
employees.





-63-


Pursuant
to the Company’s 2006 SOEC Plan, stock appreciation rights (SARs) may be granted
to employees.  The stock appreciation rights may be settled in cash or
cash and common stock as determined at the date of issuance.  The
Compensation Committee or the Board of Directors determines vesting provisions
when awards are granted, and the awards granted generally vest over three or
four years and have a maximum life of ten years.  SARs settled in
stock are recognized as equity-based awards while SARs settled in cash are
recognized on the balance sheet as liability-based awards, both of which are
granted at the fair market value of our common stock at the grant
date.  The grant-date fair value of the liability based awards vesting
in the current period, along with the change in fair value of the awards during
the period, are recognized as compensation expense and as an adjustment to the
recorded liability.  For the year ended December 31, 2008, the Company
issued 221 SARs, of which 121,475 have a fair value of $2.17 per unit and 7,400
have a fair value of $1.87 per unit and are to be settled in stock and 92,374
have a fair value of $2.59 per unit and 1,440 have a fair value of $1.63 per
unit and are to be settled in cash.





Also,
pursuant to the Company’s 2006 SOEC Plan, non-qualified options awards and
restricted stock awards may be granted to directors.  Stock options
may be granted at exercise prices of not less than 100% of the fair market value
of our common stock at the grant date.  Restricted stock awards may be
granted at the fair market value on the date of the grant.  The
maximum life of options granted under this plan is ten years from the grant
date.  The Company issued 21,120 nonqualified stock options, with a
fair value of $2.65 per option, during the third quarter 2006.  For
the year ended December 31, 2007, the Company issued 17,292 nonqualified stock
options, with a fair value of $3.09 per option.  For the year ended
December 31, 2008, the company issued 4 restricted stock awards to its
Directors, with a fair value of $14.44 per share, the closing share price on the
date of the grant.





The
following tables identify the compensation expenses and tax benefits received by
the Company according to the compensation plans and awards described above for
the years 2008 and 2007:








2008
            
            
            2007Comp.
      Exp.
            
            
            Tax
      Benefit
            
            
            Comp.
      Exp.
            
            
            Tax
      Benefit1999
      ESOP Plan
            
            $
            159
            
            
            $
            -
            
            
            $
            282
            
            
            $
            -1999
      DSOP Plan
            
            
            -
            
            
            
            -
            
            
            
            7
            
            
            
            32006
      SOEC - ISOs
            
            
            158
            
            
            
            -
            
            
            
            108
            
            
            
            -2006
      SOEC - SARS stock
            
            
            185
            
            
            
            68
            
            
            
            128
            
            
            
            492006
      SOEC - SARS cash
            
            
            37
            
            
            
            14
            
            
            
            26
            
            
            
            102006
      SOEC - DSOs
            
            
            27
            
            
            
            10
            
            
            
            26
            
            
            
            102006
      SOEC - DRSA
            
            
            60
            
            
            
            22
            
            
            
            -
            
            
            
            -Total
            
            $
            626
            
            
            $
            114
            
            
            $
            577
            
            
            $
            72


-64-


Stock
Options –


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







Year
      Ended December 31,2008
              
              
              2007
              
              
              2006Expected
      life in years (1)
              
              
              7.01
              
              
              
              5.61
              
              
              
              5.26Volatility
      (1)
              
              
              18.93
              %
              
              
              17.87
              %
              
              
              17.97Interest
      Rate (2)
              
              
              3.44
              %
              
              
              4.81
              %
              
              
              4.70
              %Yield
      Rate (3)
              
              
              2.77
              %
              
              
              1.58
              %
              
              
              1.77
              %Average
      Fair-Value
              
              $
              2.59
              
              
              $
              4.18
              
              
              $
              3.78


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


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


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





For any
future grants, as required by SFAS 123R, the Company will estimate the impact of
forfeitures based  on our historical experience with previously
granted stock options, and consider the impact of the forfeitures when
determining the amount of expense to record for the stock options
granted.  For stock options issued prior to the adoption of SFAS 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 adjusted for all stock dividends and splits for all
Company plans during the current fiscal year is presented below:


Total
      Stock Options
              
              Shares
                (in
      thousands)
              
              
              Average
      Price Per Share
              
              
              Weighted-Average
      Remaining Contractual Life
              
              
              Aggregate
      Intrinsic ValueOutstanding
      at December 31, 2007
              
              
              698
              
              
              $
              13.46Granted
              
              
              94
              
              
              
              14.44Exercised
              
              
              (141
              )
              
              
              10.27Forfeited
      or expired
              
              
              (23
              )
              
              
              15.71Outstanding
      at December 31, 2008
              
              
              628
              
              
              $
              14.24
              
              
              
              4.04
              
              
              $
              871Exercisable
      at December 31, 2008
              
              
              423
              
              
              $
              13.35
              
              
              
              2.26
              
              
              $
              819
  -65-


Nonvested
      Options
              
              Shares
                (in
      thousands)
              Weighted-Average
      Grant Date Fair ValueOutstanding
      at December 31, 2007
              233
              
              $           3.48Granted
              
              
              94
              
              2.59Vested
              
              
              (111)
              
              4.31Forfeited
      or expired
              
              (11)
              
              2.80Outstanding
      at December 31, 2008
              205
              
              $           2.66





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





Year
      Ended December 312008
              
              
              2007
              
              
              2006Total
      intrinsic value ofstock
      options exercised
              
              $
              488
              
              
              $
              1,206
              
              
              $
              2,883


Stock
Appreciation Rights -


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





Year
      Ended December 31,2008
              
              
              2007
              
              
              2006Expected
      life in years (1)
              
              
              6.01
              
              
              
              6.00
              
              
              
              6.00Volatility
      (1)
              
              
              16.99
              %
              
              
              18.68
              %
              
              
              19.51
              %Interest
      Rate (2)
              
              
              3.21
              %
              
              
              4.81
              %
              
              
              4.72
              %Yield
      Rate (3)
              
              
              2.78
              %
              
              
              1.58
              %
              
              
              1.78
              %Average
      Fair-Value
              
              $
              2.15
              
              
              $
              4.45
              
              
              $
              4.27




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


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


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





-66-


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





Total
      SAR - Stock Awards
              
              Awards
                (in
      thousands)
              
              
              Average
      Price Per Award
              
              
              Weighted-Average
      Remaining Contractual LifeOutstanding
      at December 31, 2007
              
              
              155
              
              
              $
              17.44Granted
              
              
              128
              
              
              
              14.40Exercised
              
              
              -
              
              
              
              -Forfeited
      or expired
              
              
              (17
              )
              
              
              16.58Outstanding
      at December 31, 2008
              
              
              266
              
              
              $
              16.03
              
              
              
              8.50Exercisable
      at December 31, 2008
              
              
              52
              
              
              $
              17.09
              
              
              
              7.87


Nonvested
      SAR - Stock Awards
              
              Awards
                (in
      thousands)
              Weighted-Average
      Grant Date Fair ValueOutstanding
      at December 31, 2007
              137
              
              $           4.22Granted
              
              
              128
              
              2.15Vested
              
              
              (36)
              
              4.21Forfeited
      or expired
              
              (14)
              
              3.63Outstanding
      at December 31, 2008
              
              215
              
              $           3.03


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





Total
      SAR - Cash Awards
              
              Awards
                (in
      thousands)
              
              
              Average
      Price Per Award
              
              
              Weighted-Average
      Remaining Contractual LifeOutstanding
      at December 31, 2007
              
              
              116
              
              
              $
              17.41Granted
              
              
              93
              
              
              
              14.43Exercised
              
              
              -
              
              
              
              -Forfeited
      or expired
              
              
              (17
              )
              
              
              16.33Outstanding
      at December 31, 2008
              
              
              192
              
              
              $
              16.06
              
              
              
              8.48Exercisable
      at December 31, 2008
              
              
              39
              
              
              $
              17.06
              
              
              
              7.86


Nonvested
      SAR - Cash Awards
              
              Awards
                (in
      thousands)
              Weighted-Average
      Grant Date Fair ValueOutstanding
      at December 31, 2007
              102
              
              $           4.22Granted
              
              
              93
              
              1.85Vested
              
              
              (27)
              
              4.15Forfeited
      or expired
              
              (15)
              
              3.30Outstanding
      at December 31, 2008
              
              153
              
              $           2.88
  -67-




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





At
December 31, 2008, the Company has estimated unrecognized compensation expense
of approximately $432, $427, and $132 for unvested stock options, SAR – stock
awards and SAR – cash awards, respectively.  These amounts are based
on a forfeiture rate assumption of 20% for all awards granted to
employees.  The weighted-average period of time the unrecognized
compensation expense will be recognized for the unvested stock options, SAR –
stock awards and SAR – cash awards is approximately 2.3, 2.4 and 2.8 years,
respectively.





15.  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:


2008
              
              
              2007Balance,
      beginning of year
              
              $
              1,462
              
              
              $
              2,242Additions
      or renewals
              
              
              549
              
              
              
              249Amounts
      collected
              
              
              (248
              )
              
              
              (1,029
              )Balance,
      end of year
              
              $
              1,763
              
              
              $
              1,462
   In addition, there
were $478 in commitments to extend credit to directors and officers at
December 31, 2008, which are included among loan commitments, disclosed
Note 17.





16.  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 to 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.





-68-


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





2008
              
              
              2007Commitments
      to extend credit (principallyvariable
      rate)
              
              $
              182,609
              
              
              $
              279,655Letters
      of credit and financial guarantees written
              
              
              2,298
              
              
              
              2,449


17.  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:




2008
              
              
              
              
              
              2007Carrying
              
              
              
              
              
              CarryingAmount
              
              
              Fair
      Value
              
              
              Amount
              
              
              Fair
      ValueFinancial
      assets:Cash
      and cash equivalents
              
              $
              20,455
              
              
              $
              20,455
              
              
              $
              26,077
              
              
              $
              26,077Securities
      available for sale
              
              
              54,933
              
              
              
              54,933
              
              
              
              53,993
              
              
              
              53,993Loans
      held for sale
              
              
              410
              
              
              
              410
              
              
              
              -
              
              
              
              -Loans,
      net of allowancefor
      loan losses
              
              
              945,377
              
              
              
              947,091
              
              
              
              813,647
              
              
              
              809,910Interest
      receivable
              
              
              4,021
              
              
              
              4,021
              
              
              
              3,652
              
              
              
              3,652Federal
      Home LoanBank
      stock
              
              
              10,652
              
              
              
              10,652
              
              
              
              3,795
              
              
              
              3,795Financial
      liabilities:Deposits
              
              
              722,437
              
              
              
              723,188
              
              
              
              644,424
              
              
              
              644,293Federal
      funds purchased
              
              
              44,000
              
              
              
              44,000
              
              
              
              5,360
              
              
              
              5,360Federal
      Home Loan Bankborrowings
              
              
              194,500
              
              
              
              196,001
              
              
              
              179,500
              
              
              
              179,819Junior
      subordinated debentures
              
              
              8,248
              
              
              
              7,903
              
              
              
              8,248
              
              
              
              7,758Accrued
      interest payable
              
              
              395
              
              
              
              395
              
              
              
              324
              
              
              
              324


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





Securities available for sale 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.





-69-


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





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





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





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





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





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





Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value
Measures”.  This statement defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements.  The statement requires
fair value measurement disclosure of all assets and liabilities that are carried
at fair value on either a recurring or non-recurring basis.  The
Company determines fair value based upon quoted prices when available or through
the use of alternative approaches, such as matrix or model pricing, when market
quotes are not readily accessible or available.  The valuation
techniques used are based on observable and unobservable
inputs.  Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the Company’s market
assumptions.  These two types of inputs create the following fair
value hierarchy:





Level 1 –
Quoted prices for identical instruments in active markets.





Level 2 –
Quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active and
model-derived valuations whose inputs are observable or whose significant value
drivers are observable.





Level 3 –
Unobservable inputs are used to measure fair value to the extent that observable
inputs are not available.  The Company’s own data used to develop
unobservable inputs shall be adjusted for market consideration when reasonably
available.





Financial
instruments are broken down in the table below by recurring or nonrecurring
measurement status.  Recurring assets are initially measured at fair
value and are required to be remeasured at fair value in the financial
statements at each reporting date.  Assets measured on a nonrecurring
basis are assets that, due to an event or circumstance, were required to be
remeasured at fair value after initial recognition in the financial statements
at some time during the reporting period.





-70-


The table
below shows assets measured at fair value as of December 31, 2008:





Fair
      ValueCarrying
      Value
              Quoted
      Prices in Active Markets for Identical Assets
                (Level
      1)
              Significant
      Other Observable Inputs
                (Level
      2)
              Significant
      Unobservable Inputs
                (Level
      3)
              Year
      Ended December 31,
                2008
                Total
      LossRecurring ItemsAvailable-for-sale
      securities
              $       54,933
              
              $                   -
              $         54,933
              $                    -
              $                   -Non-Recurring ItemsGoodwill
              $       22,031
              
              
              
              22,031
              -Loans
      measured for impairment(net
      of guarantees)
              1,927
              
              -
              -
              1,927
              887Other
      real estate owned
              3,806
              
              -
              -
              3,806
              49Total
              $       82,697
              
              $                   -
              $         54,933
              $          27,764
              $              936


18.  Commitments and Legal
Contingencies:





The
Company has entered into employment agreements with two key executive
officers.  The employment agreements provide for minimum aggregate
annual base salaries of $550,000, plus performance adjustments, life insurance
coverage, and other perquisites commonly found in such
agreements.  The two employment agreements expire in 2011 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.





19.  Regulatory
Matters:





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





Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios of Total and Tier I
capital to risk-weighted assets and of Tier I capital to leverage
assets.  Management believes, as of December 31, 2008, that the
Company and the Bank meet all capital adequacy requirements to which they are
subject.





As of
December 31, 2008 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.





-71-


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).





Actual
              
              
              
              
              
              For
      CapitalAdequacy
      Purposes
              
              
              To
      Be WellCapitalized Under Prompt
      CorrectiveAction
    ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              RatioAs
      of December 31, 2008:Total
      capital (to riskweighted
      assets)
              
              $
              113,600
              
              
              
              11.11
              %
              
              $
              81,773
              
              
              
              8
              %
              
              $
              102,216
              
              
              
              10
              %Tier
      I capital (to riskweighted
      assets)
              
              
              102,424
              
              
              
              10.02
              %
              
              
              40,887
              
              
              
              4
              %
              
              
              61,330
              
              
              
              6
              %Tier
      I capital (to leverageassets)
              
              
              102,424
              
              
              
              9.68
              %
              
              
              42,306
              
              
              
              4
              %
              
              
              52,882
              
              
              
              5
              %As
      of December 31, 2007:Total
      capital (to riskweighted
      assets)
              
              $
              101,065
              
              
              
              10.97
              %
              
              $
              73,720
              
              
              
              8
              %
              
              $
              92,150
              
              
              
              10
              %Tier
      I capital (to riskweighted
      assets)
              
              
              92,194
              
              
              
              10.00
              %
              
              
              36,860
              
              
              
              4
              %
              
              
              55,290
              
              
              
              6
              %Tier
      I capital (to leverageassets)
              
              
              92,194
              
              
              
              10.11
              %
              
              
              36,491
              
              
              
              4
              %
              
              
              45,614
              
              
              
              5
              %





20.  Parent Company Financial
Information:





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





BALANCE
SHEETS


December
31


2008
              
              
              2007Assets:Cash
      deposited with the Bank
              
              $
              621
              
              
              $
              337Prepaid
      expenses
              
              
              6
              
              
              
              4Deferred
      income taxes
              
              
              -
              
              
              
              -Equity
      in Trust
              
              
              248
              
              
              
              248Investment
      in the Bank, at cost plus equityin
      earnings
              
              
              123,670
              
              
              
              115,300$
              124,545
              
              
              $
              115,889Liabilities
      and stockholders' equity:Liabilities
              
              $
              132
              
              
              $
              132Junior
      subordinated debentures
              
              
              8,248
              
              
              
              8,248Stockholders'
      equity
              
              
              116,165
              
              
              
              107,509$
              124,545
              
              
              $
              115,889
  -72-






STATEMENTS
OF INCOME


For the
Periods Ended December 31





2008
              
              
              2007
              
              
              2006Income:Cash
      dividends from the Bank
              
              $
              4,100
              
              
              $
              2,610
              
              
              $
              -4,100
              
              
              
              2,610
              
              
              
              -Expenses:Interest
      expense
              
              
              498
              
              
              
              509
              
              
              
              510Investor
      relations
              
              
              46
              
              
              
              52
              
              
              
              85Legal,
      registration expense, and other
              
              
              94
              
              
              
              74
              
              
              
              80Personnel
      costs paid to Bank
              
              
              110
              
              
              
              109
              
              
              
              95748
              
              
              
              744
              
              
              
              770Income
      (loss) before income tax (expense) benefitand
      equity in undistributedearnings
      of the Bank
              
              
              3,352
              
              
              
              1,866
              
              
              
              (770
              )Income
      tax  (expense) benefit
              
              
              (1,274
              )
              
              
              (709
              )
              
              
              293Equity
      in undistributed earnings of the Bank
              
              
              10,861
              
              
              
              11,778
              
              
              
              13,132Net
      income
              
              $
              12,939
              
              
              $
              12,935
              
              
              $
              12,655
  -73-


STATEMENTS
OF CASH FLOWS


For the
Periods Ended December 31


2008
              
              
              2007
              
              
              2006Cash
      flows from operating activities:Net
      income
              
              $
              12,939
              
              
              $
              12,935
              
              
              $
              12,655Adjustments
      to reconcile net incometo
      net cash provided by operatingactivities:Equity
      in undistributed earnings of
              
              
              (10,861
              )
              
              
              (11,778
              )
              
              
              (13,132
              )the
      BankOther,
      net
              
              
              (2,542
              )
              
              
              (1,609
              )
              
              
              66Net
      cash used in operating activities
              
              
              (464
              )
              
              
              (452
              )
              
              
              (411
              )Cash
      flows from investing activities:Dividend
      received from bank subsidiary
              
              
              4,100
              
              
              
              2,610
              
              
              
              -Net
      cash provided by investing activities
              
              
              4,100
              
              
              
              2,610
              
              
              
              -Cash
      flows from financing activities:Proceeds
      from stock options exercised
              
              
              1,445
              
              
              
              1,939
              
              
              
              3,547Dividends
      paid
              
              
              (4,797
              )
              
              
              (4,175
              )
              
              
              (3,381
              )Net
      cash provided by (used in) financing activities
              
              
              (3,352
              )
              
              
              (2,236
              )
              
              
              166Net
      increase (decrease) in cash
              
              
              284
              
              
              
              (78
              )
              
              
              (245
              )Cash,
      beginning of period
              
              
              337
              
              
              
              415
              
              
              
              660Cash,
      end of period
              
              $
              621
              
              
              $
              337
              
              
              $
              415




21.  Subsequent
Events:





On
January 7, 2009, the Company completed a private placement stock offering
for 750,000 shares of common stock at a price of $13.50 per share. The net
proceeds from the offering, after placement fees and estimated transaction
expenses, are approximately $9.6 million. Proceeds of the offering will be
available to support ongoing operating growth and to fund possible future
acquisitions.





Effective
January 1, 2009, the FDIC has increased federal deposit insurance premiums by 7
basis points.  The increase of these premiums will add to our cost of
operations and could have a significant impact on the Company.  New
rules governing deposit insurance premiums are expected to go into effect on
April 1, 2009. These new rules are intended to make assessments more balanced by
requiring riskier institutions to pay a larger share.





In
addition, during the first quarter of 2009, the FDIC adopted an interim rule
imposing an emergency special assessment of 10 basis points on insured
institutions, and granting the FDIC the authority to impose an additional
emergency special assessment after June 30, 2009 of up to 10 basis points if
necessary.  The assessment will be calculated on June 30, 2009 deposit
balances and collected on September 30, 2009.  Based on the Company’s
December 31, 2008 deposits subject to FDIC insurance assessments, the special
assessment will be approximately $750 thousand.








-74-





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





None





ITEM 9A Controls and
Procedures





Evaluation
of Disclosure Controls and Procedures





An
evaluation was carried out under the supervision and with the participation of
the Company’s management, including the Chief Executive Officer (“CEO”) and
Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls
and procedures, as required by Rule 13a-15(b) of the Securities Exchange Act of
1934.  Based on that evaluation, the CEO and CFO have concluded that
as of the end of the period covered by this report, our disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized, and timely
reported as provided in the SEC rules and forms.  As a result of this
evaluation, there were no significant changes in our internal control over
financial reporting during the three months ended December 31, 2008 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.





Management’s
Report on Internal Control Over Financial Reporting





The
management of the Company 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,
2008.  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, 2008, 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
10                           Directors, Executive
Officers, and Corporate Governance





The
information regarding “Directors and Executive Officers of the Registrant” of
the Company is incorporated by reference from the sections entitled “ELECTION OF
DIRECTORS—Nominees for Director,” “MANAGEMENT” and “COMPLIANCE WITH SECTION
16(a) FILING REQUIREMENTS” of the Company’s 2009 Annual Meeting Proxy Statement
(the “Proxy Statement”).





-75-




In
September of 2003, consistent with the requirements of The Sarbanes-Oxley Act of
2002, the Company adopted a Code of Ethics applicable to senior financial
officers including the principal executive officer.  The Code of
Ethics was amended in 2007 to reflect non-material changes and is filed as
Exhibit 14 to the Company’s Annual Report on Form 10-K for the year-end December
31, 2008.  The Code of Ethics can also be accessed electronically by
visiting the Company’s website.





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





ITEM
11                           Executive
Compensation





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





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





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





ITEM
13                           Certain Relationships and
Related Transactions and Director Independence





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





ITEM
14                           Principal Accounting 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.


-76-


ITEM
15                           Exhibits and Financial
Statement Schedules





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





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





(a)(2)                 Exhibit
Index





Exhibit


3.1                   
Amended Articles of Incorporation (1)


3.2                   
Amended and Restated 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                 
Change of Control/Salary Continuation Agreement for Michael Reynolds
(5)


10.9                 
Change of Control/Salary Continuation Agreement for Daniel Hempy
(5)


10.10                 Change
of Control/Salary Continuation Agreement for Basant Singh (6)


10.11                 Executive
Employment Agreement for Roger Busse (7)


10.12                 Executive
Employment Agreement for Hal Brown (7)


10.13                 NWB
Financial Corporation Employee Stock Option Plan (8)


10.14                 NWB
Financial Corporation Director Stock Option Plan (8)


10.15
            Director
      Fee Schedule, Effective January 1,
2009


10.16
            Director
      Stock Trading Plan (7)


10.17
            Form
      of Common Stock Purchase Agreement between the Company and each of the
      Purchasers, dated as of January 6, 2009
(9)


10.18
            Form
      of Registration Rights Agreement between the Company and each of the
      Purchasers, dated as of January 6, 2009
(9)


14                     Code
of Ethics for Senior Financial Officers and Principal Executive Officer
(7)


Subsidiars (See Part I,
Item 1. Business of this Form 10K)


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


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


(1)
            Incorporated
      by reference to Exhibit 3 of the Company’s Quarterly Report on 10-Q for
      the Quarter ended June 30, 2007.(2)
            Incorporated
      by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q
      for the Quarter ended September 30, 2008.(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 99.1 - 99.5 of the Company’s S-8 Registration
      Statement (File No. 333-134702).(5)
            Incorporated
      by reference to Exhibits 10.1 and 10.2 of the Company’s Quarterly Report
      on 10-Q for the Quarter ended March 31, 2005.(6)
            Incorporated
      by reference to Exhibit 10.10 of the Registration Statement on Form S-4
      (File No. 333-128968).(7)
            Incorporated
      by reference to Exhibits 10.11, 10.12, 10.16 and 14 of the Company’s
      Annual Report on Form 10-K for the fiscal year ended December 31,
      2007.(8)
            Incorporated
      by reference to Exhibits 99.1 and 99.2 of the Company’s S-8 Registration
      Statement (File No. 333-130886).(9)
            Incorporated
      by reference to Exhibits 10.1 and 10.2 of the Company’s Current Report on
      Form 8-K filed January 8, 2009.






-77-







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 13, 2009.





PACIFIC
CONTINENTAL CORPORATION


(Company)











By:    /s/ Hal M. Brown


Hal Brown


Chief Executive Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities indicated on the 13th day of March, 2009.





Principal
Executive Officer








By   /s/  Hal M.
Brown                                          Chief
Executive Officer


Hal
Brown                                                      and
Director





Principal
Financial and Accounting Officer








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


Michael A.
Reynolds                                   Chief Financial
Officer





Remaining
Directors








By   /s/ Robert A.
Ballin                                         Chairman
of the Board


Robert A. Ballin





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


Donald G.
Montgomery                                                                                                    
Michael D. Holzgang








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


Larry G.
Campbell                                                                                                               
Donald L. Krahmer, Jr.








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


Cathi
Hatch                                                                              
 John H. Rickman








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


Michael S.
Holcomb                                                                         
R. Jay
Tejera








By   /s/  Michael E.
Heijer                                           Director


Michael E. Heijer


-78-




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
      13, 2009
            /s/ Hal
      BrownHal
      Brown, Chief Executive Officer





-79-








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
13,
2009                                              /s/
Michael A. Reynolds


Michael
A. Reynolds, Executive Vice President & CFO


-80-


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, 2008 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
13, 2009


-81-