Back to GetFilings.com



 

As Filed with the Securities & Exchange Commission on August 12, 2004
SECURITIES & EXCHANGE COMMISSION

FORM 10-Q


[ X ]   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2004.

[ ]   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______________ to ________________


SEC File Number: 0-30106    

 
PACIFIC CONTINENTAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)


 
OREGON
93-1269184
 
 
(State or Other Jurisdiction of
(I.R.S. Employer
 
 
Incorporation or Organization)
Identification Number)
 
 
 
 
 

111 West 7th Avenue
Eugene, Oregon 97401
(address of Principal Executive Offices) (Zip Code)

(541) 686-8685
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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

Indicate by check mark whether the Registrant is an accelerated filer (as defined by Exchange Act Rule 12b-2).
Yes __       No X

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:

Common Stock outstanding as of July 31, 2004:    6,864,035    

     
 


PACIFIC CONTINENTAL CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS


PART I
FINANCIAL INFORMATION
Page
 
 
 
Item 1.
Financial Statements
 
 
 
 
 
3
 
 
 
 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
 
8
 
 
 
Item 2.
10
 
 
 
Item 3.
15
 
 
 
Item 4.
15
 
 
 
PART II
 
 
 
 
Item 1.
Legal Proceedings
none
 
 
 
Item 2.
Changes in Securities, Use of Proceeds, and Issuer Repurchases of Equity Securities
none
 
 
 
Item 3.
Defaults Upon Senior Securities
none
 
 
 
Item 4.
16
 
 
 
Item 5.
Other Information
none
 
 
 
Item 6.
17
 
 
 
 
18
 
 
 
 
     
 
PART I
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
Amounts in $1,000’s
(Unaudited)

 
  
Quarter ended June 30,
Year to date June 30,
 
  
2004
2003
2004
2003
   
Interest income
    
 
    
 
    
 
    
 
  
Loans
  
$
6,727
  
$
6,628
  
$
13,194
  
$
12,598
  
Securities
    
233
    
77
    
447
    
180
  
Dividends on Federal Home Loan Bank stock
    
23
    
31
    
47
    
67
  
Federal funds sold
    
1
    
6
    
10
    
14
  
   
 
 
 
 
 
    
6,984
    
6,742
    
13,698
    
13,219
  
   
 
 
 
 
Interest expense
    
 
    
 
    
 
    
 
  
Deposits
    
718
    
763
    
1,423
    
1,517
  
Federal Home Loan Bank borrowings
    
249
    
314
    
554
    
614
  
Federal funds purchased
    
45
    
25
    
55
    
64
  
   
 
 
 
 
 
    
1,012
    
1,102
    
2,032
    
2,195
  
 
    
 
    
 
    
 
    
 
  
Net interest income
    
5,972
    
5,640
    
11,666
    
11,024
  
                           
Provision for loan losses
    
75
    
200
    
175
    
800
  
Net interest income after provision
    
5,897
    
5,440
    
11,491
    
10,224
  
Noninterest income
    
 
    
 
    
 
    
 
  
Service charges on deposit accounts
    
413
    
429
    
829
    
815
  
Other fee income, principally bankcard
    
350
    
266
    
677
    
519
  
Loan servicing fees
    
49
    
24
    
98
    
111
  
Mortgage banking income and gains on loan sales
    
 
266
    
 
374
    
 
475
    
 
949
  
Gain (loss) on sale of securities
    
(13
)
  
0
    
(13
)
  
0
  
Other noninterest income
    
87
    
76
    
163
    
139
  
   
 
 
 
 
 
    
1,152
    
1,169
    
2,229
    
2,533
  
   
 
 
 
 
Noninterest expense
    
 
    
 
    
 
    
 
  
Salaries and employee benefits
    
2,352
    
2,160
    
4,712
    
4,398
  
Premises and equipment
    
437
    
405
    
849
    
797
  
Bankcard processing
    
122
    
79
    
222
    
170
  
Business development
    
304
    
139
    
547
    
450
  
Other noninterest expense
    
684
    
998
    
1,446
    
1,762
  
   
 
 
 
 
 
    
3,899
    
3,781
    
7,776
    
7,577
  
   
 
 
 
 
Income before income taxes
    
3,150
    
2,828
    
5,944
    
5,178
  
Provision for income taxes
    
1,202
    
1,085
    
2,272
    
1,989
  
   
 
 
 
 
Net income
  
$
1,948
  
$
1,743
  
$
3,672
  
$
3,189
  
   
 
 
 
 
 
    3
 


 
  
 
 
 
 
Earnings per share
 
 
 
 
 
Basic
  
$
0.28
  
$
0.26
  
$
0.54
  
$
0.47
  
   
 
 
 
 
Diluted
  
$
0.28
  
$
0.26
  
$
0.52
  
$
0.47
  
   
 
 
 
 

Weighted average shares outstanding
  
 
 
 
 
Basic
    
6,846
    
6,742
    
6,823
    
6,735
  
   
 
 
 
 
Common stock equivalents
attributable to stock options
    
 
175
    
 
132
    
 
174
    
 
124
  
   
 
 
 
 
Diluted
    
7,021
    
6,874
    
6,997
    
6,759
  
   
 
 
 
 


 
    4
 
 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Amounts in $1,000’s
(Unaudited)

 
Quarter ended
June 30,
 
Year to date
June 30,
 
2004
2003
 
2004
2003
Net income
$1,948
$1,743
 
$3,672
$3,189
Unrealized gains (losses) on Investment Securities Unrealized gains (losses) arising during the period
 
Reclassification for (gains) losses included in statement of income
 
(646)
 
13
 
(135)
 
0
 
 
(374)
 
13
 
(216)
 
0
 
(633)
(135)
 
(361)
(216)
Income tax (expense) benefit
244
52
139
83
Net unrealized gains (losses) on securities available for sale
 
(389)
 
(83)
 
 
(222)
 
(133)
Comprehensive Income
$1,559
$1,660
 
$3,450
$3,056
 

 
    5
 
CONSOLIDATED BALANCE SHEETS
Amounts in $1,000’s
(Unaudited)

 
  
June 30,
December 31,
June 30,
 
 
2004
2003
2003
Assets
  
 
 
 
Cash and due from banks
  
$
15,923
  
$
24,149
  
$
17,917
  
Federal funds sold
    
729
    
1,387
    
9,719
  
   
 
 
 
Total cash and cash equivalents
    
16,652
    
25,536
    
27,636
  
 
    
 
    
 
    
 
  
Securities available-for-sale
    
27,755
    
30,029
    
12,058
  
Loans held for sale
    
1,543
    
1,958
    
3,881
  
Loans, less allowance for loan losses
    
396,165
    
348,894
   
345,152
  
Interest receivable
    
1,614
    
1,586
    
1,489
  
Federal Home Loan Bank stock
    
2,785
    
2,738
    
2,679
  
Property, net of accumulated depreciation
    
12,823
    
13,060
    
13,190
  
Foreclosed assets
    
343
    
411
    
3,152
  
Deferred income taxes
    
389
    
250
    
196
  
Other assets
    
640
    
1,337
    
683
  
   
 
 
 
Total assets
    
460,709
    
425,799
    
410,116
  
   
 
 
 
Liabilities and stockholders' equity
    
 
    
 
    
 
  
Deposits
    
 
    
 
    
 
  
Noninterest-bearing demand
    
126,126
    
125,576
    
113,444
  
Savings and interest-bearing checking
    
198,286
    
176,016
    
150,428
  
Time $100,000 and over
    
38,232
    
27,961
    
47,171
  
Other time
    
23,519
    
26,546
    
29,776
  
Total deposits
    
386,163
    
356,099
    
340,819
  
   
 
 
 
Federal funds purchased
    
11,975
    
-
    
-
  
Federal Home Loan Bank term advances
    
16,000
    
26,000
    
29,500
  
Accrued interest and other liabilities
    
1,363
    
1,466
    
764
  
                 
Total liabilities
    
415,501
    
383,565
    
371,083
  
   
 
 
 
Stockholders' equity
    
 
    
 
    
 
  
Common stock
    
27,237
    
26,619
    
26,156
  
Retained earnings
    
18,223
    
15,645
    
12,934
  
Accumulated other comprehensive income (loss)
    
(252
)
  
(30
)
  
(57
)
Total stockholders' equity
    
45,208
    
42,234
    
39,033
  
   
 
 
 
 
  
$
460,709
  
$
425,799
  
$
410,116
  
   
 
 
 


 
    6
 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in $1,000’s

(Unaudited)

 


 
  
For six months ended June 30,
 
  
2004
2003
 
  
 
 
Cash flows from operating activity:
    
 
    
 
  
Net cash provided by operating activities
    
4,999
    
6,170
  
   
 
 
Cash flows from investing activities
    
 
    
 
  
Proceeds from sales and maturities of securities
    
4,242
    
6,227
  
Purchase of securities
    
(2,015
)
  
(7,506
)
Loans made net of principal collections
    
(47,445
)
  
(29,012
)
Proceeds from sale of loans
    
-
    
7,940
  
Acquisition
    
-
    
(6,863
)
Purchase of property
    
(229
)
  
(360
)
   
 
 
Net cash used in investing activities
    
(45,447
)
  
(29,575
)
   
 
 
Cash flows from financing activities
    
 
    
 
  
Net increase in deposits
    
30,064
    
30,910
  
Increase (decrease) in fed funds purchased
    
11,975
    
(9,000
)
Increase (decrease) in Federal Home Loan Bank borrowings
    
(10,000
)
  
6,500
  
Proceeds from stock options exercised
    
619
    
188
  
Dividends paid
    
(1,094
)
  
(910
)
   
 
 
Net cash provided by financing activities
    
31,564
    
27,689
  
   
 
 
Net increase (decrease) in cash and cash equivalents
    
(8,884
)
  
4,284
  
 
    
 
    
 
  
Cash and cash equivalents, beginning of period
    
25,536
    
23,352
  
   
 
 
Cash and cash equivalents, end of period
  
$
16,652
  
$
27,636
  
   
 
 

 

 
    7
 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

A complete set of Notes to Consolidated Financial Statements is a part of the Bank’s Form 10-K filed March 18, 2004. The notes below are included because of material changes in the financial statements or to provide the reader with additional information not otherwise available. All numbers in the following notes are expressed in dollar thousands, except per share data.

1. Basis of Presentation
The accompanying interim condensed 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 Services Corporation (which owns and operates bank-related real estate) and PCB Loan Services Corporation (presently inactive). All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying condensed consolidated financial statements have been prepared by the Company without audit and in conformity with generally accepted accounting principles in the United States of America for interim financial information. The financial statements include all adjustments and normal accruals, which the Company considers necessary for a fair presentation of the results of operations for such interim periods. In preparing the condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, as of the date of the balance sheets and income and expenses for the periods. Actual results could differ from those estimates.

The balance sheet data as of December 31, 2003 was derived from audited financial statements, but does not include all disclosures contained in the Company’s 2003 Form 10-K.

The interim condensed consolidated financial statements should be read in conjunction with the December 31, 2003 consolidated financial statements, including the notes thereto, included in the Company’s 2003 Form 10-K.

2. Stock Option Plans

The Company applies the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock issued to Employees, in accounting for its stock option plans. Accordingly, no stock-based employee compensation expense is reflected in net income as all options were granted at an exercise price equal to the market value of the underlying common stock on the date of the grant. The following tables illustrate the effect on net income and earnings per share year-to-date June 30, 2004 and for the second quarter ended June 30, 2004 if the Company had applied the optional fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

 
    8
 


 
  
Year-to-Date
 
June 30, 2004
June 30, 2003
   
Net income – as reported
  
$
3,672
  
$3,189
Deduct total stock-based employee compensation expense
determined under fair value for all awards, net of related tax effects
    
 
(220
)
 
(180)
Net income – pro forma
  
$
3,452
  
$3,009
 
    
 
  
 
Earnings per share
    
 
  
 
Basic – as reported
  
$
0.54
  
$ 0.47
Basic – pro forma
  
$
0.51
  
$0.45
Diluted – as reported
  
$
0.52
  
$0.47
Diluted – pro forma
  
$
0.49
  
$0.44


 
  
For the Quarter Ended
 
  
June 30, 2004
June 30, 2003
   
Net income – as reported
  
$
1,948
  
$
1,743
  
Deduct total stock-based employee compensation expense
determined under fair value for all awards, net of related tax effects
    
 
(110
)
  
 
(90
)
Net income – pro forma
  
$
1,838
  
$
1,653
  
 
    
 
    
 
  
Earnings per share
    
 
    
 
  
Basic – as reported
  
$
0.28
  
$
0.26
  
Basic – pro forma
  
$
0.27
  
$
0.25
  
Diluted – as reported
  
$
0.28
  
$
0.26
  
Diluted – pro forma
  
$
0.26
  
$
0.24
  

3. Loans

Major classifications of loans at June 30, 2004, December 31, 2003, and June 30, 2003 are as follows:

 
  
June 30, 2004
December 31, 2003
June 30, 2003
                     
Commercial loans
  
$
97,056
  
$
89,128
  
$
93,102
  
Real estate loans
    
294,790
    
255,150
    
247,758
  
Consumer loans
    
11,236
    
11,424
    
11,335
  
   
 
 
 
 
    
403,082
    
355,702
    
352,195
  
Deferred loan origination fees
    
(1,787
)
  
(1,583
)
  
(1,512
)
   
 
 
 
 
    
401,295
    
354,119
    
350,683
  
Allowance for loan losses
    
(5,130
)
  
(5,225
)
  
(5,531
)
   
 
 
 
 
  
$
396,165
  
$
348,894
  
$
345,152
  


 
    9
 
 
Allowance for loan losses

 
  
2004
2003
   
Balance, January 1
  
$
5,225
  
$
4,403
  
Provision charged to income
    
175
    
800
  
Loans charged against allowance
    
(308
)
  
(669
)
Loans recovered against allowance
    
38
    
806
  
Acquisition
    
-
    
190
  
   
 
 
Balance, June 30
  
$
5,130
  
$
5,531
  



The recorded investment in restructured and other impaired loans, net of government guarantees, totaled $3,357 and $3,605 at June 30, 2004 and 2003, respectively. Impaired loans at June 30, 2004 included $1,461 of nonaccrual loans and a $1,896 restructured and performing loan. The specific valuation allowance for loan losses related to these impaired loans was approximately $703 and $567 at June 30, 2004 and 2003, respectively and is included in the ending allowances shown above. The average recorded investment in impaired loans was approximately $3,250 and $6,500 for the first six months of 2004 and 2003, respectively. Interest income recognized on restructured and impaired loans was $20 and $60 during the first six months 2004 and 2003, respectively.
A substantial portion of the loan portfolio is collateralized by real estate, and is, therefore, susceptible to changes in local market conditions. It is management’s opinion that the allowance for loan losses is adequate to absorb known and inherent risks in the loan portfolio. However, actual results may differ from estimates.

4. Other real estate owned

At June 30, 2004, the Bank had $343 in other real estate owned, which consisted of one residential property. Subsequent to the end of the quarter, this property was sold at book value.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operation

The following discussion contains a review of Pacific Continental Corporation, and its wholly owned subsidiary, Pacific Continental Bank operating results and financial condition for the second quarter of 2004. When warranted, comparisons are made to the same period in 2003 and to the previous year ended December 31, 2003. The discussion should be read in conjunction with the financial statements (unaudited) and related notes contained elsewhere in this report. The reader is assumed to have access to the Company’s Form 10-K for the previous year ended December 31, 2003, which contains additional statistics and explanations. All numbers, except per share data, are expressed in thousands of dollars.

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

 
    10


HIGHLIGHTS

                For the quarter ended June 30,           Year-to-date June 30,
 
  
2004
2003
% Change
2004
2003
% Change
   
Net income
  
$
1,948

 
$
1,743
    
12
%
$
3,672

 
$
3,189

 

 
15
%
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Earnings per share
    
 
    
 
    
 
    
 
    
 
    
 
  
Basic
  
$
0.28

 
$
0.26

 

 
8
%
$
0.54

 
$
0.47

 

 
15
%
Diluted
  
$
0.28

 
$
0.26

 

 
8
%
$
0.52

 
$
0.47

 

 
11
%
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Return on assets
    
1.74
%

 
1.77
%

 
 

 

 
1.68
%

 
1.65
%
  
 
  
Return on equity
    
17.37
%

 
17.90
%

 
 

 

 
16.67
%

 
16.78
%
  
 
  
Net interest margin
    
5.74
%

 
6.22
%

 
 

 

 
5.76
%

 
6.21
%
  
 
  
 
    
 
    
 
    
 
    
 
    
 
    
 
  
Loans, at period end
    
 
    
 
    
 
  
$
402,838

 
$
354,672

 

 
14
%
Deposits, at period end
    
 
    
 
    
 
  
$
386,163

 
$
340,819

 

 
13
%


Per share data for 2003 was retroactively adjusted to reflect the 4-for-3 stock split declared during the third quarter 2003. In addition, 2003 noninterest income and noninterest expense has been reclassified to reflect a change in the Company’s method of reporting merchant bankcard processing fees to enable consistent presentation of the financial results.

The Company earned $1,948 in the second quarter 2004, a 12% increase over net income of $1,743 for the same quarter last year. The improvement in income was the result of loan and deposit growth, and improvement in credit quality, which resulted in a decline in the provision for loan losses. Improvement in these areas was partially offset by a decline in revenues generated from the origination of residential mortgages. These trends are expected to continue throughout 2004.

Through June 30, 2004, the Company reported net income of $3,672, a 15% increase over net income of $3,189 for the comparable period last year. Earnings per diluted share were $0.52 for the first six months of the current year compared to $0.47 for the same period last year. The improvement in year-to-date income was the result of loan and deposit growth, and improvement in credit quality, which resulted in a decline in the provision for loan losses.

Outstanding loans and deposits at June 30, 2004 showed growth rates of 14% and 13%, respectively over June 30, 2003. Core deposits, which are defined as demand deposits, interest checking, money market account, and local time deposits, constitute 91% of June 30, 2004 outstanding deposits. Demand deposits were $126,126 or 33% of total deposits at June 30, 2004.

 
    11
 
 
Results of Operations

Net Interest Income

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

Net interest income, prior to the provision for loan loss, for the second quarter of 2004 increased $332, or 6%, over same period in 2003. This increase was the result of growth of earning assets, as the net interest margin declined from the same quarter last year. Average earning assets in the current quarter increased 15% from $363,859 in the second quarter 2003 to $418,548 in the second quarter 2004.

The net interest margin as a percentage of earning assets was 5.78% in the second quarter 2004 compared to 6.22% in the second quarter 2003. However, the net interest margin in the second quarter 2004 compared favorably to the 5.78% margin recorded for the first quarter 2004 and the 5.83% margin averaged for the last six months of 2003. Earning asset yields in the second quarter 2004 were 6.71% compared to 7.43% in the second quarter 2003, a decline of 72 basis points, while the cost of funds fell by only 24 basis points from 1.21% to 0.97%. The prolonged low interest rate environment placed downward pressure on earning asset yields as new loan production continued to be booked at low rates. As market interest rates remained at a 45 year low, the Bank’s cost of funds was stable as many of the Bank’s deposits, specifically interest checking, money market, and savings accounts were priced at practical floors.

The year-to-date net interest margin as a percentage of earning assets through June 30, 2004 showed results similar to the quarter-to-quarter comparison. For the first six months of 2004, net interest income, prior to the provision for loan loss, totaled $11,666, an increase of 6% over $11,024 for the same period in 2003. Year-to-date average earning assets increased 14% as compared to the same period in 2003, while net interest income as a percent of earning assets declined from 6.21% in 2003 to 5.76% in 2004. The decrease resulted from yields on earning assets falling faster than the Company’s cost of funds as the Bank’s cost of funds has stabilized in the low interest rate environment. A detailed rate and volume analysis shows that the interest income component increased by $479, a $1,497 improvement due to higher volumes, which was offset by $1,018 d ecline due to lower rates. The year-to-date June 30, 2004 interest expense component was $163 lower than the same period last year. The decrease in interest expense shows $97 was due to volumes and the mix of funding and $66 was due to a decline in rates.

During second quarter 2004, the Bank experienced pressure on its cost of funds as money market accounts tied directly to the 91-day Treasury Bill rate increased approximately 40 basis points during the quarter. The increase in the cost of these deposits was offset by opportunities to refinance wholesale funding at lower rates. During the second quarter 2004, $10,000 of Federal Home Loan Bank advances with an average rate of 5.10% matured, and an additional $4,500 of national time deposits matured with an average rate of 3.35%. These maturities of wholesale funding were refinanced through core deposit growth and short-term borrowings, which kept the Bank’s cost of funds stable in the second quarter. During the third quarter 2004, the Bank has similar refinancing opportunities with $3,000 in Federal Home Loan Bank advances maturing along with $4,300 in national ti me deposits, which is expected to offset some of the increase expected in the cost of core deposits and overnight funding as market interest rates are expected to increase.

On June 30, 2004, the Federal Reserve took action to increase market interest rates for the first time in four years, which resulted in an increase in the prime-lending rate of 25 basis points from 4.00% to 4.25%. The Bank has approximately $220,000 in variable rate loans tied to the prime-lending rate. However, the Bank has consistently used rate floors when negotiating rate terms; and at June 30, 2004, approximately $90,000 in variable rate loans were priced at floors ranging from 25 basis points to 100 basis points above the calculated rate. Therefore, the June 30, 2004 increase in the prime-lending rate did not immediately affect the yields on these loans. While $90,000 in variable rate loans did not reprice immediately with the rate increase, the remaining $130,000 of other variable rate loans in the Bank’s loan portfolio did reprice. With the June 2004 inc rease in the prime-lending rate, the Bank now has approximately $54 million in variable rate loans priced at floors above the calculated rate.

As reported in previous 10-Q’s and the 2003 10-K, the Bank is asset sensitive and considering the maturity and repricing characteristics of the Bank’s deposits and funding sources, the Bank is well positioned in the event market interest rates continue to increase.

 
    12
 


Provision for Loan Losses

The second quarter 2004 provision for loan losses was $75 compared to $200 for the comparable quarter last year. Year-to-date June 30, 2004 loan loss provision was $175 compared to $800 for the same period in 2003. The larger provision for loan losses for the first six months of 2003 was based upon uncertainties related to impaired loans, internally classified loans, and anticipated foreclosures. During the second half of 2003, the Bank was able to resolve the uncertainties surrounding these loans through foreclosures and sales of collateral as well as planned exits of weaker credits. Accordingly, the Company anticipates the provision for loan losses for the year 2004 will be reduced from provisions made during 2003.

During the second quarter 2004, the Bank continued progress with regard to certain foreclosed assets. At June 30, 2004, the Bank had one property in foreclosed assets, a single-family residence valued at $343,000. Subsequent to the end of the second quarter, this property was sold, and the Bank received proceeds equal to its book value.

The following table shows a summary of nonaccrual loans, loans past due 90 days or more and still accruing interest, and other real estate owned for the periods covered in this report:

 
  
June 30, 2004
December 31, 2003
June 30, 2003
   
Nonaccrual loans
  
$
1,876
  
$
1,506
  
$
1,870
  
90 days past due and accruing interest
    
0
  
$
545
    
205
  
Repossessed assets
  
$
343
  
$
411
    
3,152
  
   
 
 
 
Total nonperforming assets
  
$
2,219
  
$
2,462
  
$
5,227
  
Nonperforming loans guaranteed by government
   
(415
)
  
(233
)
  
(161
)
   
 
 
 
Total nonperforming assets, net of guarantee
  
$
1,804
  
$
2,229
  
$
5,066
  


Noninterest Income

Year-to-date June 30, 2004 noninterest income of $2,229 was down $304 or 12% from 2003 noninterest income for the same time period. Noninterest income was negatively impacted by two factors: a significant slow down in the origination of residential mortgages due to higher residential mortgage rates; and a decline on gains on sales of commercial real estate loans. Noninterest income from the origination of residential mortgages declined $344 or 42% from year-to-date June 30, 2003. However, there was an increase in mortgage noninterest income in the second quarter of 2004 when compared to first quarter 2004. Revenues from the originations of residential mortgages were $266 in second quarter 2004 compared to $209 in the first quarter. Programs implemented in the latter part of 2003 to provide residential construction and permanent financing are supplementing and stab ilizing the normal mortgage revenues. In addition to the decline in mortgage revenues during the first quarter 2004, the Company took no gains from the sale of commercial real estate loans. In the first quarter 2003, sales of commercial real estate loans contributed $130 in one-time noninterest income. The reduction in income in these two areas was partially offset by $151 or 37% increase in merchant bankcard revenues.

The Company anticipates that for the year 2004, due to continued expectation of reduced income from residential mortgage originations noninterest income will be flat with or slightly lower than noninterest income reported for the year 2003. However, anticipated loan growth and corresponding growth in net interest income will more than offset any decline in noninterest income.

 
    13
 
 
Noninterest Expense

Year-to-date June 30, 2004 noninterest expense was $7,776, an increase of $199 or 3% over the same period in 2003. Comparing 2004 to 2003, the largest increase was in personnel expense, which grew by $314 or 7% over last year, reflecting personnel costs for staff added during 2003, primarily related to expansion in the Portland area market. As reported in the Company’s first quarter 2004 10-Q, advertising expense was expected to increase in 2004 as the Bank’s new branding campaign was fully implemented. For the first six months of 2004, advertising expense was up $102 or 29% over last year. Growth in these noninterest expense categories was offset by a decrease in one-time expenses related to the January 2003 opening of the KOIN Center office in Portland, Oregon and a decline in other real estate expense. Other real estate expense declined by approximate ly $300 as 2003 included expenses related to write downs and operating losses associated with motel and hotel properties which were sold in subsequent quarters during 2003.

The Company expects the growth rate of noninterest expenses to be well below anticipated asset growth. While expense growth is expected to slow in 2004, the Company anticipates increased advertising expense as additional advertising is introduced in the Portland market. In addition, the Company anticipates increased expenses related to compliance with Section 404 of Sarbannes-Oxley in terms of staff, software, and professional services. However, expense increases in these areas will be offset by anticipated declines in legal fees related to problem loans and in other real estate expense. For the full year 2003, approximately $520 in other real estate expense was recorded, entirely related to three motel properties, which will not recur in 2004.

Liquidity

Liquidity is the term used to define the Company’s ability to meet its financial commitments. The Company maintains sufficient liquidity to ensure funds are available for both lending needs and the withdrawal of deposit funds. The Company derives liquidity primarily through core deposit growth, the maturity of investment securities, and loan payments. Core deposits include demand, interest checking, money market, savings and local time deposits. Additional liquidity is provided through sales of loans, access to national CD markets, public deposits and both secured and unsecured borrowings. Core deposits represented 91% of total deposits at June 30, 2004 compared to 89% at June 30, 2003. Historically, due to seasonal construction and economic activity and client payment of various tax obligations, the Company experiences a decline or slower growth of core depo sits during the first six months of each year. However, during the first half of 2004, the Company experienced a $20,827 increase in core deposits from December 31, 2003. During the first six months of 2004, the Company grew outstanding loans by $46,761. Loan growth was funded primarily by growth in core deposits and short-term borrowings.

The planned use of overnight borrowings increased significantly during the second quarter as maturing FHLB advances and money desk deposits were refinanced into overnight borrowings, and additional borrowings were necessary to fund the strong loan growth experienced during the quarter. Wholesale funding at June 30, 2004 was 15% of total assets. During second quarter 2004, existing overnight borrowing lines at three correspondent banks were increased. In addition, the Bank received notification of new borrowing lines for both the Bank and the Company. Three correspondent banks increased existing borrowing lines by a combined $16,000. In addition, a new correspondent bank approved a borrowing line for the Bank of $5,000 and a line of $15,000 for the Company. With the new increases in effect and the new line, the Bank and the Company now have unsecured overnight borr owing lines totaling $72,000 with correspondent banks. The Bank also has a secured borrowing line of $115,000 with the Federal Home Loan Bank (“FHLB”) of Seattle. However, the borrowing line at the FHLB is limited by the amount of collateral pledged presently valued at $64,000. At June 30, 2004, based on the value of current pledged collateral at the FHLB and current overnight borrowing lines, the bank and the holding company had approximately $107,000 available to borrow from correspondents and the FHLB. The Bank also had $1,000 available from the State of Oregon CD program, and the Bank’s loan portfolio also contains $25,500 in guaranteed SBA loans, which can be sold on the secondary market.

Capital Resources

Capital is the shareholder’s investment in the Company. Capital grows through the retention of earnings and the issuance of new stock through the exercise of incentive options and decreases through the payment of dividends and share repurchase programs. Capital formation allows the Company to grow assets and provides flexibility in times of adversity. In the following section on Capital, share numbers reported are in whole numbers.

Banking regulations require the Company to maintain minimum levels of capital. The Company manages its capital to maintain a “well capitalized” designation (the FDIC’s highest rating). At June 30, 2004, the Company’s total capital to risk-weighted assets was 11.82% compared to 11.44% at June 30, 2003.

The Company’s board of directors reviews its dividend considerations so that cash dividends, when and if declared by the Company, would typically be paid in mid-March, June, September, and December of each year. On February 11, 2004 and May 13, 2004, the Company declared quarterly dividends of $0.08 per share paid on March 15, 2004 and June 15, 2004. The Company expects to maintain the $0.08 per share dividend per quarter during 2004, which would result in an annual dividend of $0.32 per share, which would equate to a 14% increase over the prior year, when adjusted for the 4-for-3 stock split declared in September 2003.

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

 
 
    14
 
 
Item 3. Market Risk and Balance Sheet Management

There has been no material change in the Bank’s exposure to market risk. Readers are referred to the Company’s Form 10-K and the Annual Report to Shareholders for the period ending December 31, 2003, for specific discussion.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c)) as of a date within 90 days before the filing date of this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective and timely, providing them with material information relating to the Company required to be disclosed in the reports we file or submit under the Exchange Act.
Changes in Internal Controls
There have not been any significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Management is not aware of any significant deficiencies or material weaknesses, therefore no corrective actions were taken.

 
    15
 
 
PART II. OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders

  1. Pacific Continental Corporation’s Annual Shareholders’ Meeting was held on April 20, 2004

  2. Not Applicable

  3. A brief description of each matter voted upon at the Annual Meeting and number of votes cast for, against or withheld, including a separate tabulation with respect to each nominee to serve on the Board is presented below:

(1)Election of (3) three Directors (Hal Brown, Larry Campbell, and Michael D. Holzgang) for three-year terms expiring in 2007.

Directors:

Hal Brown –
 
 
 
 
 
Votes Cast For:
5,946,994
 
 
Votes Withheld
46,781


Larry Campbell –
 
 
 
Votes Cast For:
5,935,564
 
Votes Withheld:
8,211


Michael D. Holzgang –
 
 
 
Votes Cast For:
5,947,308
 
Votes Withheld:
46,467



(2)Amend the Company’s Articles of Incorporation to: 1) increase the number of authorized shares of common stock from 10 million to 25 million; 2) eliminate the par value for shares of both common and preferred stock; and 3) to delete various provision pertaining to the Company’s formation that are no longer required to appear in the Articles of Incorporation.
Votes Cast For: 4,470,926
Votes Cast Against: 57,233

(d)   None

 
    16
 
 
Item 6. Exhibits and Reports on Form 8-K

(a)   Exhibits:
   31.1   302 Certification, Hal Brown, President and Chief Executive Officer
   31.2   302 Certification, Michael A. Reynolds, Senior Vice President and
    Chief Financial Officer
32   Certifications Pursuant to 18 U.S.C. Section 1350

(b)Reports on Form 8-K

A Report on Form 8-K was filed by Pacific Continental Corporation on April 14, 2004 that announced earnings for the first quarter and year-to-date at March 31, 2004.

 
    17
 


SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PACIFIC CONTINENTAL CORPORATION
(Registrant)



Dated
August 12, 2004
/s/ Hal Brown
 
 
Hal Brown
 
 
President and Chief Executive Officer



Dated
August 12, 2004
/s/ Michael A. Reynolds
 
 
Michael A. Reynolds
 
 
Senior Vice President and Chief Financial Officer



    18