Pacific Continental 10-Q 2012 Q1 Quarterly report

UNITED STATES

SECURITIES & EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

March 31, 2012 for the quarterly period ended March 31, 2012.

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             .

Commission File Number: 0-30106

PACIFIC CONTINENTAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

OREGON	93-1269184
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer 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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  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 definitions 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 practicable date:

Common Stock outstanding as of May 1, 2012: 18,204,121

PACIFIC CONTINENTAL CORPORATION

FORM 10-Q

QUARTERLY REPORT

TABLE OF CONTENTS

		Page
Part I	Financial Information		3
Item 1	Financial Statements		3
Consolidated Balance Sheet			3
Consolidated Statements of Income			4
Consolidated Statements of Comprehensive Income			5
Consolidated Statements of Changes in Shareholders’ Equity			6
Consolidated Statements of Cash Flows			7
Notes to Consolidated Financial Statements			8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		42
Item 3	Quantitative and Qualitative Disclosures About Market Risk		60
Item 4	Controls and Procedures		60
Part II	Other Information		60
Item 1	Legal Proceedings		60
Item 1A	Risk Factors		60
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		66
Item 3	Defaults Upon Senior Securities		66
Item 4	Mine Safety Disclosures		66
Item 5	Other Information		66
Item 6	Exhibits		67

2

Part I Financial Information

Item 1 Financial Statements

Pacific Continental Corporation and Subsidiaries

Consolidated Balance Sheets

(In thousands)

(Unaudited)

	March 31, 2012		December 31, 2011		March 31, 2011
ASSETS
Cash and due from banks	$	18,187	$	19,807	$	17,333
Interest-bearing deposits with banks		207		52		273
Total cash and cash equivalents		18,394		19,859		17,606
Securities available-for-sale		366,916		346,542		270,792
Loans held-for-sale		—		1,058		360
Loans, less allowance for loan losses and net deferred fees		809,031		805,211		826,466
Interest receivable		4,560		4,725		4,458
Federal Home Loan Bank stock		10,652		10,652		10,652
Property and equipment, net of accumulated depreciation		19,950		20,177		20,597
Goodwill and intangible assets		22,179		22,235		22,402
Deferred tax asset		6,648		7,308		9,869
Taxes receivable		1,671		1,671		—
Other real estate owned		10,102		11,000		13,740
Prepaid FDIC assessment		2,536		2,782		3,907
Bank-owned life insurance		15,165		15,038		—
Other assets		1,989		1,974		1,686
Total assets	$	1,289,793	$	1,270,232	$	1,202,535
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest-bearing demand	$	281,282	$	278,576	$	247,223
Savings and interest-bearing checking		517,350		545,856		541,833
Time $100,000 and over		72,309		72,436		62,385
Other time		83,706		68,386		74,929
Total deposits		954,647		965,254		926,370
Federal funds and overnight funds purchased		—		12,300		—
Federal Home Loan Bank borrowings		143,500		101,500		91,500
Junior subordinated debentures		8,248		8,248		8,248
Accrued interest and other payables		3,838		4,064		2,667
Total liabilities		1,110,233		1,091,366		1,028,785
Shareholders’ equity
Common stock, shares authorized: 50,000,000; shares issued and outstanding: 18,195,415 at March 31, 2012, 18,435,084 at December 31, 2011 and 18,421,132 at March 31, 2011		135,920		137,844		137,221
Retained earnings		39,267		37,468		35,234
Accumulated other comprehensive income		4,373		3,554		1,295
		179,560		178,866		173,750
Total liabilities and shareholders’ equity	$	1,289,793	$	1,270,232	$	1,202,535

See accompanying notes.

3

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Income

(In thousands, except share and per share amounts)

(Unaudited)

	Three months ended March 31,
	2012		2011
Interest and dividend income
Loans	$	12,122	$	12,999
Securities		2,144		2,041
Federal funds sold & interest-bearing deposits with banks		1		2
		14,267		15,042
Interest expense
Deposits		1,139		1,926
Federal Home Loan Bank & Federal Reserve borrowings		469		492
Junior subordinated debentures		40		31
Federal funds purchased		6		11
		1,654		2,460
Net interest income		12,613		12,582
Provision for loan losses		1,300		2,150
Net interest income after provision for loan losses		11,313		10,432
Noninterest income
Service charges on deposit accounts		440		430
Other fee income, principally bankcard		387		387
Net gain (loss) on sale of investment securities		—		(9	)
Mortgage banking income		72		42
Loan servicing fees		18		28
Bank-owned life insurance income		127		—
Other noninterest income		408		272
		1,452		1,150
Noninterest expense
Salaries and employee benefits		4,913		4,667
Premises and equipment		863		858
Bankcard processing		141		157
Business development		423		382
FDIC insurance assessment		239		508
Other real estate expense		378		955
Other noninterest expense		1,762		1,818
		8,719		9,345
Income before provision for income taxes		4,046		2,237
Provision for income taxes		1,330		788
Net income	$	2,716	$	1,449
Earnings per share
Basic	$	0.15	$	0.08
Diluted	$	0.15	$	0.08
Weighted average shares outstanding
Basic		18,376,324		18,415,865
Common stock equivalents attributable to stock-based awards		141,996		28,539
Diluted		18,518,320		18,444,404

See accompanying notes.

4

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2012			2011
Net income	$	2,716		$	1,449
Other comprehensive income:
Available-for-sale securities:
Unrealized gains arising during the quarter		1,328			134
Reclassification adjustment for losses realized in net income		—			9
Income tax expense		(509	)		(55	)
Total other comprehensive income, net of tax		819			88
Total comprehensive income	$	3,535		$	1,537

See accompanying notes.

5

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except share amounts)

(Unaudited)

	Number of Shares			Common Stock			Retained Earnings			Accumulated Other Comprehensive Income		Total
Balance, December 31, 2010		18,415,132			137,062			33,969			1,207		172,238
Net income								5,341					5,341
Other comprehensive income, net of tax:											2,347		2,347
Stock issuance		5,952			56								56
Stock options exercised and related tax benefit		14,000			103								103
Share Based compensation					623								623
Cash dividends								(1,842	)				(1,842	)
Balance, December 31, 2011		18,435,084		$	137,844		$	37,468		$	3,554	$	178,866
Net income								2,716					2,716
Other comprehensive income, net of tax											819		819
Stock options exercised and related tax benefit		2,500			19								19
Stock Repurchased		(242,169	)		(2,088	)							(2,088	)
Share Based compensation					145								145
Cash dividends								(917	)				(917	)
Balance, March 31, 2012		18,195,415		$	135,920		$	39,267		$	4,373	$	179,560

See accompanying notes.

6

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Three months ended March 31,
	2012			2011
Cash flows from operating activities:
Net income	$	2,716		$	1,449
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization, net of accretion		2,078			1,353
Valuation adjustment on foreclosed assets		345			843
Loss (gain) on sale of foreclosed assets		(42	)		57
Provision for loan losses		1,300			2,150
Deferred income taxes		674			319
BOLI Income		(127	)		—
Share-based compensation		145			115
Excess tax benefit of stock options exercised		(3	)		(6	)
Production of mortgage loans held-for-sale		(2,259	)		(1,890	)
Proceeds from the sale of mortgage loans held-for-sale		3,317			3,646
Change in:
Interest receivable		165			(87	)
Deferred loan fees		50			40
Accrued interest payable and other liabilities		(732	)		(1,112	)
Other assets		230			209
Net cash provided by operating activities		7,857			7,086
Cash flows from investing activities:
Proceeds from maturities and sales of available-for-sale investment securities		19,250			19,372
Purchase of available-for-sale investment securities		(39,966	)		(37,054	)
Net loan principal collections		(5,242	)		10,798
Net purchase of property and equipment		(125	)		(72	)
Proceeds on sale of foreclosed assets		668			14
Purchase of energy tax credits		(14	)		—
Net cash used by investing activities		(25,429	)		(6,942	)
Cash flows from financing activities:
Change in deposits		(10,607	)		(32,589	)
Change in federal funds purchased and FHLB short-term borrowings		34,200			30,000
FHLB advances repayment		(4,500	)		(5,500	)
Proceeds from stock options exercised		16			38
Income tax benefit from stock options exercised		3			6
Dividends paid		(917	)		(184	)
Repurchase of Common Stock		(2,088	)		—
Net cash provided (used) by financing activities		16,107			(8,229	)
Net decrease in cash and cash equivalents		(1,465	)		(8,085	)
Cash and cash equivalents, beginning of period		19,859			25,691
Cash and cash equivalents, end of period	$	18,394		$	17,606
Supplemental information:
Noncash investing and financing activities:
Transfers of loans to foreclosed assets	$	73		$	361
Change in fair value of securities, net of deferred income taxes	$	819		$	88
Cash paid during the period for:
Income taxes	$	—		$	—
Interest	$	1,628		$	2,241

See accompanying notes.

7

Pacific Continental Corporation and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

A complete set of Notes to Consolidated Financial Statements is a part of the Company’s 2011 Form 10-K filed March 9, 2012. The notes below are included due to material changes in the financial statements or to provide the reader with additional information not otherwise available. In preparing these financial statements, the Company has evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements. All dollar amounts in the following notes are expressed in thousands, except per share amounts or where otherwise indicated.

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

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, 2011, was derived from audited financial statements, but does not include all disclosures contained in the Company’s 2011 Form 10-K. The interim consolidated financial statements should be read in conjunction with the December 31, 2011, consolidated financial statements, including the notes thereto, included in the Company’s 2011 Form 10-K.

8

2. Securities Available-for Sale

At March 31, 2012, there were 70 investment securities in unrealized loss positions. The unrealized loss associated with the investments of $4,182 in a continuous unrealized loss position for twelve months or longer was $659, of which $649 is related to private-label mortgage backed securities, and $10 is related to mortgage-backed securities. The Company has no current intent, nor is it more likely than not that it will be required to sell these securities before the recovery of carrying value.

March 31, 2012 (in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Securities in Continuous Unrealized Loss Position For Less Than 12 Months		Securities in Continuous Unrealized Loss Position For 12 Months or Longer
Unrealized Loss Positions
Obligations of U.S. government agencies	$	1,500	$	—	$	(10	)	$	1,490	$	1,490	$	—
Obligations of states and political subdivisions		6,509		—		(171	)		6,338		6,338		—
Private-label mortgage-backed securities		3,908		—		(694	)		3,214		389		2,825
Mortgage-backed securities		55,529		—		(313	)		55,216		53,859		1,357
	$	67,446	$	—	$	(1,188	)	$	66,258	$	62,076	$	4,182
Unrealized Gain Positions
Obligations of U.S. government agencies	$	12,550	$	454	$	—		$	13,004
Obligations of states and political subdivisions		47,729		2,886		—			50,615
Private-label mortgage-backed securities		7,314		235		—			7,549
Mortgage-backed securities		224,789		4,701		—			229,490
		292,382		8,276		—			300,658
	$	359,828	$	8,276	$	(1,188	)	$	366,916

At March 31, 2012, unrealized losses exist on certain securities classified as agencies, obligations of state and political subdivisions, mortgage-backed securities and private-label mortgage-backed securities. The unrealized losses on agency securities are deemed to be temporary. Additionally, the unrealized losses on agency mortgage-backed securities and securities that are obligations of U.S. government agencies were deemed to be temporary, as these securities retain strong credit ratings, continue to perform adequately, and are backed by various government-sponsored enterprises (“GSEs”). These decreases in fair value are associated with the changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral. The decline in value of these securities has resulted from current economic conditions. Although yields on these securities may be below market rates during the period, no loss of principal is expected.

During the first quarter 2012, management reviewed all of its private-label mortgage-backed securities for the presence of other-than-temporary impairment (“OTTI”). Management’s evaluation included the use of independently-generated third-party credit surveillance reports that analyze the loans underlying each security. These reports include estimates of default rates and severities, life collateral loss rates, and static voluntary prepayment assumptions to generate estimated cash flows at the individual security level. Additionally, management considered factors such as downgraded credit ratings, severity and duration of the impairments, the stability of the issuers, and any discounts paid when the securities were purchased. Management has considered all available information related to the collectability of the impaired investment securities and believes that the estimated credit loss is appropriate.

9

Following is a tabular roll-forward of the amount of credit-related OTTI recognized in earnings during the three months ended March 31, 2012, and 2011:

	Three months ended
	March 31, 2012		March 31, 2011
Balance, beginning of period:	$	204	$	226
Additions:
Initial OTTI credit loss		—		—
Balance, end of period:	$	204	$	226

At March 31, 2012, seven of the Company’s private-label mortgage-backed securities with an amortized cost of $3,525 were classified as substandard as their ratings were below investment grade. Securities with an amortized cost of $3,644 and $6,523 were classified as substandard at December 31, 2011 and March 31, 2011, respectively.

The projected average life of the securities portfolio is 3.8 years.

The amortized cost and estimated fair values of securities available-for-sale at December 31, 2011, are as follows:

December 31, 2011 (in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Securities in Continuous Unrealized Loss Position For Less Than 12 Months		Securities in Continuous Unrealized Loss Position For 12 Months or Longer
Unrealized Loss Positions
Obligations of U.S. government agencies	$	2,000	$	—	$	(6	)	$	1,994	$	1,994	$	—
Obligations of states and political subdivisions		—		—		—			—		—		—
Private-label mortgage-backed securities		5,590		—		(823	)		4,767		2,290		2,477
Mortgage-backed securities		94,314		—		(685	)		93,629		92,064		1,565
	$	101,904	$	—	$	(1,514	)	$	100,390	$	96,348	$	4,042
Unrealized Gain Positions
Obligations of U.S. government agencies	$	10,553	$	411	$	—		$	10,964
Obligations of states and political subdivisions		46,721		2,855		—			49,576
Private-label mortgage-backed securities		6,927		233		—			7,160
Mortgage-backed securities		174,677		3,775		—			178,452
		238,878		7,274		—			246,152
	$	340,782	$	7,274	$	(1,514	)	$	346,542

At December 31, 2011, there were 91 investment securities in unrealized loss positions of which 9 had been in a continuous loss position for twelve months or longer. The unrealized loss associated with the investments of $4,042 in a continuous unrealized loss position for twelve months or longer was $763.

10

The amortized cost and estimated fair values of securities available-for-sale at March 31, 2011, are as follows:

March 31, 2011 (in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Securities in Continuous Unrealized Loss Position for Less Than 12 Months		Securities in Continuous Unrealized Loss Position For 12 Months or Longer
Unrealized Loss Positions
Obligations of U.S. government agencies	$	21,665	$	—	$	(747	)	$	20,918	$	20,918	$	—
Obligations of states and political subdivisions		—		—		—			—		—		—
Private-label mortgage-backed securities		5,240		—		(609	)		4,631		1,627		3,004
Mortgage-backed securities		66,724		—		(538	)		66,186		66,186		—
	$	93,629	$	—	$	(1,894	)	$	91,735	$	88,731	$	3,004
Unrealized Gain Positions
Obligations of U.S. government agencies	$	7,048	$	177	$	—		$	7,225
Obligations of states and political subdivisions		13,066		475		—			13,541
Private-label mortgage-backed securities		11,862		455		—			12,317
Mortgage-backed securities		143,089		2,885		—			145,974
		175,065		3,992		—			179,057
	$	268,694	$	3,992	$	(1,894	)	$	270,792

At March 31, 2011, there were 106 investment securities in unrealized loss positions, of which 7 had been in a continuous loss position for twelve months or longer. The unrealized loss associated with the investments of $3,004 in a continuous unrealized loss position for twelve months or longer was $549.

The amortized cost and estimated fair value of securities at March 31, 2012, December 31, 2011, and March 31, 2011, by maturity are shown below. Obligations of U.S. government agencies and states and political subdivisions are shown by contractual maturity. Mortgage-backed securities are shown by projected average life.

	March 31, 2012				December 31, 2011				March 31, 2011
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	36,577	$	36,830	$	52,769	$	52,757	$	19,383	$	19,667
Due after one year through 5 years		215,492		218,919		199,757		202,889		205,135		207,581
Due after 5 years through 10 years		104,896		108,308		86,479		89,043		37,179		36,775
Due after 10 years		2,863		2,859		1,777		1,853		6,997		6,769
	$	359,828	$	366,916	$	340,782	$	346,542	$	268,694	$	270,792

No securities available for sale were sold during the first quarter of 2012. Three investment securities were sold during the first quarter of 2011 resulting in proceeds of $3,179, gross realized gains of $149 and gross realized losses of $158. The specific identification method was used to determine the cost of the securities sold.

At March 31, 2012, securities with amortized costs of $16,673 (estimated market values of $17,136) were pledged to secure certain treasury and public deposits as required by law, and to secure borrowing lines.

11

3. Loans, Allowance for Loan Losses, and Credit Quality Indicators

Loans are stated at the amount of unpaid principal net of loan premiums or discounts for purchased loans, net deferred loan origination fees, discounts associated with retained portions of loans sold, and an allowance for loan losses. Interest on loans is calculated using the simple-interest method on daily balances of the principal amount outstanding. Loan origination fees, net of origination costs and discounts, are amortized over the lives of the loans as adjustments to yield.

Major classifications of period-end loans, including loans held-for-sale, are as follows:

	March 31, 2012			% of gross loans			December 31, 2011			% of gross loans			March 31, 2011			% of gross loans
Real estate secured loans:
Permanent Loans:
Multifamily residential	$	51,102			6.2	%	$	51,897			6.3	%	$	48,111			5.7	%
Residential 1-4 family		59,642			7.2	%		61,717			7.5	%		72,926			8.7	%
Owner-occupied commercial		218,526			26.5	%		207,008			25.2	%		205,701			24.4	%
Non-owner-occupied commercial		140,142			17.0	%		157,844			19.2	%		178,885			21.2	%
Total permanent real estate loans		469,412			56.9	%		478,466			58.3	%		505,623			60.0	%
Construction Loans:
Multifamily residential		4,906			0.6	%		2,574			0.3	%		1,114			0.1	%
Residential 1-4 family		16,590			2.0	%		17,960			2.2	%		21,774			2.6	%
Commercial real estate		12,546			1.5	%		10,901			1.3	%		12,332			1.5	%
Commercial bare land and acquisition & development		18,566			2.2	%		19,496			2.4	%		25,072			3.0	%
Residential bare land and acquisition & development		11,016			1.3	%		12,707			1.5	%		14,506			1.7	%
Total construction real estate loans		63,624			7.7	%		63,638			7.8	%		74,798			8.9	%
Total real estate loans		533,036			64.6	%		542,104			66.0	%		580,421			68.9	%
Commercial loans		286,543			34.7	%		272,600			33.2	%		253,810			30.1	%
Consumer loans		4,569			0.6	%		4,569			0.6	%		5,966			0.7	%
Other loans		1,439			0.2	%		1,556			0.2	%		2,119			0.3	%
Gross loans		825,587			100.0	%		820,829			100.0	%		842,316			100.0	%
Deferred loan origination fees		(727	)					(677	)					(623	)
		824,860						820,152						841,693
Allowance for loan losses		(15,829	)					(14,941	)					(15,227	)
Total loans, net of allowance for loan losses and net deferred fees	$	809,031					$	805,211					$	826,466
Loans held-for-sale	$	—					$	1,058					$	360

At March 31, 2012, outstanding loans to dental professionals totaled $222,979 and represented 27.0% of total outstanding loans compared to dental professional loans of $208,489 or 25.4% at December 31, 2011, and $182,258 or 21.6% at March 31, 2011. There are no other industry concentrations in excess of 10% of the total loan portfolio. However, as of March 31, 2012, approximately 64.6% of the Company’s loan portfolio was collateralized by real estate and is, therefore, susceptible to changes in real estate market conditions. While appropriate action is taken to manage identified concentration risks, management believes that the loan portfolio is well diversified by geographic location and among industry groups.

12

Allowance for loan losses

A summary of activity in the allowance for loan losses is as follows for the three months ended March 31, 2012. And 2011:

	Three months ended March 31,
	2012			2011
Balance, beginning of period	$	14,941		$	16,570
Provision charged to income		1,300			2,150
Loans charged against allowance		(522	)		(3,613	)
Recoveries credited to allowance		110			120
Balance, end of period	$	15,829		$	15,227

The allowance for loan losses is established as an amount that management considers adequate to absorb possible losses on existing loans within the portfolio. The allowance consists of general, specific, and unallocated components. The general component is based upon all loans collectively evaluated for impairment. The specific component is based upon all loans individually evaluated for impairment. The unallocated component represents credit losses inherent in the loan portfolio that may not have been contemplated in the general risk factors or the specific allowance analysis. Loans are charged against the allowance when management believes the collection of principal or interest is unlikely.

The Company performs regular credit reviews of the loan portfolio to determine the credit quality and adherence to underwriting standards. When loans are originated, they are assigned a risk rating that is reassessed periodically during the term of the loan through the credit review process. The Company’s internal risk rating methodology assigns risk ratings ranging from one to ten, where a higher rating represents higher risk. The ten-point risk rating categories are a primary factor in determining an appropriate amount for the allowance for loan losses.

Estimated credit losses reflect consideration of all significant factors that affect the collectability of the loan portfolio. The historical loss rate for each group of loans with similar risk characteristics is determined based on the Company’s own loss experience in that group. Historical loss experience and recent trends in losses provides a reasonable starting point for analysis, however they do not by themselves form a sufficient basis to determine the appropriate level for the allowance for loan losses. Qualitative or environmental factors that are likely to cause estimated credit losses to differ from historical losses are also considered including but not limited to:

• Changes in international, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments,

• Changes in the nature and volume of the portfolio and in the terms of loans,

• Changes in the experience, ability, and depth of lending management and other relevant staff,

• Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans,

• Changes in the quality of the institution’s loan review system,

• Changes in the value of underlying collateral for collateral-dependent loans,

• The existence and effect of any concentrations of credit, and changes in the level of such concentrations,

• The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio,

• Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses.

13

The adequacy of the allowance for loan losses and the reserve for unfunded commitments is determined using a consistent, systematic methodology and is monitored regularly based on management’s evaluation of numerous factors. For each portfolio segment, these factors include:

• The quality of the current loan portfolio,

• The trend in the migration of the loan portfolio’s risk ratings,

• The velocity of migration of losses and potential losses,

• Current economic conditions,

• Loan concentrations,

• Loan growth rates,

• Past-due and nonperforming trends,

• Evaluation of specific loss estimates for all significant problem loans,

• Recovery experience,

• Peer comparison loss rates.

There have been no significant changes to the Company’s allowance for loan losses methodology or policies in the periods presented.

14

A summary of the activity in the allowance for loan losses by major loan classification follows:

Allowance for Loan Losses and Recorded Investment in Loans Receivable

	For the three months ended March 31, 2012
	Commercial and Other		Real Estate			Construction			Consumer			Unallocated			Total
Beginning balance	$	2,776	$	8,267		$	2,104		$	87		$	1,707		$	14,941
Charge-offs		—		(221	)		(301	)		—			—			(522	)
Recoveries		28		10			71			1			—			110
Provision		219		(110	)		1,278			(4	)		(83	)		1,300
Ending balance	$	3,023	$	7,946		$	3,152		$	84		$	1,624		$	15,829

	For the three months ended March 31, 2011
	Commercial and Other			Real Estate			Construction			Consumer			Unallocated		Total
Beginning balance(1)	$	2,230		$	10,042		$	3,040		$	64		$	1,194	$	16,570
Charge-offs		(629	)		(1,310	)		(1,663	)		(11	)		—		(3,613	)
Recoveries		43			25			51			1			—		120
Provision		1,573			(171	)		424			12			312		2,150
Ending balance	$	3,217		$	8,586		$	1,852		$	66		$	1,506	$	15,227

	Balances as of March 31, 2012
	Commercial and Other		Real Estate		Construction		Consumer		Unallocated		Total
Ending allowance: collectively evaluated for impairment	$	3,023	$	7,551	$	3,152	$	84	$	1,624	$	15,434
Ending allowance: individually evaluated for impairment		—		395		—		—		—		395
Total ending allowance	$	3,023	$	7,946	$	3,152	$	84	$	1,624	$	15,829
Ending loan balance: collectively evaluated for impairment	$	281,453	$	459,118	$	50,774	$	4,569	$	—	$	795,914
Ending loan balance: individually evaluated for impairment		6,529		10,294		12,850		—		—		29,673
Total ending loan balance	$	287,982	$	469,412	$	63,624	$	4,569	$	—	$	825,587

15

	Balances as of December 31, 2011
	Commercial and Other		Real Estate		Construction		Consumer		Unallocated		Total
Ending allowance: collectively evaluated for impairment	$	2,776	$	7,812	$	2,104	$	87	$	1,707	$	14,486
Ending allowance: individually evaluated for impairment		—		455		—		—		—		455
Total ending allowance	$	2,776	$	8,267	$	2,104	$	87	$	1,707	$	14,941
Ending loan balance: collectively evaluated for impairment	$	267,099	$	467,426	$	50,548	$	4,569	$	—	$	789,642
Ending loan balance: individually evaluated for impairment		7,057		11,040		13,090		—				31,187
Total ending loan balance	$	274,156	$	478,466	$	63,638	$	4,569	$	—	$	820,829

	Balances as of March 31, 2011
	Commercial and Other		Real Estate		Construction		Consumer		Unallocated		Total
Ending allowance: collectively evaluated for impairment	$	2,674	$	8,438	$	1,634	$	66	$	1,506	$	14,318
Ending allowance: individually evaluated for impairment		543		148		218		—		—		909
Total ending allowance	$	3,217	$	8,586	$	1,852	$	66	$	1,506	$	15,227
Ending loan balance: collectively evaluated for impairment	$	248,654	$	483,107	$	53,150	$	5,966	$	—	$	790,877
Ending loan balance: individually evaluated for impairment		7,275		22,516		21,648		—		—		51,439
Total ending loan balance	$	255,929	$	505,623	$	74,798	$	5,966	$	—	$	842,316

Management believes that the allowance for loan losses was adequate as of March 31, 2012. However, future loan losses may exceed the levels provided for in the allowance for loan losses and could possibly result in additional charges to the provision for loan losses.

16

Credit Quality Indicators

The Company uses the following loan grades, which are also often used by regulators when assessing the credit quality of a loan portfolio.

Pass – Credit exposure in this category range between the highest credit quality to average credit quality. Primary repayment sources generate satisfactory debt service coverage under normal conditions. Cash flow from recurring sources is expected to continue to produce adequate debt service capacity. There are many levels of credit quality contained in the Pass definition, but none of the loans contained in this category rise to the level of special mention.

Special Mention – A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. The Bank strictly and carefully employs the FDIC definition in assessing assets that may apply to this category. It is apparent that in many cases asset weaknesses relevant to this definition either, (1) better fit a definition of a “well-defined weakness,” or (2) in our experience ultimately migrate to worse risk grade categories, such as Substandard and Doubtful. Consequently, management elects to downgrade most potential Special Mention credits to Substandard or Doubtful, and therefore adopts a conservative risk grade process in the use of the Special Mention risk grade.

Substandard –A substandard asset is inadequately protected by the current sound worth and paying capacity of the Borrower or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans in this category are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard.

Doubtful –An asset classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Management strives to consistently apply these definitions when allocating its loans by loan grade. The loan portfolio is continuously monitored for changes in credit quality and management takes appropriate action to update the loan risk ratings accordingly. Management has not changed the Company’s policy towards its use of credit quality indicators during the periods reported.

17

The following tables present the Company’s loan portfolio information by loan type and credit grade at March 31, 2012, December 31, 2011, and March 31, 2011:

Credit Quality Indicators

As of March 31, 2012

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful		Totals
Real estate loans
Multifamily residential	$	49,762	$	—	$	1,340	$	—	$	51,102
Residential 1-4 family		49,583		—		10,059		—		59,642
Owner-occupied commercial		205,878		—		11,083		1,565		218,526
Nonowner-occupied commercial		137,782		—		2,360		—		140,142
Total real estate loans		443,005		—		24,842		1,565		469,412
Construction
Multifamily residential		4,906		—		—		—		4,906
Residential 1-4 family		13,356		—		3,234		—		16,590
Commercial real estate		8,742		—		3,804		—		12,546
Commercial bare land and acquisition & development		10,074		—		8,492		—		18,566
Residential bare land and acquisition & development		6,164		—		4,852		—		11,016
Total construction loans		43,242		—		20,382		—		63,624
Commercial and other		277,913		—		9,993		76		287,982
Consumer		4,491		—		78		—		4,569
Totals	$	768,651	$	—	$	55,295	$	1,641	$	825,587

Credit Quality Indicators

As of December 31, 2011

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful		Totals
Real estate loans
Multifamily residential	$	50,547	$	—	$	1,350	$	—	$	51,897
Residential 1-4 family		51,622		—		10,095		—		61,717
Owner-occupied commercial		194,250		—		11,143		1,615		207,008
Nonowner-occupied commercial		154,805		—		3,039		—		157,844
Total real estate loans		451,224		—		25,627		1,615		478,466
Construction
Multifamily residential		2,574		—		—		—		2,574
Residential 1-4 family		14,036		—		3,924		—		17,960
Commercial real estate		7,075		—		3,826		—		10,901
Commercial bare land and acquisition & development		11,000		—		8,496		—		19,496
Residential bare land and acquisition & development		9,929		—		2,778		—		12,707
Total construction loans		44,614				19,024				63,638
Commercial and other		264,415		—		9,663		78		274,156
Consumer		4,486		—		83		—		4,569
Totals	$	764,739	$	—	$	54,397	$	1,693	$	820,829

18

Credit Quality Indicators

As of March 31, 2011

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful		Totals
Real estate loans
Multifamily residential	$	44,121	$	—	$	3,990	$	—	$	48,111
Residential 1-4 family		57,194		—		15,248		484		72,926
Owner-occupied commercial		195,723		—		9,978		—		205,701
Nonowner-occupied commercial		166,729		—		12,156		—		178,885
Total real estate loans		463,767		—		41,372		484		505,623
Construction
Multifamily residential		882		—		232		—		1,114
Residential 1-4 family		18,524		—		3,250		—		21,774
Commercial real estate		7,893		—		4,439		—		12,332
Commercial bare land and acquisition & development		11,347		—		13,725		—		25,072
Residential bare land and acquisition & development		10,753		—		3,753		—		14,506
Total construction loans		49,399		—		25,399		—		74,798
Commercial and other		244,382		400		11,147		—		255,929
Consumer		5,909		—		57		—		5,966
Totals	$	763,457	$	400	$	77,975	$	484	$	842,316

At March 31, 2012, December 31, 2011, and March 31, 2011, the Company had $568, $363 and $10, respectively, in contingent liabilities on its classified loans.

19

Past Due and Nonaccrual Loans

The Company uses the terms “past due” and “delinquent” interchangeably. Amortizing loans are considered past due or delinquent based upon the number of contractually required payments not made as indicated in the following table:

Number of Payments Past Due	Days Delinquent
2 Payments	30 Days
3 Payments	60 Days
4 Payments	90 Days
5 Payments	120 Days
6 Payments	150 Days
7 Payments	180 Days

Delinquency status for all contractually matured loans, commercial and commercial real estate loans with non-monthly amortization, and all other extensions of credit is determined based upon the number of calendar months past due.

The following tables present an aged analysis of past due and nonaccrual loans at March 31, 2012, and December 31, 2011 and March 31, 2011:

Age Analysis of Loans Receivable

As of March 31, 2012

	30-59 Days Past Due Still Accruing		60-89 Days Past Due Still Accruing		Greater Than 90 Days Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Total Current		Total Loans Receivable
Real estate loans
Multifamily residential	$	—	$	—	$	—	$	—	$	—	$	51,102	$	51,102
Residential 1-4 family		635		—		—		3,344		3,979		55,420		59,399
Owner-occupied commercial		—		243		—		5,058		5,301		212,736		218,037
Non owner-occupied commercial		96		732		—		—		828		140,046		140,874
Total real estate loans		731		975		—		8,402		10,108		459,304		469,412
Construction
Multifamily residential		—		—		—		—		—		4,906		4,906
Residential 1-4 family		—		—		—		15		15		16,575		16,590
Commercial real estate		1,538		—		—		933		2,471		10,075		12,546
Commercial bare land and acquisition & development		—		—		—		8,491		8,491		10,075		18,566
Residential bare land and acquisition & development		—		—		—		1,791		1,791		9,225		11,016
Total construction loans		1,538		—		—		11,230		12,768		50,856		63,624
Commercial and other		1,340		951		—		5,899		8,190		279,792		287,982
Consumer		6		9		—		—		15		4,554		4,569
Total	$	3,615	$	1,935	$	—	$	25,531	$	31,081	$	794,506	$	825,587

20

Age Analysis of Loans Receivable

As of December 31, 2011

	30-59 Days Past Due Still Accruing		60-89 Days Past Due Still Accruing		Greater Than 90 Days Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Total Current		Total Loans Receivable
Real estate loans
Multifamily residential	$	—	$	—	$	—	$	—	$	—	$	51,897	$	51,897
Residential 1-4 family		251		210		—		3,426		3,887		57,830		61,717
Owner-occupied commercial		151		190		—		5,138		5,479		201,529		207,008
Non owner-occupied commercial		—		—		—		575		575		157,269		157,844
Total real estate loans		402		400		—		9,139		9,941		468,525		478,466
Construction
Multifamily residential		—		—		—		—		—		2,574		2,574
Residential 1-4 family		67		—		—		757		824		17,136		17,960
Commercial real estate		1,635		—		—		933		2,568		8,333		10,901
Commercial bare land and acquisition & development		—		—		—		7,837		7,837		11,659		19,496
Residential bare land and acquisition & development		52		175		—		1,929		2,156		10,551		12,707
Total construction loans		1,754		175		—		11,456		13,385		50,253		63,638
Commercial and other		634		—		—		5,999		6,633		267,523		274,156
Consumer		—		—		—		—		—		4,569		4,569
Total	$	2,790	$	575	$	—	$	26,594	$	29,959	$	790,870	$	820,829

Age Analysis of Loans Receivable

As of March 31, 2011

	30-59 Days Past Due Still Accruing		60-89 Days Past Due Still Accruing		Greater Than 90 Days Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Total Current		Total Loans Receivable
Real estate loans
Multifamily residential	$	—	$	—	$	—	$	64	$	64	$	48,047	$	48,111
Residential 1-4 family		588		2,453		—		6,503		9,544		63,382		72,926
Owner-occupied commercial		2,694		—		—		1,959		4,653		201,048		205,701
Non owner-occupied commercial		5		14		—		9,622		9,641		169,244		178,885
Total real estate loans		3,287		2,467		—		18,148		23,902		481,721		505,623
Construction
Multifamily residential		—		—		—		232		232		882		1,114
Residential 1-4 family		213		—		—		1,972		2,185		19,589		21,774
Commercial real estate		1,538		—		—		1,500		3,038		9,294		12,332
Commercial bare land and acquisition & development		660		—		—		—		660		24,412		25,072
Residential bare land and acquisition & development		—		—		—		2,024		2,024		12,482		14,506
Total construction loans		2,411		—		—		5,728		8,139		66,659		74,798
Commercial and other		452		—		—		7,275		7,727		248,202		255,929
Consumer		22		—		—		—		22		5,944		5,966
Total	$	6,172	$	2,467	$	—	$	31,151	$	39,790	$	802,526	$	842,316

21

Impaired Loans

Regular credit reviews of the portfolio are performed to identify loans that are considered potentially impaired. Potentially impaired loans are referred to the ALCO Committee for review and are included in the specific calculation of allowance for loan losses. A loan is considered impaired when, based on current information and events, the Company is unlikely to collect all principal and interest due according to the terms of the loan agreement. When the amount of the impairment represents a confirmed loss it is charged off against the allowance for loan losses. Impaired loans are often reported net of government guarantees to the extent that the guarantees are expected to be collected. Impaired loans generally include all loans classified as nonaccrual and troubled debt restructurings.

Accrual of interest is discontinued on impaired loans when management believes that, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of principal or interest is doubtful. Accrued, but uncollected interest is generally reversed when loans are placed on nonaccrual status. Interest income is subsequently recognized only to the extent cash payments are received satisfying all delinquent principal and interest amounts, and the prospects for future payments in accordance with the loan agreement appear relatively certain. In accordance with GAAP, payments received on nonaccrual loans are applied to the principal balance and no interest income is recognized. Interest income may be recognized on impaired loans that are not on nonaccrual status.

22

The following tables display an analysis of the Company’s impaired loans at March 31, 2012, December 31, 2011 and March 31, 2011:

Impaired Loan Analysis

As of March 31, 2012

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Real estate
Multifamily residential	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		4,430		5,523		—		4,179		9
Owner-occupied commercial		3,923		4,263		—		4,139		4
Non owner-occupied commercial		376		376		—		179		7
Total real estate loans		8,729		10,162		—		8,497		20
Construction
Multifamily residential		—		—		—		—		—
Residential 1-4 family		15		171		—		408		—
Commercial real estate		2,553		3,290		—		2,528		36
Commercial bare land and acquisition & development		8,491		13,682		—		8,175		—
Residential bare land and acquisition & development		1,791		5,150		—		1,756		—
Total construction loans		12,850		22,293		—		12,867		36
Commercial and other		6,529		10,870		—		6,799		11
Consumer		—		—		—		—		—
With an allowance recorded
Real estate
Multifamily residential	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		—		—		—		73		—
Owner-occupied commercial		1,565		1,565		395		1,564		—
Non owner-occupied commercial		—		—		—		—		—
Total real estate loans		1,565		1,565		395		1,637		—
Construction
Multifamily residential		—		—		—		—		—
Residential 1-4 family		—		—		—		—		—
Commercial real estate		—		—		—		—		—
Commercial bare land and acquisition & development		—		—		—		—		—
Residential bare land and acquisition & development		—		—		—		—		—
Total construction loans		—		—		—		—		—
Commercial and other		—		—		—		—		—
Consumer		—		—		—		—		—
Total
Real estate
Multifamily residential	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		4,430		5,523		—		4,252		9
Owner-occupied commercial		5,488		5,828		395		5,703		4
Non owner-occupied commercial		376		376		—		179		7
Total real estate loans		10,294		11,727		395		10,134		20
Construction
Multifamily residential		—		—		—		—		—
Residential 1-4 family		15		171		—		408		—
Commercial real estate		2,553		3,290		—		2,528		36
Commercial bare land and acquisition & development		8,491		13,682		—		8,175		—
Residential bare land and acquisition & development		1,791		5,150		—		1,756		—
Total construction loans		12,850		22,293		—		12,867		36
Commercial and other		6,529		10,870		—		6,799		11
Consumer		—		—		—		—		—
Total impaired loans	$	29,673	$	44,890	$	395	$	29,800	$	67

23

Impaired Loan Analysis

As of December 31, 2011

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Real estate
Multi-family residential	$	—	$	—	$	—	$	54	$	—
Residential 1-4 family		4,300		4,756		—		5,785		52
Owner-occupied commercial		3,954		4,295		—		6,220		36
Nonowner-occupied commercial		956		1,423		—		5,781		33
Total real estate loans		9,210		10,474		—		17,840		121
Construction
Multi-family residential		—		—		—		136		—
Residential 1-4 family		757		1,037		—		1,331		—
Commercial real estate		2,568		3,306		—		3,161		111
Commercial bare land and acquisition & development		7,837		13,027		—		12,617		234
Residential bare land and acquisition & development		1,928		5,319		—		2,242		38
Total construction loans		13,090		22,689		—		19,487		383
Commercial and other		7,057		10,691		—		6,137		44
Consumer		—		—		—		—		—
With an allowance recorded
Real estate
Multi-family residential	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		215		248		10		351		—
Owner-occupied commercial		1,615		1,614		445		427		—
Nonowner-occupied commercial		—		—		—		97		—
Total real estate loans		1,830		1,862		455		875		—
Construction
Multi-family residential		—		—		—		—		—
Residential 1-4 family		—		—		—		462		—
Commercial real estate		—		—		—		—		—
Commercial bare land and acquisition & development		—		—		—		—		—
Residential bare land and acquisition & development		—		—		—		1,099		—
Total construction loans		—		—		—		1,561		—
Commercial and other		—		—		—		1,391		—
Consumer		—		—		—		—		—
Total
Real estate
Multi-family residential	$	—	$	—	$	—	$	54	$	—
Residential 1-4 family		4,515		5,004		10		6,136		52
Owner-occupied commercial		5,569		5,909		445		6,647		36
Nonowner-occupied commercial		956		1,423		—		5,878		33
Total real estate loans		11,040		12,336		455		18,715		121
Construction
Multi-family residential		—		—		—		136		—
Residential 1-4 family		757		1,037		—		1,793		—
Commercial real estate		2,568		3,306		—		3,161		111
Commercial bare land and acquisition & development		7,837		13,027		—		12,617		234
Residential bare land and acquisition & development		1,928		5,319		—		3,341		38
Total construction loans		13,090		22,689		—		21,048		383
Commercial and other		7,057		10,691		—		7,528		44
Consumer		—		—		—		—		—
Total impaired loans	$	31,187	$	45,716	$	455	$	47,291	$	548

24

Impaired Loan Analysis

As of March 31, 2011

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Real estate
Multifamily residential	$	64	$	243	$	—	$	113	$	—
Residential 1-4 family		6,077		7,672		—		5,983		111
Owner-occupied commercial		6,093		6,168		—		6,112		74
Non owner-occupied commercial		9,357		11,346		—		8,835		75
Total real estate loans		21,591		25,429		—		21,043		260
Construction
Multifamily residential		233		1,143		—		551		—
Residential 1-4 family		1,972		2,741		—		1,816		—
Commercial real estate		3,167		3,338		—		3,282		24
Commercial bare land and acquisition & development		13,065		13,065		—		13,125		196
Residential bare land and acquisition & development		2,023		4,653		—		1,701		—
Total construction loans		20,460		24,940		—		20,475		220
Commercial and other		3,902		4,427		—		6,014		—
Consumer		—		—		—		—		—
With an allowance recorded
Real estate
Multifamily residential	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		925		925		148		631		28
Owner-occupied commercial		—		—		—		—		—
Non owner-occupied commercial		—		—		—		—		—
Total real estate loans		925		925		148		631		28
Construction
Multifamily residential		—		—		—		—		—
Residential 1-4 family		—		—		—		399		—
Commercial real estate		—		—		—		—		—
Commercial bare land and acquisition & development		—		—		—		—		—
Residential bare land and acquisition & development		1,188		1,188		218		1,964		15
Total construction loans		1,188		1,188		218		2,363		15
Commercial and other		3,373		7,791		543		1,095		—
Consumer		—		—		—		—		—
Total
Real estate
Multifamily residential	$	64	$	243	$	—	$	113	$	—
Residential 1-4 family		7,002		8,597		148		6,614		139
Owner-occupied commercial		6,093		6,168		—		6,112		74
Non owner-occupied commercial		9,357		11,346		—		8,835		75
Total real estate loans		22,516		26,354		148		21,674		288
Construction
Multifamily residential		233		1,143		—		551		—
Residential 1-4 family		1,972		2,741		—		2,215		—
Commercial real estate		3,167		3,338		—		3,282		24
Commercial bare land and acquisition & development		13,065		13,065		—		13,125		196
Residential bare land and acquisition & development		3,211		5,841		218		3,665		15
Total construction loans		21,648		26,128		218		22,838		235
Commercial and other		7,275		12,218		543		7,109		—
Consumer		—		—		—		—		—
Total impaired loans	$	51,439	$	64,700	$	909	$	51,621	$	523

25

The impaired balances reported above are not adjusted for government guarantees of $1,086, $1,094 and $761 at March 31, 2012, December 31, 2011, and March 31, 2011, respectively. The recorded investment in impaired loans, net of government guarantees totaled $28,587, $30,093 and $50,678 at March 31, 2012, December 31, 2011, and March 31, 2011, respectively. The specific valuation allowance for impaired loans was $ 395, $455 and $909 at March 31, 2012, December 31, 2011, and March 31, 2011, respectively.

Troubled Debt Restructurings

In the normal course of business, the Company may modify the terms of certain loans, attempting to protect as much of its investment as possible. Management evaluates the circumstances surrounding each modification to determine whether it is a troubled debt restructuring (“TDR”). TDRs exist when 1) the restructuring constitutes a concession, and 2) the debtor is experiencing financial difficulties. The Company adopted the amendments of Accounting Standards Update No. 2011-02, “Receivables – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” during the first quarter 2011. The Update requires retrospective application to the beginning of the annual period of adoption.

For the three months ended March 31, 2012 and March 31, 2011, the Company identified 2 and 4 TDRs, respectively. The TDRs identified are newly considered impaired for which impairment was previously measured under the Company’s general loan loss allowance methodology. The total recorded investment in such receivables was $320, and $2,501 for the periods ended, March 31, 2012, and March 31, 2011. The associated allowance for loan losses was $0 and $226 at March 31, 2012, and March 31, 2011, respectively.

The following table displays the Company’s TDRs by class at March 31, 2012, December 31, 2011, and March 31, 2011:

	Troubled Debt Restructurings as of March 31, 2012
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate
Multifamily residential		—	$	—	$	—
Residential 1-4 family		9		2,673		2,396
Owner-occupied commercial		3		877		849
Non owner-occupied commercial		1		160		151
Total real estate loans		13		3,710		3,396
Construction
Multifamily residential		—		—		—
Residential 1-4 family		—		—		—
Commercial real estate		—		—		—
Commercial bare land and acquisition & development		—		—		—
Residential bare land and acquisition & development		4		2,701		1,648
Total construction loans		4		2,701		1,648
Commercial and other		3		1,150		951
Consumer		—		—		—
		20	$	7,561	$	5,995

26

	Troubled Debt Restructurings as of March 31, 2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate
Multifamily residential		—	$	—	$	—
Residential 1-4 family		2		2,192		1,596
Owner-occupied commercial		—		—		—
Non owner-occupied commercial		2		1,653		1,389
Total real estate loans		4		3,845		2,985
Construction
Multifamily residential		—		—		—
Residential 1-4 family		—		—		—
Commercial real estate		—		—		—
Commercial bare land and acquisition & development		—		—		—
Residential bare land and acquisition & development		2		2,242		2,241
Total construction loans		2		2,242		2,241
Commercial and other		1		203		203
Consumer		—		—		—
		7	$	6,290	$	5,429

Virtually all of the Company’s TDRs include rate reductions and/or the extension of terms to alleviate the burden of the debtor’s near-term cash requirements. Additionally, some restructured loans are modified to temporarily allow interest only payments.

Three residential 1-4 family loans with a current outstanding balance of $337 and two commercial loans with a current outstanding balance of $320 were modified according to the terms of the borrowers’ bankruptcy agreements.

Two residential 1-4 family loans with a current outstanding balance of $924 were modified to allow interest-only payments. One owner-occupied commercial loan with a current outstanding balance of $124 was restructured using an A – B Note format. In all cases, modifications are made to improve the Company’s likelihood of collecting the entire debt. Under all segments, loans modified as TDRs are considered impaired. As a result, each TDR is individually evaluated for impairment, and if necessary, an allowance for loan losses is provided under the Company’s specific reserve methodology.

27

Subsequent to a loan being classified as a TDR, a borrower may become unwilling or unable to abide by the terms of the modified agreement. In such cases of default, the Company takes appropriate action to secure additional payments including the use of foreclosure proceedings. The following table presents loans receivable modified as troubled debt restructurings that subsequently defaulted:

Troubled Debt Restructurings That Subsequently Defaulted

	As of March 31,
	2012				2011
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Real estate
Multifamily residential		—	$	—		—	$	—
Residential 1-4 family		1		728		1		1,596
Owner-occupied commercial		1		420		—		—
Non owner-occupied commercial		—		—		1		890
Total real estate loans		2		1,148		2		2,486
Construction
Multifamily residential		—		—		—		—
Residential 1-4 family		—		—		—		—
Commercial real estate		—		—		—		—
Commercial bare land and acquisition & development		—		—		—		—
Residential bare land and acquisition & development		2		404		—		—
Total construction loans		2		404		—		—
Commercial and other		2		631		2		203
Consumer		—		—		—		—
		6	$	2,183		4	$	2,689

At March 31, 2012, and March 31, 2011, the Company had no commitments to lend additional funds on loans restructured as TDRs.

28

4. Dental Loan Portfolio:

To assist in understanding the concentrations and risks associated with the Bank’s loan portfolio, the following Note has been included to provide additional information relating to the Bank’s dental lending portfolio. At March 31, 2012, December 31, 2011 and March 31, 2011 loans to dental professionals totaled $222,979, $208,489 and $182,258, respectively and represented 27.0, 25.4 and 21.6 percent of outstanding loans. As of March 31, 2012, December 31, 2011 and March 31, 2011 the dental loans are supported by government guarantees totaling $21,481, $21,048 and $24,290, respectively. This represented 9.63%, 10.01% and 13.33% of the outstanding dental loan balances. The Company defines a “dental loan” as loan to dental professionals for the purpose of practice expansion, acquisition or other purpose, supported by the cash flows of a dental practice.

Loan Classification

Major classifications of Dental Loans, at March 31, 2012, December 31, 2011, and March 31, 2011 are as follows:

	March 31, 2012		December 31, 2011		March 31, 2011
Real estate secured loans:
Owner-occupied commercial	$	45,260	$	35,949	$	31,452
Other dental real estate loans		5,021		12,284		15,061
Total permanent real estate loans		50,281		48,233		46,513
Dental construction loans		2,621		1,993		660
Total construction real estate loans		2,621		1,993		660
Total real estate loans		52,902		50,226		47,173
Commercial loans		170,077		158,263		135,085
Gross loans	$	222,979	$	208,489	$	182,258

Market Area

The Bank’s defined “market area” is within the states of Oregon and Washington west of the Cascade Mountain Range. This area is serviced by branch locations in Eugene, Portland and Seattle. The Company also makes out-of-market dental loans throughout the Western and Central United States. Out-of-market loan relationships are maintained and serviced by Bank personnel primarily located in Portland. The following table represents the dental lending by borrower location:

Dental Loan Total by Market

	Balance March 31, 2012		Balance December 31, 2011		Balance March 31, 2011
Eugene Market	$	18,679	$	17,345	$	15,244
Portland Market		126,127		120,975		114,243
Seattle Market		28,163		27,813		25,829
Out-of-Market		50,010		42,356		26,942
Total	$	222,979	$	208,489	$	182,258

29

Credit Quality

Please refer to Note 3 for additional information on the definitions of the credit quality indicators.

The following tables present the Company’s dental loan portfolio information by Market and credit grade at March 31, 2012, December 31, 2011 and March 31, 2011:

Dental Credit Quality Indicators

As of March 31, 2012

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful		Totals
Eugene Market	$	18,044	$	—	$	635	$	—	$	18,679
Portland Market		123,106		—		3,021		—		126,127
Seattle Market		28,163		—		—		—		28,163
Out-of-Market		50,010		—		—		—		50,010
Total	$	219,323	$	—	$	3,656	$	—	$	222,979

Dental Credit Quality Indicators

As of December 31, 2011

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful		Totals
Eugene Market	$	16,688	$	—	$	657	$	—	$	17,345
Portland Market		117,934		—		3,041		—		120,975
Seattle Market		27,813		—		—		—		27,813
Out-of-Market		42,356		—		—		—		42,356
Total	$	204,791	$	—	$	3,698	$	—	$	208,489

Dental Credit Quality Indicators

As of March 31, 2011

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful		Totals
Eugene Market	$	14,998	$	—	$	246	$	—	$	15,244
Portland Market		110,205		—		3,612		426		114,243
Seattle Market		25,710		—		119		—		25,829
Out-of-Market		26,942		—		—		—		26,942
Total	$	177,855	$	—	$	3,977	$	426	$	182,258

30

Past Due and Nonaccrual Loans

Please refer to Note 3 for additional information on the definitions of “past due.”

The following tables present an aged analysis of the dental loans by market, including nonaccrual loans at March 31, 2012, December 31, 2011, and March 31, 2011:

Aged Analysis of Dental Loans Receivable

As of March 31, 2012

	30-59 Days Past Due Still Accruing		60-89 Days Past Due Still Accruing		Greater Than 90 Days Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Total Current		Total  Loans Receivable
Eugene Market	$	398	$	—	$	—	$	—	$	398	$	18,281	$	18,679
Portland Market		613		631		—		731		1,975		124,152		126,127
Seattle Market		—		—		—		—		—		28,163		28,163
Out-of-Market		—		—		—		—		—		50,010		50,010
Total	$	1,011	$	631	$	—	$	731	$	2,373	$	220,606	$	222,979

Aged Analysis of Dental Loans Receivable

As of December 31, 2011

	30-59 Days Past Due Still Accruing		60-89 Days Past Due Still Accruing		Greater Than 90 Days Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Total Current		Total  Loans Receivable
Eugene Market	$	—	$	—	$	—	$	—	$	—	$	17,345	$	17,345
Portland Market		634		—		—		744		1,378		119,597		120,975
Seattle Market		—		—		—		—		—		27,813		27,813
Out-of-Market		—		—		—		—		—		42,356		42,356
Total	$	634	$	—	$	—	$	744	$	1,378	$	207,111	$	208,489

Aged Analysis of Dental Loans Receivable

As of March 31, 2011

	30-59 Days Past Due Still Accruing		60-89 Days Past Due Still Accruing		Greater Than 90 Days Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Total Current		Total Loans Receivable
Eugene Market	$	480	$	—	$	—	$	246	$	726	$	14,518	$	15,244
Portland Market		443		—		—		1,283		1,726		112,517		114,243
Seattle Market		—		—		—		119		119		25,710		25,829
Out-of-Market		—		—		—		—		—		26,942		26,942
Total	$	923	$	—	$	—	$	1,648	$	2,571	$	179,687	$	182,258

31

5. Federal Funds and Overnight Funds Purchased:

The Company has unsecured federal funds borrowing lines with various correspondent banks totaling $108,000. At March 31, 2012, December 31, 2011 and March 31, 2011 there was $0, $12,300, and $0 outstanding on these lines, respectively.

The Company also has a secured overnight borrowing line available from the Federal Reserve Bank totaling $77,032, 68,227and $106,627 at March 31, 2012, December 31, 2011 and March 31, 2011 respectively. The Federal Reserve Bank borrowing line is secured through the pledging of approximately $115,348 of commercial loans under the Company’s Borrower-In-Custody program. At March 31, 2012, December 31, 2011 and March 31, 2011, there were no outstanding borrowings on this line.

6. Federal Home Loan Bank Borrowings:

The Company has a borrowing limit with the FHLB equal to 30% of total assets, subject to discounted collateral and stock holdings. At March 31, 2012, the maximum borrowing line was $386,938; however, the FHLB borrowing line was limited by the lower of the amount of FHLB stock held or the discounted value of collateral pledged. At March 31, 2012, the FHLB stock held by the Company supported a total of $237,144 borrowings. At March 31, 2012, the Company had pledged $406,791 in real estate loans to the FHLB that had a discounted value of $227,672. At March 31, 2012, the borrowing line was limited to the discounted value of collateral pledged. There was $143,500 borrowed on this line at March 31, 2012.

The maximum FHLB borrowing line at December 31, 2011, was $381,070. At December 31, 2011, the Company had pledged real estate loans and securities to the FHLB with a discounted value of $253,961. There was $101,500 borrowed on this line at December 31, 2011.

The maximum FHLB borrowing line at March 31, 2011, was $360,761. At March 31, 2011, the Company had pledged real estate loans and securities to the FHLB with a discounted collateral value of $145,647. There was $91,500 borrowed on this line at March 31, 2011.

	Current Rates			March 31, 2012		December 31, 2011		March 31, 2011
Cash Management Advance		N/A		$	—	$	—	$	—
2011					—		—		34,500
2012		0.24%-4.12	%		102,500		60,500		16,000
2013		2.46%-4.27	%		22,000		22,000		22,000
2014		2.78%-3.25	%		13,500		13,500		13,500
2015		2.19%-2.86	%		3,500		3,500		3,500
2016		5.05	%		2,000		2,000		2,000
				$	143,500	$	101,500	$	91,500

32

7. Stock-based Compensation:

The Company’s 2006 Stock Option and Equity Compensation Plan (the “2006 SOEC Plan”) authorizes the award of up to 1,050,000 shares in stock-based awards. The awards granted under this plan are performance-based and are subject to vesting. 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. Awards granted generally vest over four years and have a maximum life of ten years. Awards may be granted at exercise prices of not less than 100 percent of the fair market value of the Company’s common stock at the grant date.

Pursuant to the 2006 SOEC Plan, incentive stock options (“ISOs”), nonqualified stock options, restricted stock, restricted stock units (“RSUs”), or stock appreciation rights (“SARs”) may be awarded to attract and retain the best available personnel to the Corporation and its subsidiaries. SARs may be settled in common stock or cash as determined at the date of issuance. Liability-based awards (including all cash-settled SARs) have no impact on the number of shares available to be issued within the plan. Additionally, non-qualified option awards and restricted stock awards may be granted to directors under the terms of this plan.

Prior to April 2006, incentive stock option (“ISO”) and non-qualified option awards were granted to employees and directors under the Company’s 1999 Employees’ Stock Option Plan and the Company’s 1999 Directors’ Stock Option Plan. The Company has stock options outstanding under both of these plans. Subsequent to the annual shareholders’ meeting in April 2006 all shares available under these plans were deregistered and are no longer available for future grants.

The following tables identify the compensation expense recorded and tax benefits received by the Company on its stock-based compensation plans for the three months ended March 31, 2012, and 2011:

	Three months ended March 31,
	2012						2011
	Compensation Expense (Benefit)			Tax Benefit (Expense)			Compensation Expense (Benefit)		Tax Benefit (Expense)
Equity-based awards:
Director stock options	$	—		$	—		$	—	$	—
Employee stock options		33			—			1		—
Employee stock SARs		52			—			47		—
Employee RSUs		60			23			67		26
Liability-based awards:
Employee cash SARs		(5	)		(2	)		64		24
	$	140		$	21		$	179	$	50

During the first three months of 2012 2,500 stock options were exercised with a weighted average exercise price of $6.38 per share and an intrinsic value of $7. The fair value of equity-based awards vested during the three months ended March 31, 2012, and 2011 was $96 and $253, respectively. The fair value of liability-based awards vested during the three months ended March 31, 2012, and 2011 was $30 and $88, respectively.

At March 31, 2012, the Company has estimated unrecognized compensation expense of approximately $172, $293, $780, and $54 for unvested stock options, stock-settled SARs, RSUs, and cash-settled SARs, respectively. These amounts are based on forfeiture rates of 20% for all stock options and SARs and 13% for all RSUs granted to employees. The weighted-average period of time the unrecognized compensation expense will be recognized for the unvested stock options, stock-settled SARs, RSUs and cash-settled SARs is approximately 1.68, 1.78, 3.05, and 1.06 years, respectively.

33

8. Fair Value

The following table presents estimated fair values of the Company’s financial instruments as of March 31, 2012, December 31, 2011, and March 31, 2011, in accordance with the provisions of FASB ASC 825 “Financial Instruments.” The use of different assumptions and estimation methods could have a significant effect on the reported fair value amounts. Accordingly, the estimates of fair value herein are not necessarily indicative of the amounts that might be realized in a current market exchange.

	March 31, 2012				December 31, 2011				March 31, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	18,394	$	18,394	$	19,859	$	19,859	$	17,606	$	17,606
Securities available-for-sale		366,916		366,916		346,542		346,542		270,792		270,792
Loans held-for-sale		—		—		1,058		1,058		360		360
Loans		824,860		820,204		820,152		814,882		841,693		834,291
Federal Home Loan Bank stock		10,652		10,652		10,652		10,652		10,652		10,652
Accrued interest receivable		4,560		4,560		4,725		4,725		4,458		4,458
Bank-owned life insurance		15,165		15,165		15,038		15,038		—		—
Financial liabilities:
Deposits		954,647		954,975		965,254		965,724		926,370		927,093
Federal funds and overnight funds purchased		—		—		12,300		12,300		—		—
Federal Home Loan Bank borrowings		143,500		145,927		101,500		103,884		91,500		93,356
Junior subordinated debentures		8,248		2,155		8,248		2,039		8,248		1,958
Accrued interest payable		253		253		264		264		368		368

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

Securities available-for-sale and Federal Home Loan Bank stock – Fair value is based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. FHLB stock is valued based on the most recent redemption price.

Loans Held-for-sale – Fair value represents the anticipated proceeds from the sale of related loans.

Loans – For variable rate loans that reprice frequently and have no significant change in credit risk, fair value is based on carrying values. Fair value of fixed rate loans is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable, and consider credit risk. The Company uses an independent third-party, McGuire Performance Solutions, in establishing the fair value of its loan portfolio.

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

Federal Home Loan Bank stock – The carrying amount approximates fair value.

Bank-owned life insurance – The carrying amount approximates fair value.

Deposits – Fair value of demand, interest bearing demand and savings deposits is the amount payable on demand at the reporting date. Fair value of time deposits is estimated using the interest rates currently offered for deposits of similar remaining maturities. The Company uses an independent third-party to establish the fair value of time deposits.

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

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

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

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

The Company also adheres to the FASB guidance with regards to ASC 820, “Fair Value Measures.” This guidance 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 nonrecurring 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 or 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 is adjusted for market consideration when reasonably available.

Financial instruments, measured at fair value, are broken down in the tables 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 tables below show assets measured at fair value on a recurring basis as of March 31, 2012, December 31, 2011 and March 31, 2011:

March 31, 2012	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities
Obligations of U.S. government agencies	$	14,493	$	—	$	14,493	$	—
Obligations of states and political subdivisions		56,954		—		56,954		—
Agency mortgage-backed securities		284,706		—		284,706		—
Private-label mortgage-backed securities		10,763		—		9,687		1,076
Total available-for-sale securities	$	366,916	$	—	$	365,840	$	1,076

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December 31, 2011	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities
Obligations of U.S. government agencies	$	12,958	$	—	$	12,958	$	—
Obligations of states and political subdivisions		49,576		—		49,576		—
Agency mortgage-backed securities		272,081		—		272,081		—
Private-label mortgage-backed securities		11,927		—		10,208		1,719
Total available-for-sale securities	$	346,542	$	—	$	344,823	$	1,719

March 31, 2011	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities
Obligations of U.S. government agencies	$	7,226	$	—	$	7,226	$	—
Obligations of states and political subdivisions		34,460		—		34,460		—
Agency mortgage-backed securities		212,158		—		212,158		—
Private-label mortgage-backed securities		16,948		—		16,948		—
Total available-for-sale securities	$	270,792	$	—	$	270,792	$	—

No transfers to or from Levels 1 and 2 occurred on assets measured at fair value on a recurring basis during the three months ended March 31, 2012 and 2011, or during the year ended December 31, 2011

The following is a description of the inputs and valuation methodologies used for assets recorded at fair value on a recurring basis. Fair value for all classes of available-for-sale securities is estimated by obtaining quoted market prices for identical assets, where available. If such prices are not available, fair value is based on independent asset pricing services and models, the inputs of which are market-based or independently sourced market parameters, including but not limited to, yield curves, interest rates, prepayments, defaults, cumulative loss projections, and cash flows. There have been no significant changes in the valuation techniques during the periods reported.

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The following table provides a reconciliation of assets measured at fair value on a recurring basis using unobservable inputs (Level 3) for the three months ended March 31, 2012:

	Private-Label Mortgage- backed Securities
Beginning Balance	$	1,719
Transfers to Level 3		—
Transfers out of Level 3		—
Total gains or losses
Included in earnings		—
Included in other comprehensive income		84
Paydowns		(97	)
Purchases, issuances, sales and settlements
Purchases		—
Issuances		—
Sales		—
Settlements		—
Ending Balance	$	1,706

Fair value for all classes of available-for-sale securities is estimated by obtaining quoted market prices for identical assets, where available. If such prices are not available, fair value is based on quoted prices for similar instruments or model-derived valuations whose inputs are observable or whose significant value drivers are observable. In instances where quoted prices for identical or similar instruments and observable inputs are not available, unobservable inputs, including the Company’s own data, are used.

The Company utilizes FTN Financial for pricing service to estimate fair value on all of its available-for-sale securities. The inputs used to value all securities include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research, market indicators, and industry and economic trends. Additional inputs specific to each asset type are as follows:

• Obligations of U.S. government agencies – TRACE reported trades.

• Obligations of states and political subdivisions – MSRB reported trades, material event notices, and Municipal Market Data (MMD) benchmark yields.

• Private-label mortgage-backed securities – new issue data, monthly payment information, and collateral performance (whole loan collateral).

• Mortgage-backed securities – TBA prices and monthly payment information.

Inputs may be prioritized differently on any given day for any security and not all inputs listed are available for use in the evaluation process on any given day for each security evaluation.

The valuation methodology used by asset type includes:

• Obligations of U.S. government agencies – security characteristics, defined sector break-down, benchmark yields, applied base spread, yield to maturity (bullet structures), corporate action adjustment, and evaluations based on T+3 settlement.

• Obligations of states and political subdivisions – security characteristics, benchmark yields, applied base spread, yield to worst or market convention, ratings updates, prepayment schedules (housing bonds), material event notice adjustments, and evaluations based on T+3 settlement.

• Private-label mortgage-backed securities – security characteristics, prepayment speeds, cash flows, TBA, Treasury and swap curves, IO/PO strips or floating indexes, applied base spread, spread adjustments, yield to worst or market convention, ratings updates (whole-loan collateral), and evaluations based on T+0 settlement.

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• Mortgage-backed securities – security characteristics, TBA, Treasury, or floating index benchmarks, spread to TBA levels, prepayment speeds, applied spreads, and evaluations based on T+0 settlement.

FTN Financial pricing service follows multiple review processes to assess the available market, credit and deal-level information to support its valuation estimates. If sufficient objectively verifiable information is not available to support a security’s valuation an alternate independent evaluation source will be used.

The Company’s entire securities portfolio was valued through its independent third-party pricing service, FTN Financial using observable inputs. For further assurance, the Company’s estimate of fair value was compared to Performance Trust, an additional independent third-party, at December 31, 2011. This analysis was performed at the individual security level and no material variances were noted.

There have been no significant changes in the valuation techniques during the periods reported.

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The tables below show assets measured at fair value on a nonrecurring basis as of March 31, 2012, December 31, 2011, and March 31, 2011:

March 31, 2012	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Three Months Ended March 30, 2012 Total Loss
Loans measured for impairment (net of government guarantees and specific reserves)	$	19,830	$	—	$	—	$	19,830	$	395
Other real estate owned		10,102						10,102		343
	$	29,932	$	—	$	—	$	29,932	$	738

December 31, 2011	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Twelve Months Ended December 31, 2011 Total Loss
Loans measured for impairment (net of government guarantees and specific reserves)	$	22,969	$	—	$	—	$	22,969	$	455
Other real estate owned		11,000		—		—		11,000		2,427
	$	33,969	$	—	$	—	$	33,969	$	2,882

March 31, 2011	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Nine Months Ended March 31, 2011 Total Loss
Loans measured for impairment (net of government guarantees and specific reserves)	$	26,046	$	—	$	—	$	26,046	$	909
Other real estate owned		13,740		—		—		13,740		843
	$	39,786	$	—	$	—	$	39,786	$	1,752

No transfers to or from Level 3 assets measured at fair value on a nonrecurring basis during the three months ended March 31, 2012 and 2011, or during the year ended December 31, 2011.

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The following is a description of the inputs and valuation methodologies used for assets recorded at fair value on a nonrecurring basis.

Loans measured for impairment (net of government guarantees and specific reserves) include the estimated fair value of collateral-dependent loans, less collectible government guarantees, as well as certain noncollateral-dependent loans measured for impairment with an allocated specific reserve. When a collateral-dependent loan is identified as impaired, the value of the loan is measured using the current fair value of the collateral less selling costs. The fair value of collateral is generally estimated by obtaining external appraisals which are usually updated every 6 to 12 months based on the nature of the impaired loans. Certain noncollateral-dependent loans measured for impairment with an allocated specific reserve are valued based upon the estimated net realizable value of the loan. If the estimated fair value of the impaired loan, less collectible government guarantees, is less than the recorded investment in the loan, impairment is recognized as a charge-off through the allowance for loan losses. The carrying value of the loan is adjusted to the estimated fair value. The carrying value of loans fully charged off is zero.

Other real estate owned represents real estate which the Company has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at the lower of the carrying amount of the loan or fair value less costs to sell, which becomes the property’s new basis. Any write downs based on the asset’s fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, management periodically orders appraisals or performs valuations to ensure that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Appraisals are generally updated every 6 to 12 months on other real estate owned. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on other real estate owned for fair value adjustments based on the fair value of the real estate.

There have been no significant changes in the valuation techniques during the periods reported.

8. Regulatory Matters:

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to leverage assets. Management believes that, as of March 31, 2012, the Company and the Bank meet all capital adequacy requirements to which they are subject.

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As of March 31, 2012, and according to Federal Reserve and FDIC guidelines, the Company and the Bank are considered to be well-capitalized. To be categorized as well-capitalized, the Company and the Bank must maintain minimum Total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table.

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt  Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2012:
Total capital (to risk weighted assets)
Bank:	$	168,232		18.55	%	$	72,557		8	%	$	90,697		10	%
Company:	$	172,400		19.02	%	$	72,530		8	%	$	90,663		10	%
Tier I capital (to risk weighted assets)
Bank:	$	156,837		17.29	%	$	36,279		4	%	$	54,418		6	%
Company:	$	161,005		17.76	%	$	36,265		4	%	$	54,398		6	%
Tier I capital (to leverage assets)
Bank:	$	156,837		12.48	%	$	50,250		4	%	$	62,812		5	%
Company:	$	161,005		12.80	%	$	50,297		4	%	$	62,871		5	%
As of December 31, 2011:
Total capital (to risk weighted assets)
Bank:	$	165,089		18.41	%	$	71,756		8	%	$	89,695		10	%
Company:	$	172,336		19.22	%	$	71,720		8	%	$	89,651		10	%
Tier I capital (to risk weighted assets)
Bank:	$	153,829		17.15	%	$	35,878		4	%	$	53,817		6	%
Company:	$	161,076		17.97	%	$	35,860		4	%	$	53,790		6	%
Tier I capital (to leverage assets)
Bank:	$	153,829		12.51	%	$	49,178		4	%	$	61,472		5	%
Company:	$	161,076		13.09	%	$	49,226		4	%	$	61,533		5	%
As of March 31, 2011:
Total capital (to risk weighted assets)
Bank:	$	160,656		17.21	%	$	74,674		8	%	$	93,342		10	%
Company:	$	169,765		18.18	%	$	74,696		8	%	$	93,371		10	%
Tier I capital (to risk weighted assets)
Bank:	$	148,943		15.96	%	$	37,337		4	%	$	56,005		6	%
Company:	$	158,052		16.93	%	$	37,348		4	%	$	56,022		6	%
Tier I capital (to leverage assets)
Bank:	$	148,943		12.65	%	$	47,087		4	%	$	58,858		5	%
Company:	$	158,052		13.42	%	$	47,116		4	%	$	58,895		5	%

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

The following discussion is intended to provide a more comprehensive review of the Company’s operating results and financial condition than can be obtained from reading the Consolidated Financial Statements alone. The discussion should be read in conjunction with the audited financial statements and the notes included later in this report. All dollar amounts, except share and 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. These forward-looking statements include, but are not limited to, statements regarding projected results for 2012, the expected interest rate environment, 2012 provision for loan losses, management’s plans, objectives, expectations and intentions that are not historical facts, and other statements identified by words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “should,” “projects,” “seeks,” “estimates” or words of similar meaning. These forward-looking statements are based on current beliefs and expectations of management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’s control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations in the forward-looking statements, including those set forth in this report, or the documents incorporated by reference:

• Local and national economic conditions could be less favorable than expected or could have a more direct and pronounced effect on us than expected and adversely affect our ability to continue internal growth at historical rates and maintain the quality of our earning assets.

• The local housing or real estate market could continue to decline.

• The risks presented by an economic recession, which could adversely affect credit quality, collateral values, including real estate collateral, investment values, liquidity and loan originations and loan portfolio delinquency rates.

• Our concentration in loans to dental professionals exposes us to the risks affecting dental practices in general.

• Interest rate changes could significantly reduce net interest income and negatively affect funding sources.

• Projected business increases following any future strategic expansion or opening of new branches could be lower than expected.

• Competition among financial institutions could increase significantly.

• The goodwill we have recorded in connection with acquisitions could become impaired, which may have an adverse impact on our earnings and capital.

• The reputation of the financial services industry could deteriorate, which could adversely affect our ability to access markets for funding and to acquire and retain customers.

• The efficiencies we may expect to receive from any investments in personnel, acquisitions and infrastructure may not be realized.

• The level of nonperforming assets and charge-offs or changes in the estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements may increase.

• Changes in laws and regulations (including laws and regulations concerning taxes, banking, securities, executive compensation and insurance) could have a material adverse effect on our business, financial condition and results of operations.

• Acts of war or terrorism, or natural disasters, such as the effects of pandemic flu, may adversely impact our business.

• The timely development and acceptance of new banking products and services and perceived overall value of these products and services by users may adversely impact our ability to increase market share and control expenses.

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• Changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters may impact the results of our operations.

• The costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews may adversely impact our ability to increase market share and control expenses.

• Our success at managing the risks involved in the foregoing items will have a significant impact on our results of operations and future prospects.

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in Risk Factors in Item 1A. Please take into account that forward-looking statements speak only as of the date of this report or documents incorporated by reference. The Company does not undertake any obligation to publicly correct or update any forward-looking statement whether as a result of new information, future events or otherwise.

SUMMARY OF CRITICAL ACCOUNTING POLICIES

We follow accounting standards set by the Financial Accounting Standards Board, commonly referred to as the “FASB.” The FASB sets generally accepted accounting principles (“GAAP”) that we follow to ensure we consistently report our financial condition, results of operations, and cash flows. References to GAAP issued by the FASB in this report are to the “FASB Accounting Standards Codification”, sometimes referred to as the “Codification” or “ASC.” The FASB finalized the Codification effective for periods ending on or after September 15, 2009. Prior FASB Statements, Interpretations, Positions, EITF consensuses, and AICPA Statements of Position are no longer being issued by the FASB. The Codification does not change how the Company accounts for its transactions or the nature of related disclosures made. However, when referring to guidance issued by the FASB, the Company refers to topics in the ASC rather than the specific FASB statement. We have updated references to GAAP in this report to reflect the guidance in the Codification.

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 theNotes to ConsolidatedFinancial Statements for the year ended December 31, 2011, in Item 8 of this report. Management believes that the following policies and those disclosed in theNotes to Consolidated Financial Statements should be considered critical under the SEC definition:

Nonaccrual Loans

Accrual of interest is discontinued on contractually delinquent loans when management believes that, after considering economic and business conditions and collection efforts, the borrower’s financial condition is such that collection of principal or interest is doubtful. At a minimum, loans that are past due as to maturity or payment of principal or interest by 90 days or more are placed on nonaccrual status, unless such loans are well-secured and in the process of collection. Interest income is subsequently recognized only to the extent cash payments are received satisfying all delinquent principal and interest amounts, and the prospects for future payments in accordance with the loan agreement appear relatively certain. In accordance with GAAP, payments received on nonaccrual loans are applied to the principal balance and no interest income is recognized.

Allowance for Loan Losses and Reserve for Unfunded Commitments

The allowance for loan losses on outstanding loans is classified as a contra-asset account offsetting outstanding loans, and the allowance for unfunded commitments is classified as an “other” liability on the balance sheet. The allowance for loan losses is established through a provision for loan losses charged against earnings. The balances of the allowance for loan losses for outstanding loans and unfunded commitments are maintained at an amount management believes will be adequate to absorb known and inherent losses in the loan portfolio and commitments to loan funds. The appropriate balance of the allowance for loan losses is determined by applying loss factors to the credit exposure from outstanding loans and unfunded loan commitments. Estimated loss factors are based on subjective measurements including management’s assessment of the internal risk classifications, changes in the nature of the loan portfolios, industry concentrations, and the impact of current local, regional, and national economic factors on the quality of the loan portfolio. Changes in these estimates and assumptions are reasonably possible and may have a material impact on the Company’s consolidated financial statements, results of operations or liquidity.

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Troubled Debt Restructurings

In the normal course of business, the Company may modify the terms of certain loans, attempting to protect as much of its investment as possible. Management evaluates the circumstances surrounding each modification to determine whether it is a troubled debt restructuring (“TDR”). TDRs exist when 1) the restructuring constitutes a concession, and 2) the debtor is experiencing financial difficulties. Additional information regarding the Company’s troubled debt restructurings can be found in Note 3 of the March 31, 2012Notes to Consolidated Financial Statements in Item 1.

Goodwill and Intangible Assets

At March 31, 2012, the Company had $22,179 in goodwill and other intangible assets. In accordance with financial accounting standards, assets with indefinite lives are no longer amortized, but instead are periodically tested for impairment. Management performs an impairment analysis of its goodwill and intangible assets with indefinite lives at least annually and has determined that there was no impairment as of December 31, 2011.

Share-based Compensation

Consistent with the provisions of FASB ASC 718,Stock Compensation, a revision to the previously issued guidance on accounting for stock options and other forms of equity-based compensation, we recognize expense for the grant-date fair value of stock options and other equity-based forms of compensation issued to employees over the employees’ requisite service period (generally the vesting period). The requisite service period may be subject to performance conditions. The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model. Management assumptions utilized at the time of grant impact the fair value of the option calculated under the Black-Scholes methodology, and ultimately, the expense that will be recognized over the life of the option. Additional information is included in Note 1 of the December 31, 2011Notes to Consolidated Financial Statements in Item 8.

Fair Value Measurements

Generally accepted accounting principles define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820, “Fair Value Measurements,” establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources while unobservable inputs reflect our estimates about market data. In general, fair values determined by Level 1 inputs utilize quoted prices for identical assets or liabilities traded in active markets that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

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Recent Accounting Pronouncements

In April 2011, the FASB issued Accounting Standards Update No. 2011-02, “Receivables: A Creditors Determination of Whether a Restructuring is a Troubled Debt Restructuring.” This Update provides additional guidance and clarification to help creditors in determining whether a creditor has granted a concession and whether the debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The adoption of this Accounting Standards Update did not have a material impact on the Company’s consolidated financial statements. The Company did, however, expand Note 3 to include additional disclosures regarding trouble debt restructurings.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurements.” This Update provides guidance that develops common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRSs). The amendments in this Update explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting. The amendments in this Update should be applied prospectively and are effect during interim and annual periods beginning after December 15, 2011. The adoption of this Accounting Standards Update did not have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Presentation of Comprehensive Income.” This Update requires that an entity elect to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments in this Update should be applied retrospectively and are effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this Accounting Standards Update did not have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, “Intangibles-Goodwill and Other: Testing Goodwill for Impairment.” This Update simplifies how entities test goodwill for impairment. The amendments of this Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of this Accounting Standard Update is not expected to have a material impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued Accounting Standards Update No. 2011-12, “Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The amendments of this Update supersede changes to those paragraphs in Update 2011-05 that pertain to how, when, and where reclassification adjustments are presented. The amendments of this Update are effective at the same time as the amendments in Update 2011-05 so that entities will not be required to comply with the presentation requirements in Update 2011-05 that this Update is deferring. The amendments in this Update should be applied retrospectively and are effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this Accounting Standard Update did not have a material impact on the Company’s consolidated financial statements.

45

HIGHLIGHTS

	For the three months ended March 31,
	2012			2011			% Change
Net income	$	2,716		$	1,449			87.4	%
Operating revenue(1)	$	14,065		$	13,732			2.4	%
Earnings per share
Basic	$	0.15		$	0.08			87.5	%
Diluted	$	0.15		$	0.08			87.5	%
Assets, period-end	$	1,289,793		$	1,202,535
Loans, period-end(2)	$	825,587		$	842,316
Core deposits, period end(3)	$	858,929		$	873,784
Deposits, period-end	$	954,647		$	926,370
Return on average assets(4)		0.85	%		0.49	%
Return on average equity(4)		6.07	%		3.40	%
Return on average tangible equity(4) (5)		6.93	%		3.90	%

⁽¹⁾  Operating revenue is defined as net interest income plus noninterest income.

⁽²⁾  Net of deferred fees; excludes loans held-for-sale, and allowance for loan losses.

⁽³⁾  Defined by the Company as demand, interest checking, money market, savings, and local non-public time deposits, including local non-public time deposits in excess of $100.

⁽⁴⁾  Amounts annualized.

⁽⁵⁾  Tangible equity excludes goodwill and core deposit intangibles related to acquisitions.

The Company earned $2,716 in the first quarter 2012, an increase of $1,267 or 87.4% over first quarter 2011. The increase in net income was due to improved operating income, lower provision for loan losses, and lower noninterest expense. The increase in operating revenue of $333 was primarily due to higher noninterest income, which was up $302 over first quarter 2011. The provision for loan losses in the current quarter was down $850 from last year and reflects overall improvement in credit quality of the loan portfolio and lower net charge offs. The decline in noninterest expense of $626 from last year was primarily related to lower FDIC assessments and lower expenses associated with problem assets, specifically other real estate valuation write downs.

During the first quarter 2012, the Company experienced growth in outstanding loans, the first linked-quarter increase in outstanding loans since fourth quarter 2008. Outstanding loans at March 31, 2012 were $825,587, up $4,758 over outstanding loans at December 31, 2011, an annualized growth rate of 2.3% for the first three months of the current year. Outstanding core deposits at March 31, 2012 were $858,829, down $26,914 from December 31, 2011. The December 31, 2011 outstanding core deposits include approximately $20,000 of temporary funds in a single large depositor account that were wired out of the Bank during the first two weeks of January 2012. The Company appears to be experiencing a more typical seasonal pattern for its core deposit base during the first quarter 2012 when compared to the last three years.

Period end assets at March 31, 2012 were $1,289,793, up $87,258 or 7.3 % over March 31, 2011. A $17,435 decline in outstanding net loans and a $3,638 decline in other real estate owned was more than offset by a $15,165 increase in BOLI investment and $96,124 increase in the securities portfolio. Core deposits at March 31, 2012 were $858,929, down $14,855 or 1.7% from one year ago, and down $26,914 from December 31, 2011. Year-to-date March 31, 2012 average core deposits were $870,097 down $7,112 from the same period one year ago. Year-to-date average assets at March 31, 2012 were $1,284,627 up $83,370 from last year as growth in average securities-available-for-sale and BOLI investment more than offset the contraction in average outstanding loans.

46

In February 2012, the Company’s Board of Directors authorized the repurchase of up to five percent of the Company’s shares, or approximately 922,000 shares with the purchases to take place over the next 12 months. During the first quarter 2012, the Company repurchased 242,169 shares at a weighted average price of $8.62 per share.

Reconciliation of non-GAAP financial information

Management utilizes certain non-GAAP financial measures to monitor the Company’s performance. While we believe the presentation of non-GAAP financial measures provides additional insight into our operating performance, readers of this report are urged to review the GAAP results as presented in theFinancial Statementsin Item 1 of this report.

The Company presents a computation of tangible equity along with tangible book value and return on average tangible equity. The Company defines tangible equity as total shareholders’ equity before goodwill and core deposit intangible assets. Tangible book value is calculated as tangible equity divided by total shares outstanding. Return on average tangible equity is calculated as net income divided by average tangible equity. We believe that tangible equity and certain tangible equity ratios are meaningful measures of capital adequacy which may be used when making period-to-period and company-to-company comparisons. Tangible equity and tangible equity ratios are considered to be non-GAAP financial measures and should be viewed in conjunction with total shareholders’ equity, book value and return on average equity. The following table presents a reconciliation of total shareholders’ equity to tangible equity.

	March 31, 2012			December 31, 2011			March 31, 2011
Total shareholders’ equity	$	179,560		$	178,866		$	173,750
Subtract:
Goodwill		(22,031	)		(22,031	)		(22,031	)
Core deposit intangible assets		(148	)		(204	)		(371	)
Tangible shareholders’ equity (non-GAAP)	$	157,381		$	156,631		$	151,348
Book value per share	$	9.87		$	9.70		$	9.43
Tangible book value per share (non-GAAP)	$	8.65		$	8.50		$	8.22
Return on average equity		6.07	%		3.01	%		3.40	%
Return on average tangible equity (non-GAAP)		6.93	%		3.45	%		3.90	%

Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although we believe these non-GAAP financial measure are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

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 average earning assets for the first quarter 2012 was 4.39%, down 20 basis points over the net interest margin for the fourth quarter 2011, and down 31 basis points from the 4.70% margin reported for first quarter 2011. The decline in the linked-quarter net interest margin was primarily due to lower earning asset yields, which was partially offset by a decline in the cost of funds.

47

The Company’s earning asset yields fell by 23 basis points from 5.19% in fourth quarter 2011 to 4.96% in first quarter 2012. Both the securities portfolio and the loan portfolio experienced significant declines in yields. The yield on the loan portfolio for first quarter 2012 was 6.02%, down 15 basis points from the prior quarter, while the yield on the securities portfolio dropped to 2.60%, down 28 basis points from fourth quarter 2011. The decline in the yield on loans was primarily due to the following factors: 1) payoffs on higher yielding loans that occurred late in the fourth quarter 2011 and additional payoffs during first quarter 2012; 2) new loan production during first quarter 2012 booked at yields lower than the average portfolio; and 3) a significant increase in rate reductions on existing loans prior to maturity or repricing due to competitive pressure. The decline in the yield on the securities portfolio was due to: 1) new purchases booked at rates lower than the average portfolio; and 2) accelerated prepayment speeds on agency mortgage-back securities accelerating the amortization of premiums.

The Company continued to lower its cost of funds as the cost of interest-bearing liabilities fell by 6 basis points from fourth quarter 2011 to first quarter 2012. The cost of both interest-bearing core deposits and wholesale funding declined in first quarter 2012 when compared to the prior quarter by 5 and 19 basis points, respectively. The overall cost of core deposits, including demand deposits fell by 5 basis points from 0.40% in fourth quarter 2011 to 0.35% in first quarter 2012.

Due to the prolonged historically low interest rate environment, highly competitive pricing on new, existing loans, and declining yields available in the Company’s securities portfolio, and the fact that core deposits are priced at or near virtual floors, suggests further margin compression as the year progresses. Certain factors may create a somewhat stabilizing effect on the margin, such as a possible slowdown in prepayment speeds on mortgage-backed securities that will improve yields, funding higher yielding loans with cash flows from the lower yielding securities portfolio, or refinancing callable brokered time deposits at lower rates, but even given these factors, the Company’s general outlook is for continued margin compression, but at a slower rate than experienced during the first quarter 2012.

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 March 31, 2012, compared to the quarter ended March 31, 2011:

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Table I

Average Balance Analysis of Net Interest Income

(dollars in thousands)

	Three Months Ended March 31, 2012								Three Months Ended March 31, 2011
	Average Balance		Interest Income or (Expense)			Average Yields or Rates			Average Balance		Interest Income or (Expense)			Average Yields or Rates
Interest earning assets
Federal funds sold and interest-bearing deposits	$	94	$	1			4.28	%	$	290		2			2.80	%
Securities available-for-sale:
Taxable		314,881		1,799			2.30	%		237,841		1,847			3.15	%
Tax-exempt(1)		45,965		531			4.64	%		23,141		298			5.22	%
Loans held-for-sale		763		7			3.69	%		654		11			6.82	%
Loans, net of deferred fees and allowance(2)		810,075		12,116			6.02	%		832,963		12,988			6.32	%
Total interest earning assets(1)		1,171,778		14,454			4.96	%		1,094,889		15,146			5.61	%
Non earning assets
Cash and due from banks		17,962								19,420
Premises and equipment		20,056								20,686
Goodwill & intangible assets		22,209								22,432
Interest receivable and other assets		52,622								43,830
Total non earning assets		112,849								106,368
Total assets	$	1,284,627							$	1,201,257
Interest-bearing liabilities
Money market and NOW accounts		488,047	$	(575	)		-0.47	%		512,855	$	(1,142	)		-0.90	%
Savings deposits		37,502		(18	)		-0.19	%		32,847		(50	)		-0.62	%
Time deposits—core (3)		60,604		(184	)		-1.22	%		84,625		(493	)		-2.36	%
Total interest-bearing core deposits		586,153		(777	)		-0.53	%		630,327		(1,685	)		-1.08	%
Time deposits—non-core		78,781		(363	)		-1.85	%		52,714		(242	)		-1.86	%
Federal funds purchased		5,146		(6	)		-0.47	%		7,690		(11	)		-0.58	%
FHLB & FRB borrowings		138,434		(469	)		-1.36	%		78,894		(492	)		-2.53	%
Trust preferred		8,248		(40	)		-1.95	%		8,248		(31	)		-1.52	%
Total interest-bearing wholesale funding		230,609		(878	)		-1.53	%		147,546		(776	)		-2.13	%
Total interest-bearing liabilities		816,762		(1,655	)		-0.81	%		777,873		(2,461	)		-1.28	%
Noninterest-bearing liabilities
Demand deposits		283,943								246,882
Interest payable and other		4,038								3,526
Total noninterest liabilities		287,981								250,408
Total liabilities		1,104,743								1,028,281
Shareholders’ equity		179,884								172,976
Total liabilities and shareholders’ equity	$	1,284,627							$	1,201,257
Net interest income			$	12,799							$	12,685
Net interest margin(1)				4.39	%							4.70	%

⁽¹⁾  Tax-exempt income has been adjusted to a tax-equivalent basis at a 35% tax rate. The amount of such adjustment was an addition to recorded income of approximately $186 and $104 for the three months ended March 31,2012 and March 31, 2011. Net interest margin was positively impacted by 6 and 4 basis point, respectively.

⁽²⁾ Interest income includes recognized loan origination fees of $29 and ($36) for the three months ended March 31, 2012 and March 31, 2011 respectively.

⁽³⁾ Defined by the Company as demand, interest checking, money market, savings and local non- public time deposits, including local non-public time deposits in excess of $100.

49

Table I shows that earning asset yields declined by 65 basis points in first quarter 2012 from first quarter 2011 from 5.61% to 4.96%. This decline in earning asset yields was primarily attributable to: 1) a lower yield on both the loan and securities portfolio; and 2) a continued change in the earning asset mix in first quarter 2012 when compared to the same quarter last year as the lower yielding securities portfolio grew in proportion to total earning assets. For the first quarter 2012, average securities available-for sale with a weighted-average tax equivalent yield of 2.60% totaled $360,846 and represented 31% of total average earnings assets and loans yielding 6.02% represented 69% of total average earning assets. This compares to first quarter 2011, when the average securities portfolio was $260,982 with a weighted average yield of 3.33% and represented 24% of total average earning assets, while loans yielding 6.32% represented 76% of total average earning assets. The decline in the yield on the securities portfolio was due to: 1) new purchases booked at rates lower than the average portfolio; and 2) accelerated prepayment speeds on agency mortgage-back securities accelerating the amortization of premiums. The decline in the yield on loans was primarily due to the following factors: 1) payoffs on higher yielding loans that occurred late in the fourth quarter 2011 and additional payoffs during first quarter 2012; 2) new loan production during first quarter 2012 booked at yields lower than the average portfolio; and 3) a significant increase in rate reductions on existing loans prior to maturity or repricing due to competitive pressure.

The decline in earning asset yields was partially offset by a decrease in the cost of funds. The cost of interest-bearing liabilities declined by 47 basis points from 1.28% in first quarter 2011 to 0.81% in first quarter 2012. The decline in rates is evident in each core deposit category as the cost of interest-bearing core deposits fell by 55 basis points from 1.08% in first quarter 2011 to 0.53% in first quarter 2012. The cost of wholesale funding also moved down from 2.13% in first quarter 2011 to 1.53% in first quarter 2012. All categories of wholesale funding showed a decline in rates with the exception of Trust Preferred.

50

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 three months ended March 31, 2012, and March 31, 2011.

Table II

Analysis of Changes in Interest Income and Interest Expense

(dollars in thousands)

	Three Months Ended March 31, 2012 compared to March 31, 2011 Increase (decrease) due to
	Volume			Rate			Net
Interest earned on:
Federal funds sold and interest-bearing deposits	$	(1	)	$	—		$	(1	)
Securities available-for-sale:		—
Taxable		619			(667	)		(48	)
Tax-exempt(1)		299			(66	)		233
Loans held-for-sale		2			(6	)		(4	)
Loans, net of deferred fees and allowance		(251	)		(621	)		(872	)
Total interest earning assets(1)		668			(1,360	)		(692	)
Interest paid on:
Money market and NOW accounts		(46	)		(521	)		(567	)
Savings deposits		8			(40	)		(32	)
Time deposits—core(2)		(137	)		(172	)		(309	)
Total interest-bearing core deposits		(175	)		(733	)		(908	)
Time deposits—non-core		123			(2	)		121
Federal funds purchased		(4	)		(1	)		(5	)
FHLB & FRB borrowings		379			(402	)		(23	)
Trust preferred		—			9			9
Total interest-bearing wholesale funding		498			(396	)		102
Total interest-bearing liabilities		323			(1,129	)		(806	)
Net interest income(1)	$	345		$	(231	)	$	114

⁽¹⁾  Tax-exempt income has been adjusted to a tax-equivalent basis at a 35% tax rate. The amount of such adjustment was an addition to recorded income of approximately $186 and $104 for the three months ended March 31,2012 and March 31, 2011.

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

The first quarter 2012 rate/volume analysis shows that net interest income increased by $114 over first quarter 2011. First quarter 2012 interest income including loan fees declined by $692 from last year with higher volumes of earning assets increasing interest income by $668, which was more than offset by a $1,360 decline in interest income due to lower rates. The decline in interest income due to lower rates was attributable to both the securities portfolio and the loan portfolio as yields on both of these earning assets continued to decline in the historically low interest rate environment. The decline in interest income in first quarter 2012 when compared to the same quarter one year ago was more than offset by an $806 drop in interest expense. Most of the decline in interest expense was related to lower rates and the majority of this decline was related to lower rates on core deposit products. The rate/volume analysis shows interest expense on core deposits fell by $908 from one year ago due to both lower volumes and lower rates.

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Loan Loss Provision and Allowance

Below is a summary of the Company’s allowance for loan losses for the periods ended March 31, 2012, and March 31, 2011:

	Three months ended March 31,
	2012			2011
Balance, beginning of period	$	14,941		$	16,570
Provision charged to income		1,300			2,150
Loans charged against allowance		(522	)		(3,613	)
Recoveries credited to allowance		110			120
Balance, end of period	$	15,829		$	15,227

The provision for loan losses through March 31, 2012 was $1,300, compared to $2,150 for the same period last year. The decrease in the provision was primarily the result of a reduction in the level of classified loans and nonperforming assets. The Bank’s classified assets at March 31, 2012 were 39.37% of regulatory capital compared to 40.58% and 55.27% at December 31, 2011, and March 31, 2011, respectively. Net charge offs through March 31, 2012 were $412 or annualized 0.20% of average loans compared to net charge offs of $3,493 or 1.67% of average loans recorded the same period in 2011. The allowance for loan losses for outstanding loans at March 31, 2012 was $15,829 or 1.92% of outstanding loans compared to 1.82% and 1.81% at December 31, 2011, and March 31, 2011, respectively.

At March 31, 2012, $28,587 of loans (net of government guarantees) were classified as impaired. A specific allowance of approximately $395 (included in the ending allowance at March 31, 2012) was assigned to these loans. That compares to impaired loans of $30,093 at December 31, 2011 and a specific allowance assigned of $455.

Total nonperforming assets, net of government guarantees, were $35,141 at March 31, 2012 or 2.72% of total assets. That compares to nonperforming assets of $37,099 or 2.92% of total assets at December 31, 2011 and $44,130 or 3.67% of total assets at March 31, 2011. Nonperforming assets at March 31, 2012 consist of $25,039 in nonaccrual loans (net of government guarantees), $0 in loans 90 days past due and still accruing interest, and $10,102 in other real estate owned.

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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:

PACIFIC CONTINENTAL CORPORATION

Nonperforming Assets and Asset Quality Ratios

(In thousands)

(Unaudited)

	March 31			December 31,			March 31
	2012			2011			2011
NONPERFORMING ASSETS
Non-accrual loans
Real estate secured loans:
Permanent loans:
Multifamily residential	$	—		$	—		$	64
Residential 1-4 family		3,344			3,426			6,503
Owner-occupied commercial		5,058			5,138			1,959
Non-owner-occupied commercial		—			575			9,622
Total permanent real estate loans		8,402			9,139			18,148
Construction loans:
Multifamily residential		—			—			232
Residential 1-4 family		15			757			1,972
Commercial real estate		933			933			1,500
Commercial bare land and acquisition & development		8,491			7,837			—
Residential bare land and acquisition & development		1,791			1,929			2,024
Total construction real estate loans		11,230			11,456			5,728
Total real estate loans		19,632			20,595			23,876
Commercial loans		5,899			5,999			7,275
Total nonaccrual loans		25,531			26,594			31,151
90 days past due and accruing interest		—			—			—
Total nonperforming loans		25,531			26,594			31,151
Nonperforming loans guaranteed by government		(492	)		(495	)		(761	)
Net nonperforming loans		25,039			26,099			30,390
Other real estate owned		10,102			11,000			13,740
Total nonperforming assets, net of guaranteed loans	$	35,141		$	37,099		$	44,130
ASSET QUALITY RATIOS
Allowance for loan losses as a percentage of total loans outstanding, net of loans held for sale		1.92	%		1.82	%		1.81	%
Allowance for loan losses as a percentage of total non performing loans, net of government guarantees		63.22	%		57.25	%		50.11	%
QTD net loan charge offs as a percentage of average loans, annualized		0.20	%		3.53	%		1.67	%
Net nonperforming loans as a percentage of total loans		3.04	%		3.18	%		3.61	%
Nonperforming assets as a percentage of total assets		2.72	%		2.92	%		3.67	%
Consolidated classified asset ratio(1)		38.44	%		38.91	%		55.27	%

⁽¹⁾  Classified asset ratio is defined as the sum of all loan-related contingent liabilities and loans internally graded substandard or worse (net of government guarantees), adversely classified securities, and other real estate owned, divided by total consolidated Tier 1 capital plus the allowance for loan losses.

53

Nonperforming assets at March 31, 2012, declined $8,989 from the same period last year, and on a linked-quarter basis declined $1,958 from the end of fourth quarter 2011. Nonperforming loans at March 31, 2012, decreased $5,351 from the same period last year, and declined $1,063 since the end of fourth quarter 2011. The $1,063 reduction in linked-quarter nonperforming loans was made up of $992 in additions to nonperforming loans, offset by $1,619 in loan pay downs, $363 in charge-offs, and $73 in transfers to other real estate owned. The economic conditions in the Northwest continue to be weak, particularly with respect to real estate, thus further additions to nonperforming loans are possible in future quarters. However, the Company does have pending resolutions on a number of nonperforming assets that are expected to reduce the level of nonperforming assets over the next three quarters.

Noninterest Income

Year-to-date March 31, 2012 noninterest income was $1,452, up $302 or 26.3% from the same period in 2011. The increase in 2012 noninterest income when compared to last year was primarily attributable to the $127 in revenue from the BOLI investment and a $136 increase in the other income category, which was primarily generated from rental income on other real estate owned properties. In addition, revenues from the origination of residential mortgages increased $30 or 71% over the same period last year.

On a linked-quarter basis, first quarter 2012 noninterest income was up $135 over fourth quarter 2011 noninterest income. The linked-quarter increase was mainly due to the increase in BOLI investment income and rental income from other real estate owned properties. Looking forward to the second quarter 2012, the Company expects noninterest income to decline as other real estate rental income should be lower and late in the first quarter 2012 the Company’s residential mortgage department was closed.

Noninterest Expense

Year-to-date March 31, 2012 noninterest expense was $8,719, down $626 or 7% from the same period in 2011. The decline in noninterest expense was primarily due to a decrease in FDIC assessments and other real estate expense that was partially offset by modest increases in salaries and benefits and business development costs. FDIC assessments through March 31, 2012 were $239, down $269 or 53% from the same period last year. The decline in FDIC assessments was due to a change in assessment methodology based on net capital versus deposits that became effective second quarter 2011. Other real estate expense in first quarter 2012 was $378, down $577 or 60% from last year reflecting a lower level of valuation write downs in the current quarter when compared to last year. Total personnel expense was up $246 or 5% over last year as base salary expense and group insurance costs were up $241 and $66 respectively which was partially offset by lower equity-based compensation costs and increased loan origination costs, which are a reduction of salary expense. Business development expenses were up $41 or 11% through March 31, 2012 compared to last year and reflect higher planned marketing expenses in 2012.

On a linked-quarter basis, noninterest expense in first quarter 2012 was down $1,065 from fourth quarter 2011. The linked-quarter decline in expense was primarily due to lower FDIC assessments and a decline in other real estate expense, specifically valuation write downs on foreclosed properties. Looking forward to the second quarter 2012, the Company believes noninterest expense is expected to increase as officer salary increases take full effect and anticipated higher group insurance costs. However, since real estate values have not fully stabilized and current appraisals show trends of lower valuations, both linked-quarter and year-over-year noninterest expenses are subject to volatility, particularly with respect to other real estate expenses and potential valuation write downs in future quarters.

54

BALANCE SHEET

Loans

At March 31, 2012, outstanding loans, net of fees were $825,587, up $4,758 from December 31, 2011, and down $16,106 from March 31, 2011. A summary of outstanding loans by market at March 31, 2012, December 31, 2011, and March 31, 2011, follows:

	March 31, 2012		December 31, 2011		March 31, 2011
Eugene market gross loans, period end	$	251,434	$	250,345	$	254,719
Portland market gross loans, period end		417,382		406,316		403,575
Seattle market gross loans, period end		156,771		164,168		183,399
Total gross loans, period end	$	825,587	$	820,829	$	841,693

The Portland and Eugene markets both showed an increase in outstanding loans over the prior quarter end, while the Seattle market continued to decline. The growth in the Portland and Eugene markets was the result of an increase in commercial and industrial and owner-occupied commercial real estate loans. The increase in these categories was primarily the result of new loans made to professional service providers, specifically loans to dental practitioners, and also an increase in owner-occupied commercial real estate loans. The decline in loans in the Seattle market reflects continued planned contraction in construction loans and non-owner occupied loans. Outstanding commercial and industrial loans and owner-occupied commercial real estate loans at March 31, 2012, were up $13,943 and $11,518, respectively over December 31, 2011. The first quarter 2012 annualized growth rate for each of these categories was 21% and 22%, respectively. All three markets showed increased loan activity and loan production pipelines continue to show improvement. The Company believes expansion of its commercial and industrial loan and owner-occupied lending will continue to accelerate during 2012 and that contraction in loans secured by real estate will abate resulting in growth in net outstanding loans throughout the remainder of the year.

The Company continued to expand outstanding loans to dental professionals during first quarter 2012. Outstanding loans to dental professionals at March 31, 2012, totaled $222,979 and represented 27.0% of total outstanding loans compared to dental professional loans of $208,489 or 25.4% at December 31, 2011, and $182,258 or 21.6% at March 31, 2011.

Securities

At March 31, 2012, the securities available-for-sale totaled $366,916, up $20,374 over December 31, 2011, and up

$96,124 over March 31, 2011. The securities portfolio represented 28.4% of our total assets at March 31, 2012, up from 22.5% at March 31, 2011. At March 31, 2012, the portfolio had an unrealized taxable gain of $7,088 compared to an unrealized taxable gain of $5,760 at December 31, 2011. During first quarter 2012, the Company purchased $39,966 in new securities, while receiving $19,250 in cash flow from the portfolio. There were no securities sales during the first quarter of 2012. Purchases during the first quarter 2012 were high-quality U.S. government agencies, agency mortgage-backed securities and longer-term tax-exempt municipals. At March 31, 2012, taxable and tax-exempt municipal securities were $56,953 and comprised 15.5% of the total portfolio. Management has exercised caution in its purchases of municipals, relying on credit reports, demographic information and general fund balances. The municipal portion of the portfolio is diversified geographically with some areas being avoided, and the Company does not have significant exposure to any single municipality. The first quarter 2012 purchases supported the Company’s strategy of positioning the securities portfolio to provide earnings and hedge the balance sheet against a rates-up scenario due to the Company’s liability sensitive position. In an unchanged rate environment, the portfolio is expected to produce annual cash flow of approximately $76,900, primarily from the mortgage-backed portion of the portfolio. At March 31, 2012, the portfolio had an average life of 3.8 years and duration of 3.6 years, virtually unchanged from the average life and duration at December 31, 2011. Going forward, the portfolio is expected to increase moderately and purchases will be dependent upon core deposit growth, loan growth, and the Company’s interest rate risk position.

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At March 31, 2012, $10,763 or 2.9% of the total securities portfolio was composed of private-label mortgage-backed securities. Management reviews monthly all available information, including current and projected default rates and current and projected loss severities, related to the collectability of its potentially impaired investment securities and determined no OTTI was required during first quarter 2012. However, recognition of OTTI on the private-label mortgage-backed portion of the portfolio is possible in future quarters depending upon economic conditions, default rates on home mortgages, loss severities on foreclosed homes, unemployment levels, and home values.

In management’s opinion, the remaining securities in the portfolio in an unrealized loss position are considered only temporarily impaired. The Company has no intent, nor is it more likely than not, that it will be required to sell these securities before their recovery. Management believes that substantially all decreases in fair value of the remaining securities are due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral. The decline in value of these securities has resulted from current economic conditions. Although yields on these securities may be below market rates during the period, no loss of principal is expected.

Goodwill and Intangible Assets

At March 31, 2012, 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 March 31, 2012, the Company had $148 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 will be fully amortized in November 2012. In accordance with generally accepted accounting principles, 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, 2011, at which time no impairment was determined to exist.

Deposits

Core deposits, which are defined by the Company as demand, interest checking, money market, savings, and nonpublic local time deposits, including non-public local time deposits in excess of $100, were $858,929 and represented 90% of total deposits at March 31, 2012. Outstanding core deposits at March 31, 2012, were down $26,914 and $14,855 from December 31, 2011 and March 31, 2011, respectively. The decline in first quarter 2012 was primarily related to volatility in large depositor balances, including approximately $20,000 in temporary funds in a single large depositor at December 31, 2011 that was wired out of the bank shortly after year end. All three of the Company’s primary markets showed a decline in core deposit during first quarter 2012 when compared to the prior quarter end.

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A summary of outstanding core deposits and average core deposits by market and other deposits classified as wholesale funding at March 31, 2012, December 31, 2011, and March 31, 2011 follows:

	March 31,		December 31,		March 31,
	2012		2011		2011
Eugene market core deposits, period end(1)	$	502,710	$	526,928	$	509,572
Portland market core deposits, period end(1)		235,571		237,230		246,339
Seattle market core deposits, period end(1)		120,648		121,685		117,873
Total core deposits, period end(1)		858,929		885,843		873,784
Other deposits, period end		95,718		79,411		52,586
Total deposits, period end	$	954,647	$	965,254	$	926,370

	Three months ended
	March 31,		December 31,		March 31,
	2012		2011		2011
Eugene market core deposits, average(1)	$	506,776	$	509,882	$	515,264
Portland market core deposits, average(1)		242,659		239,459		245,911
Seattle market core deposits, average(1)		120,662		123,421		116,034
Total core deposits, average(1)		870,097		872,762		877,209
Other deposits, average		78,781		73,988		52,714
Total deposits, average	$	948,878	$	946,750	$	929,923

⁽¹⁾  Core deposits include all demand, savings, & interest checking accounts, plus all local time deposits including local time deposits in excess of $100.

Junior Subordinated Debentures

The Company had $8,248 in junior subordinated debentures at March 31, 2012, which were issued in conjunction with the acquisition of NWBF and had an interest rate of 6.265% that was fixed through January 2011. In January 2011, the rate on the junior subordinated debentures changed to three-month LIBOR plus 135 basis points. At March 31, 2012, the entire balance of the junior subordinated debentures qualified as Tier 1 capital under regulatory capital guidelines.

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was signed into law which, among other things, limits the ability of certain bank holding companies to treat trust preferred security debt issuances, such as the Company’s junior subordinated debentures, as Tier 1 capital. This law may require many banks to raise new Tier 1 capital and will effectively close the trust-preferred securities markets from offering new issuances in the future. Since the Company had less than $15 billion in assets at December 31, 2009, under the Dodd-Frank Act, the Company will be able to continue to include its existing trust preferred securities in Tier 1 capital.

Additional information regarding the terms of the junior subordinated debentures, including maturity/repricing dates and interest rate, is included in Note 10 of theNotes to Consolidated Financial Statementsin the Company’s 2011annual Form 10-K.

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Capital Resources

Capital is the shareholders’ investment in the Company. Capital grows through the retention of earnings and the issuance of new stock whether through stock offerings or through the exercise of stock options. Capital formation allows the Company to grow assets and provides flexibility in times of adversity.

Shareholders’ equity at March 31, 2012, was $179,560, relatively unchanged from December 31, 2011, and up $5,810 from March 31, 2011. In February 2012, the Company’s Board of Directors authorized the repurchase of up to five percent of the Company’s shares, or approximately 922,000 shares with the purchases to take place over the next 12 months. During the first quarter 2012, the Company repurchased 242,169 shares at a weighted average price of $8.62 per share. The Company intends to use a combination of regular dividends, special dividends, and share repurchases to maintain capital levels comparable with year-end December 31, 2011 capital levels. For additional details regarding the changes in equity, review the Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income on page 6 of this report.

The Federal Reserve Board and the FDIC have in place guidelines for risk-based capital requirements applicable to U.S. bank holding companies and banks. These risk-based capital guidelines take into consideration risk factors, as defined by regulation, associated with various categories of assets, both on and off-balance sheet. Under the guidelines, capital strength is measured in three ways, first by measuring Tier 1 capital to leverage assets, followed by capital measurement in two tiers, which are used in conjunction with risk-adjusted assets to determine the risk-based capital ratios. These guidelines require a minimum of 4% Tier 1 capital to leverage assets, 4% Tier 1 capital to risk-weighted assets, and 8% total capital to risk-weighted assets. In order to be classified as well-capitalized, the highest capital rating, by the Federal Reserve and FDIC, these three ratios must be in excess of 5.00%, 6.00%, and 10.00%, respectively. The Company’s leverage capital ratio, Tier 1 risk-based capital ratio, and Total risk-based capital ratio were 12.80%, 17.76%, and 19.02%, respectively at March 31, 2012, all ratios being well above the minimum well-capitalized designation.

The Company pays cash dividends on a quarterly basis, typically in March, June, September and December of each year. The Board of Directors considers the dividend amount quarterly and takes a broad perspective in its dividend deliberations including a review of recent operating performance, capital levels, and concentrations of loans as a percentage of capital, and growth projections. The Board also considers dividend payout ratios, dividend yield, and other financial metrics in setting the quarterly dividend.

The Board of Directors, at its February 17, 2012, meeting, approved a dividend of $0.05 per share that was paid on March 15, 2012. The Company has sufficient liquidity to maintain this level of dividend throughout 2012. The Company projects that existing capital will be sufficient to fund anticipated organic asset growth, while maintaining a well-capitalized designation from all regulatory agencies.

OFF-BALANCE SHEET ARRANGEMENTS AND COMMITMENTS

In the normal course of business, the Company commits to extensions of credit and issues letters of credit. The Company 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 Company’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 March 31, 2012, the Company had $136,810 in commitments to extend credit.

Letters of credit written are conditional commitments issued by the Company 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 March 31, 2012, the Company had $1,068 in letters of credit and financial guarantees written.

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LIQUIDITY AND CASH FLOWS

Liquidity is the term used to define the Company’s ability to meet its financial commitments. The Company maintains sufficient liquidity to ensure funds are available for both lending needs and the withdrawal of deposit funds. The Company derives liquidity through core deposit growth, maturity of investment securities, and loan payments. Core deposits include demand, interest checking, money market, savings, and local time deposits, including local non-public time deposits in excess of $100. Additional liquidity and funding sources are provided through the sale of loans, sales of securities, access to national CD markets, and both secured and unsecured borrowings. The Company uses a number of measurements to monitor its liquidity position on a daily, weekly, and monthly basis, which includes its ability to meet both short-term and long-term obligations, and requires the Company to maintain a certain amount of liquidity on the asset side of its balance sheet. The Company also prepares quarterly projections of its liquidity position 30 days, 90 days, 180 days, and 1 year into the future. In addition, the Company prepares a Liquidity Contingency Plan at least semi-annually that is strategic in nature and forward-looking to test the ability of the Company to fund a liquidity shortfall arising from various escalating events. The Liquidity Contingency Plan is presented and reviewed by the Company’s Asset and Liability Committee.

Core deposits at March 31, 2012, were $858,929 and represented 90% of total deposits. During first quarter 2012, the Company experienced a decline in its core deposit base, which was primarily the result of temporary balances held by a single large depositor at the Company on December 31, 2011. These temporary funds moved out of the Company during January 2012. The Company experienced an increase in outstanding loans and the securities portfolio during the current quarter, which was funded through the use of wholesale funds. Over the last year, the Company has built up significant liquidity on the asset side of the balance sheet through growth in the securities portfolio. The securities portfolio represents 28% of total assets at March 31, 2012, compared to 23% at March 31, 2011. At March 31, 2012, $17,136 of the securities portfolio was pledged to support public deposits, leaving $349,780 of the securities portfolio unencumbered and available-for-sale. In addition, at March 31, 2012, the Company had $42,855 of government guaranteed loans that could be sold in the secondary market to support the Company’s liquidity position.

Due to its strategic focus to market to specific segments, the Company has been successful in developing deposit relationships with several large clients, which are generally defined as deposit relationships of $1,000 or more, which are closely monitored by management and Company officers. At March 31, 2012, 35 large deposit relationships with the Company account for $301,210 or 35% of total outstanding core deposits. The single largest client represented 6.0% of outstanding core deposits at March 31, 2012. The loss of this deposit relationship or other large deposit relationships could cause an adverse effect on short-term liquidity. The Company uses a 10-point risk-rating system to evaluate each of its large depositors in order to assist management in its daily monitoring of the volatility of this portion of its core deposit base. The risk-rating system attempts to determine the stability of the deposits of each large depositor, evaluating among other things the length of time the depositor has been with the Company and the likelihood of loss of individual large depositor relationships. Risk ratings on large depositors are reviewed at least quarterly and adjusted if necessary. Company management and officers maintain close relationships and hold regular meetings with its large depositors to assist in management of these relationships. The Company expects to maintain these relationships and believes it has sufficient sources of liquidity to mitigate the loss of one or more of these clients and regularly tests its ability to mitigate the loss of multiple large depositor relationships in its Liquidity Contingency Plan.

At March 31, 2012, the Company had secured borrowing lines with the Federal Home Loan Bank of Seattle (“FHLB”) and the Federal Reserve Bank of San Francisco (“FRB”), along with unsecured borrowing lines with various correspondent banks totaling $412,704. The Company’s secured lines with the FHLB and FRB were limited by the amount of collateral pledged. At March 31, 2012, the Company had pledged $227,672 in discounted collateral value in commercial real estate loans, first and second lien single-family residential loans, multi-family loans, and securities to the FHLB. Additionally, certain commercial and commercial real estate loans with a discounted value of $77,032 were pledged to the FRB under the Company’s Borrower-In-Custody program. The Company’s unsecured correspondent bank lines were $108,000. During the first quarter 2012, the Company’s unsecured correspondent bank lines were increased by $20,000. At March 31, 2012, the Company had $143,500 in borrowings outstanding from the FHLB, $0 outstanding with the Federal Reserve Bank of San Francisco, and $0 outstanding on its overnight correspondent bank lines, leaving a total of $269,204 available on it secured and unsecured borrowing lines.

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As disclosed in the Consolidated Statements of Cash Flows in Item 1 of this report, net cash provided by operating activities was $7,857 during the three months ended March 31, 2012. The difference between cash provided by operating activities and net income largely consisted of non-cash items including a $1,300 provision for loan losses.Net cash of $25,429 was used in investing activities, consisting principally of $39,966 in purchases of investment securities and a net loan principal increase of $5,242, which was partially offset by proceeds from investment securities of $19,250. Cash provided by financing activities was $16,107 and primarily consisted of an increase in FHLB borrowings.

Item 3 Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in the Company’s exposure to market risk. Readers are referred to the Company’s Form 10-K and the Annual Report to Shareholders for the year ended December 31, 2011, 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 the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-15(e) and 15d-15(e)) as of March 31, 2012, the measurement date for purposes 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, 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 quarter of 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 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 1 Legal Proceedings

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

Item 1A Risk Factors

The continued challenges in the economy could have a material adverse effect on our future results of operations or market price of our stock.

The national economy and the financial services sector in particular are still facing challenges. Substantially all of our loans are to businesses in western Washington and Oregon, markets facing many of the same challenges as the national economy, including elevated unemployment and weakness in commercial and residential real estate values. Although some economic indicators are improving both nationally and in the markets we serve, unemployment remains high and there remains uncertainty regarding the strength of the economic recovery. A continued slow economic recovery could result in the following consequences, any of which could have an adverse impact, which may be material, on our business, financial condition, results of operations and prospects, and could also cause the market price of our stock to decline:

• Economic conditions may not stabilize, increasing the likelihood of credit defaults by borrowers.

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

• Demand for banking products and services may decline, including loan products and services for low cost and noninterest-bearing deposits.

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

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

We maintain an allowance for loan losses in an amount that we believe is adequate to provide for losses inherent in our loan portfolio. While we strive to carefully manage and monitor credit quality and to identify loans that may be deteriorating, at any time there are loans included in the portfolio that may result in losses, but that have not yet been identified as potential problem loans. Through established credit practices, we attempt to identify deteriorating loans and adjust the loan loss reserve accordingly. However, because future events are uncertain, there may be loans that deteriorate in an accelerated time frame. As a result, future additions to the allowance at elevated levels may be necessary. Because the loan portfolio contains a number of commercial real estate loans with relatively large balances, deterioration in the credit quality of one or more of these loans may require a significant increase to the allowance for loan losses. Future additions to the allowance may also be required based on changes in the financial condition of borrowers, such as have resulted due to the current, and potentially worsening, economic conditions. Additionally, federal banking regulators, as an integral part of their supervisory function, periodically review our allowance for loan losses. These regulatory agencies may require us to recognize further loan loss provisions or charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for loan losses would have an adverse effect, which may be material, on our financial condition and results of operations.

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

We have a high degree of concentration in loans secured by real estate (see Note 3 in theNotes to Consolidated Financial Statements included in this report). If there was further deterioration in the local economies we serve could have a material adverse effect on our business, financial condition and results of operations due to a weakening of our borrowers’ ability to repay these loans and a decline in the value of the collateral securing them. In light of the continuing effects of the economic downturn, real estate values have been adversely affected. As we have experienced, significant declines in real estate collateral can occur quite suddenly as new appraisals are performed in the normal course of monitoring the credit quality of the loan. Significant declines in the value of real estate collateral due to new appraisals can occur due to declines in the real estate market, changes in methodology applied by the appraiser, and/or using a different appraiser than was used for the prior appraisal. Our ability to recover on these loans by selling or disposing of the underlying real estate collateral is adversely impacted by declining real estate values which increases the likelihood we will suffer losses on defaulted loans secured by real estate beyond the amounts provided for in the allowance for loan losses. This, in turn, could require material increases in our allowance for loan losses and adversely affect our financial condition and results of operations, perhaps materially.

Loan concentrations within one industry may create additional risk, and we have a significant concentration in loans to dental professionals.

Bank regulatory authorities and investors generally view significant loan concentrations within any particular industry as carrying higher inherent risk than a loan portfolio without any significant concentration in one industry. We have a significant concentration of loans to dental professionals which represented 27.0 percent of our total loan portfolio at March 31, 2012. While we apply prudent credit practices to these loans as well as all the other loans in our portfolio, and we believe that the expertise we have developed as a result of focusing on dental lending somewhat mitigates risk, due to our concentration in dental lending we are exposed to the general risks of industry concentration, which include adverse market factors impacting that industry alone or disproportionately to other industries. In addition, bank regulatory authorities may in the future require us to limit additional lending in the dental industry if they have concerns that our concentration in that industry creates significant risks, which in turn could limit our ability to pursue new loans in an area where we believe we currently have a competitive advantage.

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

At March 31, 2012, our nonperforming loans (which include all nonaccrual loans, net of government guarantees) were 3.04 percent of the loan portfolio. At March 31, 2012, our nonperforming assets (which include foreclosed real estate) were 2.72 percent of total assets. These levels of nonperforming loans and assets are at elevated levels compared to historical norms. Nonperforming loans and assets adversely affect our net income in various ways. Until economic and market conditions improve, we may expect to continue to incur losses relating to nonperforming assets. We generally do not record interest income on nonperforming loans or other real estate owned, thereby adversely affecting our income, and increasing our loan administration costs. When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the then fair market value of the collateral which may ultimately result in a loss. An increase in the level of nonperforming assets increases our risk profile and may impact the capital levels our regulators believe are appropriate in light of the ensuing risk profile. While we reduce problem assets through loan sales, workouts, and restructurings and otherwise, decreases in the value of the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition, perhaps materially. In addition, the resolution of nonperforming assets requires significant commitments of time from management and our directors which can be detrimental to the performance of their other responsibilities. Any significant future increase in nonperforming assets could have a material adverse effect on our business, financial condition and results of operations.

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

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

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

In recent years, like all insured institutions the Bank paid an FDIC-imposed special deposit insurance assessment of five basis points and prepaid its estimated quarterly risk-based assessments through 2012.

Despite the FDIC’s actions to restore the deposit insurance fund, the fund may suffer additional losses in the future due to failures of insured institutions. There may be additional significant deposit insurance premium increases, special assessments or prepayments in order to restore the insurance fund’s reserve ratio. Any significant premium increases or special assessments could have a material adverse effect on the Company’s financial condition and results of operations.

We may not have the ability to continue paying dividends on our common stock at current or historic levels.

Our ability to pay dividends on our common stock depends on a variety of factors. On February 23, 2012, we announced a quarterly dividend of $0.05 per share, payable March 15, 2012, which was the same per-share amount as the prior quarter’s dividend. For the year ended December 31, 2011, the Company paid $0.10 per share in dividends. It is possible in the future that we may not be able to continue paying quarterly dividends commensurate with historic levels, if at all. Cash dividends will depend on sufficient earnings to support them and adherence to bank regulatory requirements.

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

Our securities portfolio contains whole loan private mortgage-backed securities and municipal securities and currently includes securities with unrecognized losses. We may continue to observe volatility in the fair market value of these securities. We evaluate the securities portfolio for any other-than-temporary-impairment (“OTTI”) each reporting period, as required by generally accepted accounting principles (“GAAP”). Future evaluations of the securities portfolio could require us to recognize impairment charges. The credit quality of securities issued by certain municipalities has deteriorated in recent quarters. Although management does not believe the credit quality of the Company’s municipal securities has similarly deteriorated, such deterioration could occur in the future. For example, it is possible that government-sponsored programs to allow mortgages to be refinanced to lower rates could materially adversely impact the yield on our portfolio of mortgage-backed securities, since a significant portion of our investment portfolio is composed of such securities.

In addition, as a condition to membership in the Federal Home Loan Bank of Seattle (“FHLB”), we are required to purchase and hold a certain amount of FHLB stock. Our stock purchase requirement is based, in part, upon the outstanding principal balance of advances from the FHLB. At March 31, 2012, we had stock in the FHLB of Seattle totaling $10,652. The FHLB stock held by us is carried at cost and is subject to recoverability testing under applicable accounting standards. The FHLB has discontinued the repurchase of their stock and discontinued the distribution of dividends. As of March 31, 2012, we did not recognize an impairment charge related to our FHLB stock holdings. Future negative changes to the financial condition of the FHLB could require us to recognize an impairment charge with respect to such holdings.

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

At March 31, 2012, we had $22,031 of goodwill on our balance sheet. In accordance with generally accepted accounting principles, our goodwill is not amortized but rather evaluated for impairment on an annual basis or more frequently if events or circumstances indicate that a potential impairment exists. Such evaluation is based on a variety of qualitative and quantitative factors, including macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, and other relevant entity-specific events. Future evaluations of goodwill may result in findings of impairment and write downs, which could be material. At March 31, 2012, we did not recognize an impairment charge related to our goodwill.

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

From time-to-time over the last few years, the capital and credit markets have experienced volatility and disruption at unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If similar levels of market disruption and volatility return, we could experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

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

As discussed more fully in the section entitled “Supervision and Regulation” in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2011, we are subject to extensive regulation, supervision and examination by federal and state banking authorities. In addition, as a publicly traded company, we are subject to regulation by the Securities and Exchange Commission. Any change in applicable regulations or federal, state or local legislation could have a substantial impact on us and our operations. Additional legislation and regulations that could significantly affect our powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of operations.

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In that regard, sweeping financial regulatory reform legislation was enacted in July 2010. Among other provisions, the new legislation (i) creates a new Bureau of Consumer Financial Protection with broad powers to regulate consumer financial products such as credit cards and mortgages, (ii) creates a Financial Stability Oversight Council comprised of the heads of other regulatory agencies, (iii) will lead to new capital requirements from federal banking agencies, (iv) places new limits on electronic debit card interchange fees, and (v) requires the Securities and Exchange Commission and national stock exchanges to adopt significant new corporate governance and executive compensation reforms. The new legislation and regulations are likely to increase the overall costs of regulatory compliance.

Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by financial institutions and holding companies in the performance of their supervisory and enforcement duties. Recently, these powers have been utilized more frequently due to the serious national, regional and local economic conditions we are facing. The exercise of regulatory authority may have a negative impact on our financial condition and results of operations.

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

Fluctuating interest rates could adversely affect our profitability.

Our profitability is dependent to a large extent upon our net interest income, which is the difference between the interest earned on loans, securities and other interest-earning assets and interest paid on deposits, borrowings, and other interest-bearing liabilities. Because of the differences in maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our net interest margin, and, in turn, our profitability. We manage our interest rate risk within established guidelines and generally seek an asset and liability structure that insulates net interest income from large deviations attributable to changes in market rates. However, our interest rate risk management practices may not be effective in a highly volatile rate environment.

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

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

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A failure in our operational systems or infrastructure, or those of third-parties, could impair our liquidity, disrupt our businesses, result in the unauthorized disclosure of confidential information, damage our reputation and cause financial losses.

We are dependent on third-parties and their ability to process and monitor, on a daily basis, a large number of transactions, many of which are highly complex, across numerous and diverse markets. These transactions, as well as the information technology services we provide to clients, often must adhere to client-specific guidelines, as well as legal and regulatory standards. Due to the breadth of our client base and our geographical reach, developing and maintaining our operational systems and infrastructure is challenging, particularly as a result of rapidly evolving legal and regulatory requirements and technological shifts. Our financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, such as a spike in transaction volume, cyber attack or other unforeseen catastrophic events, which may adversely affect our ability to process these transactions or provide services.

In addition, our operations rely on the secure processing, storage and transmission of confidential and other information on our computer systems and networks. Although we take numerous protective measures to maintain the confidentiality, integrity and availability of our and our clients’ information across all geographic and product lines, and endeavor to modify these protective measures as circumstances warrant, the nature of the threats continues to evolve. As a result, our computer systems, software and networks may be vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses or other malicious code, cyber attacks and other events that could have an adverse security impact. Despite the defensive measures we take to manage our internal technological and operational infrastructure these threats may originate externally from third-parties, such as foreign governments, organized crime and other hackers, and outsource or infrastructure-support providers and application developers, or the threats may originate from within our organization. Given the increasingly high volume of our transactions certain errors may be repeated or compounded before they can be discovered and rectified.

We also face the risk of operational disruption, failure, termination or capacity constraints of any of the third-parties that facilitate our business activities, including exchanges, clearing agents, clearing houses or other financial intermediaries. Such parties could also be the source of an attack on, or breach of, our operational systems, data or infrastructure. In addition, as interconnectivity with our clients grows, we increasingly face the risk of operational failure with respect to our clients’ systems.

Although we have not experienced a cyber incident, if one or more of these events occurs, it could potentially jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, as well as our clients’ or other third-parties’ operations, which could result in damage to our reputation, substantial costs, regulatory penalties and/or client dissatisfaction or loss. Potential costs of a cyber incident may include, but would not be limited to, remediation costs, increased protection costs, lost revenue from the unauthorized use of proprietary information or the loss of current and/or future customers, and litigation.

We maintain an insurance policy which we believe provides sufficient coverage at a manageable expense for an institution of our size and scope with similar technological systems. However, we cannot assure that this policy would be sufficient to cover all financial losses, damages, penalties, including lost revenues, should we experience any one or more of our or a third-party’s systems failing or experiencing attack.

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

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

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

From time-to-time, particularly in the current uncertain economic environment, we may consider alternatives for raising capital when opportunities present themselves, in order to further strengthen our capital and/or better position ourselves to take advantage of identified or potential opportunities that may arise in the future. Such alternatives may include issuance and sale of common or preferred stock, or borrowings by the Company, with proceeds contributed to the Bank. Any such capital raising alternatives could dilute the holders of our outstanding common stock and may adversely affect the market price of our common stock.

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

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

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

Rider 66A

The Company has adopted a repurchase plan to purchase up to five percent of the Company’s outstanding shares. For the quarter ended March 31, 2012, the Company purchased 242,169 shares of stock at a weighted average price of $8.62 per share.

Period	Average Price Paid Per Share		Total Number of Shares Purchase as part of Publicly Announced Plan1		Maximum Number of Shares that May Yet Be Purchased Under the Plan
January 1 – 31, 2012
February 1 – 29, 2012	$	8.48		128,045		793,955
March 1 – 31, 2012	$	8.78		114,124		679,831

(1) On February 23, 2012 the Company announced in a press release the adoption of a plan to repurchase approximately 922,000 shares of its common stock over a twelve month period.

Item 3 Defaults Upon Senior Securities

None

Item 4 Mine Safety Disclosures

None

Item 5 Other Information

None

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Item 6 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
101*	The following financial information from Pacific Continental Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, is formatted in XBRL: (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Operations, (iii) the Unaudited Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income, (iv) the Unaudited Consolidated Statements of Cash Flows, and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.

* Furnished herewith.

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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.

(Registrant)	PACIFIC CONTINENTAL CORPORATION
Dated May 4, 2012		/s/ Hal Brown
		Hal Brown
		Chief Executive Officer
Dated May 4, 2012		/s/ Michael A. Reynolds
		Michael A. Reynolds
		Executive Vice President and Chief Financial Officer

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