Pacific Continental 10Q 2008 Q3 Quarterly report

As Filed with the Securities & Exchange Commission on November 6, 2008

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, 2008.

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

SEC File Number: 0-30106

PACIFIC CONTINENTAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

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

111 West 7th Avenue

Eugene, Oregon 97401

(address of Principal Executive Offices) (Zip Code)

(541) 686-8685

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Act.

(Check one).

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

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, 2008: 12,012,819

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, 2008 and September 30, 2007

	Consolidated Statements of Comprehensive Income (unaudited): Three and nine months ended September 30, 2008 and September 30, 2007	4

	Consolidated Balance Sheets (unaudited):	5
	September 30, 2008, December 31, 2007 and September 30, 2007

	Consolidated Statements of Cash Flows (unaudited):	6
	Nine months ended September 30, 2008 and September 30, 2007

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial	15
	Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosures on Market Risk	29

Item 4.	Controls and Procedures	29

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	none

Item 1a.	Risk Factors	29

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	32

SIGNATURES		33

CONSOLIDATED INCOME STATEMENTS

Amounts in $ 000’s, Except for Per Share Data

(Unaudited)

	Three months ended				Nine months ended
	September 30,				September 30,
	2008		2007		2008		2007
Interest and dividend income
Loans	$	16,019	$	16,931	$	47,181	$	50,453
Securities		647		472		2,070		1,310
Dividends on Federal Home Loan Bank stock		9		5		132		14
Federal funds sold		5		11		18		40
		16,680		17,419		49,401		51,817

Interest expense
Deposits		2,696		4,946		7,844		14,350
Federal Home Loan Bank & Federal Reserve borrowings		1,463		1,160		4,552		4,549
Trust preferred securities		127		128		373		380
Federal funds purchased		91		207		555		304
		4,377		6,441		13,324		19,583

Net interest income		12,303		10,978		36,077		32,234

Provision for loan losses		1,050		125		2,550		450
Net interest income after provision for loan losses		11,253		10,853		33,527		31,784

Noninterest income
Service charges on deposit accounts		421		342		1,217		1,032
Other fee income, principally bankcard		470		426		1,378		1,206
Loan servicing fees		20		25		68		74
Mortgage banking income		72		90		291		279
Other noninterest income		64		114		273		303
		1,047		997		3,227		2,894

Noninterest expense
Salaries and employee benefits		4,670		3,938		13,705		11,773
Premises and equipment		995		799		2,967		2,331
Bankcard processing		143		141		421		397
Business development		315		308		966		1,130
Other noninterest expense		1,374		1,213		4,068		3,639
		7,497		6,399		22,127		19,270

Income before provision for income taxes		4,803		5,451		14,627		15,408
Provision for income taxes		1,783		2,030		5,521		5,781

Net income	$	3,020	$	3,421	$	9,106	$	9,627

Earnings per share
Basic	$	0.25	$	0.29	$	0.76	$	0.82
Diluted	$	0.25	$	0.29	$	0.76	$	0.80

Weighted average shares outstanding
Basic		11,978		11,848		11,960		11,808

Common stock equivalents
attributable to stock-based awards		55		133		60		153
Diluted		12,033		11,981		12,020		11,961

See accompanying notes.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Amounts in $ 000’s

(Unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007

Net income	$	3,020		$	3,421		$	9,106		$	9,627

Other comprehensive income:
Unrealized gains (losses) arising during the period		(532	)		345			(1,330	)		174

Income tax (expense) benefit		204			(132	)		510			(67	)
Net unrealized gains on securities
available for sale		(328	)		213			(820	)		107
Comprehensive Income	$	2,692		$	3,634		$	8,286		$	9,734

See accompanying notes.

CONSOLIDATED BALANCE SHEETS

Amounts in $ 000’s

(Unaudited)

	September 30,			Dec. 31,			September 30,
	2008			2007			2007
ASSETS
Cash and due from banks	$	21,510		$	23,809		$	20,357
Interest-bearing deposits with banks		290			410			410
Federal funds sold		-			1,857			130
Total cash and cash equivalents		21,800			26,076			20,897

Securities available-for-sale		49,848			53,994			50,345
Loans held for sale		447			-			-
Loans, less allowance for loan losses		913,430			813,647			795,184
Interest receivable		4,096			3,652			4,277
Federal Home Loan Bank stock		9,198			3,795			3,480
Property, net of accumulated depreciation		21,000			20,876			19,934
Goodwill and other intangible assets		22,960			23,127			23,182
Other assets		9,105			4,104			3,590

Total assets	$	1,051,884		$	949,271		$	920,889

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand	$	178,632		$	175,941		$	175,932
Savings and interest-bearing checking		413,688			401,714			405,578
Time $100,000 and over		61,850			31,856			47,025
Other time		57,470			34,913			54,679
Total deposits		711,640			644,424			683,214

Federal funds purchased		38,460			5,360			13,500
Federal Home Loan Bank and Federal Reserve borrowings		176,000			179,500			107,500
Junior subordinated debentures		8,248			8,248			8,248
Accrued interest and other payables		4,338			4,230			4,010
Total liabilities		938,686			841,762			816,472

Stockholders' equity
Common stock, 25,000,000 shares authorized
issued & outstanding: 11,994,363 at Sept. 30, 2008,
11,934,866 at December 31, 2007, and
11,865,541 at Sept. 30, 2007		62,037			77,909			60,304
Retained earnings		52,003			29,622			44,251
Accumulated other comprehensive loss		(842	)		(22	)		(138	)
		113,198			107,509			104,417

Total liabilities and stockholders’ equity	$	1,051,884		$	949,271		$	920,889

See accompanying notes.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in $ 000’s

(Unaudited)

	For nine months ended September 30,
	2008			2007

Net cash provided by operating activities	$	11,340		$	12,643

Cash flows from investing activities
Proceeds from sales and maturities of investment securities		15,115			6,111
Purchase of available for sale investment securities		(12,158	)		(17,417	)
Loans made net of principal collections received		(95,726	)		(67,432	)
Proceeds from sale of loans		-			31,510
Purchase of loans		(12,120	)		(118	)
Cash paid for acquisitions		(2	)		(15	)
Purchase of property		(1,216	)		(2,327	)
Proceeds on sale of foreclosed assets		3,152			-
Purchase of energy tax credits		(1,000	)		-
Purchase of FHLB stock		(5,403	)		-

Net cash provided by investing activities		(109,358	)		(49,688	)

Cash flow from financing activities
Change in deposits		67,217			41,942
Change in federal funds purchased and
FHLB & FRB short-term borrowings		73,100			14,090
Proceeds from FHLB term advances		692,500			436,500
FHLB term advances paid-off		(736,000	)		(465,804	)
Proceeds from stock options exercised		514			1,366
Excess tax benefit of stock options exercised		-			172
Dividends paid		(3,589	)		(3,102	)

Net cash provided by financing activities		93,742			25,164

Net decrease in cash and cash equivalents		(4,276	)		(11,881	)

Cash and cash equivalents, beginning of period		26,076			32,778

Cash and cash equivalents, end of period	$	21,800		$	20,897

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A complete set of Notes to Consolidated Financial Statements is a part of the Company’s 2007 Form 10-K filed March 14, 2008. 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, except per share data.

Certain amounts contained in the prior period consolidated financial statements have been reclassified where appropriate to conform with the financial statement presentation used in the current period. These reclassifications had no effect on previously reported net income.

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, 2007 was derived from audited financial statements, but does not include all disclosures contained in the Company’s 2007 Form 10-K. The interim consolidated financial statements should be read in conjunction with the December 31, 2007 consolidated financial statements, including the notes thereto, included in the Company’s 2007 Form 10-K.

2. Stock Option Plans

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 Company and its subsidiaries. Upon adoption of the 2006 SOEC Plan, the Company’s 1999 Employees’ Stock Option Plan (“1999 ESOP Plan”) and the Directors’ Stock Option Plan (“1999 DSOP Plan”) were cancelled and no longer available for future grants. The exercise price for shares of common stock subject to an option under the 2006 SOEC Plan shall not be less than 100% of the fair market value of a share of common stock as of the date of grant of the option; provided, however, that in the case of an incentive stock option granted to an employee who immediately before the grant of such incentive stock option is a 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. For the quarter ended September 30, 2008, the Company issued no incentive stock options.

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 of the Board of Directors determines vesting provisions when awards are granted, and the awards granted generally vest over three or four years and have a maximum life of ten years. SARs settled in stock are recognized as equity-based awards while SARs settled in cash are recognized on the balance sheet as liability-based awards, both of which are granted at the fair market value of our common stock at the grant date. The grant-date fair value of the liability based awards vesting in the current period, along with the change in fair value of the awards during the period, are recognized as compensation expense and as an adjustment to the recorded liability. For the quarter ended September 30, 2008, the Company issued no SARs.

Also, pursuant to the Company’s 2006 SOEC Plan, non-qualified options and restricted stock awards may be granted to directors. Stock options may be granted at exercise prices of not less than 100% of the fair market value of our common stock at the grant date. Restricted stock awards may be granted at the fair market value on the date of the grant. The maximum life of options granted under this plan is ten years from the grant date. For the quarter ended September 30, 2008, the Company issued no stock options or restricted stock awards to its Directors.

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 months ended September 30, 2008 and 2007:

	Three months ended September 30, 2008				Three months ended September 30, 2007
	Comp. Exp.		Tax Benefit		Comp. Exp.		Tax Benefit
1999 ESOP Plan	$	42	$	-	$	75	$	-
1999 DSOP Plan		-		-		-		-
2006 SOEC - ISOs		41		-		28		-
2006 SOEC - SARS stock		47		18		34		-
2006 SOEC - SARS cash		10		4		15		6
2006 SOEC - DSOs		7		3		7		2
2006 SOEC - DRSA		18		7		-		-
Total	$	165	$	32	$	159	$	8

	Nine months ended				Nine months ended
	September 30, 2008				September 30, 2007
	Comp. Exp.		Tax Benefit		Comp. Exp.		Tax Benefit
1999 ESOP Plan	$	130	$	-	$	228	$	-
1999 DSOP Plan		-		-		7		3
2006 SOEC - ISOs		118		-		80		-
2006 SOEC - SARS stock		136		52		94		-
2006 SOEC - SARS cash		1		-		40		22
2006 SOEC - DSOs		21		8		19		10
2006 SOEC - DRSA		42		16		-		-
Total	$	448	$	76	$	468	$	35

Stock Options –

The following table provides the weighted-average fair values for stock options granted during the three and nine months ended September 30, 2008 and 2007. These values were estimated using the Black-Scholes option valuation model with the following weighted-average assumptions:

	Three Months Ended Sept. 30,				Nine Months Ended Sept. 30,
	2008		2007		2008			2007

Expected life in years (1)		-		-		7.01			5.61
Volatility (1)		-		-		18.93	%		17.87	%
Interest Rate (2)		-		-		3.44	%		4.81	%
Yield Rate (3)		-		-		2.77	%		1.58	%

Average Fair-Value	$	-	$	-	$	2.59		$	4.18

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

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

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

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

A summary of stock option activity for all Company plans for the fiscal year ending September 30, 2008 is presented below:

Total Stock Options	Shares			Average Price Per Share		Weighted-Average Remaining Contractual Life		Aggregate Intrinsic Value
Outstanding at December 31, 2007		698		$	13.46
Granted		94			1.55
Exercised		(55	)		8.11
Forfeited or expired		(23	)		15.64
Outstanding at September 30, 2008		714		$	13.77		3.80	$	1,119

Exercisable at September 30, 2008		445		$	12.56		1.48	$	1,097

Nonvested Options	Shares			Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2007		233		$	3.48
Granted		94			2.59
Vested		(47	)		(1.09	)
Forfeited or expired		(11	)		3.21
Outstanding at September 30, 2008		269		$	3.98

A summary of value received by employees and directors exercising stock options for the three and nine month periods ending September 30, 2008 and 2007 is presented below:

	Three months ended Sept. 30,				Nine months ended Sept. 30,
	2008		2007		2008		2007
Total intrinsic value of
stock options exercised	$	61	$	215	$	218	$	1,206

Stock Appreciation Rights -

The following table provides the weighted-average fair values for stock appreciation rights (SARs) to be settled in stock and granted during the nine months ended September 30, 2008. These are considered to be equity-based awards. The values were estimated using the Black-Scholes option valuation model with the following weighted-average assumptions:

	Three months ended Sept. 30,				Nine months ended Sept. 30,
	2008		2007		2008			2007

Expected life in years (1)		-		-		6.01			6.00
Volatility (1)		-		-		16.99	%		18.68	%
Interest Rate (2)		-		-		3.21	%		4.81	%
Yield Rate (3)		-		-		2.78	%		1.58	%

Average Fair-Value	$	-	$	-	$	2.15		$	4.45

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

(2)	Interest rates are 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
Outstanding at December 31, 2007		155		$	17.44
Granted		128			-
Exercised		-			-
Forfeited or expired		(13	)		16.61
Outstanding at September 30, 2008		270		$	16.03		8.75

Exercisable at September 30, 2008		53		$	17.09		8.12

Nonvested SAR - Stock Awards	Awards	Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2007	137	$ 4.22
Granted	128	2.15
Vested	(36)	4.21
Forfeited or expired	(12)	3.69
Outstanding at September 30, 2008	217	$ 3.03

The following table provides the weighted-average fair values for stock appreciation rights (SARs) to be settled in cash granted during the nine months ended September 30, 2008. These are considered to be liability-based awards. The values were estimated using the Black-Scholes option valuation model with the following weighted-average assumptions:

	Three months ended Sept. 30,				Nine months ended Sept. 30,
	2008		2007		2008			2007

Expected life in years (1)		-		-		5.01			6.00
Volatility (1)		-		-		15.89	%		18.68	%
Interest Rate (2)		-		-		3.01	%		4.81	%
Yield Rate (3)		-		-		2.77	%		1.58	%

Average Fair-Value	$	-	$	-	$	1.85		$	4.45

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

2)	Interest rates are 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 – 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
Outstanding at December 31, 2007		116		$	17.41
Granted		93			14.43
Exercised		-			-
Forfeited or expired		(14	)		16.36
Outstanding at September 30, 2008		195		$	16.06		8.73

Exercisable at September 30, 2008		40		$	17.06		8.11

Nonvested SAR - Cash Awards	Shares			Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2007		102		$	4.22
Granted		93			1.85
Vested		(27	)		4.17
Forfeited or expired		(13	)		3.32
Outstanding at September 30, 2008		155		$	2.88

At September 30, 2008, the Company has estimated unrecognized compensation expense of approximately $508, $475 and $126 for unvested stock options, SAR – stock awards and SAR – cash awards, respectively. These amounts are based on forfeiture rates 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 2.46, 2.68 and 3.06 years, respectively.

3. Loans

Major classifications of period end loans are as follows:

	September 30, 2008			December 31, 2007			September 30, 2007

Commercial loans	$	210,695		$	188,940		$	186,026
Real estate loans		701,093			627,140			612,712
Consumer loans		13,984			8,226			7,153

		925,772			824,306			805,891
Deferred loan origination fees		(1,670	)		(1,984	)		(1,973	)

		924,102			822,322			803,918
Allowance for loan losses		(10,672	)		(8,675	)		(8,734	)

	$	913,430		$	813,647		$	795,184

Allowance for loan losses

Below is a summary of additions, charge-offs and recoveries within the allowance for loan losses for the nine month periods ending September 30, 2008 and 2007:

	2008			2007

Balance, January 1	$	8,675		$	8,284
Provision charged to income		2,550			450
Loans charged against allowance		(723	)		(61	)
Recoveries credited to allowance		170			61

Balance, September 30	$	10,672		$	8,734

The recorded investment in impaired loans, net of government guarantees, totaled $3,077 and $1,554 at September 30, 2008 and 2007, respectively. The specific valuation allowance for impaired loans was $583 and $291 at September 30, 2008 and 2007, respectively, and is included in the ending allowance shown above. The average recorded investment in impaired loans was approximately $5,076 and $1,029 during the first nine months of 2008 and 2007, respectively. Interest income recognized on impaired loans was $0 and $110 in the first nine months of 2008 and 2007, 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, 2008, outstanding residential construction loans totaled $87,496 and represented 9.5% of total outstanding loans. In addition, at September 30, 2008, unfunded loan commitments for residential construction totaled $25,210. Outstanding residential construction loans at December 31, 2007 were $96,918 or 11.8% of total outstanding loans, and unfunded commitments for residential construction totaled $46,461. Outstanding loans to dental practitioners totaled $112,899 and represented 12.2% of total outstanding loans at September 30, 2008. 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 these estimates.

4. Fair Value

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

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

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

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

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

The table below shows assets measured at fair value as of September 30, 2008:

			Fair Value
	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Recurring Items
Available-for-sale securities	$	49,848	$	-	$	49,848	$	-

Non-Recurring Items
Goodwill		22,031		-		-		22,031
Loans measured for impairment
(net of guarantees)		3,077		-		-		3,077
Other real estate owned		3,186		-		-		3,186

Total	$	78,142	$	-	$	49,848	$	28,294

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

The following discussion contains a review of Pacific Continental Corporation and its wholly-owned subsidiary Pacific Continental Bank operating results and financial condition for the nine and three months ended September 30, 2008. When warranted, comparisons are made to the same period in 2007 and to the previous year ended December 31, 2007. 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, 2007, 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; a continued decline in the housing and real estate market, 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; a tightening of available credit, 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 release. Readers should carefully review any risk factors described in Pacific Continental’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other documents, including any Current Reports on Form 8-K furnished to or filed from time to time with the Securities & Exchange Commission. This statement is included for the express purpose of invoking PSLRA's safe harbor provisions.

SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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, 2007 in Item 8. 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 loan losses 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 objective and 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 September 30, 2008, the Company had $22,960 in goodwill and other intangible assets. In accordance with Financial Accounting Standard 142, Goodwill and Other Intangible Assets, assets with indefinite lives are no longer amortized, but instead are periodically tested for impairment. Management performs an impairment analysis of the intangible assets with indefinite lives at least annually. At September 30, 2008, management performed an interim analysis and determined there was no impairment of the goodwill at the time of the analysis.

Share-based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued FAS 123(R), Share Based Payment, a revision to the previously issued guidance on accounting for stock options and other forms of equity-based forms of compensation issued to employees. This standard became effective in the first quarter of 2006. The method for determining the grant date fair value of equity based payments under FAS 123(R) is presented above in the footnotes to the consolidated financial statements.

The Company adopted FAS 123(R) using the modified prospective method. Therefore, previously reported financial data was not restated, and expenses related to equity-based payments granted and vesting during 2008 and 2007 were recorded as compensation expense.

Recent Accounting Pronouncements

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.

The Company did not elect the fair value option on financial assets and liabilities, other than investment securities held for sale already so stated. Implementation of SFAS 159 is not expected to impact the Company’s consolidated financial statements.

HIGHLIGHTS

													As of and
	For the three months ended Sept. 30,									For the nine months ended Sept. 30,
	2008			2007			% Change			2008			2007			% Change

Net income	$	3,020		$	3,421			-11.72	%	$	9,106		$	9,627			-5.41	%

Earnings per share
Basic	$	0.25		$	0.29			-13.79	%	$	0.76		$	0.82			-7.32	%
Diluted	$	0.25		$	0.29			-13.79	%	$	0.76		$	0.80			-5.00	%

Assets, period-end										$	1,051,884		$	920,889			14.22	%
Loans, period-end										$	924,102		$	803,918			14.95	%
Core Deposits, period end (1)										$	639,201		$	619,464			3.19	%
Deposits, period-end										$	711,640		$	683,214			4.16	%

Return on avg. assets (2)		1.16	%		1.51	%					1.21	%		1.44	%
Return on avg. equity (2)		10.68	%		13.03	%					10.97	%		12.66	%
Return on avg. tangible equity (2) (3)		13.42	%		16.77	%					13.86	%		16.46	%

(1) Defined by the Company as demand, interest checking, money market, savings, and local time deposits,
including local time deposits in excess of $100 thousand.
(2) Amounts annualized.
(3) Tangible equity excludes goodwill and core deposit intangibles related to acquisitions.

The Company earned $3,020 in the third quarter 2008, a 12% decrease from net income of $3,421 for the same quarter last year. The decline in net income in third quarter 2008 was due to a higher provision for loan losses, combined with growth in noninterest expenses. Operating revenue consists of net interest income and noninterest income, which grew by $1,325 or 12% and $50 or 5%, respectively. The growth in net interest income resulted from growth in average earning assets, which were up 16% in third quarter 2008 over third quarter 2007, which was partially offset by a declining net interest margin.

For the first nine months of 2008, the Company earned $9,106, a 5% decrease from net income of $9,627 for the same period last year. The decline in year-to-date September 30, 2008 net income was attributable to the same factors as the decline in quarter-over-quarter net income as described above. Operating revenue for the first nine months of 2008 was $39,304, an improvement of $4,176 or 12% over the same period last year. Net interest income and noninterest income were up $3,843 or 12% and $333 or 12%, respectively, over the same period last year.

Period-end loans at September 30, 2008 showed growth of 15% over September 30, 2007. Core deposits at September 30, 2008 were up 3% from September 30, 2007. 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 90% of September 30, 2008 and 91% of September 30, 2007 outstanding deposits. Noninterest-bearing demand deposits were $178,632 or 28% of outstanding core deposits at September 30, 2008.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income is the primary source of the Company’s revenue. Net interest income is the difference between interest income derived from earnings assets, principally loans, and interest expense associated with interest-bearing liabilities, principally deposits. The volume and mix of earnings 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 average earning assets for the third quarter 2008 was 5.08%, down 17 basis points from the 5.25% reported for the third quarter 2007. On a linked-quarter basis, the third quarter 2008 net interest margin of 5.08% was down 16 basis points from the second quarter 2008 net interest margin of 5.24%. There were a number of factors that contributed to the third quarter 2008 net interest margin compared to the second quarter 2008 net interest margin including the following: 1) the industry’s continued liquidity squeeze that kept alternative funding costs high; 2) the expiration of active floors on a portion of the Bank’s variable rate loan portfolio; 3) the extension of the maturity structure of alternative funding using brokered and local certificates of deposit; and 4) a core deposit promotion that was implemented in late second quarter of 2008 that attracted approximately $65 million in deposits.

Due to the current daily volatility and disruption in the financial markets, it has become increasingly difficult to provide forward-looking projections of the Company’s net interest margin. There are presently certain factors suggesting some improvement in the Company’s net interest margin in the fourth quarter 2008, including the 50 basis point emergency reduction in market interest rates during the first week of October 2008 that activated floors on approximately $233,000 of the Bank’s variable rate loan portfolio. In addition, loan pricing opportunities are available in the Company’s markets as evidenced by improving yields on loans over the course of the third quarter 2008. On the funding side, through the use of the Bank’s multiple sources of short-term funding, average rates paid during the first three weeks of October 2008 averaged approximately 1.00% or 50 basis points under the stated overnight fed funds rate of 1.50%. In addition, a 100 basis point drop in the 91-day Treasury bill rate lowered the rate on approximately $160,000 of the Bank’s indexed money market accounts.

On the other hand, other factors point to a flat to lower fourth quarter 2008 net interest margin when compared to third quarter 2008. First, although the Bank’s recent core deposit promotion concluded on October 10, 2008, the 3.09% promotional rate on approximately $55 million of core deposits is effective until January 9, 2009. Second, the extension of liability maturities during late second quarter 2008 and third quarter 2008 through a local time deposit promotion, while improving the Bank’s liquidity position came at the expense of the net interest margin. Third, the Bank was not able to fully offset the recent 50 basis point decline in market interest rates on much of its core deposit base due to stated or virtual floor rates on many deposit products. Fourth, while to date, the Bank has been able to take advantage of the volatility in short-term funding markets, there is no guarantee such conditions will continue throughout the fourth quarter 2008. Finally, the Company continues to expect a highly competitive market for core deposits in terms of rates as many financial institutions continue to experience liquidity issues.

The following table presents condensed balance sheet information, together with interest income and yields on average interest-earning assets, and interest expense and rates on interest-bearing liabilities for the quarter ended September 30, 2008 compared to the quarter ended September 30, 2007:

Table I

Average Balance Analysis of Net Interest Earnings

(dollars in thousands)

			Quarter Ended September 30, 2008								Quarter 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	$	559	$	5			3.56	%	$	730	$	11			5.99	%
Securities available for sale:
Taxable (1)		54,042		607			4.47	%		39,936		435			4.33	%
Tax-exempt		5,261		49			3.71	%		4,387		42			3.81	%
Loans, net of allowance for loan losses(2)(3)(4)		903,241		16,019			7.06	%		784,902		16,931			8.58	%
Total interest earning assets		963,103		16,680			6.89	%		829,955		17,419			8.35	%

Non Earning Assets
Cash and due from banks		18,520								20,667
Premises and equipment		21,045								19,598
Goodwill & other intangibles		22,991								23,213
Interest receivable and other		11,556								6,464
Total non interest assets		74,112								69,942

Total assets	$	1,037,215							$	899,897

Interest-Bearing Liabilities
Money market and NOW accounts	$	388,369		(1,716	)		-1.76	%	$	380,422		(3,587	)		-3.75	%
Savings deposits		21,989		(46	)		-0.83	%		25,176		(131	)		-2.07	%
Time deposits - core (5)		45,005		(356	)		-3.15	%		29,696		(327	)		-4.38	%
Total interest-bearing core deposits		455,363		(2,118	)		-1.85	%		435,294		(4,045	)		-3.70	%

Time deposits - non-core		71,799		(579	)		-3.21	%		67,525		(901	)		-5.31	%
Federal funds purchased		15,812		(90	)		-2.26	%		16,298		(220	)		-5.37	%
FHLB & FRB borrowings		197,943		(1,463	)		-2.94	%		92,242		(1,147	)		-4.95	%
Junior subordinated debentures		8,248		(127	)		-6.13	%		8,248		(128	)		-6.17	%
Total interest-bearing alternative funding		293,802		(2,259	)		-3.06	%		184,313		(2,396	)		-5.17	%
Total interest-bearing liabilities		749,165		(4,377	)		-2.32	%		619,607		(6,441	)		-4.14	%

Noninterest-Bearing Liabilities
Demand deposits		171,103								171,624
Interest payable and other		4,416								4,502
Total noninterest liabilities		175,519								176,126
Total liabilities		924,684								795,733
Stockholders' equity		112,531								104,164
Total liabilities and stockholders' equity	$	1,037,215							$	899,897
Net Interest Income			$	12,303							$	10,978
Net Interest Income as a Percent of Earning Assets				5.08	%							5.25	%
(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 $596 and $521 for the three months ended
September 30, 2008 and 2007, respectively.
(4) Total includes loans held for sale.
(5) Core time deposits include all non-public time deposits, including non-public time deposits over $100.

Table I above shows that earning asset yields for the third quarter 2008 of 6.89% were down 146 basis points from third quarter 2007 due to the effect of the falling rate environment. However, the cost of interest-bearing liabilities moved down more than earning asset yields dropping 182 basis points from 4.14% in third quarter 2007 to 2.32% in third quarter 2008. The decline in the cost of interest-bearing core deposits of 185 basis points illustrates the Bank’s ability to reprice its core deposit base during a falling rate environment. The decline of 211 basis points in the cost the Bank’s interest-bearing alternative funding from 5.17% in third quarter 2007 to 3.06% in third quarter 2008 reflected the relatively short maturity structure of the Bank’s alternative funding, which permitted repricing of this debt during the falling rate environment.

The following table sets forth a summary of changes in net interest income due to changes in average asset and liability balances (volume) and changes in average rates (rate) for the quarters ended September 30, 2008 and September 30, 2007.

Table II

Analysis of Changes in Interest Income and Interest Expense

(dollars in thousands)

		Three Months Ended
	September 30, 2008 compared to September 30, 2007
		Increase (decrease) due to
		Volume			Rate			Net
Interest earned on:
Federal funds sold and interest
bearing deposits in banks		$	(3	)	$	(3	)	$	(6	)
Securities available-for-sale:
Taxable			154			18			172
Tax-exempt			8			(1	)		7
Loans, net of allowance for loan losses			2,553			(3,465	)		(912	)

Total interest income			2,712			(3,451	)		(739	)


Interest paid on:
Money market and NOW accounts			(35	)		1,906			1,871
Savings deposits			7			78			85
Time deposits - core			(121	)		92			(29	)
Total interest-bearing core deposits			(149	)		2,076			1,927

Time deposits - non-core			(34	)		356			322
Federal funds purchased			3			127			130
FHLB &FRB borrowings			(781	)		465			(316	)
Junior subordinated debentures			-			1			1
Total interest-bearing alternative funding			(812	)		949			137

Total interest expense			(961	)		3,025			2,064

Net interest income		$	1,751		$	(426	)	$	1,325

The rate/volume analysis for the quarter ended September 30, 2008 shows that interest income including loan fees declined by $739 from the same period last year. Higher volumes of earning assets increased interest income by $2,712, while lower yields on earning assets, primarily loans, decreased interest income by $3,451. The rate/volume analysis shows that interest expense for the quarter ended September 30, 2008 decreased by $2,064 from last year, as changes in mix and higher volumes caused interest expense to increase by $961, which was more than offset by a decrease in interest expense of $3,025 due to lower rates. Most of the decline in interest expense was due to lower rates in the Bank’s core deposit base and illustrates the Bank’s ability to quickly reprice its core deposits.

The following table presents the condensed balance sheet information, together with interest income and yields on average interest-earning assets, and interest expense and rates on interest-bearing liabilities for the nine months ended September 30, 2008 compared to September 30, 2007:

Table III

Average Balance Analysis of Net Interest Earnings

(dollars in thousands)

	Nine Months Ended September 30, 2008								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	$	573	$	18			4.20	%	$	1,039	$	40			5.19	%
Securities available for sale:
Taxable (1)		57,021		2,055			4.81	%		38,449		1,216			4.23	%
Tax-exempt		5,338		147			3.68	%		3,958		108			3.64	%
Loans, net of allowance for loan losses(2)(3)(4)		867,035		47,181			7.27	%		778,774		50,453			8.66	%
Total interest earning assets		929,967		49,401			7.10	%		822,220		51,817			8.43	%

Non Earning Assets
Cash and due from banks		18,346								22,349
Premises and equipment		20,976								19,384
Goodwill & other intangibles		23,046								23,449
Interest receivable and other		9,669								6,608
Total non interest assets		72,037								71,790

Total assets	$	1,002,004							$	894,010

Interest-Bearing Liabilities
Money market and NOW accounts	$	378,822		(5,217	)		-1.84	%	$	360,040		(10,292	)		-3.82	%
Savings deposits		21,285		(144	)		-0.90	%		25,542		(404	)		-2.12	%
Time deposits - core (5)		41,824		(1,072	)		-3.42	%		30,660		(959	)		-4.18	%
Total interest-bearing core deposits		441,931		(6,433	)		-1.94	%		416,242		(11,655	)		-3.74	%

Time deposits - non-core		51,118		(1,412	)		-3.69	%		68,747		(2,695	)		-5.24	%
Federal funds purchased		26,489		(554	)		-2.79	%		7,954		(325	)		-5.47	%
FHLB & FRB borrowings		189,767		(4,552	)		-3.20	%		119,502		(4,528	)		-5.07	%
Junior subordinated debentures		8,248		(373	)		-6.04	%		8,248		(380	)		-6.16	%
Total interest-bearing alternative funding		275,622		(6,891	)		-3.34	%		204,451		(7,928	)		-5.18	%
Total interest-bearing liabilities		717,553		(13,324	)		-2.48	%		620,693		(19,583	)		-4.22	%

Noninterest-Bearing Liabilities
Demand deposits		169,421								167,461
Interest payable and other		4,200								4,210
Total noninterest liabilities		173,621								171,671
Total liabilities		891,174								792,364
Stockholders' equity		110,830								101,646
Total liabilities and stockholders' equity	$	1,002,004							$	894,010
Net Interest Income			$	36,077							$	32,234
Net Interest Income as a Percent of Earning Assets				5.18	%							5.24	%
(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 $1,619 and $1,618 for the nine months ended
September 30, 2008 and 2007, respectively.
(4) Total includes loans held for sale.
(5) Core time deposits include all non-public time deposits, including non-public time deposits over $100.

Table III shows that earning asset yields declined by 133 basis points through September 30, 2008 from September 30, 2007 from 8.43% to 7.10%. The decline in earning asset yields was attributable to a 139 basis point drop in average loan yields, which resulted primarily from the rapid decline in short-term market interest rates during the first half of 2008, including the Bank’s prime-lending rate. However, some of this decline was offset by improvement in the yield on the Bank’s securities portfolio, which was up 55 basis points in third quarter 2008 when compared to third quarter 2007. This increase in the yield on securities was the direct result of the Bank’s purchase of approximately $25,000 in new securities from September 2007 through March 2008.

Table III also shows that rates paid on interest-bearing core deposits have moved down faster than yields on earning assets as evidenced by the 180 basis point decline. Overall, the cost of interest-bearing liabilities through September 30, 2008, which includes core deposits and alternative funding, has fallen 174 basis points from the same period in 2007.

Finally, Table III illustrates the full effect of presentment of imaged cash letters to correspondent banks, which has significantly increased funds availability and reduced float, a non-earning asset. This is evidenced by the $4,003 decline in average cash and due from bank balances in the non-earning asset section of the table. This reduction in average cash and due from bank balances allowed the Bank to reduce its borrowed funds by a corresponding amount, thus decreasing interest expense and improving the net interest margin.

The following table sets forth a summary of 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, 2008 and September 30, 2007:

Table IV

Analysis of Changes in Interest Income and Interest Expense

(dollars in thousands)

	Nine Months Ended September 30, 2008 compared to September 30, 2007
		Increase (decrease) due to
		Volume			Rate			Net
Interest earned on:
Federal funds sold and interest
bearing deposits in banks		$	(18	)	$	(4	)	$	(22	)
Securities available-for-sale:
Taxable			589			250			839
Tax-exempt			37			2			39
Loans, net of allowance for loan losses			5,770			(9,042	)		(3,272	)

Total interest income			6,378			(8,794	)		(2,416	)


Interest paid on:
Money market and NOW accounts			(268	)		5,343			5,075
Savings deposits			28			232			260
Time deposits - core			(287	)		174			(113	)
Total interest-bearing core deposits			(527	)		5,749			5,222

Time deposits - non-core			485			798			1,283
Federal funds purchased			(388	)		159			(229	)
FHLB &FRB borrowings			(1,689	)		1,665			(24	)
Junior subordinated debentures			-			7			7
Total interest-bearing alternative funding			(1,592	)		2,629			1,037

Total interest expense			(2,119	)		8,378			6,259

Net interest income		$	4,259		$	(416	)	$	3,843

The year-to-date September 30, 2008 rate/volume analysis in Table IV above shows that interest income including loan fees declined by $2,416 from the same period last year. Higher volumes of earning assets increased interest income by $6,378, while lower yields on earnings assets, primarily loans, decreased interest income by $8,794. The rate/volume analysis shows that interest expense through September 30, 2008 decreased by $6,259 from the same period last year, as changes in mix and higher volumes caused interest expense to increase by $2,119, which was more than offset by a decrease in interest expense of $8,378 due to lower rates. Most of the decline in interest expense due to lower rates was generated by the Bank’s core deposit base and illustrates the Bank’s ability to reprice its core deposits.

Loan Loss Provision and Allowance

Below is a summary of the Company’s allowance for loan losses for the first nine months of 2008 and 2007:

	2008			2007

Balance, January 1	$	8,675		$	8,284
Provision charged to income		2,550			450
Loans charged against allowance		(723	)		(61	)
Recoveries credited to allowance		170			61

Balance, September 30	$	10,672		$	8,734

The year-to-date September 30, 2008 provision for loan losses was $2,550, compared to $450 for the same period last year. The increase in the provision for loan losses was primarily attributable to the loan growth experienced during the first nine months of 2008. In addition, the increase in the provision was related to management’s decision to add to its unallocated reserves based on current economic uncertainties.

Year-to-date September 30, 2008 net charge offs were $552, compared to no net charge offs reported for the same period in 2007. Annualized net loan losses to average outstanding loans were 0.08% for year-to-date 2008 compared to none for year-to-date 2007.

The allowance for loan losses at September 30, 2008 was 1.15% of the period end loans, excluding loans held for sale, compared to 1.05% and 1.09% at December 31, 2007 and September 30, 2007, respectively. At September 30, 2008, the allowance for loan losses as a percentage of net nonperforming loans was 346.83% or 3.5 times the level of net nonperforming loans. At September 30, 2008, the unallocated portion of the allowance for loan losses was approximately 7.7% and at the high end of the approved range. The allowance at September 30, 2008 includes $583 in specific allowance (included in the ending allowance above) for impaired loans, which total $3,077, net of government guarantees. At December 31, 2007, the Company had $3,671 of impaired loans with a specific allowance of $160 assigned.

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

	September 30, 2008			December 31, 2007			September 30, 2007
Nonaccrual loans	$	3,316		$	4,122		$	1,325
90 days past due and accruing interest		-			-			229
Total nonperforming loans		3,316			4,122			1,554
Nonperforming loans guaranteed by government		(239	)		(451	)		-
Net nonperforming loans		3,077			3,671			1,554
Foreclosed assets		3,186			423			-
Total nonperforming assets, net of guaranteed loans	$	6,263		$	4,094		$	1,554


Non performing assets as a percentage of total assets		0.60	%		0.43	%		0.17	%

Nonperforming assets decreased by $1,377 during third quarter from the end of second quarter 2008. This decrease was primarily attributable to the loan pay offs and the disposition of residential construction properties that were previously classified as nonaccrual loans or other real estate owned. Nonaccrual loans at September 30, 2008 consist of nine residential consumer construction loans totaling approximately $1,300, one commercial real estate loan for $1,700, and one business loan for $100. Losses on the nonperforming loans in the consumer residential construction portfolio are not expected to be significant due to their collateral value as well as a cash-secured 20% guarantee for these loans. The other real estate owned of $3,186 at September 30, 2008 consists of 20 residential construction properties.

Noninterest Income

Noninterest income was $3,227 for the nine months ended September 30, 2008, up $333 or 11.5% over the same period in 2007. The increase in year-to-date noninterest income when compared to 2007 was attributable to increased account service charges, up $173 or 42%, increased merchant bankcard fees, which were up $98 or 11%, and increased other income of $67 or 10%. The increase in account service charges was directly related to lower market interest rates, which has lowered the earnings credit on analyzed business accounts to less than 1.00% during the latter part of the third quarter. This reduction in the earnings credit has increased hard dollar fee income as the earnings on business accounts were not sufficient to cover costs. The increase in merchant bankcard fees was primarily due to higher sales volume and improved margins. The increase in the other income category was primarily due to a $71 gain on the disposal of assets from insurance proceeds related to the Bellevue, Washington office.

On a linked quarter basis, noninterest income in third quarter 2008 of $1,047 was down $116 from second quarter 2008 noninterest income of $1,163. The decrease can be primarily attributable to reduced revenues from the mortgage banking activities combined with a decrease in other income for the quarter. Looking forward to fourth quarter 2008, the Company expects noninterest income to be similar to third quarter 2008.

Noninterest Expense

Noninterest expense for the nine months ended September 30, 2008 was $22,127, an increase of $2,857 or 14.8% over the same period in 2007. Year-to-date September 30, 2008 personnel expense increased 16.4% and accounted for $1,932 of the total expense increase. Increased salary expense and increased benefits and taxes accounted for $1,284 and $705, respectively, of the total increase in personnel expense, respectively. Approximately $389 of the increase in salary expense was due to lower loan origination costs, which are a direct offset to salary expense, while $895 of the increase in salaries was due to staff additions and salary increases. The increase in benefits and taxes was primarily attributable to higher group insurance costs, up $266 over last year and increased incentive compensation accruals, up $327 over last year. A number of other expense categories also showed increases for year-to-date September 30, 2008 when compared to year-to-date September 30, 2007, including premises and equipment expense and FDIC insurance. Premises and equipment expense increased $636 or 27.3% through September 30, 2008 over the same period last year due to the new Tualatin office coming on line in December 2007, the reopening of the Bellevue office, which was closed last year in the first quarter due to a crane accident, and the expansion of space at the Bank’s KOIN Center office in downtown Portland. FDIC insurance premium through September 30, 2008 was up $224 from the same period last year as the credit the Bank received from the FDIC when the new pricing was implemented was exhausted during 2007.

On a linked-quarter basis, third quarter 2008 noninterest expense was up $34 from second quarter 2008. Looking forward to fourth quarter 2008, the Company expects noninterest expense will be comparable to third quarter 2008 expense levels.

BALANCE SHEET

Loans

At September 30, 2008, outstanding loans net of deferred loan fees and excluding loans held for sale, were $924,102, up $120,184 or 14.9% over outstanding loans of $803,918 at September 30, 2007 and up $101,780 or 12.4% from December 31, 2007 outstanding loans of $822,322. A summary of outstanding loans by market at September 30, 2008, December 31, 2007 and September 30, 2007 follows:

	Balance		Balance		Balance
	Sept. 30, 2008		Dec. 31, 2007		Sept. 30, 2007

Eugene Market	$	224,327	$	217,962	$	216,602

Portland Market		423,194		389,053		390,186

Seattle Market		276,581		215,307		197,130

Total	$	924,102	$	822,322	$	803,918

Securities

At September 30, 2008, the Bank had $49,848 in securities classified as available-for-sale. At September 30, 2008, $34,426 of these securities were pledged as collateral for FHLB of Seattle borrowings, 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, 2008, the Company had a recorded balance of $22,031 in goodwill from the November 30, 2005 acquisition of Northwest Business Financial Corporation (NWBF). In addition, at September 30, 2008 the Company had $929 of core deposit intangible assets resulting from the acquisition of NWBF. The core deposit intangible was determined to have an expected life of approximately seven years and is being amortized over that period using the straight-line method and has approximately four years remaining on the amortization schedule. In accordance with Financial Accounting Standard (“FAS”) 142, Goodwill and Other Intangible Assets, the Company does not amortize goodwill or other intangible assets with indefinite lives, but instead periodically tests these assets for impairment. Management performs an impairment analysis of the intangible assets with indefinite lives at least annually. The last impairment test was performed at December 31, 2007. At September 30, 2008, an interim analysis was performed and no impairment was indicated by the analysis.

Deposits

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 $639,201 and represented 89.9% of total deposits at September 30, 2008. Outstanding core deposits at September 30, 2008 were up $19,736 or 3.2% over outstanding core deposits at September 30, 2007. Total outstanding deposits at September 30, 2008 were $711,640, an increase of $28,187 over outstanding deposits of $683,214 at September 30, 2007 and an increase of $66,978 over December 31, 2007 deposits of $644,424. A summary of outstanding core deposits and average core deposits by market and other deposits classified as alternative funding at September 30, 2008, December 31, 2007, and September 30, 2007 follows:

	Balance		Balance		Balance
	Sept. 30, 2008		Dec. 31, 2007		Sept. 30, 2007

Eugene Market core deposits	$	413,240	$	405,351	$	398,189

Portland Market core deposits		122,310		109,698		125,458

Seattle Market core deposits		103,889		100,843		95,817

Total core deposits		639,439		615,892		619,464

Other deposits		72,201		28,532		63,750

Total	$	711,640	$	644,424	$	683,214

	Quarters Ended						Nine Months Ended
	Sept. 30, 2008		Dec. 31, 2007		Sept. 30, 2007		Sept. 30, 2008		Sept. 30, 2007

Eugene Market core deposits, average	$	400,461	$	393,030	$	387,334	$	402,132	$	382,843

Portland Market core deposits, average		117,472		121,687		129,648		113,364		119,261

Seattle Market core deposits, average		108,533		96,797		89,936		95,856		81,599

Total core deposits, average		626,466		611,514		606,918		611,352		583,703

Other deposits, average		71,799		49,588		67,525		51,118		68,747

Total	$	698,265	$	661,102	$	674,443	$	662,470	$	652,450

The prospects for core deposit growth in the fourth quarter 2008 are good as the Bank’s new business opportunity pipelines are solid in all three of the Bank’s principal markets.

Junior Subordinated Debentures

The Company had $8,248 in junior subordinated debentures at September 30, 2008, which were issued in conjunction with the acquisition of NWBF. At September 30, 2008, the entire $8,248 in junior subordinated debentures had an interest rate of 6.265% that is fixed through November 2010 and qualified as Tier 1 capital under regulatory capital purposes. Additional information regarding the terms of the junior subordinated debentures, including maturity/repricing dates and interest rate, is included in Note 12 of the Notes to Consolidated Financial Statements in the Company’s 2007 annual Form 10-K.

Capital Resources

Capital is the stockholders’ investment in the Company. Capital grows through the retention of earnings and the issuance of new stock through the exercise of stock options 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.

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 Company maintain risk-based capital levels of 10% of total risk-based assets. At September 30, 2008, the Company’s total capital to risk weighted assets was 10.81% compared to 11.03% at September 30, 2007.

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 2008, the Company declared quarterly dividends of $0.10 per share paid on March 14, 2008, June 13, 2008, and September 15, 2008 to shareholders of record on March 4, 2008, June 3, 2008, and September 5, 2008, respectively. If the Company maintains the $0.10 per share dividend amount through fourth quarter 2008, that would result in an annual dividend of $0.40 per share, and would equate to a 14% increase over the prior year.

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

In that regard, on October 3, 2008, Congress approved and the President signed the Emergency Economic Stabilization Act of 2008 (the “EESA”). The Troubled Assets Relief Program (“TARP”) is the heart of the EESA and provides the Secretary of the Treasury the authority to purchase troubled assets from eligible financial institutions in an aggregate amount of up to $700 billion. Under the EESA, the Treasury created the Capital Purchase Program (“CPP”) that enables the federal government to purchase equity in participating financial institutions to help restore credit markets. Application to participate in the CPP must be submitted by November 14, 2008. The Company is considering possible participation in the CPP.

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, 2008, the Bank had $222,395 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, 2008, the Bank had $2,458 in letters of credit and financial guarantees written.

In prior quarterly reports on the Form 10-Q, the Company reported that the Bank had internal guidance lines of credit established for certain borrowers, primarily in the residential construction industry. These guidance lines were not contractual commitments to extend credit, and could be terminated by the Bank for any reason without any obligation to the borrower. On June 30, 2008, the Bank suspended all internal guidance lines for residential construction loans.

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 89.9% of total deposits at September 30, 2008 and 90.7% at September 30, 2007. Loan growth during the quarter was funded entirely through growth in core deposits, which were up approximately $35,000. Historically, the Bank experiences accelerated growth in its core deposit base during the fourth quarter. This core deposit growth is expected to fund projected loan growth in the fourth quarter of 2008.

Borrowing lines have been established at various correspondent banks, the Federal Home Loan Bank of Seattle and with the Federal Reserve Bank of San Francisco. At September 30, 2008, the Bank had secured and unsecured borrowing lines totaling approximately $479,774 consisting of $315,565 with the Federal Home Loan Bank of Seattle, $118,000 with various correspondent banks, and $46,209 with the Federal Reserve Bank of San Francisco. The Federal Home Loan Bank borrowing line is limited to the amount of collateral pledged. At September 30, 2008, the Bank had collateral pledged to the FHLB in the form of commercial real estate loans and securities that had a discounted collateral value of approximately $253,239 for this line. The $46,209 borrowing line with the Federal Reserve Bank of San Francisco is also secured through the pledging of commercial loans under the Bank’s Borrower-In-Custody program. The $118,000 in borrowing lines with correspondent banks is unsecured. At September 30, 2008, the Bank had $176,000 in borrowings outstanding from the FHLB of Seattle and the Federal Reserve Bank of San Francisco and $38,460 outstanding on its overnight correspondent bank lines. In addition, the Bank is part of the State of Oregon and State of Washington community bank time deposit programs and at September 30, 2008 had approximately $34,500 available from these sources. The Bank’s loan portfolio also contains approximately $15,000 in unpledged securities and $31,497 in guaranteed government loans, which can be sold on the secondary market.

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, 2007, 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, 2008, 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 of 2008 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

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

Fluctuating interest rates can adversely affect our profitability

The Company’s 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 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 the Company’s interest rate spread, and, in turn, profitability. Because the Company is asset sensitive, we seek to manage our interest rate risk within well established guidelines. Generally, the Company seeks an asset and liability structure that insulates net interest income from large deviations attributable to changes in market rates.

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

The Company maintains 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, and if the economy continues to soften, there may be loans that deteriorate to a nonperforming status in an accelerated time frame. As a result, future additions to the allowance may be necessary. Because the loan portfolio contains a number of 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 mix of loans comprising the portfolio, 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.

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

The national economy, and the financial services sector in particular, is currently facing challenges of a scope unprecedented in recent history. No one can predict the severity or duration of this downturn. We cannot predict the extent to which the more severe regional and local economic downturns that have plagued other areas of the country may also occur in the markets we serve. Any such deterioration in our markets would have an adverse effect on our business, financial condition, results of operations and prospects, and could also cause the trading price of our stock to decline.

We cannot predict the effect of the recently enacted federal rescue plan.

Congress recently enacted the Emergency Economic Stabilization Act of 2008, which is intended to stabilize the financial markets, including providing funding of up to $700 billion to purchase troubled assets and loans from financial institutions. The legislation also increases the amount of deposit account insurance coverage from $100,000 to $250,000 for interest-bearing deposit accounts and non-interest bearing transaction accounts, the latter of which are fully insured until December 31, 2009. Most recently, the federal government agreed to invest $125 billion in preferred stock of nine U.S. financial institutions, and to make available up to another $125 billion for investment in preferred stock of other U.S. financial institutions, on certain terms and conditions. The full effect of this wide-ranging legislation on the national economy and financial institutions, particularly on mid-sized institutions like us, cannot now be predicted.

Concentration in real estate market

The Company has a concentration of loans secured by real estate. While the Pacific Northwest economy typically lags the national economy, the effects of the economic downturn have started to impact our market area. Further 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, as the collateral securing those loans may decrease in value. Additional downturn in the local economy could have a material adverse effect both on the borrowers’ ability to repay these loans, as well as the value of the real property held as collateral. Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and we be would more likely to suffer losses on defaulted loans.

Tightening of credit markets and liquidity risk

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

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 a continuing decline in the economy of these market areas could impact us adversely. As a lender, we are exposed to the risk that our customers will be unable to repay their loans in accordance with their terms, and that any collateral securing the payment of their loans may not be sufficient to assure repayment.

The FDIC has increased insurance premiums to rebuild and maintain the federal deposit insurance fund.

Due to recent events and the state of the economy, the FDIC has increased federal deposit insurance premiums beginning in the first quarter of 2009 to double what we originally paid. The increase of these premiums will add to our cost of operations and could have a significant impact on the Company.

Item 6. Exhibits

(a)

Exhibits

3.1 Amended and Restated Bylaws for the Company

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

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

Chief Financial Officer

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

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 6, 2008	/s/ Hal Brown
		Hal Brown
		President and Chief Executive Officer



	Dated November 6, 2008	/s/ Michael A. Reynolds
		Michael A. Reynolds
		Executive Vice President and Chief Financial Officer

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Pacific Continental Inactive 10-Q2008 Q3 Quarterly report

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