Pacific Continental 10Q 2007 Q3 Quarterly report

As Filed with the Securities & Exchange Commission on November 5, 2007

SECURITIES & EXCHANGE COMMISSION

FORM 10-Q

[ X ]

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2007.

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

SEC File Number: 0-30106

PACIFIC CONTINENTAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

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

111 West 7th Avenue

Eugene, Oregon 97401

(address of Principal Executive Offices) (Zip Code)

(541) 686-8685

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

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

Common Stock outstanding as of October 31, 2007: 11,875,898

PACIFIC CONTINENTAL CORPORATION

FORM 10-Q

QUARTERLY REPORT

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION	Page

Item 1.	Financial Statements

	Consolidated Income Statements (unaudited):	3
	Three and nine months ended September 30, 2007 and September 30, 2006

	Consolidated Statements of Comprehensive Income (unaudited):	4
	Three and nine months ended September 30, 2007 and September 30, 2006

	Consolidated Balance Sheets (unaudited):	5
	September 30, 2007, December 31, 2006 and September 30, 2006

	Consolidated Statements of Cash Flows (unaudited):	6
	Nine months ended September 30, 2007 and September 30, 2006

	Notes to Consolidated Financial Statements (unaudited):	7


Item 2.	Management’s Discussion and Analysis of Financial	13
	Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.	Controls and Procedures	27


PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	none

Item 1a.	Risk Factors	27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	none

Item 3.	Defaults Upon Senior Securities	none

Item 4.	Submission of Matters to a Vote of Security Holders	none

Item 5.	Other Information	none

Item 6.	Exhibits	28

SIGNATURES		29

PART I

Item 1. Financial Statements

CONSOLIDATED INCOME STATEMENTS
Amounts in $ 000's, Except for Per Share Data
(Unaudited)

	Three months ended September 30,				Nine months ended September 30,
	2007		2006		2007		2006
Interest and dividend income
Loans	$	16,931	$	15,622	$	50,453	$	43,962
Securities		472		426		1,310		1,233
Dividends on Federal Home Loan Bank stock		5		-		14		-
Federal funds sold		11		14		40		34
		17,419		16,062		51,817		45,229

Interest expense
Deposits		4,946		4,151		14,350		11,386
Federal Home Loan Bank borrowings		1,160		1,482		4,549		3,711
Junior Subordinated Debentures		128		129		380		382
Federal funds purchased		207		103		304		297
		6,441		5,865		19,583		15,776

Net interest income		10,978		10,197		32,234		29,453

Provision for loan losses		125		150		450		600
Net interest income after provision		10,853		10,047		31,784		28,853

Noninterest income
Service charges on deposit accounts		342		322		1,032		994
Other fee income, principally bankcard		426		378		1,206		1,112
Loan servicing fees		25		25		74		85
Mortgage banking income and gains
on loan sales		90		214		279		599
Gain on sale of fixed assets		-		335		-		335
Other noninterest income		114		80		303		242
		997		1,354		2,894		3,367

Noninterest expense
Salaries and employee benefits		3,938		3,855		11,773		10,603
Premises and equipment		799		762		2,331		2,271
Bankcard processing		141		126		397		373
Business development		308		342		1,130		1,076
Other noninterest expense		1,213		1,024		3,639		2,878
		6,399		6,109		19,270		17,201

Income before income taxes		5,451		5,292		15,408		15,019
Provision for income taxes		2,030		1,851		5,781		5,458

Net income	$	3,421	$	3,441	$	9,627	$	9,561

Earnings per share
Basic	$	0.29	$	0.30	$	0.82	$	0.83
Diluted	$	0.29	$	0.29	$	0.80	$	0.82

Weighted average shares outstanding
Basic		11,848		11,652		11,808		11,550

Common stock equivalents
attributable to stock options		133		122		153		128
Diluted		11,981		11,774		11,961		11,678

See accompanying notes.

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

	Three months ended September 30,						Nine months ended September 30,
	2007			2006			2007			2006

Net income	$	3,421		$	3,441		$	9,627		$	9,561

Other comprehensive income:
Unrealized gains arising during the period		345			557			174			157

Income tax (expense) benefit		(132	)		(213	)		(67	)		(60	)
Net unrealized gains (losses) on securities
available for sale		213			344			107			97
Comprehensive Income	$	3,634		$	3,785		$	9,734		$	9,658

See accompanying notes.

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

	Sep. 30,			Dec. 31,			Sep. 30,
	2007			2006			2006
ASSETS
Cash and due from banks	$	20,357		$	32,323		$	25,531
Interest-bearing deposits with banks		410			406			406
Federal funds sold		130			49			2,082
Total cash and cash equivalents		20,897			32,778			28,019

Securities available-for-sale		50,345			38,783			39,360
Loans held for sale		-			2,140			1,971
Loans, less allowance for loan losses		795,184			758,816			733,414
Interest receivable		4,277			3,998			3,617
Federal Home Loan Bank stock		3,480			3,480			3,480
Property, net of accumulated depreciation		19,934			18,591			18,104
Goodwill and other intangible assets		23,182			23,626			24,034
Deferred tax asset		1,964			1,652			1,370
Other assets		1,626			1,487			1,351

Total assets	$	920,889		$	885,351		$	854,720

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand	$	175,932		$	187,834		$	178,321
Savings and interest-bearing checking		405,578			355,863			329,178
Time $100,000 and over		47,025			48,876			46,932
Other time		54,679			48,699			57,754
Total deposits		683,214			641,272			612,185

Federal funds purchased		13,500			4,410			16,890
Federal Home Loan Bank borrowings		107,500			131,804			120,429
Junior subordinated debenture		8,248			8,248			8,248
Accrued merger consideration liability		242			256			334
Accrued interest and other payables		3,768			3,626			3,345
Total liabilities		816,472			789,616			761,431

Stockholders' equity
Common stock, no par value; 25,000,000 shares		60,304			58,255			58,068
authorized; 11,865,541, 11,711,990, 11,687,639
outstanding as of September 30, 2007,
December 31, 2006 and September 30, 2006,
respectively
Retained earnings		44,251			37,725			35,483
Accumulated other comprehensive loss		(138	)		(245	)		(262	)
		104,417			95,735			93,289

Total liabilities and stockholders’ equity	$	920,889		$	885,351		$	854,720

See accompanying notes.

CONSOLIDATED STATEMENTS OF CASH FLOWS
Amounts in $ 000’s
(Unaudited)

	For nine months ended Sep. 30,
	2007			2006

Net cash provided by operating activities	$	12,643		$	8,518

Cash flows from investing activities
Proceeds from sales and maturities of investment securities		6,111			4,578
Purchase of investment securities		(17,417	)		(4,632	)
Loans made net of principal collections received		(67,432	)		(62,478	)
Proceeds from sale of loans		31,510			5,377
Purchase of loans		(118	)		(6,406	)
Cash paid for acquisitions		(15	)		(12,671	)
Purchase of property		(2,327	)		(2,118	)
Proceeds from sale of property		-			403
Proceeds on sale of foreclosed assets		-			194

Net cash used in investing activities		(49,688	)		(77,753	)

Cash flow from financing activities
Change in deposits		41,942			7,914
Change in federal funds purchased and
FHLB short-term borrowings		14,090			12,890
Proceeds from FHLB term advances		436,500			312,000
FHLB term advances paid-off		(465,804	)		(268,375	)
Proceeds from stock options exercised		1,366			3,274
Excess tax benefit of stock options exercised		172			239
Dividends paid		(3,102	)		(2,531	)

Net cash provided by financing activities		25,164			65,411

Net decrease in cash and cash equivalents		(11,881	)		(3,824	)

Cash and cash equivalents, beginning of period		32,778			31,843

Cash and cash equivalents, end of period	$	20,897		$	28,019

See accompanying notes.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A complete set of Notes to Consolidated Financial Statements is a part of the Company’s 2006 Form 10-K filed March 15, 2007. The notes below are included due to material changes in the financial statements or to provide the reader with additional information not otherwise available. All numbers in the following notes are expressed in thousands of dollars, except per share data. All outstanding shares and per share data for the third quarter and nine months of 2006 have been retroactively adjusted to reflect the 10% stock dividend distributed June 15, 2007.

1. Basis of Presentation

The accompanying interim consolidated financial statements include the accounts of Pacific Continental Corporation (the “Company”), a bank holding company, and its wholly-owned subsidiary, Pacific Continental Bank (the “Bank”) and the Bank’s wholly-owned subsidiaries, PCB Services Corporation and PCB Loan Services Corporation (both of which are presently inactive). All significant intercompany accounts and transactions have been eliminated in consolidation.

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

The balance sheet data as of December 31, 2006 was derived from audited financial statements, but does not include all disclosures contained in the Company’s 2006 Form 10-K. The interim consolidated financial statements should be read in conjunction with the December 31, 2006 consolidated financial statements, including the notes thereto, included in the Company’s 2006 Form 10-K.

2. Equity and Liability Based Compensation Plans

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

The Bank’s stock option and equity compensation plan information has been retroactively restated to reflect the 10% stock dividend declared and paid during the second quarter 2007.

Pursuant to the Company’s 1999 Employees’ Stock Option Plan, as amended (the “1999 ESOP Plan”), either incentive stock option or non-qualified option awards have been granted to employees. Subsequent to the annual shareholders’ meeting in April 2006, all shares available for future grants under this plan were cancelled and are no longer available for future grants. Stock options in the past had been granted at exercise prices not less than 100% of the fair market value of our common stock at the grant date. The Compensation Committee or the Board of Directors determined vesting provisions when stock options were granted, and stock options granted generally vested over three or four years. The maximum life of stock options granted under this plan was ten years from the grant date.

Pursuant to the Company’s 1999 Directors’ Stock Option Plan, as amended (the “1999 DSOP Plan”), non-qualified options awards had been granted to directors. Subsequent to the annual shareholders’ meeting in April 2006, all shares available for future grants under this plan were cancelled and are no longer available for future grants. Stock options had been granted at exercise prices of not less than 100% of the fair market value of our common stock at the grant date. The maximum life of options granted under this plan was ten years from the grant date.

Pursuant to the approval of the 2006 Stock Option and Equity Compensation Plan (the “2006 SOEC Plan”) at the annual shareholders’ meeting in April 2006, incentive stock options, nonqualified stock options, restricted stock, restricted stock units, or stock appreciation rights may be awarded to attract and retain the best available personnel for positions of responsibility with the corporation and its subsidiaries. The exercise price for shares of common stock subject to an option shall not be less than 100% of the fair market value of a share of common stock as of the date of grant of the option; provided, however, that in the case of an incentive stock option granted to an employee who immediately before the grant of such incentive stock option is a shareholder-employee, the incentive stock option exercise price shall be at least 110% of the fair value of the common stock as of the date of grant of the incentive stock option. The Compensation Committee of the Board of Directors may impose any terms or conditions on the vesting of an award that it determines to be appropriate. The first stock options, under this plan, were granted in the third quarter 2006, in which 60 incentive stock options, each with a fair value of $3.88, were issued to selected employees. The Company issued no options during the third quarter 2007. However, the Company did issue 71 incentive stock options, with a fair value of $4.45 per unit, to selected employees during the nine-month period ending September 30, 2007.

Pursuant to the Company’s 2006 SOEC Plan, stock appreciation rights (SARs) may be granted to employees. The stock appreciation rights may be settled in cash or cash and common stock as determined at the date of issuance. The Compensation Committee or the Board of Directors determines vesting provisions when awards are granted, and the awards granted generally vest over three or four years and have a maximum life of ten years. SARs settled in stock are recognized as equity-based awards while SARs settled in cash are recognized on the balance sheet as liability-based awards, both of which are granted at the fair market value of our common stock at the grant date. The grant-date fair value of the liability based awards vesting in the current period, along with the change in fair value of the awards during the period, are recognized as compensation expense and as an adjustment to the recorded liability. The Company began issuing SARS in the third quarter 2006, in which 75 SARs settled in stock and 60 SARs settled in cash were issued with both awards having a fair value of $3.88 per SAR. No SARs were issued during the third quarter 2007. For the nine-month period ending September 30, 2007, the Company issued 152 SARs, with a fair value of $4.45 per unit, of which 66 are to be settled in cash, while 86 are to be settled in stock. The conversion of SARs, to be settled in stock, is estimated to be one share of common stock for every 4.89 SARs. Therefore, 18 shares of common stock are expected to be issued if all 86 SARs are settled.

Also, pursuant to the Company’s 2006 SOEC Plan, non-qualified options awards have been granted to directors. Stock options have been granted at exercise prices of not less than 100% of the fair market value of our common stock at the grant date. The maximum life of options granted under this plan is ten years from the grant date. The Company issued 21 nonqualified stock options, with a fair value of $2.65 per option, during the third quarter 2006. The Company issued no options during the third quarter 2007 and issued 18 nonqualified stock options, with a fair value of $3.09 per option, to the directors during the nine-month period ending September 30, 2007.

The following tables identify the compensation expenses and tax benefits received by the Company according to the compensation plans and awards described above for the three- and nine-month periods ending September 30, 2007 and 2006:

	3-months ending Sep. 30, 2007				3-months ending Sep. 30, 2006
	Comp. Exp.		Tax Benefit		Comp. Exp.		Tax Benefit
1999 ESOP Plan	$	75	$	-	$	75	$	-
1999 DSOP Plan		-		-		14		5
2006 SOEC - ISOs		28		-		5		-
2006 SOEC - SARS stock		34		-		11		-
2006 SOEC - SARS cash		15		6		-		-
2006 SOEC - DSOs		7		2		1		-
Total	$	159	$	8	$	106	$	5


	9-months ending Sep. 30, 2007				9-months ending Sep. 30, 2006
	Comp. Exp.		Tax Benefit		Comp. Exp.		Tax Benefit
1999 ESOP Plan	$	228	$	-	$	318	$	-
1999 DSOP Plan		7		3		56		31
2006 SOEC - ISOs		80		-		5		-
2006 SOEC - SARS stock		94		-		11		-
2006 SOEC - SARS cash		40		22		-		-
2006 SOEC - DSOs		19		10		1		-
Total	$	468	$	35	$	391	$	31

Stock Options –

The following table provides the weighted-average fair values for stock options granted during the three– and nine-month periods ending September 30, 2007 and 2006. These values were estimated using the Black-Scholes option valuation model with the following weighted-average assumptions:

	Three Months Ended Sep. 30,		Nine Months Ended Sep. 30,
	2007	2006	2007	2006

Expected life in years (1)	N/A	5.48	5.61	5.34
Volatility (1)	N/A	18.29%	17.87%	18.16%
Interest Rate (2)	N/A	4.72%	4.81%	4.72%
Yield Rate (3)	N/A	1.78%	1.58%	1.78%

Average Fair-Value	N/A	$ 3.56	$ 4.18	$ 3.48

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

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

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

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

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

Total Stock Options	Shares			Average Price Per Share		Weighted-Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at December 31, 2006		842		$	11.68
Granted		89			18.39
Exercised		(154	)		9.16
Forfeited or expired		(7	)		13.70
Outstanding at September 30, 2007		770		$	12.94		3.42	$	2,347

Exercisable at September 30, 2007		427		$	10.90		2.32	$	2,007

Nonvested Options	Shares			Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2006		311		$	2.88
Granted		89			4.18
Vested		(50	)		2.74
Forfeited or expired		(6	)		2.73
Outstanding at September 30, 2007		343		$	3.24

A summary of value received by employees and directors exercising stock options for the three- and nine-month periods ending September 30, 2007 and 2006 is presented below:

	Three months ended Sep. 30,				Nine months ended Sep. 30,
	2007		2006		2007		2006
Total intrinsic value of
stock options exercised	$	215	$	684	$	1,206	$	2,724

Stock Appreciation Rights -

The following table provides the weighted-average fair values for stock appreciation rights (SARs) to be settled in stock granted during the three- and nine-month periods ending September 30, 2007 and 2006. These are considered to be equity-based awards. No activity was recognized during the third quarter 2007. The values were estimated using the Black-Scholes option valuation model with the following weighted-average assumptions:

	Three Months Ended Sep. 30,		Nine Months Ended Sep. 30,
	2007	2006	2007	2006

Expected life in years (1)	N/A	6.00	6.00	6.00
Volatility (1)	N/A	19.51%	18.68%	19.51%
Interest Rate (2)	N/A	4.72%	4.81%	4.72%
Yield Rate (3)	N/A	1.78%	1.58%	1.78%

Average Fair-Value	N/A	$ 3.88	$ 4.45	$ 3.88

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

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

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

A summary of SAR – stock award activity during the current fiscal year is presented below:

Total SAR - Stock Awards	Awards			Average Price Per Award		Weighted-Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at December 31, 2006		75		$	16.34
Granted		86			18.39
Exercised		-			-
Forfeited or expired		(4	)		17.14
Outstanding at September 30, 2007		157		$	17.44		9.19	$	-

Exercisable at September 30, 2007		18		$	16.34		9.19	$	-

Nonvested SAR - Stock Awards	Awards			Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2006		75		$	3.88
Granted		86			4.45
Vested		(18	)		3.88
Forfeited or expired		(4	)		4.10
Outstanding at September 30, 2007		139		$	4.22

The stock appreciation rights (SARs) to be settled in cash awarded February 13, 2007 have the same weighted –average fair value inputs as the SARs settled in stock mentioned above.

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

Total SAR - Cash Awards	Shares			Average Price Per Share		Weighted-Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at December 31, 2006		60		$	16.34
Granted		66			18.39
Exercised		-			-
Forfeited or expired		(8	)		17.22
Outstanding at September 30, 2007		118		$	17.43		9.19	$	-

Exercisable at September 30, 2007		14		$	16.34		9.19	$	-

Nonvested SAR - Cash Awards	Shares			Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2006		60			3.88
Granted		66			4.45
Vested		(14	)		3.88
Forfeited or expired		(8	)		3.88
Outstanding at September 30, 2007		104		$	4.22

At September 30, 2007, the Company has estimated unrecognized compensation expense of $670, $423 and $222 for unvested stock options, SAR – stock awards and SAR – cash awards, respectively. These amounts are based on a forfeiture rate assumption of 20% for all awards granted to employees. The weighted-average period of time the unrecognized compensation expense will be recognized for the unvested stock options, SAR – stock awards and SAR – cash awards is approximately 2.6, 3.2 and 3.2 years, respectively.

3. Loans

Major classifications of loans at September 30, 2007, December 31, 2006, and September 30, 2006 are as follows:

	September 30, 2007			December 31, 2006			September 30, 2006

Commercial loans	$	185,929		$	169,566		$	154,185
Real estate loans		612,740			590,855			577,978
Consumer loans		7,288			9,168			12,332

		805,957			769,589			744,495
Deferred loan origination fees		(2,039	)		(2,489	)		(2,648	)

		803,918			767,100			741,847
Allowance for loan losses		(8,734	)		(8,284	)		(8,433	)

	$	795,184		$	758,816		$	733,414

Allowance for loan losses

Below is a summary of additions and charges against the allowance for loan losses for the nine-month periods ending September 30, 2007 and 2006:

	2007			2006

Balance, January 1	$	8,284		$	7,792
Provision charged to income		450			600
Loans charged against allowance		(61	)		(63	)
Recoveries credited to allowance		61			104

Balance, September 30	$	8,734		$	8,433

The recorded investment in restructured and other impaired loans totaled $1,554 and $629 at September 30, 2007 and 2006, respectively. Impaired loans at September 30, 2007 include $1,325 of nonaccrual loans and $229 of a 90-day past-due loan that was still accruing interest. The specific valuation allowance for loan losses related to these impaired loans was $291 and $138 at September 30, 2007 and 2006, respectively, and is included in the ending allowance shown above. The average recorded investment in impaired loans for the first nine months of 2007 and 2006 was approximately $1,029 and $611, respectively. Interest income recognized on restructured and impaired loans was $110 and $28 in the first nine months of 2007 and 2006, respectively.

A substantial portion of the loan portfolio is collateralized by real estate, and is, therefore, susceptible to changes in local market conditions. Management believes that the loan portfolio is diversified among industry groups. At September 30, 2007, outstanding residential construction loans totaled $98,395 and represented 12.2% of total outstanding loans. In addition, at September 30, 2007, unfunded loan commitments for residential construction totaled approximately $40,327. Outstanding residential construction loans at December 31, 2006 were $100,996 or 13.3% of total outstanding loans, and unfunded commitments for residential construction totaled approximately $59,642. There are no other industry concentrations in excess of 10% of total outstanding loans. It is management’s opinion that the allowance for loan losses is adequate to absorb known and inherent risks in the loan portfolio. However, actual results may differ from estimates.

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

The following discussion contains a review of Pacific Continental Corporation’s and its wholly-owned subsidiary, Pacific Continental Bank’s operating results and financial condition for the three and nine months ended September 30, 2007. When warranted, comparisons are made to the same period in 2006 and to the previous year ended December 31, 2006. The discussion should be read in conjunction with the financial statements (unaudited) and related notes contained elsewhere in this report. The reader is assumed to have access to the Company’s Form 10-K for the previous year ended December 31, 2006, which contains additional statistics and explanations. All numbers, except per share data, are expressed in thousands of dollars.

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

SUMMARY OF CRITICAL ACCOUNTING POLICIES

The SEC defines “critical accounting policies” as those that require the application of management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. Significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements for the year ended December 31, 2006 as filed on the Form 10-K. 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 amounts 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 accounts 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 possible and may have a material impact on the Company’s consolidated financial statements, results of operations, or liquidity.

Goodwill and Intangible Assets

At September 30, 2007, the Company had $23,182 in goodwill and other intangible assets consisting of $22,030 in goodwill and $1,152 in core deposit intangible from the 2005 acquisition of Northwest Business Financial Corporation (NWBF). During the second quarter 2007, the Bank sold its Consumer Finance Division and eliminated the $275 of goodwill related to this division. The core deposit intangible is currently being amortized to expense over seven years at approximately $223 per year. In accordance with Financial Accounting Standard 142, Goodwill and Other Intangible Assets, which was effective January 1, 2002, assets with indefinite lives are no longer amortized, but instead are periodically tested for impairment. Management performs an impairment analysis for the intangible assets with indefinite lives quarterly and has determined that there was no impairment as of September 30, 2007.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 157, “Fair Value Measurement”, defining fair value, establishing a framework for measuring fair value in generally accepted accounting principles, and expanding disclosures about fair value measurements. SFAS 157 is effective for the Company beginning in 2008. Implementation of SFAS 157 is not expected to have a material impact on our financial statements.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans”, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS 158”). This standard requires employers to recognize the under or over funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through accumulated other comprehensive income. The new reporting requirements and related new footnote disclosure rules of SFAS 158 are effective for fiscal years ending after December 15, 2007, and are not expected to have a material impact on our financial statements as the Company does not currently offer a defined benefit plan for its employees.

On February 15, 2007, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115”. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in Statement 159 are elective; however, the amendment to FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. The FASB's stated objective is "to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions."

The fair value option established by Statement 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments.

Although early adoption of this standard is allowed, the Company has elected to adopt Statement 159 effective January 1, 2008 as that is the beginning of our next fiscal year after November 15, 2007. Implementation of SFAS 159 is not expected to have a material impact on our financial statements.

HIGHLIGHTS

	For the three months ended Sep. 30,									For the nine months ended Sep. 30,
	2007			2006			% Change			2007			2006			% Change

Net income	$	3,421		$	3,441			-1	%	$	9,627		$	9,561			1	%

Earnings per share
Basic (1)	$	0.29		$	0.30			-3	%	$	0.82		$	0.83			-1	%
Diluted (1)	$	0.29		$	0.29			0	%	$	0.80		$	0.82			-2	%

Assets, period-end										$	920,889		$	854,720			8	%
Loans, period-end										$	803,918		$	743,818			8	%
Core Deposits, period-end (2)										$	619,464		$	547,557			13	%
Deposits, period-end										$	683,214		$	612,185			12	%

Return on avg. assets (3)		1.51	%		1.64	%					1.44	%		1.57	%
Return on avg. equity (3)		13.03	%		14.90	%					12.66	%		14.46	%
Return on avg. tangible equity (4)		16.76	%		20.20	%					16.46	%		19.88	%

(1)	All per share data has been retroactively adjusted to reflect 10% stock dividend declared and paid during the second quarter 2007.

(2)	Defined by the Company as demand, interest checking, money market, savings, and local time deposits, including local time deposits in excess of $100 thousand.

(3)	Amounts annualized.

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

The Company earned $3,421 in the third quarter 2007, a 1% decrease from net income of $3,441 for the same quarter last year. Earnings per diluted share were $0.29 for third quarter 2007, the same as was reported for the prior year third quarter. During the third quarter 2006, the Bank recorded two nonrecurring transactions that resulted in a cumulative after-tax gain of $0.01 per share.

The net interest margin for the third quarter 2007 was 5.25%, down 4 basis points from last year for the same quarter, but up 1 basis point from the 5.24% net interest margin reported for second quarter 2007. The Bank’s net interest margin has been very stable for the first three quarters of the current year with net interest margins of 5.23%, 5.24%, and 5.25% reported for first, second, and third quarters of 2007, respectively.

Noninterest expenses for third quarter 2007 were $6,399, up 5% from the $6,109 reported for third quarter 2006, reflecting cost control initiatives implemented by the Company during the first quarter 2007. On a linked-quarter basis, third quarter noninterest expense was down $114 from second quarter 2007, and down $191 from fourth quarter noninterest expense of $6,590.

For the first nine months of 2007, the Company earned $9,627, a 1% increase over the $9,561 reported for the first nine months of 2006.

Through September 30, 2007, the Company’s net interest margin was 5.24%, down 4 basis points from last year’s net interest margin of 5.28% for the same period. While the net interest margin continued to be under pressure in a challenging and highly competitive operating environment, the Company has been able to mitigate the margin compression through its ability to generate core deposit growth.

Loans and core deposits at September 30, 2007 showed growth rates of 8% and 13%, respectively, over September 30, 2006. Core deposits, which are defined as demand deposits, interest checking, money market account, and local time deposits (including local time deposits in excess of $100 thousand), constitute 91% of September 30, 2007 outstanding deposits compared to 89% at September 30, 2006. Outstanding core deposits at September 30, 2007 were $619,464, and up $71,907 or 13% over outstanding core deposits at September 30, 2006. Outstanding core deposits at September 30, 2007 grew by $17,655 in the third quarter over June 30, 2007 core deposits, when a temporary $25,000 deposit is excluded from June 30, 2007 results. During the third quarter 2007, average core deposits were $606,918, an increase of $31,978 over average core deposits of $574,940 reported for the second quarter 2007. Noninterest-bearing demand deposits at September 30, 2007 were $175,932 or 26% of total deposits and 28% of core deposits.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income is the primary source of the Company’s revenue. Net interest income is the difference between interest income derived from earning assets, principally loans, and 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.

The net interest margin as a percentage of earning assets for the third quarter 2007 was 5.25%, a 4 basis point decline from the 5.29% net interest margin reported for third quarter 2006. However, the third quarter 2007 net interest margin of 5.25% was up 1 basis point from the second quarter 2007 net interest margin of 5.24%. On a linked-quarter basis, the 1 basis point improvement in the net interest margin can be attributable to a 16 basis point decline in the Bank’s cost of funds, which was partially offset by a decline of 15 basis points in earning asset yields. The drop in the Bank’s cost of funds in third quarter 2007 from second quarter 2007 was attributable to three factors: 1) growth of $31,980 in average core deposits in third quarter 2007 over second quarter 2007; 2) implementation of presentment of imaged cash letters to correspondent banks, which increased funds availability, lowered overnight borrowings and added approximately 3 basis points to the third quarter 2007 net interest margin; and 3) market interest rates that lowered the 91-day Treasury bill rate during the quarter and effectively lowered the rate paid on approximately $200,000 of the Bank’s indexed money market deposits. In addition, the disruption in the financial markets during August 2007 created a flight to quality that led to the 91-day Treasury bill rate to fall temporarily to as low as 2.80%, again, benefiting the cost of funds and improving the net interest margin.

The following table presents the condensed average balance sheet information, together with interest income and yields on average interest-bearing liabilities for the quarter ended September 30, 2007 compared to the quarter ended September 30, 2006:

Table I

Average Balance Analysis of Net Interest Earnings

(dollars in thousands)

	Three Months Ended September 30, 2007								Three Months Ended September 30, 2006
			Interest			Average					Interest			Average
	Average		Income or			Yields or			Average		Income or			Yields or
	Balance		Expense			Rates			Balance		Expense			Rates
Interest Earning Assets
Federal funds sold and interest-
bearing deposits in banks	$	730	$	11			5.98	%	$	988	$	14			5.62	%
Securities available for sale:
Taxable (1)		39,936		435			4.32	%		38,488		394			4.06	%
Tax-exempt		4,387		42			3.80	%		3,360		32			3.78	%
Loans, net of allowance for loan losses(2)(3)(4)		784,902		16,931			8.56	%		721,675		15,622			8.59	%

Total interest earning assets		829,955		17,419			8.33	%		764,511		16,062			8.34	%

Non Earning Assets
Cash and due from banks		20,667								21,795
Premises and equipment		19,598								17,774
Goodwill & other intangibles		23,213								24,067
Interest receivable and other		6,464								4,695
Total non interest assets		69,942								68,331

Total assets	$	899,897							$	832,842

Interest-Bearing Liabilities
Money market and NOW accounts	$	380,422	$	3,587			3.74	%	$	307,669	$	2,811			3.62	%
Savings deposits		25,176		131			2.06	%		23,211		87			1.49	%
Time deposits - core (5)		29,696		327			4.37	%		38,288		361			3.74	%
Total interest-bearing core deposits		435,294		4,045			3.69	%		369,168		3,259			3.50	%

Time deposits - non-core		67,525		901			5.29	%		69,528		892			5.09	%
Federal funds purchased		16,298		220			5.36	%		7,900		115			5.78	%
FHLB borrowings		92,242		1,147			4.93	%		118,831		1,470			4.91	%
Trust preferred		8,248		128			6.16	%		8,248		129			6.21	%
Total interest-bearing alternative funding		184,313		2,396			5.16	%		204,507		2,606			5.06	%
Total interest-bearing liabilities		619,607		6,441			4.12	%		573,675		5,865			4.06	%

Noninterest-Bearing Liabilities
Demand deposits		171,624								163,641
Interest payable and other		4,502								3,886
Total noninterest liabilities		176,126								167,527
Total liabilities		795,733								741,202
Stockholders' equity		104,164								91,640
Total liabilities and stockholders' equity	$	899,897							$	832,842
Net Interest Income			$	10,978							$	10,197
Net Interest Income as a Percent of Earning Assets				5.25	%							5.29	%
(1) Federal Home Loan Bank stock is included in securities available for sale.
(2) Nonaccrual loans have been included in average balance totals.
(3) Interest income includes recognized loan origination fees of $521 and $603 for the three months ended
September 30, 2007 and 2006, respectively.
(4) Total includes loans held for sale.
(5) Core time deposits include all non-public time deposits, including in-market non-public time deposits over $100.

Table I above shows that earning asset yields for the third quarter 2007 of 8.33% were virtually unchanged from third quarter 2006 earning asset yields. While earning asset yields were relatively unchanged, the Bank’s cost of interest-bearing liabilities increased from 4.06% for third quarter 2006 to 4.12% for third quarter 2007. This increase is reflected in both the cost of the Bank’s interest-bearing core deposits and cost of alternative funding. Each of the Bank’s interest-bearing core deposit categories showed an increase in rates, as did all alternative funding categories, with the exception of federal funds purchased. Table I also illustrates the significant difference between the Bank’s cost of interest-bearing core deposits compared to the cost of alternative funding. For the quarter ended September 30, 2007, the Bank’s cost of interest-bearing core deposits was 3.69% or 147 basis points below the cost of alternative funding at 5.16%. When the Bank’s average noninterest-bearing deposits of $171,624 are included in the core deposit base, the average cost of core deposits drops to 2.69% for the third quarter 2007 or 247 basis points below the cost of alternative funding.

The following table sets forth a summary of the changes in net interest income due to changes in average asset and liability balances (volume) and changes in average rates (rate) for the three months ended September 30, 2007 as compared to the same period last year:

Table II

Analysis of Changes in Interest Income and Interest Expense

(dollars in thousands)

	Three Months Ended September 30, 2007 compared to September 30, 2006 Increase (decrease) due to
		Volume			Rate			Net
Interest earned on:
Federal funds sold and interest
bearing deposits in banks		$	(4	)	$	1		$	(3	)
Securities available-for-sale:
Taxable			15			26			41
Tax-exempt			10			0			10
Loans, net of allowance for loan losses			1,369			(60	)		1,309

Total interest income			1,390			(33	)		1,357

Interest paid on:
Money market and NOW accounts			(686	)		(90	)		(776	)
Savings deposits			(10	)		(34	)		(44	)
Time deposits - core			95			(60	)		34
Total interest-bearing core deposits			(601	)		(184	)		(786	)

Time deposits - non-core			27			(35	)		(9	)
Federal funds purchased			(113	)		8			(105	)
FHLB borrowings			331			(8	)		323
Trust preferred			-			1			1
Total interest-bearing alternative funding			244			(34	)		210

Total interest expense			(357	)		(218	)		(576	)

Net interest income		$	1,033		$	(251	)	$	781

The quarter ended September 30, 2007 rate/volume analysis shows that interest income, including recognized loan fees, improved by $1,357 over the same period last year. Higher volumes of earning assets increased interest income by $1,390, while lower yields on loans decreased interest income by $33. The rate/volume analysis shows that interest expense for the quarter ended September 30, 2007 increased by $576 over the same quarter last year, as higher volumes on all deposit categories caused interest expense to increase by $357, combined with changes in rates, which increased interest expense by $218.

The Company is starting the fourth quarter with a strong core deposit base due to the growth experienced during the third quarter, and historically the core deposit growth rate accelerates during the fourth quarter each year. In addition, due to the Company’s relatively balanced interest rate risk profile, the recent action or any future action by the Federal Reserve to lower short-term interest rates is not expected to have a material impact on the Bank’s net interest margin.

However, the Company does not expect any significant abatement in the competitive environment for loans and deposits and when combined with the projected interest rate environment, suggests a flat margin in the fourth quarter 2007 when compared to the third quarter 2007 margin. The interest margin forecast is highly dependent upon the historical expectation that the core deposit growth rate will accelerate during the fourth quarter and that this growth in core deposits will be in the appropriate product mix.

The following table presents the condensed balance sheet information, together with interest income and yields on year-to-date average interest-earning assets, and interest expense and rates on interest-bearing liabilities for the nine months ended September 30, 2007 compared to September 30, 2006:

Table I

Average Balance Analysis of Net Interest Earnings

(dollars in thousands)

	Nine Months Ended September 30, 2007								Nine Months Ended September 30, 2007
			Interest			Average					Interest			Average
	Average		Income or			Yields or			Average		Income or			Yields or
	Balance		Expense			Rates			Balance		Expense			Rates
Interest Earning Assets
Federal funds sold and interest-
bearing deposits in banks	$	1,039	$	40			5.19	%	$	960	$	34			4.74	%
Securities available for sale:
Taxable (1)		38,449		1,216			4.23	%		38,673		1,142			3.95	%
Tax-exempt		3,958		108			3.64	%		3,220		91			3.78	%
Loans, net of allowance for loan losses(2)(3)(4)		778,774		50,453			8.66	%		702,336		43,962			8.37	%

Total interest earning assets		822,220		51,817			8.43	%		745,189		45,229			8.11	%

Non Earning Assets
Cash and due from banks		22,349								23,011
Premises and equipment		19,384								17,428
Goodwill & other intangibles		23,449								24,116
Interest receivable and other		6,608								4,490
Total non interest assets		71,790								69,045

Total assets	$	894,010							$	814,234

Interest-Bearing Liabilities
Money market and NOW accounts	$	360,040	$	10,292			3.82	%	$	298,231	$	7,408			3.32	%
Savings deposits		25,542		404			2.12	%		23,083		239			1.38	%
Time deposits - core (5)		30,660		959			4.18	%		41,574		1,086			3.49	%
Total interest-bearing core deposits		416,242		11,655			3.74	%		362,888		8,733			3.22	%

Time deposits - non-core		68,747		2,695			5.24	%		74,875		2,653			4.74	%
Federal funds purchased		7,954		325			5.47	%		7,882		323			5.48	%
FHLB borrowings		119,502		4,528			5.07	%		106,181		3,685			4.64	%
Trust preferred		8,248		380			6.16	%		8,248		382			6.19	%
Total interest-bearing alternative funding		204,451		7,928			5.18	%		197,186		7,043			4.78	%
Total interest-bearing liabilities		620,693		19,583			4.22	%		560,074		15,776			3.77	%

Noninterest-Bearing Liabilities
Demand deposits		167,461								159,997
Interest payable and other		4,210								5,748
Total noninterest liabilities		171,671								165,745
Total liabilities		792,364								725,819
Stockholders' equity	$	101,646							$	88,415
Total liabilities and stockholders' equity	$	894,010							$	814,234
Net Interest Income			$	32,234							$	29,453
Net Interest Income as a Percent of Earning Assets				5.24	%							5.28	%
(1) Federal Home Loan Bank stock is included in securities available for sale.
(2) Nonaccrual loans have been included in average balance totals.
(3) Interest income includes recognized loan origination fees of $1,618 and $1,506 for the nine months ended
September 30, 2007 and 2006, respectively.
(4) Total includes loans held for sale.
(5) Core time deposits include all non-public time deposits, including in-market non-public time deposits over $100.

Table I above shows that earning asset yields improved by 32 basis points in the first nine months of 2007 over the same period last year from 8.11% to 8.43%. Table I shows the overall cost of interest-bearing liabilities for the first nine months of 2007 was 4.22%, up 45 basis points from the 3.77% cost for the same period last year. Table I also illustrates the difference between the cost of interest-bearing core deposits for the first nine months of 2007 as compared to the cost of alternative funding. Table I shows that through September 30, 2007, the cost of interest-bearing core deposits was 3.74% or 144 basis points less than the 5.18% cost of alternative funding. When noninterst-bearing demand deposits are included in the core deposit base, the overall cost of the Bank’s core deposits fall to 2.67% for the first nine months of 2007 or 251 basis points less than the cost of alternative funding.

The following table sets forth a summary of the changes in net interest income due to changes in average asset and liability balances (volume) and changes in average rates (rate) for the nine months ended September 30, 2007 as compared to the same period last year:

Table II

Analysis of Changes in Interest Income and Interest Expense

(dollars in thousands)

	Nine Months Ended September 30, 2007 compared to September 30, 2006 Increase (decrease) due to
		Volume			Rate			Net
Interest earned on:
Federal funds sold and interest
bearing deposits in banks		$	2		$	4		$	6
Securities available-for-sale:
Taxable			(7	)		81			74
Tax-exempt			21			(4	)		17
Loans, net of allowance for loan losses			4,785			1,706			6,491

Total interest income			4,801			1,787			6,588

Interest paid on:
Money market and NOW accounts			(1,766	)		(1,117	)		(2,884	)
Savings deposits			(39	)		(126	)		(165	)
Time deposits - core			341			(214	)		127
Total interest-bearing core deposits			(1,464	)		(1,457	)		(2,922	)

Time deposits - non-core			240			(282	)		(42	)
Federal funds purchased			(3	)		1			(2	)
FHLB borrowings			(505	)		(338	)		(843	)
Trust preferred			0			2			2
Total interest-bearing alternative funding			(268	)		(618	)		(885	)

Total interest expense			(1,732	)		(2,075	)		(3,807	)

Net interest income		$	3,069		$	(288	)	$	2,781

The year-to-date September 30, 2007 rate/volume analysis shows that interest income, including recognized loan fees, improved by $6,588 over the same period last year. Higher volumes of earning assets increased interest income by $4,801, and higher yields on loans increased interest income by $1,787. The rate/volume analysis shows that interest expense through September 30, 2007 increased by $3,807 over last year, as higher volumes on all deposit categories caused interest expense to increase by $1,733, combined with changes in rates, which increased interest expense by $2,074.

Loan Loss Provision and Allowance

Below is a summary of the Company’s allowance for loan losses for the first nine months of:

	2007			2006

Balance, January 1	$	8,284		$	7,792
Provision charged to income		450			600
Loans charged against allowance		(61	)		(63	)
Recoveries credited to allowance		61			104

Balance, September 30	$	8,734		$	8,433

The year-to-date September 30, 2007 provision for loan losses was $450, compared to $600 for the same period last year. The lower provision in 2007 reflects a slowdown in loan growth during the current year and continued stability in the overall credit quality of the Bank’s loan portfolio.

There were no year-to-date September 30, 2007 net loan charge offs compared to $41 in net loan recoveries reported for the same period in 2006. The allowance for loan losses at September 30, 2007 was 1.09% of period end loans compared to 1.08% and 1.13% at December 31, 2006 and September 30, 2006, respectively. The allowance at September 30, 2007 includes $291 in specific allowance (included in the ending allowance above) for impaired loans, which total $1,554. Impaired loans include $1,325 of nonaccrual loans and a 90-day past due loan in the amount of $229, which was still accruing interest. At December 31, 2006, the Company had $495 of impaired loans with a specific allowance of $109 assigned.

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

	Sep. 30, 2007		Dec. 31, 2006		Sep. 30, 2006
Nonaccrual loans	$	1,325	$	-	$	208
90 days past due and accruing interest		229		-		-
Total nonperforming loans		1,554		-		208
Nonperforming loans guaranteed by government		-		-		(82	)
Net nonperforming loans		1,554		-		126
Foreclosed assets		-		-		-
Total nonperforming assets, net of guaranteed loans	$	1,554	$	-	$	126

At September 30, 2007, net nonperforming assets as a percentage of total assets was 0.17%. That compares to total net nonperforming assets to total assets of 0.00% and 0.01% at December 31, 2006 and September 30, 2006, respectively. Nonperforming assets at September 30, 2007 were $1,554, up approximately $1,400 over June 30, 2007 levels. The increase in third quarter nonperforming assets is attributable to the addition of seven nonaccrual loans from an isolated segment of the Bank’s consumer residential construction loan portfolio. Through an independent third-party review initiated by Bank management, management ascertained that an additional 25 loans in this small segment of the Bank’s portfolio totaling approximately $3,000 present similar risk profiles of the seven loans already placed on nonaccrual status. While management believes that some increase in nonperforming assets from this portfolio in the fourth quarter is likely, management does not expect any significant losses on these or any future nonperforming loans in this portfolio due to a cash-secured 20% principal guarantee for each of these loans. Management also believes that the calculation of the adequacy of the allowance for loan losses has accurately captured the inherent risk in this portfolio, and thus expects no specific addition to the provision for loans losses or the allowance for loan losses will be required for these loans.

Noninterest Income

Noninterest income through September 30, 2007 was $2,894, down $473 or 14% from the same period in 2006. Excluding the $335 gain on sale of rental properties included in 2006 results, noninterest income through September 30, 2007 was down $138 or 5% from the same period last year. The following discussion on noninterest income will exclude the effect of the gain on sale of rental properties in 2006. The $138 decline in year-to-date noninterest income from September 30, 2006 was primarily due to $319 decrease in revenues from the origination and sale of residential mortgages. This decline can be attributable to a significant slowdown in the mortgage market and the loss of an experienced mortgage lender early in the year. In addition, current disruption in the residential mortgage area has led to the Bank’s current buyers of mortgage loans all tightening underwriting standards and is expected to persist into 2008. The decline in mortgage revenues was partially offset by an increase of $119 in the other income category and an increase in other service charges. The increase in the other income category was primarily attributable to loan referral fees and loan filing fee revenues. The other service charge category increase was primarily due to increased wire transfer fees.

On a linked quarter basis, and as projected, third quarter 2007 noninterest income of $997 was up $48 over second quarter noninterest income of $949, primarily due to higher revenues from the origination and sale of mortgage loans and increased account service charges. Noninterest income in the fourth quarter 2007 is expected to be flat to down slightly from third quarter 2007 as residential mortgage revenues are expected to contract from third quarter levels. However, account service charge income is expected to offset all or a portion of this decline as the lower 91-day Treasury bill rate will lower the earnings credit on analyzed business accounts and increase hard dollar fee income.

Noninterest Expense

Noninterest expense through September 30, 2007 was $19,270, an increase of $2,069 or 12% over the same period in 2006. Virtually all categories of noninterest expense showed an increase over last year. Personnel expense was up $1,170 or 11% in the first nine months of 2007 over the same period last year and accounted for 57% of the total increase in noninterest expense on a year-over-year basis. This increase can be attributed to salary increases and equity-pay adjustments made during the first half of 2007 combined with the full year effect of staff additions made during 2006, primarily in the Seattle and Portland markets. The other noninterest expense category is also showing an increase of $761 or 26% over last year through September 30, 2007 and is primarily attributable to increased third party processing expenses of $223 due to new contracts, a $67 increase in on-line banking processing due to enhanced systems provided by an outside party, and a $367 increase in the other expenses category. The increase in the other expense category is related to the write-down of goodwill on the sale of Consumer Finance Division assets and increased expenses due to additions to the Bank’s liability for unfunded loan commitments.

Beginning in first quarter 2007, the Bank undertook a number of expense control initiatives and, on a linked quarter basis, and as projected, third quarter 2007 noninterest expense of $6,399 was down $114 or 1.8% from second quarter 2007 noninterest expense of $6,513, and down $191 from fourth quarter 2006 noninterest expense of $6,590. The effectiveness of the Bank’s cost control initiatives was also evidenced by the year-over-year growth in third quarter 2007 expense over third quarter 2006 expense. Third quarter 2007 noninterest expense of $6,399 was up $290 or 4.8% over third quarter 2006 noninterest expense of $6,109.

Looking forward to the fourth quarter, noninterest expense is expected to be up from third quarter 2007. This expected increase is the result of higher anticipated personnel costs and the completion of the Bank’s new and highly visible Tualatin, Oregon office.

BALANCE SHEET

Loans

At September 30, 2007, outstanding loans, net of deferred loan fees, and including loans held for sale, were $803,918, up $60,100 or 8.1% over outstanding loans of $743,818 at September 30, 2006 and up $34,678 from December 31, 2006 outstanding loans of $769,240. The sale of Consumer Finance Division loans during the second quarter reduced outstanding loans at September 30, 2007 by approximately $10,800. A summary of loans by market follows:

	Balance		Balance		Balance
	Sep. 30, 2007		Dec. 31, 2006		Sep. 30, 2006

Lane County Market	$	216,602	$	234,118	$	237,571

Portland Market		390,186		378,904		357,847

Seattle Market		197,130		156,218		148,400

Total	$	803,918	$	769,240	$	743,818

The Seattle and Portland markets are accounting for the Bank’s loan growth. The decline in Lane County market loans is attributable to the sale of $10,800 of Consumer Finance Division loans and normal seasonal changes and payoffs. Loan growth in this market is expected to accelerate during the last three months of the year. During the third quarter 2007, the Bank’s residential construction portfolio contracted by approximately $19,000. This contraction is expected to continue into the fourth quarter 2007. While contraction in the residential construction area is expected, the prospects for increased loan activity in the fourth quarter 2007 is good as the Bank’s new business opportunity pipelines in other business segments remain strong in all three of the Bank’s principal markets.

Securities

The Bank presently has $50,345 in securities classified as available-for-sale. During the third quarter 2007, the Bank purchased approximately $17,417 in new securities. These purchases were part of an overall plan to make opportunistic additions to the securities portfolio in light of current market conditions, reposition the duration of the Bank’s securities portfolio, and to replace, in advance, projected cash flows of approximately $25,000 expected over the next 16 months from the portfolio. The plan calls for purchases of additional securities of approximately $10,000 to $13,000 during the fourth quarter 2007 as opportunities present themselves. At September 30, 2007, $12,681 of the Bank’s securities were pledged as collateral for public deposits in Oregon and Washington and to the Federal Reserve Bank of San Francisco to support balances in its Treasury, Tax and Loan deposit account.

Goodwill and Intangible Assets

At September 30, 2007, the Company had a recorded balance of $22,030 in goodwill attributable to the November 30, 2005 acquisition of NWBF. In addition, at September 30, 2007, the Company had $1,152 in core deposit intangible assets resulting from the acquisition of NWBF. During the second quarter 2007, the goodwill associated with the Consumer Finance Division of $275 was eliminated as a result of the sale of this division’s loans. In accordance with Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, the Company does not amortize goodwill or other intangible assets with indefinite lives, but instead periodically tests these assets for impairment. Management is required to perform an impairment analysis for the intangible assets (goodwill) with indefinite lives at least annually. Management did perform an impairment analysis at September 30, 2007 and determined there was no indication of impairment of goodwill at that time. The core deposit intangible was determined to have an expected life of approximately seven and one-half years and will be amortized through mid-year 2013.

Deposits

Outstanding deposits at September 30, 2007 were $683,214, an increase of $71,029 over outstanding deposits of $612,185 at September 30, 2006. Core deposits, which are defined by the Company as demand, interest checking, money market, savings, and local time deposits, including local time deposits in excess of $100 thousand, were $619,464, up $71,907 or 13% over last year and represented 91% of total deposits at September 30, 2007. A summary of both core deposit growth by market and other deposits classified as alternative funding follows:

	Balance		Balance		Balance
	Sep. 30, 2007		Dec. 31, 2006		Sep. 30, 2006

Lane County Market core deposits	$	398,121	$	392,903	$	374,642

Portland Market core deposits		125,458		124,273		109,819

Seattle Market core deposits		95,885		63,034		63,096

Total core deposits		619,464		580,210		547,557

Other deposits		63,750		61,062		64,628

Total	$	683,214	$	641,272	$	612,185

The Lane County and Seattle markets are accounting for the majority of year-over-year growth in core deposits and the growth of core deposits during the first nine months of 2007. The Lane County market core deposits are up $23,479 or 6% over last year, of which $15,248 came in the third quarter 2007. The Seattle market accounted for $32,789 of the year-over-year growth in the Bank’s core deposits, all of which came during the first nine months of 2007. The Portland market has experienced an increase of over $15,000 in its year-over-year core deposit base. Although competition for core deposits is extremely high in all markets, the Bank expects its core deposit growth trend started in the third quarter to continue through the fourth quarter 2007 as the pipeline for new deposit relationships is strong in all three markets. Management expects all three markets to increase their core deposit base during the fourth quarter.

Junior Subordinated Debentures

The Company had $8,248 in junior subordinated debentures at September 30, 2007, which were issued in conjunction with the acquisition of NWBF. At September 30, 2007, the entire $8,248 in junior subordinated debenture had an interest rate of 6.265% that is fixed through January 2011. As of September 30, 2007, the entire balance of the junior subordinated debentures qualified as Tier 1 capital under regulatory capital guidelines. Additional information regarding the terms of the junior subordinated debentures, including maturity/repricing dates and interest rate, is included in Note 12 of the Notes to Consolidated Financial Statements in the Company’s 2006 annual Form 10-K.

Capital Resources

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

Below is a summary of changes in the Company’s capital accounts from December 31, 2006 through September 30, 2007:

Beginning capital December 31, 2006	$	95,735
Net income for nine months ended Sep. 30, 2007		9,627
Additions from exercise of stock options		1,366
Share based payments		424
Tax benefit from options exercised		260
Change in other accumulated comprehensive loss		107
Cash dividends paid to shareholders		(3,102	)

Ending capital September 30, 2007	$	104,417

Banking regulations require the Company to maintain minimum levels of capital. The Company manages its capital to maintain a “well capitalized” designation (the FDIC’s highest rating). A “well-capitalized” rating from the FDIC requires that the Bank maintain risk-based capital levels of 10% of total risk-based assets. At September 30, 2007, the Company’s total capital to risk weighted assets was 11.03%, compared to 10.94% at September 30, 2006.

The Company’s Board of Directors reviews its dividend considerations so that cash dividends, when and if declared by the Company, would typically be paid in mid-March, June, September, and December of each year. During the first three quarters of 2007, the Company declared quarterly dividends of $0.09 per share paid on March 15, 2007, June 15, 2007 and September 15, 2007. The Company also declared and paid a 10% stock dividend during the second quarter of 2007 and maintained its $0.09 per share cash dividend. The Company expects to continue the $0.09 per share dividend amount for each quarter remaining in 2007, which would result in an annual dividend of $0.35 per share, and would equate to a 21% increase over the prior year, retroactively adjusting last year’s outstanding shares and cash dividends paid.

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

OFF-BALANCE SHEET ARRANGEMENTS AND COMMITMENTS

In the normal course of business, the Bank commits to extensions of credit and issues letters of credit. The Bank uses the same credit policies in making commitments to lend funds and conditional obligations as it does for other credit products. In the event of nonperformance by the customer, the Bank’s exposure to credit loss is represented by the contractual amount of the instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established by the contract. Since some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At September 30, 2007, the Bank had $248,040 in commitments to extend credit.

Letters of credit written are conditional commitments issued by the Bank to guarantee performance of a customer to a third party. The credit risk involved is essentially the same as that involved in extending loan facilities to customers. At September 30, 2007, the Bank had $4,086 in letters of credit and financial guarantees written.

The Bank also has internal guidance lines of credit established for certain borrowers, primarily in the residential construction industry. These guidance lines are not contractual commitments to extend credit, and may be terminated by the Bank for any reason without any obligation to the borrower. These lines provide the Bank’s lenders limits on future extensions of credit to certain borrowers. The Bank uses the same credit policies in establishing internal guidance lines as it does for other credit products. At June 30, 2007, the Bank had unused and uncommitted guidance lines totaling approximately $47,689.

LIQUIDITY

Liquidity is the term used to define the Company’s ability to meet its financial commitments. The Company maintains sufficient liquidity to ensure funds are available for both lending needs and the withdrawal of deposit funds. The Company derives liquidity primarily through core deposit growth, the maturity of investment securities, and loan payments. Core deposits include demand, interest checking, money market, savings and local time deposits, including local time deposits in excess of $100. Additional liquidity is provided through sales of loans, sales of securities, and access to alternative funding sources. National time deposits, public deposits, Federal Home Loan Bank borrowings, and unsecured overnight fed funds borrowings are referred to as alternative funding sources.

Core deposits represented 91% of total deposits at September 30, 2007 compared to 89% at September 30, 2006. Historically, during the third quarter each year, core deposit growth accelerates, which was the case during third quarter 2007. Excluding the $25,000 temporary deposit included in the June 30, 2007 core deposit base, outstanding core deposits at September 30, 2007 were up $17,655 over the prior quarter end. Average core deposits for the third quarter 2007 of $606,920 also showed a significant increase over the prior quarter, up nearly $32,000. Growth in core deposits during the third quarter funded all of the loan growth experienced and securities purchased during the quarter. At September 30, 2007, alternative funding sources were funding 20% of total Company assets compared to 19% of total assets at December 31, 2006. Historically, core deposit growth is the strongest during the fourth quarter each year, and thus management expects core deposit growth is expected to fund all or a substantial portion of loan growth during the fourth quarter.

The Bank has a borrowing limit with the Federal Home Loan Bank of Seattle (the “FHLB”) equal to 30% of total assets. At September 30, 2007, the borrowing line was approximately $270,000. However, two factors limit the availability of the FHLB line: value of collateral pledged and amount of FHLB stock owned. At September 30, 2007, the Company had collateral pledged valued at approximately $140,000 and had stock on hand and use of the FHLB excess stock pool that would permit total borrowings of approximately $220,000, thus total borrowings at September 30, 2007 were limited to by collateral pledged of approximately $140,000. At September 30, 2007, $107,500 was advanced on the FHLB line. At

September 30, 2007, the Bank has established unsecured overnight lines totaling $118,000 with various correspondent banks of which $13,500 was being used at quarter end. In addition, at September 30, 2007, the Bank has commercial real estate loans pledged to the Federal Reserve Bank of San Francisco, which permits it to borrow up to approximately $6,400. Other sources of liquidity available to the Bank at September 30, 2007 included approximately $4,000 in funding available through the State of Washington time deposit program, $27,360 of unpledged securities available-for-sale, and approximately $27,500 of marketable government guaranteed loans included in the Bank’s loan portfolio. Subsequent to the end of the quarter, the Bank pledged approximately $30,000 of Commercial & Industrial loans on its line of credit with the Federal Reserve Bank of San Francisco, which increased the borrowing capacity on this line to approximately $22,000. In addition, the real estate loans that were pledged to the Federal Reserve Bank of San Francisco will be repledged to the FHLB of Seattle, thus increasing collateral pledged on the FHLB line in fourth quarter 2007.

Item 3. Quantitative and Qualitative Disclosures on Market Risk

There has been no material change in the Bank’s exposure to market risk. Readers are referred to the Bank’s Form 10-K and the Annual Report to Shareholders for the period ending December 31, 2006, for specific discussion.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-14(c) and 15d-14(c)) as of September 30, 2007, the date of this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective and timely, providing them with material information relating to the Company required to be disclosed in the reports we file or submit under the Exchange Act.

Changes in Internal Controls

There have not been any significant changes in our internal controls or in other factors during the first nine months 2007 that could significantly affect these controls subsequent to the date of their evaluation. We are not aware of any significant deficiencies or material weaknesses in our internal controls, therefore no corrective actions were taken.

PART II. Other Information

Item 1A. Risk Factors

Our business exposes us to certain risks. The following is a discussion of the most significant risks and uncertainties that may affect our business, financial condition and future results. However, these are not the only risks and uncertainties that the Company faces. Additional risks and uncertainties that the Company currently does not know about or believes to be immaterial, or that have not been predicted, may also harm the Company’s business operations or adversely affect the Company. If any of these risks or uncertainties actually occurs, the Company’s business, financial condition, operating results or liquidity could be materially harmed.

Fluctuating interest rates and availability of low cost deposits can adversely affect our profitability

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

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

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

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

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

Item 6. Exhibits

(a)

Exhibits

31.1 302 Certification, Hal Brown, Chief Executive Officer

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

Chief Financial Officer

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

SIGNATURES

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

PACIFIC CONTINENTAL CORPORATION

(Registrant)

	Dated November 5, 2007	/s/ Hal Brown
		Hal Brown
		Chief Executive Officer



	Dated November 5, 2007	/s/ Michael A. Reynolds
		Michael A. Reynolds
		Executive Vice President and Chief Financial Officer

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Pacific Continental Inactive 10-Q2007 Q3 Quarterly report

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