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EX-31.1 - 302 CERTIFICATION, CEO - PACIFIC CONTINENTAL CORPcertification302ceo.htm
EX-31.2 - 302 CERTIFICATION, CFO - PACIFIC CONTINENTAL CORPcertification302cfo.htm
EX-32 - SECTION 1350 CERTIFICATION - PACIFIC CONTINENTAL CORPcertificationsection1350.htm

Washington D.C. 20549






(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:

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 ___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ______                      No _____

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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, 2009 (the last business day of the most recent second quarter) was $143,056,040 based on the closing price as quoted on the NASDAQ Global Market on that date.

The number of shares outstanding of the registrant’s common stock, no par value, as of March 5, 2010, was 18,393,773.


Part III incorporates by reference information from the registrant’s definitive proxy statement for the 2010 annual meeting of shareholders.




PART 1   Page
(Items 10 through 14 are incorporated by reference from Pacific Continental Corporation’s definitive proxy statement for the annual meeting of shareholders scheduled for April 19, 2010)




Item 1.                      Business

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 Bank”).

The Company’s principal business activities are conducted through 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 formerly held and managed Bank property, and PCB Loan Services (presently inactive), which formerly managed certain other real estate owned.

The Bank operates in three primary markets: Portland, Oregon / Southwest Washington; Seattle, Washington; and Eugene, Oregon.  At December 31, 2009, the Bank operated fourteen full-service offices in six Oregon and three Washington cities.


For the year ended December 31, 2009, the consolidated net loss of the Company was $4.9 million or $0.35 per diluted share.  The net loss in 2009 was due to the elevated $36.0 million provision for loan losses.  At December 31, 2009, the consolidated shareholders’ equity of the Company was $165.7 million with 18.4 million shares outstanding and a book value of $9.01 per share.  Total assets were $1,199.1 million.  Loans net of allowance for loan losses and unearned fees, were $931.0 million at December 31, 2009 and represented 77.6% of total assets.  Deposits totaled $827.9 million at year-end 2009 with core deposits representing 93.2% or $772.0 million of total deposits.  Core deposits are defined as all deposits gathered locally and include local time deposits over $100 thousand.  During the year 2009, the Company successfully raised $55.3 million in new capital through a private offering and a public offering.  On January 7, 2009, the Company announced completion of a private placement of 750 thousand shares of common stock at $13.50 per share.  The net proceeds from the offering, after underwriting discounts and transaction costs, were approximately $9.6 million. Due to this successful capital raise in private equity markets, on January 14, 2009, the Company announced that it had declined to participate in the US Treasury Capital Purchase Program despite receiving  preliminary approval from the US Treasury to receive up to $30 million in new capital through issuance of preferred stock.  On October 20, 2009, the Company announced that it had raised approximately $45.7 million of capital, net of underwriting discounts and transaction costs, through an underwritten public offering by issuing 5.52 million shares of its common stock at a price of $8.75 per share.  At December 31, 2009, the Company had a tier 1 leverage capital ratio, tier 1 risk-based capital ratio, and total risk-based capital ratio, of 13.66%, 14.38%, and 15.63%, respectively, all of which are significantly above the minimum “well-capitalized” level for all capital ratios under FDIC guidelines of 5%, 6%, and 10%, respectively.  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 6 and 7 of this Form 10-K.


The Bank commenced operations on August 15, 1972.  At December 31, 2009, the Bank operated fourteen banking offices in Oregon and Washington.  The primary business strategy of the Bank is to operate in large commercial markets and to provide comprehensive banking and related services tailored to community-based business, not-for-profits, professional service providers and 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.


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, Key Bank and Chase, 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 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 and more recently this consolidation has accelerated due to closures of banks by the FDIC.  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 contribute to consolidation in the industry.  The Company seeks acquisition opportunities, including FDIC assisted transactions, 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

The Bank offers a full array of financial service products to meet the banking needs of its targeted segments in the market areas served.  The Bank regularly reviews the profitability and desirability of various product offerings, particularly new product offerings, to assure on-going viability.

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  All deposit accounts are insured by the FDIC to the maximum amount permitted by law.

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

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 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 is a national preferred lender.

Within its primary markets, the Bank originates permanent and construction loans financing commercial facilities and 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, 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.  In addition, due to the economic recession and softness in commercial real estate markets, the Bank has taken steps to reduce its exposure to commercial real estate loans, both for construction of new facilities and permanent loans for commercial facilities, particularly investor-owned facilities.  The focus of the Bank’s commercial real estate lending activities is primarily on owner-occupied facilities.  The Bank also finances requests for multi-family residences.

Inter-agency guidelines adopted by federal bank regulators mandate that financial institutions establish real estate lending policies with maximum allowable real estate loan-to-value limits, subject to an allowable amount of non-conforming loans as a percentage of capital.  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 that are within established federal banking guidelines, 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.

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.

Merchant and Card Services

The Bank provides merchant card payment services, through an outside processor, for its client base, including  community-based businesses, not-for-profits, and professional service providers.  This 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 professional service providers.  During 2009, the Company processed approximately $190 million in credit card transactions for its merchant clients.   The Bank also offers credit card services to its business customers and uses an outside vendor for credit card processing.  The Bank does not issue credit cards to individuals.



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.

Subsequent to the end of the year, the Bank entered into an agreement with Money Pass, an ATM network provider.  This agreement will permit all Bank customers to use Money Pass ATM’s located throughout the country at no charge to the customer.


At December 31, 2009, the Bank employed 254 full-time equivalent  (FTE) employees with 26 FTE’s in the Seattle market, 53 FTE’s in the Portland market, 82 FTE’s in the Eugene market, and 93 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.  During 2009, the Bank was recognized for the eighth consecutive year by Oregon Business Magazine as one of Oregon’s Best 100 Companies for which to work, and was the highest rated financial institution in the state.  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) plan, and equity compensation plans.

Supervision and Regulation


The following discussion provides an overview of certain 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 and growth 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 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. Recently, in light of the recent financial crisis, numerous proposals to modify or expand banking regulation have surfaced. Based on past history, if any are approved, they will add to the complexity and cost of our business.

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.


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 and limitations 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 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.

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


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

Interstate Banking and Branching

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

Oregon and Washington have both enacted “opting in” legislation in accordance with the Interstate Act, 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 or through authorized de novo branching, 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.


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 applicable state regulators.  Current guidance from the Federal Reserve provides, among other things, that dividends per share generally should not exceed earnings per share, measured over the previous four fiscal quarters.  As a result, since the dividends paid to shareholders over the last four fiscal quarters have exceeded the Company’s earnings, the Company does not expect to continue paying dividends at historic levels over the medium term, and future dividends will depend on sufficient earnings to support them and approval of appropriate bank regulatory authorities.
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. During these challenging economic times, the federal banking regulators have actively enforced these provisions.

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.  Subsequent to December 31, 2009, and based on its annual safety and soundness examination completed by the FDIC in mid-September, the Bank entered into an informal agreement with the FDIC and the Oregon Department of Consumer and Business Services, which outlined specific areas of improvement primarily related to capital levels and levels of classified assets.  In addition, the agreement requires the Company and the Bank to obtain permission for dividends from the Bank to the Company and cash dividends to shareholders prior to declaration and payment.  At December 31, 2009, management believes it has achieved all objectives and improvements requested in the agreement.

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 effect on our record keeping and reporting expenses, we do not believe that the renewal and amendment will have a material adverse effect on our business or operations.

Financial Services Modernization

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

Recent Legislation

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, 2013. After December 31, 2013, 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.

Deposit Insurance Assessments.  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) effective for the first quarter of 2009.  In February 2009, the FDIC adopted a final rule modifying the risk-based assessment system and setting initial base assessment rates beginning April 1, 2009 at 12 to 45 basis points.  The rule also gives the FDIC the authority to, as necessary, implement emergency special assessments to maintain the deposit insurance fund.  On November 12, 2009, the FDIC approved a final rule requiring all FDIC-insured depository institutions to prepay estimated quarterly assessments for the fourth quarter 2009 and for all of 2010, 2011, and 2012.  The prepayment was collected on December 30, 2009, along with the institutions’ regular quarterly deposit insurance assessments for the third quarter 2009.  For the fourth quarter of 2009 and all of 2010, the prepaid assessments will be based on an institution’s total base assessment rate in effect on September 30, 2009.  That rate will be increased by 3 basis points for 2011 and 2012 prepayments.  The prepaid assessments will be accounted for as prepaid expense amortized over the three year period.



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 program is voluntary and requires an institution to comply with a number of restrictions and provision, including limits on executive compensation, stock redemptions, and declaration of dividends.  After receiving preliminary approval from the US Treasury Department to participate in the CPP, the Company elected not to participate in light of its capital position and due to its ability to raise capital successfully in private equity markets.

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 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.

Proposed Legislation

Proposed legislation that may affect the Company and the Bank is introduced in almost every legislative session.  Certain of such legislation could dramatically affect the regulation of the banking industry.  In light of the 2008 financial crisis, legislation reshaping the regulatory landscape for financial institutions has been proposed.  A current proposal includes measures aimed to prevent another financial crisis like the one in 2008 by forming a federal regulatory body to protect the interests of consumers by preventing abusive and risky lending practices, increasing supervision and regulation on financial firms deemed too big to fail, giving shareholders an advisory vote on executive pay, and regulating complex derivative instruments.  We cannot predict if any such legislation will be adopted or if it is adopted how it would affect the business of the Bank or the Company.  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.

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, and their impact on us cannot be predicted with certainty.



Statistical Information

All dollar amounts in the following sections are in thousands except where otherwise indicated.

Selected Quarterly Information

The following chart contains data for the last eight quarters ended December 31, 2009. All data, except per share data, is in thousands of dollars.

Interest income
  $ 17,079     $ 16,982     $ 16,555     $ 16,259     $ 16,544     $ 16,680     $ 16,215     $ 16,506  
Interest expense
    3,295       3,265       3,168       3,108       3,350       4,377       4,057       4,890  
Net interest income
    13,784       13,717       13,387       13,151       13,194       12,203       12,158       11,616  
Provision for loan loss
    7,000       8,300       19,200       1,500       1,050       1,050       925       575  
Noninterest income
    1,079       1,109       1,196       1,021       1,042       1,047       1,163       1,017  
Noninterest expense
    7,452       7,014       8,646       8,050       7,435       7,497       7,463       7,167  
Net income (loss)
    24       279       (8,129 )     2,947       3,833       3,020       3,007       3,079  
Net income (loss) \(basic)
  $ -     $ 0.02     $ (0.63 )   $ 0.23     $ 0.32     $ 0.25     $ 0.25     $ 0.26  
Net income (loss) (diluted)
  $ -     $ 0.02     $ (0.63 )   $ 0.23     $ 0.32     $ 0.25     $ 0.25     $ 0.26  
Cash dividends
  $ 0.01     $ 0.04     $ 0.10     $ 0.10     $ 0.10     $ 0.10     $ 0.10     $ 0.10  
    16,863       12,873       12,873       12,812       12,039       11,978       11,963       11,940  
    16,904       12,909       12,873       12,857       12,095       12,034       12,030       12,006  
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 shareholders’ equity.

December 31,
(dollars in thousands)
U.S. Treasury, U.S. Government agencies and corporations
  $ 5,000     $ 2,029     $ 10,541  
Obligations of states and political subdivisions
    6,709       7,485       7,514  
Other mortgage-backed securities
    155,909       45,419       35,939  
  $ 167,618     $ 54,933     $ 53,994  



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, 2009 projected average life.

After One
After Five
Year But
Years But
One Year
Five Years
Ten Years
After Ten
(dollars in thousands)
US Treasury, US Government
     agencies and agency
      mortgage-backed securities
  $ 33,110       3.10 %   $ 119,762       3.72 %   $ 6,944       5.03 %   $ 1,093       5.55 %
Obligations of states and
      political subdivisions
    -       -       2,301       3.92 %     4,408       3.75 %     -       -  
  $ 33,110       3.10 %   $ 122,063       3.72 %   $ 11,352       4.54 %   $ 1,093       5.55 %

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 2009 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 table contains information related to the Company’s loan portfolio for the five-year periods ended December 31, 2009.

December 31,
(dollars in thousands)
Commercial loans
  $ 239,450     $ 233,513     $ 188,940     $ 169,566     $ 160,988  
Real estate loans
    699,539       717,119       627,140       590,855       507,479  
Consumer loans
    6,763       7,455       8,226       9,168       12,463  
      945,752       958,087       824,306       769,589       680,930  
Deferred loan origination fees, net
    (1,388 )     (1,730 )     (1,984 )     (2,489 )     (2,609 )
      944,364       956,357       822,322       767,100       678,321  
Allowance for loan losses
    (13,367 )     (10,980 )     (8,675 )     (8,284 )     (7,792 )
    $ 930,997     $ 945,377     $ 813,647     $ 758,816     $ 670,529  

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, 2009, the Bank had approximately $280,000 of variable rate loans at their floors that are included in the analysis below.



Real Estate
(dollars in thousands)
Three months or less
  $ 64,729     $ 220,262     $ 4,310     $ 289,301  
Over three months through 12 months
    9,461       41,458       547       51,466  
Over 1 year through 3 years
    25,615       172,006       450       198,071  
Over 3 years through 5 years
    55,569       208,820       774       265,163  
Over 5 years through 15 years
    84,076       41,889       489       126,454  
    -       15,104       193       15,297  
   Total loans
  $ 239,450     $ 699,539     $ 6,763     $ 945,752  

Loan Concentrations

At December 31, 2009, loans to dental professionals totaled $158,433 and represented 16.8% of outstanding loans.  At December 31, 2009, residential construction loans totaled $41,714 and represented 4.4% of outstanding loans.  In addition, at December 31, 2009, unfunded loan commitments for residential construction totaled $9,948.  Approximately 75% 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.

December 31,
(dollars in thousands)
Nonaccrual loans
  $ 32,792     $ 4,137     $ 4,122     $ -     $ 180  
90 or more days past due and still accruing
    -       -       -       -       -  
   Total nonperforming loans
    32,792       4,137       4,122       -       180  
Government guarantees
    (446 )     (239 )     (451 )     -       (28 )
   Net nonperforming loans
    32,346       3,898       3,671       -       152  
Other Real Estate Owned
    4,224       3,806       423       -       131  
   Total nonperforming assets
  $ 36,570     $ 7,704     $ 4,094     $ -     $ 283  
Nonperforming assets as a percentage of
  of total assets
    3.05 %     0.71 %     0.43 %     0.00 %     0.04 %

If interest on nonaccrual loans had been accrued, such income would have been approximately $2,611, $173, and $140, respectively, for years 2009, 2008 and 2007.

Allowance for Loan Loss

The following chart presents information about the Company’s allowance 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.



December 31,
(dollars in thousands)
Balance at beginning of year
  $ 10,980     $ 8,675     $ 8,284     $ 7,792     $ 5,224  
  Charges to the allowance
      Real estate loans
    (25,449 )     (1,235 )     -       -       (214 )
      Consumer loans
    (198 )     (118 )     (46 )     (71 )     (106 )
    (8,234 )     (124 )     (350 )     (152 )     (316 )
  Total charges to the allowance
    (33,881 )     (1,477 )     (396 )     (223 )     (636 )
  Recoveries against the allowance
      Real estate loans
    203       128       15       4       37  
      Consumer loans
    9       23       27       20       56  
    56       31       20       91       31  
  Total recoveries against the allowance
    268       182       62       115       124  
    -       -       -       -       2,014  
    36,000       3,600       725       600       1,100  
  Unfunded commitments *
    -       -       -       -       (34 )
Balance at end of the year
  $ 13,367     $ 10,980     $ 8,675     $ 8,284     $ 7,792  
Net charge offs as a percentage of  total
   average loans
    3.50 %     0.15 %     0.04 %     0.01 %     0.10 %

* 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, 2009:

December 31,
% of Total
% of Total
Real estate loans
 $      8,660
 $      7,586
Consumer loans
Allowance for loan losses
 $    13,367
 $    10,980

During 2009, the Bank recorded a provision for loan losses of $36,000 compared to $3,600 for the year 2008.  The increase in the loan loss provision was related to charge offs and deterioration in the overall credit quality of the loan portfolio, primarily in residential and commercial real estate loans.  At December 31, 2009, the recorded investment in certain loans totaling $58,861, net of government guarantees, was considered impaired.  Of the total impaired loans at December 31, 2009, $32,346 were on nonaccrual status with a specific reserve of $1,048 provided for in the ending allowance for loan losses.

While the Bank saw some positive trends in fourth quarter 2009 with regard to the overall credit quality of the loan portfolio, management cannot predict the level of the provision for loan losses, the level of the allowance for loan losses, nor the level of nonperforming assets in future quarters as a result of uncertain economic conditions.  At December 31, 2009, and as shown above, the Bank’s unallocated reserves were $2,084 or 15.6% of the total allowance for loan losses at year end.  Management believes that the allowance for loan losses at December 31, 2009 is adequate and this level of unallocated reserves was prudent in light of the economic conditions and uncertainty that exists in the Northwest markets that the Bank serves.




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, 2009.  The Company does not have any foreign deposits.  Variable rate deposits are listed by first repricing opportunity.

Time Deposits
Time Deposits
of $100,000
Or More
of less than
Time Deposits
(dollars in thousands)
  $ 40,739     $ 58,592     $ 99,331  
    21,950       20,872       42,822  
    1,949       463       2,412  
    3,191       1,720       4,911  
    100       283       383  
    102       -       102  
    $ 68,031     $ 81,930     $ 149,961  


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.  The secured borrowing lines are collateralized by both loans and securities.  At December 31, 2009, the Bank had secured borrowing lines totaling approximately $360,000 with the Federal Home Loan Bank of Seattle (“FHLB”).  The borrowing line at the FHLB is limited by the lesser of the value of collateral pledged or amount of FHLB stock held.  At present, the borrowing line is limited by the amount of stock held, which limits total borrowings at the FHLB to $239,089.  The borrowing line with the Federal Reserve Bank of San Francisco (“FRB”) is limited by the value of collateral pledged, which at December 31, 2009 was $110,756.  At December 31, 2009, the Bank also had unsecured borrowing lines with various correspondent banks totaling $75,000.  At December 31, 2009, there was $231,820 available on secured and unsecured borrowing lines with the FHLB, FRB, and various correspondent banks.

(dollars in thousands)
Federal Funds Purchased, FHLB CMA, Federal Reserve,
           & Short Term Advances
   Average interest rate
      At year end
    0.34 %     0.48 %     4.39 %     5.55 %
      For the year
    0.49 %     2.25 %     5.25 %     5.31 %
   Average amount outstanding for the year
  $ 144,026     $ 182,301     $ 93,733     $ 73,171  
   Maximum amount outstanding at any month end
  $ 212,001     $ 213,225     $ 151,360     $ 99,410  
   Amount outstanding at year end
  $ 118,025     $ 193,000     $ 151,360     $ 99,410  

In addition to the short-term borrowings, at December 31, 2009, the Bank had other FHLB borrowings totaling $75,000 with a weighted average interest rate of 3.32% and a remaining average maturity of approximately 2.8 years. More information on long-term borrowings can be found in the Selected Financial Data in Item 5 and in Note 9 in the Consolidated Financial Statements in Item 7 below.

The Company’s other 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.



We cannot accurately predict the effect of the current economic downturn on our future results of operations or market price of our stock.

The national economy, and the financial services sector in particular, are currently facing challenges of a scope unprecedented in recent history.  We cannot accurately predict the severity or duration of the current economic downturn, which has adversely impacted the markets we serve.  Any further deterioration in the economies of the nation as a whole or in our markets would have an adverse effect, which could be material, on our business, financial condition, results of operations and prospects, and could also cause the market price of our stock to decline.

The current economic downturn in the market areas we serve may continue to adversely impact our earnings and could increase our credit risk associated with our loan portfolio.

Substantially all of our loans are to businesses and individuals in western Washington and Oregon, and a continuing decline in the economies of these market areas could have a material adverse effect on our business, financial condition, and results of operations.  A series of large Puget Sound-based businesses, including Microsoft, Starbucks, and Boeing, have implemented substantial employee layoffs and scaled back plans for future growth.  Additionally, the acquisition of Washington Mutual by JPMorgan Chase & Co. has resulted in substantial employee layoffs, and has resulted in a substantial increase in office space availability in downtown Seattle.  Oregon has also seen a similar pattern of large layoffs 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, which may be material, on our business, financial condition, and results of operations:

economic conditions may worsen, increasing the likelihood of credit defaults by borrowers;

loan collateral values, especially as they relate to commercial and residential real estate, may decline further, thereby increasing the severity of loss in the event of loan defaults;

demand for banking products and services may decline, including services for low cost and non-interest-bearing deposits; and

changes and volatility in interest rates may negatively impact the yields on earning assets and the cost of interest-bearing liabilities.

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 our loan portfolio.  While we strive to carefully manage and monitor credit quality and to identify loans that may be deteriorating, at any time there are loans included in the portfolio that may result in losses, but that have not yet been identified as potential problem loans.  Through established credit practices, we attempt to identify deteriorating loans and adjust the loan loss reserve accordingly.  However, because future events are uncertain, there may be loans that deteriorate in an accelerated time frame.  As a result, future additions to the allowance at elevated levels may be necessary.  Because the loan portfolio contains a number of commercial real estate loans with relatively large balances, deterioration in the credit quality of one or more of these loans may require a significant increase to the allowance for loan losses.  Future additions to the allowance may also be required based on changes in the financial condition of borrowers, such as have resulted due to the current, and potentially worsening, economic conditions or as a result of incorrect assumptions by management in determining the allowance for loan losses.  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 would have an adverse effect, which may be material, on our financial condition and results of operations.



Concentration in real estate loans and the deterioration in the real estate markets we serve could require material increases in our allowance for loan losses and adversely affect our financial condition and results of operations.

The economic downturn is significantly impacting our market area.  We have a high degree of concentration in loans secured by real estate (see Note 3 in the Notes to Consolidated Financial Statements included in this report).  Further deterioration in the local economies we serve could have a material adverse effect on our business, financial condition and results of operations due to a weakening of our borrowers’ ability to repay these loans and a decline in the value of the collateral securing them.  Our ability to recover on these loans by selling or disposing of the underlying real estate collateral is adversely impacted by declining real estate values, which increases the likelihood we will suffer losses on defaulted loans secured by real estate beyond the amounts provided for in the allowance for loan losses.  This, in turn, could require material increases in our allowance for loan losses and adversely affect our financial condition and results of operations, perhaps materially.

Non-performing assets take significant time to resolve and adversely affect our results of operations and financial condition.

At December 31, 2009, our non-performing loans (which include all non-accrual loans, net of government guarantees) were 3.43% of the loan portfolio.  At December 31, 2009, our non-performing assets (which include foreclosed real estate) were 3.05% of total assets.  These levels of non-performing loans and assets are at elevated levels compared to historical norms.  Non-performing loans and assets adversely affect our net income in various ways.  Until economic and market conditions improve, we may expect to continue to incur losses relating to non-performing assets.  We generally do not record interest income on non-performing loans or other real estate owned, thereby adversely affecting our income, and increasing our loan administration costs.  When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the then fair market value of the collateral, which may ultimately result in a loss.  An increase in the level of non-performing assets increases our risk profile and may impact the capital levels our regulators believe are appropriate in light of the ensuing risk profile.  While we reduce problem assets through loan sales, workouts, and restructurings and otherwise, decreases in the value of the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition, perhaps materially.  In addition, the resolution of non-performing assets requires significant commitments of time from management and our directors, which can be detrimental to the performance of their other responsibilities.  There can be no assurance that we will not experience future increases in non-performing assets.

Tightening of credit markets and liquidity risk could adversely affect our business, financial condition and results of operations.

A tightening of the credit markets or any inability to obtain adequate funds for continued loan growth at an acceptable cost could adversely 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 wholesale funding sources including unsecured borrowing lines with correspondent banks, secured borrowing lines with the Federal Home Loan Bank of Seattle and the Federal Reserve Bank of San Francisco, public time certificates of deposits and out of area and brokered time certificates of deposit.  Our ability to access these sources could be impaired by deterioration in our financial condition as well as factors that are not specific to us, such as a disruption in the financial markets or negative views and expectations for the financial services industry or serious dislocation in the general credit markets.  In the event such disruption should occur, our ability to access these sources could be adversely affected, both as to price and availability, which would limit, or potentially raise the cost of, the funds available to the Company.

The FDIC has increased insurance premiums to rebuild and maintain the federal deposit insurance fund and there may be additional future premium increases and special assessments.

The FDIC adopted a final rule revising its risk-based assessment system, effective April 1, 2009.  The changes to the assessment system involve adjustments to the risk-based calculation of an institution’s unsecured debt, secured liabilities and brokered deposits.  The revisions effectively result in a range of possible assessments under the risk-based system of 7 to 77.5 basis points.  The potential increase in FDIC insurance premiums will add to our cost of operations and could have a significant impact on the Company.

The FDIC also has recently required insured institutions to prepay estimated quarterly risk-based assessments for the fourth quarter of 2009 and for 2010, 2011 and 2012, and increased the regular assessment rate by three basis points effective January 1, 2011, as a means of replenishing the deposit insurance fund.  The prepayment totaling $6.2 million

 was collected from the Bank on December 30, 2009, and was accounted for as a prepaid expense amortized over the assessment periods.

The FDIC also recently imposed a special Deposit Insurance assessment of five basis points on all insured institutions.  This emergency assessment was calculated based on the insured institution’s assets at June 30, 2009, totaled $510 for the Bank, and was collected on September 30, 2009.

The FDIC deposit insurance fund may suffer additional losses in the future due to bank failures.  There can be no assurance that there will not be additional significant deposit insurance premium increases, special assessments or prepayments in order to restore the insurance fund’s reserve ratio.  Any significant premium increases or special assessments could have a material adverse effect on our financial condition and results of operations.

We do not expect to continue paying dividends on our common stock at historic levels over the medium term.

Our ability to pay dividends on our common stock depends on a variety of factors.  On November 18, 2009, we announced a quarterly dividend of $0.01 per share, payable December 15, 2009, which was a reduction from the prior quarter’s dividend of $0.04 per share and quarterly dividends of $0.10 per share declared each prior quarter since the first quarter of 2008.  There can be no assurance that we will be able to continue paying quarterly dividends commensurate with recent levels, if at all.  Current guidance from the Federal Reserve provides, among other things, that dividends per share generally should not exceed earnings per share, measured over the previous four fiscal quarters.  As a result, since our dividends over the last four fiscal quarters have exceeded our earnings, we do not expect to continue paying dividends at historic levels over the medium term, and future dividends will depend on sufficient earnings to support them and approval of appropriate bank regulatory authorities.

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

Our securities portfolio contains whole loan private mortgage-backed securities and currently includes securities with unrecognized losses.  We may continue to observe volatility in the fair market value of these securities.  We evaluate the securities portfolio for any other than temporary impairment each reporting period, as required by generally accepted accounting principles, and as of December 31, 2009, 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 these and other 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.  At December 31, 2009, we had stock in the FHLB of Seattle totaling approximately $10.7 million.  The FHLB stock held by us is carried at cost and is subject to recoverability testing under applicable accounting standards.  The FHLB has discontinued the repurchase of their stock and discontinued the distribution of dividends.  As of December 31, 2009, 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 require us to recognize an impairment charge with respect to such holdings.

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

At December 31, 2009, we had approximately $22.0 million 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.  At December 31, 2009, we did not recognize an impairment charge related to our goodwill.



We may pursue additional capital in the future, which could dilute the holders of our outstanding common stock and may adversely affect the market price of our common stock.

On October 20, 2009, we announced the consummation of a public offering of 5.52 million shares of our common stock at $8.75 per share for gross proceeds of $48.3 million.  Notwithstanding this recent capital raise, from time to time, particularly in the current uncertain economic environment, we may consider alternatives for raising capital when opportunities present themselves, in order to further strengthen our capital and/or better position ourselves to take advantage of identified or potential opportunities that may arise in the future.  Such alternatives may include issuance and sale of common or preferred stock, trust preferred securities, or borrowings by the Company, with proceeds contributed to the Bank.  Any such capital raising alternatives could dilute the holders of our outstanding common stock and may adversely affect the market price of our common stock.

Our ability to access markets for funding and acquire and retain customers could be adversely affected by the deterioration of other financial institutions or if the financial service industry’s reputation is damaged further.

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.  In addition, our ability to engage in routine funding and other transactions could be adversely affected by the actions and financial condition of other financial institutions.  Financial services institutions are interrelated as a result of trading, clearing, correspondent, counterparty or other relationships.  As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry in general, could lead to market-wide liquidity problems, losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions.  We could experience material changes in the level of deposits as a direct or indirect result of other banks’ difficulties or failure, which could affect the amount of capital we need.

Recent levels of market volatility were unprecedented and we cannot predict whether they will return.

From time to time over the last two of years, the capital and credit markets have experienced volatility and disruption at unprecedented levels.  In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength.  If similar levels of market disruption and volatility return, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

We operate in a highly regulated environment and we cannot predict the effect of recent and pending federal legislation.

As discussed more fully in the section entitled “Supervision and Regulation”, we are subject to extensive regulation, supervision and examination by federal and state banking authorities.  In addition, as a publicly traded company, we are subject to regulation by the Securities and Exchange Commission.  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.  In that regard, proposals for legislation restructuring the regulation of the financial services industry are currently under consideration.  Adoption of such proposals could, among other things, increase the overall costs of regulatory compliance.  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.  Recently, these powers 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.

We cannot accurately predict the actual effects of recent legislation or the proposed regulatory reform measures and various governmental, regulatory, monetary and fiscal initiatives which have been and may be enacted on the financial markets, on the Company and on the Bank. The terms and costs of these activities, or the failure of these actions to help stabilize the financial markets, asset prices, market liquidity and a continuation or worsening of current financial market and economic conditions could materially and adversely affect our business, financial condition, results of operations, and the trading price of our common stock.



Fluctuating interest rates could adversely affect our profitability.

Our profitability is dependent to a large extent upon our net interest income, which is the difference 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 net interest margin, and, in turn, our profitability.  We manage our interest rate risk within established guidelines and generally seek an asset and liability structure that insulates net interest income from large deviations attributable to changes in market rates.  However, our interest rate risk management practices may not be effective in a highly volatile rate environment.

We face strong competition from financial services companies and other companies that offer banking services.

Our three major markets are in Oregon and Washington.  The banking and financial services businesses in our market area are highly competitive and increased competition may adversely impact the level of our loans and deposits.  Ultimately, we may not be able to compete successfully against current and future competitors.  These competitors include national banks, foreign banks, regional banks and other community banks.  We also face competition from many other types of financial institutions, including savings and loan associations, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries.  In particular, our competitors include major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous locations and mount extensive promotional and advertising campaigns.  Areas of competition include interest rates for loans and deposits, efforts to obtain loan and deposit customers and a range in quality of products and services provided, including new technology driven products and services.  If we are unable to attract and retain banking customers, we may be unable to continue our loan growth and level of deposits.

Future acquisitions and expansion activities may disrupt our business and adversely affect our operating results.

We regularly evaluate potential acquisitions and expansion opportunities.  To the extent that we grow through acquisitions, we cannot ensure that we will be able to adequately or profitably manage this growth.  Acquiring other banks, branches or other assets, as well as other expansion activities, involve various risks including the risks of incorrectly assessing the credit quality of acquired assets, encountering greater than expected costs of incorporating acquired banks or branches into our Company, and being unable to profitably deploy funds acquired in an acquisition.

Anti-takeover provisions in our amended and restated articles of incorporation and bylaws and Oregon law could make a third party acquisition of us difficult.

Our amended and restated articles of incorporation contain provisions that could make it more difficult for a third party to acquire us (even if doing so would be beneficial to our shareholders) and for holders of our common stock to receive any related takeover premium for their common stock.  We are also subject to certain provisions of Oregon law that could delay, deter or prevent a change in control of us.  These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.


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:

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

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

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


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.

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

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

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

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

The Bank leases facilities for branch offices in Downtown Seattle, Washington, Downtown Bellevue, Washington, Downtown Portland, Oregon, and Vancouver, Washington.  In addition, the Bank leases a portion of an adjoining building to the High Street office for administrative and training functions.  Management considers all owned and leased facilities adequate for current use.

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     Market for Company’s Common Equity, Related Shareholder 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 2009.  During the fourth quarter 2009, the Company announced it had raised approximately $45,700 of new capital, net of underwriting discounts and commissions and transaction costs, through an underwritten public offering by issuing 5,520 shares of its common stock at a price of $8.75 per share.


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 $0.25 per share for the year 2009.  That compares to cash dividends of $0.40 per share paid for the year 2008. Regulatory authorities may prohibit the Company from paying dividends in a manner that would constitute unsafe or unsound banking practice or would reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements.  Current guidance from the Federal Reserve provides, among other things, that dividends per share generally should not exceed earnings per share, measured over the previous four fiscal quarters.  As a result, since the Company’s dividends to shareholders over the last four fiscal quarters have exceeded earnings, the Company does not expect to continue paying dividends at historic levels over the medium term, and future dividends will depend on sufficient earnings to support them and approval of appropriate bank regulatory authorities.



Equity Compensation Plan Information

Year Ended December 31, 2009
Number 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)
  919,463   $14.03   576,240
Equity compensation plans not approved by security holders
  0   $0   0

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.

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

Market Information

The Company’s common stock trades on the NASDAQ Global Select Market under the symbol PCBK.  At March 5, 2010, the Company had 18,393,773 shares of common stock outstanding held by approximately 2,025 shareholders of record.

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

Market value:



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 Index and SNL Securities $1 Billion to $5 Billion Bank Asset Size Index.  The graph assumes $100 invested on December 31, 2004, in the Company’s Common Stock and each of the indices.

Period Ending
Pacific Continental Corporation
Russell 2000
SNL Bank $1B-$5B



ITEM 5                               Selected Financial Data

Selected financial data for the past five years is shown in the table below.
($ in thousands, except for per share data)

For the year
 Net interest income
  $ 54,039     $ 49,271     $ 43,426     $ 40,057     $ 30,240  
 Provision for loan losses
  $ 36,000     $ 3,600     $ 725     $ 600     $ 1,100  
 Noninterest income
  $ 4,405     $ 4,269     $ 3,925     $ 4,401     $ 4,083  
 Noninterest expense
  $ 31,162     $ 29,562     $ 25,861     $ 23,791     $ 18,134  
 Income taxes
  $ (3,839 )   $ 7,439     $ 7,830     $ 7,412     $ 5,510  
 Net income (loss)
  $ (4,879 )   $ 12,939     $ 12,935     $ 12,655     $ 9,578  
 Cash dividends
  $ 3,272     $ 4,797     $ 4,175     $ 3,381     $ 2,556  
Per common share data (1)
 Net income (loss):
  $ (0.35 )   $ 1.08     $ 1.09     $ 1.09     $ 0.98  
  $ (0.35 )   $ 1.08     $ 1.08     $ 1.08     $ 0.95  
Cash dividends
  $ 0.25     $ 0.40     $ 0.35     $ 0.29     $ 0.25  
Book value
  $ 9.01     $ 9.62     $ 9.01     $ 8.17     $ 7.96  
Tangible book value
  $ 7.77     $ 7.72     $ 7.07     $ 6.16     $ 5.59  
Market value, end of year
  $ 11.44     $ 14.97     $ 12.52     $ 17.68     $ 14.45  
At year end
  $ 1,199,113     $ 1,090,843     $ 949,271     $ 885,351     $ 791,794  
 Loans, less allowance for loan loss (2)
  $ 930,997     $ 945,787     $ 813,647     $ 760,957     $ 671,171  
 Core deposits (4)
  $ 771,986     $ 615,832     $ 615,892     $ 580,210     $ 529,794  
 Total deposits
  $ 827,918     $ 722,437     $ 644,424     $ 641,272     $ 604,271  
 Shareholders' equity
  $ 165,662     $ 116,165     $ 107,509     $ 95,735     $ 81,412  
 Tangible Equity (3)
  $ 142,981     $ 93,261     $ 84,382     $ 72,109     $ 57,211  
Average for the year
  $ 1,129,971     $ 1,019,040     $ 903,932     $ 825,671     $ 573,717  
 Earning assets
  $ 1,051,315     $ 945,856     $ 832,451     $ 755,680     $ 533,930  
 Loans, less allowance for loan losses
  $ 943,788     $ 882,742     $ 785,132     $ 712,563     $ 501,541  
 Core deposits (4)
  $ 703,894     $ 613,243     $ 590,713     $ 533,861     $ 425,716  
 Total deposits
  $ 782,835     $ 699,623     $ 654,631     $ 605,814     $ 461,013  
 Interest-paying liabilities
  $ 810,380     $ 732,466     $ 627,569     $ 567,708     $ 372,880  
 Shareholders' equity
  $ 135,470     $ 111,868     $ 103,089     $ 90,238     $ 54,528  
Financial ratios
 Return on average:
    -0.43 %     1.27 %     1.43 %     1.53 %     1.67 %
    -3.60 %     11.57 %     12.55 %     14.02 %     17.57 %
  Tangible Equity (3)
    -4.33 %     14.56 %     16.23 %     19.12 %     18.25 %
 Avg shareholders' equity / avg assets
    11.99 %     10.98 %     11.40 %     10.93 %     9.50 %
 Dividend payout ratio
      37.07 %     32.28 %     26.72 %     26.69 %
 Risk-based capital:
  Tier I capital
    14.38 %     10.07 %     10.02 %     9.97 %     9.41 %
  Total capital
    15.63 %     11.16 %     10.98 %     11.01 %     10.57 %
(1) Per common share data is retroactively adjusted to reflect the 10% stock dividend of 2007.
(2) Outstanding loans include loans held for sale.
(3) Tangible equity excludes goodwill and core deposit intangible related to acquisitions.
(4) Core deposits include all local time deposits, including local time deposits over $100.



ITEM 6                               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 dollar amounts, 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:

local and national economic conditions could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth at historical rates and maintain the quality of our earnings assets;
the local housing / real estate market could continue to decline;
the risks presented by a continued economic recession, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations and loan portfolio delinquency rates;
interest rate changes could significantly reduce net interest income and negatively affect funding sources;
projected business increases following any future strategic expansion or opening of new branches could be lower than expected;
competition among financial institutions could increase significantly;
the goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings and capital;
the reputation of the financial services industry could deteriorate, which could adversely affect our ability to access markets for funding and to acquire and retain customers;
the efficiencies we may expect to receive from any investments in personnel, acquisitions and infrastructure may not be realized;
the level of non-performing assets and charge-offs or changes in the estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements may increase;
changes in laws and regulations (including laws and regulations concerning taxes, banking, securities, executive compensation and insurance) could have a material adverse effect on our business, financial conditions and results of operations;
acts of war or terrorism, or natural disasters, such as the effects of pandemic flu, may adversely impact our business;
the timely development and acceptance of new banking products and services and perceived overall value of these products and services by users may adversely impact our ability to increase market share and control expenses;
changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters may impact the results of our operations;
the costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews may adversely impact our ability to increase market share and control expenses; and
our success at managing the risks involved in the foregoing items will have a significant impact upon our results of operations and future prospects.

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.




% Change
% Change
2009 vs. 2008
2008 vs. 2007
Operating revenue (1)
  $ 58,444     $ 53,540       9 %   $ 47,351       13 %
Net income (loss)
  $ (4,879 )   $ 12,939       -138 %   $ 12,935       0 %
Earnings (loss) per share (2)
  $ (0.35 )   $ 1.08       -132 %   $ 1.09       -1 %
  $ (0.35 )   $ 1.08       -132 %   $ 1.08       0 %
Assets, period-end
  $ 1,199,113     $ 1,090,843       10 %   $ 949,271       15 %
Core deposits, period-end
  $ 771,986     $ 615,832       25 %   $ 615,892       0 %
Deposits, period-end
  $ 827,918     $ 722,437       15 %   $ 644,424       12 %
Return on assets
    -0.43 %     1.27 %             1.43 %        
Return on equity
    -3.60 %     11.57 %             12.55 %        
Return on tangible equity (3)
    -4.33 %     14.56 %             16.23 %        
Net interest margin
    5.14 %     5.21 %             5.22 %        
Efficiency Ratio
    53.32 %     55.21 %             54.62 %        
(1)  Operating revenue is defined as net interest income plus noninterest income.
(2) Per share data for 2007 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.

For the year 2009, the Company recorded a net loss of $4,879, compared to net income of $12,939 in 2008.    The net loss recorded in 2009 and decline in income from the prior year was primarily due to the $36,000 provision for loan losses in 2009 as credit losses increased significantly in 2009 over 2008 and the credit quality of the loan portfolio deteriorated due to weak economic conditions that significantly affected real estate values.  The Company’s core earnings (defined as earnings before provision for loan losses and taxes) remained strong at $27,282, up 14% over the prior year.  Operating revenue for the year 2009 was up 9% over the year 2008 and was primarily driven by growth in net interest income, which accounted for 92% of total operating revenue in 2009.  The improvement in 2009 net interest income was primarily the result of 11% growth in average earning assets.  During 2009, the Company actively managed its noninterest expense as evidenced by the 53.32% efficiency ratio (noninterest expense divided by operating revenue) compared to 55.21% for 2008.  During the third and fourth quarters of 2009, the Company’s efficiency ratio was 47.31% and 50.14%, respectively.   During 2009, the Company also experienced record growth in outstanding core deposits, which were up $156,154 or 25% over the prior year end due to expanding existing deposit relationships and through the development of new deposit relationships.

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.

Period-end assets at December 31, 2009 were $1,199,113, compared to $1,090,843 at December 31, 2008.  The increase in period-end assets was primarily attributable to growth in the Company’s securities portfolio as outstanding loans at December 31, 2009 were down from the same period last year.  Core deposits, which are defined as demand deposits, interest checking, money market accounts, and local time deposits (including local time deposits over $100) were $771,986 and constitute 93% of December 31, 2009 outstanding deposits.  Non-interest bearing deposits were $202,088 or 24% of total deposits at year-end December 31, 2009.



During 2010, the Company believes the following factors could impact reported financial results:

The 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;

Changes and volatility in interest rates negatively impacting yields on earning assets and the cost of interest-bearing liabilities, thus negatively affecting the net interest margin and net interest income;

The ability to grow core deposits during 2010 in a highly competitive environment where many financial institutions are experiencing liquidity problems;

The availability of wholesale funding sources due to disruption in the financial and capital markets;

The ability to manage noninterest expense growth in light of anticipated increases in regulatory expenses, including FDIC insurance assessments and expenses related to resolving problem loans; and

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


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, 2009 in Item 7 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, 2009, the Company had $22,681 in goodwill and other intangible assets.  In accordance with financial accounting standards, 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, 2009, 2008, and 2007.

Share-based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued 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 this standard which is further discussed in Note 1 of the Notes to Consolidated Financial Statements in Item 7 below.

The Company adopted the new accounting standard using the modified prospective method.  Therefore, previously reported financial data was not restated, and expenses related to equity-based payments granted and vesting during 2007, 2008, and 2009 were recorded as compensation expense.

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, 2009 in Item 7 of this report.  None of these pronouncements are expected to have a significant effect on the Company’s financial condition or 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 2009 Compared to 4th Quarter 2008

Two tables follow which analyze the changes in net interest income for the fourth quarter 2009 and fourth quarter 2008.  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 2009 was 5.02% compared to 5.28% for the fourth quarter 2008.   Table I shows that yield on earning assets for the fourth quarter 2009 of 6.21% was down 42 basis points from fourth quarter 2008 earning asset yields due to three factors: 1) a decline in yields on both loans and securities; 2) a change in the mix of earning assets as average lower yielding securities represented 14% of total average earning assets in fourth quarter 2009 compared to 6% in fourth quarter 2008; and 3) interest reversals on loans placed on nonaccrual status during the quarter and interest lost on loans on nonaccrual status.  The Bank was able to mitigate some of the decline in the yield on loans in 2009 when compared to 2008 through its practice of including floors on most of its variable rate loans.  Loan yields remained relatively stable due to active interest rate floors on approximately $280,000 of the Bank’s variable rate loan portfolio at December 31, 2009.

Table I also shows that the rates paid on interest-bearing core deposits and interest-bearing wholesale funding did not move down as fast as the decline in earning asset yields, thus causing the net interest margin to compress by 26 basis points.  The cost of interest-bearing core deposits dropped 5 basis points, while the cost of interest-bearing wholesale funding moved down 8 basis points.  In total, the total cost of interest-bearing liabilities decreased 12 basis points in fourth quarter 2009 when compared to fourth quarter 2008, while earnings asset yields declined by 42 basis points as noted above.
Table I also shows the difference between the cost of interest-bearing core deposits and wholesale funding.  Overall, interest-bearing core deposits in fourth quarter 2009 had a rate of 1.51% or 33 basis points lower than wholesale funding costs at 1.84%.  This spread is similar to the same quarter last year when the cost of interest-bearing core deposits was 36 basis points below the cost of interest-bearing wholesale funding.  However, in the historically low interest rate environment, the cost of interest-bearing core deposits remains well above the cost of short-term wholesale funding as noted by the 1.51% cost of interest-bearing core deposits in fourth quarter 2009 compared to 0.56% for federal funds purchased.  For as long as the current interest rate environment persists, and to the extent growth in interest-bearing core deposits is used to pay down short-term borrowings, there will be an adverse effect on the Bank’s net interest margin.

Table II shows the changes in net interest income due to rate and volume for the quarter ended December 31, 2009.  Interest income including loan fees for the fourth quarter 2009 increased by $535 from the same period last year.  Higher