Pacific Continental 10-Q 2012 Q3 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 for the quarterly period ended September 30, 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.

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 October 31, 2012: 17,843,588

PACIFIC CONTINENTAL CORPORATION

FORM 10-Q

QUARTERLY REPORT

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION		3
Item 1	Financial Statements		3
	Consolidated Balance Sheets		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		64
Item 4	Controls and Procedures		64
PART II	OTHER INFORMATION		65
Item 1	Legal Proceedings		65
Item 1A	Risk Factors		66
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		73
Item 3	Defaults Upon Senior Securities		73
Item 4	Mine Safety Disclosures		73
Item 5	Other Information		73
Item 6	Exhibits		73

2

PART I FINANCIAL INFORMATION

Item 1 Financial Statements

Pacific Continental Corporation and Subsidiary

Consolidated Balance Sheets

(In thousands)

(Unaudited)

	September 30, 2012		December 31, 2011		September 30, 2011
ASSETS
Cash and due from banks	$	20,840	$	19,807	$	16,896
Interest-bearing deposits with banks		53		52		69
Total cash and cash equivalents		20,893		19,859		16,965
Securities available-for-sale		406,175		346,542		340,118
Loans held-for-sale		—		1,058		400
Loans, less allowance for loan losses and net deferred fees		819,922		805,211		812,525
Interest receivable		4,861		4,725		4,243
Federal Home Loan Bank stock		10,557		10,652		10,652
Property and equipment, net of accumulated depreciation		19,478		20,177		20,379
Goodwill and intangible assets		22,068		22,235		22,291
Deferred tax asset		6,803		7,308		7,428
Taxes receivable		—		1,671		—
Other real estate owned		19,235		11,000		11,663
Prepaid FDIC assessment		1,998		2,782		3,164
Bank-owned life insurance		15,469		15,038		—
Other assets		2,963		1,974		1,743
Total assets	$	1,350,422	$	1,270,232	$	1,251,571
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing demand	$	304,016	$	278,576	$	279,733
Savings and interest-bearing checking		520,218		545,856		537,009
Time $100,000 and over		77,790		72,436		68,330
Other time		78,138		68,386		66,545
Total deposits		980,162		965,254		951,617
Federal funds and overnight funds purchased		9,385		12,300		8,185
Federal Home Loan Bank borrowings		165,000		101,500		98,500
Junior subordinated debentures		8,248		8,248		8,248
Accrued interest and other payables		4,848		4,064		3,951
Total liabilities		1,167,643		1,091,366		1,070,501
Shareholders’ equity
Common stock, shares authorized: 50,000,000; shares issued and outstanding: 17,900,188 at September 30, 2012, 18,435,084 at December 31, 2011 and 18,433,084 at September 30, 2011		133,385		137,844		137,660
Retained earnings		43,113		37,468		39,242
Accumulated other comprehensive income		6,281		3,554		4,168
		182,779		178,866		181,070
Total liabilities and shareholders’ equity	$	1,350,422	$	1,270,232	$	1,251,571

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 September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Interest and dividend income
Loans	$	11,971	$	12,583	$	36,089	$	38,146
Securities		1,910		2,415		6,048		6,710
Federal funds sold & interest-bearing deposits with banks		2		1		4		5
		13,883		14,999		42,141		44,861
Interest expense
Deposits		992		1,628		3,149		5,325
Federal Home Loan Bank & Federal Reserve borrowings		364		459		1,259		1,412
Junior subordinated debentures		38		34		116		99
Federal funds purchased		4		11		20		32
		1,398		2,132		4,544		6,868
Net interest income		12,485		12,867		37,597		37,993
Provision for loan losses		—		1,750		1,900		5,900
Net interest income after provision for loan losses		12,485		11,117		35,697		32,093
Noninterest income
Service charges on deposit accounts		463		462		1,359		1,328
Other fee income, principally bankcard		408		402		1,205		1,207
Net gain on sale of investment securities		—		359		—		825
Mortgage banking income		—		50		72		124
Loan servicing fees		20		27		59		82
Bank-owned life insurance (BOLI) income		157		—		432		—
Other noninterest income		367		431		1,231		981
		1,415		1,731		4,358		4,547
Noninterest expense
Salaries and employee benefits		4,720		4,691		14,721		14,136
Premises and equipment		838		861		2,553		2,605
Bankcard processing		147		155		440		472
Business development		411		350		1,181		1,132
FDIC insurance assessment		285		381		814		1,268
Other real estate expense		466		734		1,082		2,146
Other noninterest expense		1,848		1,752		5,407		5,531
		8,715		8,924		26,198		27,290
Income before provision for income taxes		5,185		3,924		13,857		9,350
Provision for income taxes		1,747		1,336		4,587		3,156
Net income	$	3,438	$	2,588	$	9,270	$	6,194
Earnings per share
Basic	$	0.19	$	0.14	$	0.51	$	0.34
Diluted	$	0.19	$	0.14	$	0.51	$	0.34
Weighted average shares outstanding
Basic		17,978,081		18,433,084		18,166,377		18,425,344
Common stock equivalents attributable to stock-based awards		152,964		15,871		152,957		18,637
Diluted		18,131,045		18,448,955		18,319,334		18,443,981

See accompanying notes.

4

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net income	$	3,438		$	2,588		$	9,270		$	6,194
Other comprehensive income:
Available-for-sale securities:
Unrealized gains arising during the period		2,679			2,692			4,420			5,624
Reclassification adjustment for gains realized in net income		—			(359	)		—			(825	)
Income tax expense		(1,026	)		(894	)		(1,693	)		(1,838	)
Total other comprehensive income, net of tax		1,653			1,439			2,727			2,961
Total comprehensive income	$	5,091		$	4,027		$	11,997		$	9,155

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
Net 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		—			—			9,270			—		9,270
Other comprehensive income, net of tax		—			—			—			2,727		2,727
Stock options exercised and related tax benefit		10,666			78			—			—		78
Stock options exercised (Note 7)		18,333			130			—			—		130
Shares exchanged in payment of option exercise consideration (Note 7)		(14,166	)		(129	)		—			—		(129	)
Stock repurchased		(576,537	)		(5,088	)		—			—		(5,088	)
Net share-based compensation		26,808			550			—			—		550
Cash dividends		—			—			(3,625	)		—		(3,625	)
Balance, September 30, 2012		17,900,188		$	133,385		$	43,113		$	6,281	$	182,779

See accompanying notes.

6

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine months ended September 30,
	2012			2011
Cash flows from operating activities:
Net income	$	9,270		$	6,194
Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization, net of accretion		7,145			4,143
Valuation adjustment on foreclosed assets		1,093			1,782
Loss (gain) on sale of foreclosed assets		(100	)		100
Provision for loan losses		1,900			5,900
Deferred income taxes		2,190			2,760
BOLI Income		(431	)		—
Share-based compensation		654			439
Excess tax benefit of stock options exercised		(11	)		(12	)
Production of mortgage loans held-for-sale		(2,259	)		(4,805	)
Proceeds from the sale of mortgage loans held-for-sale		3,317			6,521
Change in:
Interest receivable		(136	)		128
Deferred loan fees		90			115
Accrued interest payable and other liabilities		(899	)		(1,537	)
Other assets		(205	)		895
Net cash provided by operating activities		21,618			22,623
Cash flows from investing activities:
Proceeds from maturities and sales of available-for-sale investment securities		72,703			73,380
Purchase of available-for-sale investment securities		(133,800	)		(157,914	)
Net loan principal (originations) collections		(30,135	)		12,840
Net purchase of property and equipment		(394	)		(349	)
Proceeds from sale of foreclosed assets		4,206			9,183
Purchase of energy tax credits		(14	)		—
Redemption of FHLB stock		95			—
Net cash used by investing activities		(87,339	)		(62,860	)
Cash flows from financing activities:
Change in deposits		14,908			(7,342	)
Change in federal funds purchased and FHLB short-term borrowings		72,585			47,185
FHLB advances repayment		(53,000	)		(7,500	)
Proceeds from FHLB term advances originated		41,000			—
Proceeds from stock options exercised		198			77
Shares surrendered in exchange for option exercise consideration		(129	)		—
Income tax benefit from stock options exercised		11			12
Dividends paid		(3,625	)		(921	)
Repurchase of common ctock		(5,088	)		—
Vested RSUs surrendered by employees to cover tax consequence		(105	)		—
Net cash provided by financing activities		66,755			31,511
Net increase (decrease) in cash and cash equivalents		1,034			(8,726	)
Cash and cash equivalents, beginning of period		19,859			25,691
Cash and cash equivalents, end of period	$	20,893		$	16,965
Supplemental information:
Noncash investing and financing activities:
Transfers of loans to foreclosed assets	$	13,434		$	8,435
Change in fair value of securities, net of deferred income taxes	$	2,727		$	2,961
Cash paid during the period for:
Income taxes	$	3,159		$	1,682
Interest	$	4,457		$	6,579

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 share and 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 (“GAAP”) for interim financial information. All dollar amounts, except share and per share data, are expressed in thousands of dollars. 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

The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of securities available-for-sale at September 30, 2012, are as follows:

	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	$	—	$	—	$	—		$	—	$	—	$	—
Obligations of states and political subdivisions		8,403		—		(80	)		8,323		8,323		—
Private-label mortgage-backed securities		3,261		—		(510	)		2,751		—		2,751
Mortgage-backed securities		75,702		—		(581	)		75,121		57,743		17,378
	$	87,366	$	—	$	(1,171	)	$	86,195	$	66,066	$	20,129
Unrealized Gain Positions
Obligations of U.S. government agencies	$	17,185	$	681	$	—		$	17,866
Obligations of states and political subdivisions		67,019		4,454		—			71,473
Private-label mortgage-backed securities		6,064		207		—			6,271
Mortgage-backed securities		218,360		6,010		—			224,370
		308,628		11,352		—			319,980
	$	395,994	$	11,352	$	(1,171	)	$	406,175

At September 30, 2012, unrealized losses existed on certain securities classified as obligations of state and political subdivisions, mortgage-backed securities and private-label mortgage-backed securities. The unrealized losses on agency mortgage-backed securities and securities that are obligations of states and political subdivisions 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”). The decrease in fair value is 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 have been below market rates during the period, no loss of principal is expected.

At September 30, 2012, there were 92 investment securities in unrealized loss positions. The unrealized loss associated with the investments of $20,129 in a continuous unrealized loss position for 12 months or longer was $1,091, of which $510 is related to private-label mortgage-backed securities, and $581 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.

During the third 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 included 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 considered all available information related to the collectability of the impaired investment securities and, at September 30, 2012, believed that the estimated credit loss was appropriate.

9

At September 30, 2012, seven of the Company’s private-label mortgage-backed securities with an amortized cost of $3,261 were classified as substandard as their ratings were below investment grade. Securities with an amortized cost of $3,644 and $5,095 were classified as substandard at December 31, 2011, and September 30, 2011, respectively.

As of September 30, 2012, the projected average life of the securities portfolio was 4.0 years.

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

	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 nine had been in a continuous loss position for 12 months or longer. The unrealized loss associated with the investments of $4,042 in a continuous unrealized loss position for 12 months or longer was $763.

10

The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair values of securities available-for-sale at September 30, 2011, are as follows:

	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	$	—	$	(17	)	$	1,983	$	1,983	$	—
Obligations of states and political subdivisions		—		—		—			—		—		—
Private-label mortgage-backed securities		6,569		—		(676	)		5,893		3,268		2,625
Mortgage-backed securities		49,444		—		(367	)		49,077		48,231		846
	$	58,013	$	—	$	(1,060	)	$	56,953	$	53,482	$	3,471
Unrealized Gain Positions
Obligations of U.S. government agencies	$	10,556	$	368	$	—		$	10,924
Obligations of states and political subdivisions		42,293		2,581		—			44,874
Private-label mortgage-backed securities		9,214		334		—			9,548
Mortgage-backed securities		213,287		4,532		—			217,819
		275,350		7,815		—			283,165
	$	333,363	$	7,815	$	(1,060	)	$	340,118

At September 30, 2011, there were 57 investment securities in unrealized loss positions, of which eight had been in a continuous loss position for 12 months or longer. The unrealized loss associated with the investments of $3,471 in a continuous unrealized loss position for 12 months or longer was $601.

The amortized cost and estimated fair value of securities at September 30, 2012, December 31, 2011, and September 30, 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.

	September 30, 2012				December 31, 2011				September 30, 2011
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	48,514	$	48,550	$	52,769	$	52,757	$	51,790	$	52,222
Due after one year through 5 years		190,881		194,534		199,757		202,889		208,681		212,521
Due after 5 years through 10 years		150,947		157,321		86,479		89,043		48,752		50,766
Due after 10 years		5,652		5,770		1,777		1,853		24,140		24,609
	$	395,994	$	406,175	$	340,782	$	346,542	$	333,363	$	340,118

No securities available for sale were sold during the first nine months of 2012. 25 investment securities were sold during the first nine months of 2011 resulting in gross realized gains of $1,005, and gross realized losses of $180 during that period. The specific identification method was used to determine the cost of the securities sold.

At September 30, 2012, securities with amortized cost of $19,232 (estimated market value of $20,071) 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:

	September 30, 2012			% of gross loans			December 31, 2011			% of gross loans			September 30, 2011			% of gross loans
Real estate secured loans:
Permanent Loans:
Multifamily residential	$	43,080			5.15	%	$	51,897			6.32	%	$	54,029			6.52	%
Residential 1-4 family		53,556			6.40	%		61,717			7.52	%		62,726			7.57	%
Owner-occupied commercial		222,374			26.57	%		207,008			25.22	%		209,702			25.31	%
Non-owner-occupied commercial		140,104			16.74	%		157,844			19.23	%		166,969			20.15	%
Total permanent real estate loans		459,114			54.86	%		478,466			58.29	%		493,426			59.55	%
Construction Loans:
Multifamily residential		12,794			1.53	%		2,574			0.31	%		1,158			0.14	%
Residential 1-4 family		18,108			2.16	%		17,960			2.19	%		17,865			2.16	%
Commercial real estate		15,817			1.89	%		10,901			1.33	%		13,368			1.61	%
Commercial bare land and acquisition & development		9,887			1.18	%		19,496			2.38	%		24,987			3.02	%
Residential bare land and acquisition & development		9,108			1.09	%		12,707			1.55	%		13,034			1.57	%
Total construction real estate loans		65,714			7.85	%		63,638			7.75	%		70,412			8.50	%
Total real estate loans		524,828			62.71	%		542,104			66.04	%		563,838			68.05	%
Commercial loans		306,870			36.66	%		272,600			33.21	%		257,889			31.13	%
Consumer loans		3,941			0.47	%		4,569			0.56	%		5,021			0.61	%
Other loans		1,334			0.16	%		1,556			0.19	%		1,762			0.21	%
Gross loans		836,973			100.00	%		820,829			100.00	%		828,510			100.00	%
Deferred loan origination fees		(768	)					(677	)					(698	)
		836,205						820,152						827,812
Allowance for loan losses		(16,283	)					(14,941	)					(15,287	)
Total loans, net of allowance for loan losses and net deferred fees	$	819,922					$	805,211					$	812,525

At September 30, 2012, outstanding loans to dental professionals totaled $245,606 and represented 29.3% of total outstanding loans compared to dental professional loans of $208,489 or 25.4% at December 31, 2011, and $196,094 or 23.7% at September 30, 2011. As of September 30, 2012 there were no other industry concentrations in excess of 10% of the total loan portfolio. However, as of September 30, 2012, approximately 62.71% of the Company’s loan portfolio was collateralized by real estate and is, therefore, susceptible to changes in real estate market conditions.

12

Allowance for Loan Losses

A summary of activity in the allowance for loan losses is as follows for the three months and nine months ended September 30, 2012, and September 30, 2011:

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Balance, beginning of period	$	16,175		$	15,326		$	14,941		$	16,570
Provision charged to income		—			1,750			1,900			5,900
Loans charged against allowance		(1,140	)		(2,208	)		(2,809	)		(8,085	)
Recoveries credited to allowance		1,248			419			2,251			902
Balance, end of period	$	16,283		$	15,287		$	16,283		$	15,287

The allowance for loan losses is established as an amount that management believes is 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 provide 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, and

• 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, and

• Peer comparison loss rates.

There have been no material 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

	For the three months ended September 30, 2012
	Commercial and Other			Real Estate			Construction			Consumer			Unallocated		Total
Beginning balance	$	3,538		$	8,926		$	2,309		$	84		$	1,318	$	16,175
Charge-offs		(950	)		(73	)		(117	)		—			—		(1,140	)
Recoveries		350			21			875			2			—		1,248
Provision		770			(106	)		(1,080	)		(7	)		423		—
Ending balance	$	3,708		$	8,768		$	1,987		$	79		$	1,741	$	16,283
	For the nine months ended September 30, 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		(956	)		(977	)		(867	)		(9	)		—		(2,809	)
Recoveries		995			72			1,178			6			—		2,251
Provision		893			1,406			(428	)		(5	)		34		1,900
Ending balance	$	3,708		$	8,768		$	1,987		$	79		$	1,741	$	16,283
	Balances as of September 30, 2012
	Commercial and Other			Real Estate			Construction			Consumer			Unallocated		Total
Ending allowance: collectively evaluated for impairment	$	3,682		$	8,722		$	1,987		$	79		$	1,741	$	16,211
Ending allowance: individually evaluated for impairment		26			46			—			—			—		72
Total ending allowance	$	3,708		$	8,768		$	1,987		$	79		$	1,741	$	16,283
Ending loan balance: collectively evaluated for impairment	$	303,289		$	452,185		$	65,611		$	3,941		$	—	$	825,026
Ending loan balance: individually evaluated for impairment		4,914			6,929			104			—			—		11,947
Total ending loan balance	$	308,203		$	459,114		$	65,715		$	3,941		$	—	$	836,973

Management believes that the allowance for loan losses was adequate as of September 30, 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.

15

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 management’s 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.

16

The following tables present the Company’s loan portfolio information by loan type and credit grade at September 30, 2012, December 31, 2011, and September 30, 2011:

Credit Quality Indicators

As of September 30, 2012

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful
Real estate loans
Multifamily residential	$	41,744	$	—	$	1,336	$	—	$	43,080
Residential 1-4 family		44,899		—		8,657		—		53,556
Owner-occupied commercial		212,243		—		10,131		—		222,374
Nonowner-occupied commercial		136,518		—		3,586		—		140,104
Total real estate loans		435,404		—		23,710		—		459,114
Construction
Multifamily residential		12,794		—		—		—		12,794
Residential 1-4 family		17,916		—		192		—		18,108
Commercial real estate		14,219		—		1,598		—		15,817
Commercial bare land and acquisition & development		9,887		—		—		—		9,887
Residential bare land and acquisition & development		6,096		—		3,012		—		9,108
Total construction loans		60,912		—		4,802		—		65,714
Commercial and other		298,136		—		10,068		—		308,204
Consumer		3,874		—		67		—		3,941
Totals	$	798,326	$	—	$	38,647	$	—	$	836,973

Credit Quality Indicators

As of December 31, 2011

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful
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

17

Credit Quality Indicators

As of September 30, 2011

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful
Real estate loans
Multifamily residential	$	52,670	$	—	$	1,359	$	—	$	54,029
Residential 1-4 family		52,064		—		10,662		—		62,726
Owner-occupied commercial		197,328		—		12,374		—		209,702
Nonowner-occupied commercial		163,177		—		3,684		108		166,969
Total real estate loans		465,239		—		28,079		108		493,426
Construction
Multifamily residential		1,158		—		—		—		1,158
Residential 1-4 family		12,647		—		5,218		—		17,865
Commercial real estate		8,962		—		4,406		—		13,368
Commercial bare land and acquisition & development		11,300		—		13,687		—		24,987
Residential bare land and acquisition & development		9,746		—		2,249		1,039		13,034
Total construction loans		43,813		—		25,560		1,039		70,412
Commercial and other		248,835		—		9,991		825		259,651
Consumer		4,935		—		86		—		5,021
Totals	$	762,822	$	—	$	63,716	$	1,972	$	828,510

At September 30, 2012, December 31, 2011, and September 30, 2011, the Company had $232, $363 and $245, respectively, in loan commitments on its classified loans.

18

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 as of September 30, 2012, December 31, 2011, and September 30, 2011:

Aged Analysis of Loans

As of September 30, 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	$	—	$	—	$	—	$	—	$	—	$	43,080	$	43,080
Residential 1-4 family		208		—		—		2,517		2,725		50,831		53,556
Owner-occupied commercial		—		340		—		3,624		3,964		218,410		222,374
Non owner-occupied commercial		92		—		—		—		92		140,012		140,104
Total real estate loans		300		340		—		6,141		6,781		452,333		459,114
Construction
Multifamily residential		—		—		—		—		—		12,794		12,794
Residential 1-4 family		192		—		—		—		192		17,916		18,108
Commercial real estate		1,598		—		—		—		1,598		14,219		15,817
Commercial bare land and acquisition & development		—		—		—		—		—		9,887		9,887
Residential bare land and acquisition & development		—		—		—		104		104		9,004		9,108
Total construction loans		1,790		—		—		104		1,894		63,820		65,714
Commercial and other		1,508		—		—		4,578		6,086		302,118		308,204
Consumer		5		—		—		—		5		3,936		3,941
Total	$	3,603	$	340	$	—	$	10,823	$	14,766	$	822,207	$	836,973

19

Aged Analysis of Loans

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

Aged Analysis of Loans

As of September 30, 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	$	—	$	—	$	—	$	—	$	—	$	54,029	$	54,029
Residential 1-4 family		—		900		—		3,393		4,293		58,433		62,726
Owner-occupied commercial		2,502		934		—		4,704		8,140		201,562		209,702
Non owner-occupied commercial								1,313		1,313		165,656		166,969
Total real estate loans		2,502		1,834		—		9,410		13,746		479,680		493,426
Construction
Multifamily residential		—		—		—		—		—		1,158		1,158
Residential 1-4 family		—		—		—		1,596		1,596		16,269		17,865
Commercial real estate		—		—		—		1,500		1,500		11,868		13,368
Commercial bare land and acquisition & development		—		—		—		13,027		13,027		11,960		24,987
Residential bare land and acquisition & development		—		—		—		1,451		1,451		11,583		13,034
Total construction loans		—		—		—		17,574		17,574		52,838		70,412
Commercial and other		532		—		—		6,732		7,264		252,387		259,651
Consumer		16		—		—		—		16		5,005		5,021
Total	$	3,050	$	1,834	$	—	$	33,716	$	38,600	$	789,910	$	828,510

20

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.

21

The following tables display an analysis of the Company’s impaired loans at September 30, 2012, December 31, 2011, and September 30, 2011:

Impaired Loan Analysis

As of September 30, 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		2,517		3,557		—		3,495		—
Owner-occupied commercial		3,746		4,587		—		4,174		17
Non owner-occupied commercial		220		220		—		59		—
Total real estate loans		6,483		8,364		—		7,728		17
Construction
Multifamily residential		—		—		—		—		—
Residential 1-4 family		—		—		—		724		—
Commercial real estate		—		—		—		1,624		—
Commercial bare land and acquisition & development		—		—		—		7,488		—
Residential bare land and acquisition & development		104		175		—		1,327		—
Total construction loans		104		175		—		11,163		—
Commercial and other		4,597		9,788		—		5,298		14
Consumer		—		—		—		—		—
Total impaired loans with no related allowance	$	11,184	$	18,327	$	—	$	24,189	$	31
With an allowance recorded
Real estate
Multifamily residential	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		—		—		—		24		—
Owner-occupied commercial		303		303		—		907		—
Non owner-occupied commercial		143		143		—		16		—
Total real estate loans		446		446		—		947		—
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		317		317		72		189		21
Consumer		—		—		—		—		—
Total impaired loans with an allowance recorded	$	763	$	763	$	72	$	1,136	$	21
Total
Real estate
Multifamily residential	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		2,517		3,557		—		3,519		—
Owner-occupied commercial		4,049		4,890		—		5,081		17
Non owner-occupied commercial		363		363		—		75		—
Total real estate loans		6,929		8,810		—		8,675		17
Construction
Multifamily residential		—		—		—		—		—
Residential 1-4 family		—		—		—		724		—
Commercial real estate		—		—		—		1,624		—
Commercial bare land and acquisition & development		—		—		—		7,488		—
Residential bare land and acquisition & development		104		175		—		1,327		—
Total construction loans		104		175		—		11,163		—
Commercial and other		4,914		10,105		72		5,487		35
Consumer		—		—		—		—		—
Total impaired loans	$	11,947	$	19,090	$	72	$	25,325	$	52

22

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		—		—		—		—		—
Total impaired loans with no related allowance	$	29,357	$	43,854	$	—	$	43,464	$	548
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 impaired loans with an allowance recorded	$	1,830	$	1,862	$	455	$	3,827	$	—
Total
Real estate
Multi-family residential	$	—	$	—	$	—	$	54.00	$	—
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

23

Impaired Loan Analysis

As of September 30, 2011

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Real estate
Multifamily residential	$	—	$	—	$	—	$	73	$	—
Residential 1-4 family		3,620		5,162		—		6,135		39
Owner-occupied commercial		6,364		6,364		—		6,188		169
Non owner-occupied commercial		1,514		1,731		—		7,332		24
Total real estate loans		11,498		13,257		—		19,728		232
Construction
Multifamily residential		—		—		—		182		—
Residential 1-4 family		1,596		2,208		—		1,276		—
Commercial real estate		3,143		3,314		—		3,196		87
Commercial bare land and acquisition & development		13,027		13,027		—		13,068		234
Residential bare land and acquisition & development		424		2,013		—		1,538		—
Total construction loans		18,190		20,562		—		19,260		321
Commercial and other		6,078		11,606		—		5,026		21
Consumer		—		—		—		—		—
Total impaired loans with no related allowance	$	35,766	$	45,425	$	—	$	44,014	$	574
With an allowance recorded
Real estate
Multifamily residential	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		215		248		10		390		—
Owner-occupied commercial		1,149		1,149		187		387		—
Non owner-occupied commercial		108		108		8		65		6
Total real estate loans		1,472		1,505		205		842		6
Construction
Multifamily residential		—		—		—		—		—
Residential 1-4 family		—		—		—		617		—
Commercial real estate		—		—		—		—		—
Commercial bare land and acquisition & development		—		—		—		—		—
Residential bare land and acquisition & development		2,066		3,539		329		1,463		38
Total construction loans		2,066		3,539		329		2,080		38
Commercial and other		677		1,116		325		1,756		13
Consumer		—		—		—		—		—
Total impaired loans with an allowance recorded	$	4,215	$	6,160	$	859	$	4,678	$	57
Total
Real estate
Multifamily residential	$	—	$	—	$	—	$	73	$	—
Residential 1-4 family		3,835		5,410		10		6,525		39
Owner-occupied commercial		7,513		7,513		187		6,575		169
Non owner-occupied commercial		1,622		1,839		8		7,397		30
Total real estate loans		12,970		14,762		205		20,570		238
Construction
Multifamily residential		—		—		—		182		—
Residential 1-4 family		1,596		2,208		—		1,893		—
Commercial real estate		3,143		3,314		—		3,196		87
Commercial bare land and acquisition & development		13,027		13,027		—		13,068		234
Residential bare land and acquisition & development		2,490		5,552		329		3,001		38
Total construction loans		20,256		24,101		329		21,340		359
Commercial and other		6,755		12,722		325		6,782		34
Consumer		—		—		—		—		—
Total impaired loans	$	39,981	$	51,585	$	859	$	48,692	$	631

24

The impaired balances reported above are not adjusted for government guarantees of $1,431, $1,094 and $851 at September 30, 2012, December 31, 2011, and September 30, 2011, respectively. The recorded investment in impaired loans, net of government guarantees totaled $10,516, $30,094 and $39,130 at September 30, 2012, December 31, 2011, and September 30, 2011, respectively. The specific valuation allowance for impaired loans was $72, $455 and $859 at September 30, 2012, December 31, 2011, and September 30, 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 of 2011. The Update requires retrospective application to the beginning of the annual period of adoption.

The following tables display the Company’s TDRs by class as of September 30, 2012, December 31, 2011, and September 30, 2011:

	Troubled Debt Restructurings as of September 30, 2012
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate
Multifamily residential		—	$	—	$	—
Residential 1-4 family		9		2,677		1,408
Owner-occupied commercial		5		2,199		2,133
Non owner-occupied commercial		1		160		143
Total real estate loans		15		5,036		3,684
Construction
Multifamily residential		—		—		—
Residential 1-4 family		—		—		—
Commercial real estate		—		—		—
Commercial bare land and acquisition & development		—		—		—
Residential bare land and acquisition & development		5		2,804		104
Total construction loans		5		2,804		104
Commercial and other		7		1,258		973
Consumer		—		—		—
		27	$	9,098	$	4,761

25

	Troubled Debt Restructurings as of December 31, 2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate
Multifamily residential		—	$	—	$	—
Residential 1-4 family		9		2,673		2,422
Owner-occupied commercial		3		877		860
Non owner-occupied commercial		2		1,275		678
Total real estate loans		14		4,825		3,960
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		1,804
Total construction loans		4		2,701		1,804
Commercial and other		3		1,178		1,058
Consumer		—		—		—
		21	$	8,704	$	6,822

	Troubled Debt Restructurings as of September 30, 2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate
Multifamily residential		—	$	—	$	—
Residential 1-4 family		9		2,562		2,372
Owner-occupied commercial		3		877		877
Non owner-occupied commercial		2		1,275		1,258
Total real estate loans		14		4,714		4,507
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		2,701
Total construction loans		4		2,701		2,701
Commercial and other		3		1,178		1,178
Consumer		—		—		—
		21	$	8,593	$	8,386

As of September 30, 2012, virtually all of the Company’s TDRs were composed of rate reductions and/or the maturity extensions to alleviate the burden of the debtor’s near-term cash requirements. Additionally, some restructured loans are modified to temporarily allow interest-only payments.

26

Three residential 1-4 family loans with a current aggregate outstanding balance of $318, one commercial loan with a current aggregate outstanding balance of $151, and two owner occupied commercial loans with a current aggregate outstanding balance of $1,290 were modified according to the terms of the respective borrower’s bankruptcy agreements.

As of September 30, 2012, three residential 1-4 family loans with a current aggregate outstanding balance of $234 and two commercial loans with a current aggregate outstanding balance of $65 were modified to allow interest-only payments. 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.

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 tables represent financing receivables modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the nine months ended September 30, 2012 and 2011, respectively:

Troubled Debt Restructurings That Subsequently Defaulted

	As of September 30,
	2012				2011
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Real estate
Multifamily residential		—	$	—		—	$	—
Residential 1-4 family		2		319		—		—
Owner-occupied commercial		—		—		—		—
Non owner-occupied commercial		—		—		1		1,098
Total real estate loans		2		319		1		1,098
Construction
Multifamily residential		—		—		—		—
Residential 1-4 family		—		—		—		—
Commercial real estate		—		—		—		—
Commercial bare land and acquisition & development		—		—		—		—
Residential bare land and acquisition & development		1		104		2		459
Total construction loans		1		104		2		459
Commercial and other		4		335		—		—
Consumer		—		—		—		—
		7	$	758		3	$	1,557

At September 30, 2012, and September 30, 2011, the Company had no commitments to lend additional funds on loans restructured as TDRs.

27

4. Dental Loan Portfolio

To assist in understanding the concentrations and risks associated with the Bank’s loan portfolio, the following information has been included relating to the Bank’s dental lending portfolio. At September 30, 2012, December 31, 2011, and September 30, 2011, loans to dental professionals totaled $245,606, $208,489 and $196,094, respectively, and represented 29.3%, 25.4% and 23.7% of outstanding loans, respectively. As of September 30, 2012, December 31, 2011, and September 30, 2011, the dental loans were supported by government guarantees totaling $19,623, $21,048 and $22,070, respectively. This represented 7.99%, 10.10% and 11.25% of the outstanding dental loan balances, respectively. The Company defines a “dental loan” as a 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 September 30, 2012, December 31, 2011, and September 30, 2011 are as follows:

	September 30, 2012		December 31, 2011		September 30, 2011
Real estate secured loans:
Owner-occupied commercial	$	52,074	$	35,949	$	34,028
Other dental real estate loans		3,159		12,284		13,493
Total permanent real estate loans		55,233		48,233		47,521
Dental construction loans		1,400		1,993		1,695
Total real estate loans		56,633		50,226		49,216
Commercial loans		188,973		158,263		146,878
Gross loans	$	245,606	$	208,489	$	196,094

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 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

	September 30, 2012		December 31, 2011		September 30, 2011
In Market	$	177,251	$	166,133	$	159,632
Out-of-Market		68,355		42,356		36,462
Total	$	245,606	$	208,489	$	196,094

28

Credit Quality

Please refer to page 16 of Note 3 on this form 10-Q 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 as of September 30, 2012, December 31, 2011, and September 30, 2011:

Dental Credit Quality Indicators

As of September 30, 2012

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful
In Market	$	171,696	$	—	$	5,555	$	—	$	177,251
Out-of-Market		67,959		—		396		—		68,355
Total	$	239,655	$	—	$	5,951	$	—	$	245,606

Dental Credit Quality Indicators

As of December 31, 2011

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful
In Market	$	162,435	$	—	$	3,698	$	—	$	166,133
Out-of-Market		42,356		—		—		—		42,356
Total	$	204,791	$	—	$	3,698	$	—	$	208,489

Dental Credit Quality Indicators

As of September 30, 2011

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful
In Market	$	155,260	$	—	$	4,372	$	—	$	159,632
Out-of-Market		36,462		—		—		—		36,462
Total	$	191,722	$	—	$	4,372	$	—	$	196,094

29

Past Due and Nonaccrual Loans

Please refer to page 19 of Note 3 of this form 10-Q 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, as of September 30, 2012, December 31, 2011, and September 30, 2011:

Aged Analysis of Dental Loans Receivable

As of September 30, 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
In Market	$	317	$	—	$	—	$	2,148	$	2,465	$	174,786	$	177,251
Out-of-Market		—		—		—		—		—		68,355		68,355
Total	$	317	$	—	$	—	$	2,148	$	2,465	$	243,141	$	245,606

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
In Market	$	634	$	—	$	—	$	744	$	1,378	$	164,755	$	166,133
Out-of-Market		—		—		—		—		—		42,356		42,356
Total	$	634	$	—	$	—	$	744	$	1,378	$	207,111	$	208,489

Aged Analysis of Dental Loans Receivable

As of September 30, 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
In Market	$	45	$	—	$	—	$	1,603	$	1,648	$	157,984	$	159,632
Out-of-Market		—		—		—		—		—		36,462		36,462
Total	$	45	$	—	$	—	$	1,603	$	1,648	$	194,446	$	196,094

30

5. Federal Funds and Overnight Funds Purchased

As of September 30, 2012, the Company had unsecured federal funds borrowing lines with various correspondent banks totaling $108,000. At September 30, 2012, December 31, 2011, and September 30, 2011, there was $9,385, $12,300, and $8,185 outstanding on these lines, respectively.

The Company also has a secured overnight borrowing line available from the Federal Reserve Bank totaling $86,881, $68,227 and $102,621 at September 30, 2012, December 31, 2011, and September 30, 2011, respectively. The Federal Reserve Bank borrowing line is secured through the pledging of approximately $130,340 of commercial loans under the Company’s Borrower-In-Custody program. At September 30, 2012, December 31, 2011, and September 30, 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 September 30, 2012, the maximum borrowing line was $405,127; 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 September 30, 2012, the FHLB stock held by the Company supported a total of $234,591 borrowings. At September 30, 2012, the Company had pledged $405,746 in real estate loans to the FHLB that had a discounted value of $229,058. At September 30, 2012, the borrowing line was limited to the discounted value of collateral pledged. There was $165,000 borrowed on this line at September 30, 2012.

On August 6, 2012, the Company restructured $39,000 of FHLB term advances and blended existing advances with a weighted average life of 1.8 years into new term advances with a weighted average life of 4.3 years. Extending the maturity allowed the Company to decrease the weighted average interest rate paid on FHLB term advances from 2.99% to 2.06%.

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 September 30, 2011, was $375,471. At September 30, 2011, the Company had pledged real estate loans and securities to the FHLB with a discounted collateral value of $153,090. There was $98,500 borrowed on this line at September 30, 2011.

Amounts outstanding at September 30, 2012, December 31, 2011, and September 30, 2011, by year of maturity are as follows:

	Current Rates			September 30, 2012		December 31, 2011		September 30, 2011
Cash Management Advance
2011				$	—	$	—	$	41,500
2012		0.29	% - 2.02%		122,000		60,500		16,000
2013		2.66	% - 3.84%		2,000		22,000		22,000
2014		0.60	% - 1.60%		13,500		13,500		13,500
2015		1.84	% - 2.36%		22,500		3,500		3,500
2016		2.28	%		3,000		2,000		2,000
After		3.85	%		2,000		—		—
				$	165,000	$	101,500	$	98,500

31

7. Share-based Compensation

The Company’s 2006 Stock Option and Equity Compensation Plan (the “2006 SOEC Plan”) authorizes the award of up to 1,550,000 shares in share-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 Company 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 under 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, 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.

There were no liability-based awards granted or exercised during the nine months ended September 30, 2012, and 2011.

For the nine months ended September 30, 2012, 7,987 restricted shares were granted and issued to directors with no restrictions imposed. Additionally, 164,516 RSUs were granted to employees during the first nine months of 2012. The RSUs vest over four years and shares of common stock will be issued as soon as is practicable upon vesting. For the nine months ended September 30, 2011, 5,952 restricted shares were granted and issued to directors with no restrictions imposed. Additionally, 127,192 RSUs were granted to employees during the first nine months of 2011. No other share-based compensation was granted during the nine months ended September 30, 2011. The following table summarizes the shares and the grant-date fair market values of the equity-based awards granted during the nine months ended September 30, 2012, and 2011:

	Nine months ended
	September 30,
	2012				2011
	Shares		Fair Market Value		Shares		Fair Market Value
Equity-based awards:
Director restricted stock		7,987	$	70		5,952	$	56
Employee stock options		—		—		—		—
Employee stock SARs		—		—		—		—
Employee RSUs		164,516		1,254		127,192		1,040
		172,503	$	1,324		133,144	$	1,096

32

The following tables identify the compensation expense recorded and tax benefits received by the Company on its share-based compensation plans for the three months and nine months ended September 30, 2012, and 2011:

	Three months ended
	September 30,
	2012				2011
	Compensation Expense		Tax Benefit		Compensation Expense			Tax Benefit
Equity-based awards:
Director restricted stock	$	—	$	—	$	—		$	—
Director stock options		—		—		—			—
Employee stock options		30		—		42			—
Employee stock SARs		47		16		60			21
Employee RSUs		143		50		67			23
Liability-based awards:
Employee cash SARs		—		—		(75	)		(26	)
	$	220	$	67	$	94		$	18
	Nine months ended
	September 30,
	2012				2011
	Compensation Expense		Tax Benefit		Compensation Expense			Tax Benefit
Equity-based awards:
Director restricted stock	$	70	$	25	$	56		$	20
Director stock options		—		—		1			—
Employee stock options		93		—		131			—
Employee stock SARs		145		51		188			66
Employee RSUs		346		121		134			47
Liability-based awards:
Employee cash SARs		—		—		(71	)		(25	)
	$	654	$	196	$	439		$	108

During the nine months ended September 30, 2012, 10,666 stock options were exercised with a weighted average exercise price of $6.38 per share and an intrinsic value of $29.

In addition to the standard option exercise, in August 2012, the Company’s Board of Directors approved a transaction involving the exchange of shares of the Company’s common stock in partial payment of the option exercise consideration of one officer to exercise vested options. On September 6, 2012, the officer exercised 18,333 outstanding options using an aggregate of $1 of cash and 14,166 shares of common stock. The shares exchanged as option exercise consideration were priced at the closing price of the Company common stock on that day. The transaction resulted in net issuance of 4,167 shares.

At September 30, 2012, the Company had estimated unrecognized compensation expense of approximately $113, $199, $1,747, and $31 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 1.27, 1.35, 3.2, and 0.6 years, respectively.

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8. Fair Value

The following table presents estimated fair values of the Company’s financial instruments as of September 30, 2012, December 31, 2011, and September 30, 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.

	September 30, 2012				December 31, 2011				September 30, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and cash equivalents	$	20,893	$	20,893	$	19,859	$	19,859	$	16,965	$	16,965
Securities available-for-sale		406,175		406,175		346,542		346,542		340,118		340,118
Loans held-for-sale		—		—		1,058		1,058		400		400
Loans		836,205		836,279		820,152		814,882		827,812		823,188
Federal Home Loan Bank stock		10,557		10,557		10,652		10,652		10,652		10,652
Accrued interest receivable		4,861		4,861		4,725		4,725		4,243		4,243
Bank-owned life insurance		15,469		15,469		15,038		15,038		—		—
Deposits	$	980,162	$	983,993	$	965,254	$	965,724	$	951,617	$	952,171
Federal funds and overnight funds purchased		9,385		9,385		12,300		12,300		8,185		8,185
Federal Home Loan Bank borrowings		165,000		165,549		101,500		103,884		98,500		100,876
Junior subordinated debentures		8,248		2,162		8,248		2,039		8,248		2,015
Accrued interest payable		236		236		264		264		297		297

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.

Accrued interest receivable – The carrying amounts of accrued interest receivable and payable approximate their 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, McGuire Performance Solutions Inc., to establish the fair value of time deposits.

Federal funds and overnight funds purchased – The carrying amount is a reasonable estimate of fair value because of the short-term nature of these borrowings.

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

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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 GAAP, 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 September 30, 2012, December 31, 2011, and September 30, 2011:

September 30, 2012

	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Obligations of U.S. government agencies	$	17,866	$	—	$	17,866	$	—
Obligations of states and political subdivisions		79,796		—		79,796		—
Agency mortgage-backed securities		299,490		—		299,490		—
Private-label mortgage-backed securities		9,023		—		7,320		1,703
Total available-for-sale securities	$	406,175	$	—	$	404,472	$	1,703

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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

September 30, 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	$	12,907	$	—	$	12,907	$	—
Obligations of states and political subdivisions		44,874		—		44,874		—
Agency mortgage-backed securities		266,896		—		266,896		—
Private-label mortgage-backed securities		15,441		—		15,441		—
Total available-for-sale securities	$	340,118	$	—	$	340,118	$	—

No transfers to or from Levels 1 and 2 occurred on assets measured at fair value on a recurring basis during the three and nine months ended September 30, 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 and nine months ended September 30, 2012:

	Private-Label Mortgage-backed Securities
	Three Months Ended			Nine Months Ended
	September 30, 2012			September 30, 2012
Beginning Balance	$	1,606		$	1,719
Transfers to Level 3		—			—
Transfers out of Level 3		—			—
Total gains or losses
Included in earnings		—			—
Included in other comprehensive income		174			255
Paydowns		(77	)		(271	)
Purchases, issuances, sales and settlements
Purchases		—			—
Issuances		—			—
Sales		—			—
Settlements		—			—
Ending Balance	$	1,703		$	1,703

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, an independent third party, 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.

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• 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.

• 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’s 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 on a recurring basis through its independent third-party pricing service, using observable inputs. For further assurance, the Company’s estimate of fair value was compared to an additional independent third-party, Harvest Investment Consultants, 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 September 30, 2012, December 31, 2011, and September 30, 2011:

September 30, 2012

	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 September 30, 2012 Total Loss
Loans measured for impairment (net of government guarantees and specific reserves)	$	7,298	$	—	$	—	$	7,298	$	72
Other real estate owned		19,235		—		—		19,235		1,052
	$	26,533	$	—	$	—	$	26,533	$	1,124

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

September 30, 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 September 30, 2011 Total Loss
Loans measured for impairment (net of government guarantees and specific reserves)	$	15,739	$	—	$	—	$	15,739	$	859
Other real estate owned		11,663		—		—		11,663		1,958
	$	27,402	$	—	$	—	$	27,402	$	2,817

There were no transfers to or from Level 3 assets measured at fair value on a nonrecurring basis during the nine months ended September 30, 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 other 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.

9. 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 September 30, 2012, the Company and the Bank met all capital adequacy requirements to which they were subject.

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As of September 30, 2012, and according to Federal Reserve and FDIC guidelines, the Company and the Bank were 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.

											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2012:
Total capital (to risk weighted assets)
Bank:	$	172,595		18.45	%	$	74,853		8	%	$	93,567		10	%
Company:	$	174,185		18.62	%	$	71,720		8	%	$	93,523		10	%
Tier I capital (to risk weighted assets)
Bank:	$	160,841		17.19	%	$	37,427		4	%	$	56,140		6	%
Company:	$	162,431		17.37	%	$	37,409		4	%	$	56,114		6	%
Tier I capital (to leverage assets)
Bank:	$	160,841		12.41	%	$	51,848		4	%	$	64,810		5	%
Company:	$	162,431		12.53	%	$	51,861		4	%	$	64,826		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 September 30, 2011:
Total capital (to risk weighted assets)
Bank:	$	165,931		18.00	%	$	73,740		8	%	$	92,175		10	%
Company:	$	174,164		18.89	%	$	73,763		8	%	$	92,203		10	%
Tier I capital (to risk weighted assets)
Bank:	$	154,377		16.75	%	$	36,870		4	%	$	55,305		6	%
Company:	$	162,610		17.64	%	$	36,881		4	%	$	55,322		6	%
Tier I capital (to leverage assets)
Bank:	$	154,377		12.79	%	$	48,283		4	%	$	60,353		5	%
Company:	$	162,610		13.48	%	$	48,267		4	%	$	60,334		5	%

10. Subsequent Events

On October 23, 2012, the Bank announced the signing of a definitive agreement to acquire Century Bank, a state-chartered bank headquartered in Eugene, Oregon, for a total of approximately $13.4 million in cash, which includes the value of outstanding options and warrants. The boards of directors of each company have approved this transaction. Completion of the transaction is subject to customary closing conditions, including bank regulatory approvals and approval of Century Bank’s common shareholders. The transaction is expected to close in the first quarter of 2013.

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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 consolidated financial statements and the notes included in this report and in our 2011 Annual Report. All 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 our strategies and expectations regarding our funding, our net interest margin and factors affecting the margin, our problem assets, allowance for loan losses, noninterest expense and real estate expense; our expectations regarding the expansion of the Company’s commercial and industrial loan and owner-occupied lending and the anticipated growth in net outstanding loans; our expectations and strategies regarding our securities portfolio, recognition of other than temporary impairment (OTTI) and the factors impacting OTTI, and our intention to sell or hold securities, or expectations regarding the recovery of their carrying value; our strategies and expectations regarding the Company’s capital levels and liquidity, core deposits, and large depositor relationships, and our expectations regarding the new capital standards under the Dodd-Frank Act and the Basel Committee capital and liquidity standards and proposed regulations by the U.S. federal banking agencies and the effect of these developments on our business; our assessment of significant factors and developments that have affected or may affect our results; the economic outlook for the national, regional and local economies; pending and recent legislative and regulatory actions and future developments and their anticipated impacts on our business and operations; our assessment of the ultimate outcome of legal actions and their potential impact on our business; loan portfolio composition and risk grading; expected rates of return and projected results; critical accounting policies and estimates and the impact or anticipated impact of recent accounting pronouncements on our financial results; our expectations regarding the impact of acquisitions on our business and results of operations; and 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, regional 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 growth at historical rates, maintain the quality of our earning assets and level of earnings.

• 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, or otherwise, 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.

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• 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 periodic reviews thereof under relevant regulatory and accounting requirements may increase.

• Changes in laws and regulations (including laws and regulations concerning taxes, banking, capital requirements, 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 the economy, the banking industry and our business.

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

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

• Integration of an acquisition including results relating to: the total cost of integration; the retention of key personnel; the time required to complete the integration, the amount of longer-term cost savings; continued growth or the overall performance of the acquired company or combined entity could impact our business.

• 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 of this Report and this “Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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.

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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 below and in Note 1 of theNotes to Consolidated Financial Statements for the year ended December 31, 2011, in Item 8 of the company’s Annual Report on Form 10-K. 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.

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 TDRs can be found in Note 3 of theNotes to Consolidated Financial Statements in Item 1 of this report.

Goodwill and Intangible Assets

At September 30, 2012, the Company had $22,068 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 7 of theNotes to Consolidated Financial Statements in Item 1 of this Report.

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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.

Recent Accounting Pronouncements

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. 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 effective 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

45

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.

In July 2012, the FASB issued ASU No. 2012-02,Testing Indefinite-Lived Intangible Assets for Impairment.With this Update, a company testing indefinite-lived intangibles for impairment now has the option to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with current guidance. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

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Results of Operations - Overview

	For the three months ended September 30,									For the nine months ended September 30,
	2012		��	2011			% Change			2012			2011			% Change
Net income	$	3,438		$	2,588			32.8	%	$	9,270		$	6,194			49.7	%
Operating revenue(1)	$	13,900		$	14,598			-4.8	%	$	41,955		$	42,540			-1.4	%
Earnings per share
Basic	$	0.19		$	0.14			36	%	$	0.51		$	0.34			50.0	%
Diluted	$	0.19		$	0.14			36	%	$	0.51		$	0.34			50.0	%
Assets, period-end										$	1,350,422		$	1,251,571			7.9	%
Loans, period-end(2)										$	836,205		$	827,812			1.0	%
Core deposits, period end(3)										$	882,614		$	880,727			0.2	%
Deposits, period-end										$	980,162		$	951,617			3.0	%
Return on average assets(4)		1.03	%		0.83	%					0.95	%		0.68	%
Return on average equity(4)		7.52	%		5.74	%					6.85	%		4.71	%
Return on average tangible equity(4) (5)		8.56	%		6.56	%					7.81	%		5.40	%

⁽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 $3,438 in the third quarter 2012, an increase of $850 or 32.8% over third quarter 2011. The increase in net income was due to a lower provision for loan losses, and lower noninterest expense. The Company recorded no provision for loan losses during the third quarter 2012 due to net loan recoveries of $108. The third quarter 2012 provision for loan losses was down $1,750 from last year and reflects overall improvement in credit quality of the loan portfolio, lower nonperforming assets, and lower net charge offs. The decline in noninterest expense of $209 from third quarter 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 third quarter 2012, the Company experienced its third consecutive quarter of growth in outstanding loans. Outstanding loans, net of deferred fees, at September 30, 2012, were $836,205, up $10,160 over June 30, 2012. Excluding $13,242 of loans transferred to other real estate owned during the quarter, gross loans increased $23,402 during the current quarter. Outstanding loans at September 30, 2012, were up $16,053 over December 31, 2011. The Company continued to experience growth in commercial and owner-occupied commercial real estate loans. Outstanding core deposits at September 30, 2012, were $882,614, up $30,833 over the prior quarter end. The Company experienced a typical seasonal core deposit pattern during the quarter where outflows historically occurr during the first half of the year followed by growth during the second half of the year.

Period end assets at September 30, 2012, were $1,350,422, up $98,851 or 7.9 % over September 30, 2011. Growth in period-end assets resulted primarily from a $7,397 increase in net loans, a $15,469 increase in BOLI investment, and a $66,057 increase in the securities portfolio. Year-to-date average assets for the nine months ended September 30, 2012, were $1,303,326, up $87,058 over last year. Growth is primarily due to growth in average securities-available-for-sale and the purchase of the BOLI investment.

In February 2012, the Company’s Board of Directors authorized the repurchase of up to 5% of the Company’s shares, or approximately 922,000 shares, with the purchases to take place over a 12-month period. During the third quarter 2012, the Company repurchased 166,612 shares at a weighted average price of $9.00 per share. Since the inception of the plan, the Company has repurchased 576,537 shares at a weighted average price of $8.82. Total shares repurchased to date amount to 3.1% of the total outstanding shares at the commencement of the repurchase plan.

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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 these 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 shareholders’ equity.

	September 30, 2012			December 31, 2011			September 30, 2011
Total shareholders' equity	$	182,779		$	178,866		$	181,070
Subtract:
Goodwill		(22,031	)		(22,031	)		(22,031	)
Core deposit intangible assets		(37	)		(204	)		(260	)
Tangible shareholders' equity (non-GAAP)	$	160,711		$	156,631		$	158,779
Book value per share	$	10.21		$	9.70		$	9.82
Tangible book value per share (non-GAAP)	$	8.98		$	8.50		$	8.61
Return on average equity		6.85	%		3.01	%		4.71	%
Return on average tangible equity (non-GAAP)		7.81	%		3.45	%		5.40	%

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 securities, 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.

Net interest margin as a percentage of average earning assets for third quarter 2012 was 4.16%, down 40 basis points from the 4.56% margin reported for third quarter 2011, and down 15 basis points from the net interest margin reported for the second quarter 2012. The linked-quarter decline in the third quarter 2012 margin compared to second quarter 2012 was due to lower yields on earning assets, which was partially offset by decrease in cost of funds.

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On a linked-quarter basis, the Company’s earning asset yields fell by 19 basis points from 4.81% in second quarter 2012 to 4.62% in third quarter 2012. Both the securities portfolio and the loan portfolio experienced declines in yields. The yield on the loan portfolio for third quarter 2012 was 5.83%, down 13 basis points from the prior quarter, while the weighted average yield on the securities portfolio dropped to 2.13%, down 22 basis points from second quarter 2012. The decline in the yield on loans was primarily due to the following factors: (1) new loan production during third quarter 2012 was booked at yields lower than the average portfolio; (2) continuation of rate reductions on existing loans prior to maturity or repricing due to competitive pressure; and (3) lowering of active floors on loans as they come up for renewal. 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 7 basis points from second quarter 2012 to third quarter 2012. The cost of both interest-bearing core deposits and wholesale funding declined in third quarter 2012 when compared to the prior quarter by 4 and 13 basis points, respectively. The overall cost of core deposits, including demand deposits, fell by 3 basis points from 0.33% in second quarter 2012 to 0.30% in third quarter 2012. During the third quarter 2012, the Company restructured $39,000 of FHLB term advances and blended existing advances with a weighted-average rate and weighted-average life of 2.99% and 1.8 years, respectively, into term advances with a weighted-average rate and weighted average life of 2.03% and 4.2 years, respectively. This restructuring is expected to reduce interest expense by approximately $340 annually. In addition, the Company continued to call higher rate brokered CD’s and refinance at lower rates, which will also lower the cost of funds.

However, over the long-term, the net interest margin is expected to remain under pressure. Continued erosion of earning asset yields is anticipated due to the low interest rate environment, competitive loan pricing, and accelerated prepayment speeds on mortgage-backed securities. 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.

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The following table presents condensed balance sheet information, together with interest income and yields on average interest earning assets, and interest expense and rates on interest-bearing liabilities for the quarter ended September 30, 2012, compared to the quarter ended September 30, 2011:

Table I

Average Balance Analysis of Net Interest Income

(dollars in thousands)

	Three Months Ended September 30, 2012								Three Months Ended September 30, 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	$	69	$	2			11.53	%	$	112	$	1			3.54	%
Securities available-for-sale:
Taxable		334,370		1,491			1.77	%		290,788		2,150			2.93	%
Tax-exempt(1)		64,785		646			3.97	%		33,096		408			4.89	%
Loans held-for-sale		—		—			0.00	%		417		4			3.81	%
Loans, net of deferred fees and allowance(2)		816,694		11,970			5.83	%		808,474		12,579			6.17	%
Total interest earning assets(1)		1,215,918		14,109			4.62	%		1,132,887		15,142			5.30	%
Non earning assets
Cash and due from banks		19,694								20,303
Premises and equipment		19,594								20,497
Goodwill & intangible assets		22,098								22,321
Interest receivable and other assets		49,773								38,000
Total non earning assets		111,159								101,121
Total assets	$	1,327,077							$	1,234,008
Interest-bearing liabilities
Money market and NOW accounts	$	482,881	$	(479	)		-0.39	%	$	505,150	$	(856	)		-0.67	%
Savings deposits		37,982		(13	)		-0.14	%		36,222		(37	)		-0.41	%
Time deposits—core(3)		58,606		(163	)		-1.11	%		71,204		(337	)		-1.88	%
Total interest-bearing core deposits		579,469		(655	)		-0.45	%		612,576		(1,230	)		-0.80	%
Time deposits—non-core		99,852		(337	)		-1.34	%		71,940		(398	)		-2.19	%
Federal funds purchased		3,690		(4	)		-0.43	%		8,509		(11	)		-0.51	%
FHLB & FRB borrowings		149,277		(364	)		-0.97	%		75,538		(459	)		-2.41	%
Trust preferred		8,248		(38	)		-1.83	%		8,248		(34	)		-1.64	%
Total interest-bearing wholesale funding		261,067		(743	)		-1.13	%		164,235		(902	)		-2.18	%
Total interest-bearing liabilities		840,536		(1,398	)		-0.66	%		776,811		(2,132	)		-1.09	%
Noninterest-bearing liabilities
Demand deposits		300,091								274,808
Interest payable and other		4,606								3,493
Total noninterest liabilities		304,697								278,301
Total liabilities		1,145,233								1,055,112
Shareholders' equity		181,844								178,896
Total liabilities and shareholders' equity	$	1,327,077							$	1,234,008
Net interest income			$	12,711							$	13,010
Net interest margin(1)				4.16	%							4.56	%

⁽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 $226 and $143 for the three months ended September 30, 2012 and September 30, 2011, respectively. Net interest margin was positively impacted by 8 and 5 basis points, respectively.

⁽²⁾ Interest income includes recognized loan origination fees of $58 and $50 for the three months ended September 30, 2012 and September 30, 2011, respectively.

⁽³⁾ Defined by the Company as local non-public time deposits, including local non-public time deposits in excess of $100.

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Table I shows that earning asset yields declined by 68 basis points in third quarter 2012 from third quarter 2011 from 5.30% to 4.62%. 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 third quarter 2012 when compared to the same quarter last year as the lower yielding securities portfolio grew in proportion to total 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-backed securities accelerating the amortization of premiums. The decline in the yield on loans was primarily due to the following factors: (1) new loan production during the latter half of 2011 and first half of 2012 booked at yields lower than the average portfolio; (2) an increase in rate reductions on existing loans prior to maturity or repricing date due to competitive pressure; and (3) reductions in loan floors on loans as they come up for renewal.

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 43 basis points from 1.09% in third quarter 2011 to 0.66% in third quarter 2012. The decline in rates is evident in each core deposit category as the cost of interest-bearing core deposits fell by 35 basis points from 0.80% in third quarter 2011 to 0.45% in third quarter 2012. The cost of wholesale funding also declined from 2.18% in third quarter 2011 to 1.13% in third quarter 2012. All categories of wholesale funding showed a decline in rates with the exception of Trust Preferred.

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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 September 30, 2012, and September 30, 2011.

Table II

Analysis of Changes in Interest Income and Interest Expense

(dollars in thousands)

	Three Months Ended September 30, 2012 compared to September 30, 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		315			(974	)		(659	)
Tax-exempt(1)		388			(150	)		238
Loans held-for-sale		(4	)		—			(4	)
Loans, net of deferred fees and allowance (2)		93			(702	)		(609	)
Total interest earning assets(1)		792			(1,825	)		(1,033	)
Interest paid on:
Money market and NOW accounts		(40	)		(337	)		(377	)
Savings deposits		2			(26	)		(24	)
Time deposits—core(3)		(60	)		(114	)		(174	)
Total interest-bearing core deposits		(98	)		(477	)		(575	)
Time deposits—non-core		153			(214	)		(61	)
Federal funds purchased		(6	)		(1	)		(7	)
FHLB & FRB borrowings		446			(541	)		(95	)
Trust preferred		—			4			4
Total interest-bearing wholesale funding		593			(752	)		(159	)
Total interest-bearing liabilities		495			(1,229	)		(734	)
Net interest income(1)	$	297		$	(596	)	$	(299	)

⁽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 $226 and $143 for the three months ended September 30,2012 and September 30, 2011, respectively. Net interest margin was positively impacted by 8 and 5 basis points, respectively.

⁽²⁾ Interest income includes recognized loan origination fees of $58 and $50 for the three months ended September 30, 2012 and September 30, 2011, respectively.

⁽³⁾ Defined by the Company as local non-public time deposits, including local non-public time deposits in excess of $100.

The third quarter 2012 rate/volume analysis shows that net interest income decreased by $299 from third quarter 2011. Third quarter 2012 interest income including loan fees declined by $1,033 from last year with higher volumes of earning assets increasing interest income by $792, which was more than offset by a $1,825 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 third quarter 2012 when compared to the same quarter one year ago was partially offset by a $734 drop in interest expense. The entire 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 $575 from one year ago due to both lower volumes and lower rates.

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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 nine months ended September 30, 2012, compared to the nine months ended September 30, 2011:

Table III

Average Balance Analysis of Net Interest Income

(dollars in thousands)

	Year-to-Date								Year-to-Date
	September 30, 2012								September 30, 2011
			Interest			Average					Interest			Average
	Average		Income or			Yields or			Average		Income or			Yields or
	Balance		(Expense)			Rates			Balance		(Expense)			Rates
Interest earning assets
Federal funds sold and interest-bearing deposits	$	95	$	4			5.62	%��	$	226	$	5			2.96	%
Securities available-for-sale:
Taxable		324,483		4,886			2.01	%		264,244		6,030			3.05	%
Tax-exempt(1)		54,760		1,787			4.36	%		27,701		1,047			5.05	%
Loans held-for-sale		253		7			3.70	%		433		18			5.56	%
Loans, net of deferred fees and allowance(2)		812,028		36,082			5.94	%		819,901		38,127			6.22	%
Total interest earning assets(1)		1,191,619		42,766			4.79	%		1,112,505		45,227			5.44	%
Non earning assets
Cash and due from banks		18,677								19,702
Premises and equipment		19,834								20,621
Goodwill & intangible assets		22,153								22,376
Interest receivable and other assets		51,043								41,064
Total non earning assets		111,707								103,763
Total assets	$	1,303,326							$	1,216,268
Interest-bearing liabilities
Money market and NOW accounts	$	481,381	$	(1,565	)		-0.43	%	$	507,969	$	(2,988	)		-0.79	%
Savings deposits		37,665		(47	)		-0.17	%		34,627		(128	)		-0.49	%
Time deposits—core(3)		59,602		(519	)		-1.16	%		79,442		(1,297	)		-2.18	%
Total interest-bearing core deposits		578,648		(2,131	)		-0.49	%		622,038		(4,413	)		-0.95	%
Time deposits—non-core		92,827		(1,018	)		-1.46	%		62,517		(912	)		-1.95	%
Federal funds purchased		5,202		(20	)		-0.51	%		8,204		(32	)		-0.52	%
FHLB & FRB borrowings		142,551		(1,259	)		-1.18	%		76,071		(1,412	)		-2.48	%
Trust preferred		8,248		(116	)		-1.88	%		8,248		(99	)		-1.60	%
Total interest-bearing wholesale funding		248,828		(2,413	)		-1.30	%		155,040		(2,455	)		-2.12	%
Total interest-bearing liabilities		827,476		(4,544	)		-0.73	%		777,078		(6,868	)		-1.18	%
Noninterest-bearing liabilities
Demand deposits		290,847								260,108
Interest payable and other		4,252								3,281
Total noninterest liabilities		295,099								263,389
Total liabilities		1,122,575								1,040,467
Shareholders’ equity		180,751								175,801
Total liabilities and shareholders’ equity	$	1,303,326							$	1,216,268
Net interest income			$	38,222							$	38,359
Net interest margin(1)				4.28	%							4.61	%

⁽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 $625 and $366 for the nine months ended September 30, 2012 and 2011, respectively. Net interest margin was positively impacted by 7 and 4 basis points, respectively.

⁽²⁾ Interest income includes recognized loan origination fees of $142 and $15 for the three months ended September 30, 2012 and 2011, respectively.

⁽³⁾ Defined by the Company as local non-public time deposits, including local non-public time deposits in excess of $100.

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Table III shows that year-to-date earning asset yields declined by 65 basis points from the same period last year. 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 during the first nine months of 2012 when compared to the same period last year as the lower yielding securities portfolio grew in proportion to total earning assets. For the first nine months of 2012, average securities available-for sale with a weighted-average tax equivalent yield of 2.34% totaled $379,243 and represented 32% of total average earnings assets and average loans yielding 5.94% represented 68% of total average earning assets. This compares to the first nine months of 2011, when the average securities portfolio was $291,945 with a weighted average yield of 3.24% and represented 26% of total average earning assets, while average loans yielding 6.22% represented 74% 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-backed securities accelerating the amortization of premiums. The decline in the yield on loans was primarily due to the following factors: (1) new loan production during the first nine months of 2012 booked at yields lower than the average portfolio; (2) rate reductions on existing loans due to competitive pressure; and (3) reductions in active rate floors on existing loans at repricing or maturity date.

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 45 basis points from 1.18% through September 30, 2011, to 0.73% through September 30, 2012. The decline in rates is evident in each core deposit category as the cost of interest-bearing core deposits fell by 46 basis points from 0.95% for the first nine months of 2011 to 0.49% for the same period in 2012. The cost of wholesale funding also declined from 2.12% through September 30, 2011, to 1.30% for the same period in 2012. All categories of wholesale funding showed a decline in rates with the exception of Trust Preferred.

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The following table sets forth a summary of changes in net interest income due to changes in average asset and liability balances (volume) and changes in average rates (rate) for the nine months ended September 30, 2012, and September 30, 2011.

Table IV

Analysis of Changes in Interest Income and Interest Expense

(dollars in thousands)

	Nine Months Ended September 30, 2012
	Compared to September 30, 2011
	Increase (decrease) due to
	Volume			Rate			Net
Interest earned on:
Federal funds sold and interest-bearing deposits	$	(3	)	$	2		$	(1	)
Securities available-for-sale:
Taxable		1,381			(2,525	)		(1,144	)
Tax-exempt(1)		1,025			(285	)		740
Loans held-for-sale		(7	)		(4	)		(11	)
Loans, net of deferred fees and allowance(2)		(331	)		(1,714	)		(2,045	)
Total interest earning assets(1)		2,065			(4,526	)		(2,461	)
Interest paid on:
Money market and NOW accounts		(154	)		(1,269	)		(1,423	)
Savings deposits		11			(92	)		(81	)
Time deposits—core (3)		(323	)		(455	)		(778	)
Total interest-bearing core deposits		(466	)		(1,816	)		(2,282	)
Time deposits—non-core		443			(337	)		106
Federal funds purchased		(12	)		—			(12	)
FHLB & FRB borrowings		1,236			(1,389	)		(153	)
Trust preferred		—			17			17
Total interest-bearing wholesale funding		1,667			(1,709	)		(42	)
Total interest-bearing liabilities		1,201			(3,525	)		(2,324	)
Net interest income(1)	$	864		$	(1,001	)	$	(137	)

⁽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 $625 and $366 for the nine months ended September 30, 2012 and 2011, respectively. Net interest margin was positively impacted by 7 and 4 basis points, respectively.

⁽²⁾  Interest income includes recognized loan origination fees of $142 and $15 for the nine months ended September 30, 2012 and 2011, respectively.

⁽³⁾ Defined by the Company as local non-public time deposits, including local non-public time deposits in excess of $100.

The year-to-date September 30, 2012, rate/volume analysis shows that net interest income decreased by $137 from the same period last year. Interest income including loan fees through September 30, 2012, declined by $2,461 from last year as higher volumes of earning assets increased interest income by $2,065, which was more than offset by a $4,526 decline in interest income due to lower rates. Interest expense through September 30, 2012, was down $2,324 when compared to the same period last year. The rate/volume analysis shows interest expense on core deposits fell by $2,282 due to both lower volumes and lower rates. Interest expense on wholesale funding was relatively unchanged at September 30, 2012, compared to the September 30, 2012, as increased interest expense due to higher volumes was offset by a reduction in interest expense due to 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 September 30, 2012, and September 30, 2011:

	Three months ended						Nine months ended
	September 30,						September 30,
	2012			2011			2012			2011
Balance, beginning of period	$	16,175		$	15,326		$	14,941		$	16,570
Provision charged to income		—			1,750			1,900			5,900
Loans charged against allowance		(1,140	)		(2,208	)		(2,809	)		(8,085	)
Recoveries credited to allowance		1,248			419			2,251			902
Balance, end of period	$	16,283		$	15,287		$	16,283		$	15,287

The year-to-date provision for loan losses through September 30, 2012, was $1,900, compared to $5,900 for the same period last year. The decrease in the provision was primarily the result of a reduction in net charge offs, classified assets and nonperforming assets. Net charge offs through September 30, 2012, were $558, or annualized 0.09% of average loans, compared to net charge offs of $7,183, or 1.15% of average loans recorded the same period in 2011. The Company’s classified assets at September 30, 2012, were 32.43% of regulatory capital compared to 38.91% and 45.51% of regulatory capital at December 31, 2011, and September 30, 2011, respectively. The allowance for loan losses for outstanding loans at September 30, 2012, was $16,283, or 1.95% of outstanding loans, compared to 1.82% and 1.85% of outstanding loans at December 31, 2011, and September 30, 2011, respectively.

At September 30, 2012, $10,516 of loans (net of government guarantees) were classified as impaired. A specific allowance of approximately $72 (included in the ending allowance at September 30, 2012) was assigned to these loans. That compares to impaired loans of $30,094, and a specific allowance assigned of $455, at December 31, 2011.

Total nonperforming assets, net of government guarantees, were $28,935 at September 30, 2012, or 2.14% of total assets. That compares to nonperforming assets of $37,099, or 2.92% of total assets, at December 31, 2011, and $44,528, or 3.56% of total assets, at September 30, 2011. Nonperforming assets at September 30, 2012 consisted of $9,700 in nonaccrual loans (net of government guarantees), $0 in loans 90 days past due and still accruing interest, and $19,235 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:

Nonperforming Assets and Asset Quality Ratios

(In thousands)

(Unaudited)

	September 30,			December 31,			September 30,
	2012			2011			2011
NONPERFORMING ASSETS
Non-accrual loans
Real estate secured loans:
Permanent loans:
Multifamily residential	$	—		$	—		$	—
Residential 1-4 family		2,517			3,426			3,393
Owner-occupied commercial		3,624			5,138			4,704
Non-owner-occupied commercial		—			575			1,313
Total permanent real estate loans		6,141			9,139			9,410
Construction loans:
Multifamily residential		—			—			—
Residential 1-4 family		—			757			1,596
Commercial real estate		—			933			1,500
Commercial bare land and acquisition & development		—			7,837			13,027
Residential bare land and acquisition & development		104			1,929			1,451
Total construction real estate loans		104			11,456			17,574
Total real estate loans		6,245			20,595			26,984
Commercial loans		4,578			5,999			6,732
Total nonaccrual loans		10,823			26,594			33,716
90 days past due and accruing interest		—			—			—
Total nonperforming loans		10,823			26,594			33,716
Nonperforming loans guaranteed by government		(1,123	)		(495	)		(851	)
Net nonperforming loans		9,700			26,099			32,865
Other real estate owned		19,235			11,000			11,663
Total nonperforming assets, net of guaranteed loans	$	28,935		$	37,099		$	44,528
ASSET QUALITY RATIOS
Allowance for loan losses as a percentage of total loans outstanding, net of loans held for sale		1.95	%		1.82	%		1.85	%
Allowance for loan losses as a percentage of total nonperforming loans, net of government guarantees		167.87	%		57.25	%		46.51	%
Net loan charge offs as a percentage of average loans, annualized		-0.05	%		1.74	%		1.15	%
Net nonperforming loans as a percentage of total loans		1.16	%		3.18	%		3.97	%
Nonperforming assets as a percentage of total assets		2.14	%		2.92	%		3.56	%
Consolidated classified asset ratio(1)		32.43	%		38.91	%		45.51	%

⁽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.

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Nonperforming assets at September 30, 2012, declined $15,593 from the same period last year, and $8,164 from December 31, 2011. Nonperforming loans net of government guarantees, at September 30, 2012, decreased $23,165 from the same period last year, and declined $16,399 since December 31, 2011. At September 30, 2012, other real estate owned increased $8,235 and $7,572 over December 31, 2011, and September 30, 2011, respectively. During the third quarter 2012 and as expected, a commercial property assemblage was transferred from nonaccrual loans to other real estate owned. In total during the third quarter 2012, $13,242 of loans were transferred from nonaccrual loans to other real estate owned, which Management expects will allow the Company to begin prudent marketing of the properties. Going forward, the timing of individual resolutions of problem assets is difficult to predict; however, the Company believes effective plans and strategies are in place that suggest a continuing decline in problem assets during the remainder of 2012 and into 2013.

Noninterest Income

Year-to-date September 30, 2012, noninterest income was $4,358, down $189 or 4% from the same period last year. The prior year’s noninterest income included $825 of revenue from the gain on the sale of securities, while in the first nine months of 2012 there were no sales of securities. Excluding this gain on sale of securities in 2011, year-to-date September 30, 2012, noninterest income was up $636 or 17% over the same period last year. The increase in 2012 noninterest income when compared to last year was primarily attributable to the $432 in revenue from the BOLI investment and a $250 increase in the other income category, which was primarily generated from rental income on other real estate owned properties. In addition, account service charge revenues increased $31 or 2% over the same period last year.

On a linked-quarter basis, third quarter 2012 noninterest income was down $78 from second quarter 2012 noninterest income. The linked-quarter decline was mainly due to a seasonal decrease in merchant bankcard fees. Looking forward to the fourth quarter 2012, noninterest income is expected to be up slightly from third quarter 2012 as merchant bankcard activity is projected to increase.

Noninterest Expense

Year-to-date September 30, 2012, noninterest expense was $26,198, down $1,092 or 4% from the same period in 2011. The decline in noninterest expense was primarily due to a decrease in FDIC assessments, other real estate expense, and the other expense category, that was partially offset by an increase in salaries and employee benefits. FDIC assessments through September 30, 2012, were $814, down $454 or 36% from the same period last year. The decline in FDIC assessments was primarily due to a change in assessment methodology based on net tangible assets versus deposits that became effective in second quarter 2011. Other real estate expense was $1,082 through September 30, 2012, down $1,064 or 50% from last year reflecting a lower level of valuation write downs in the current year when compared to last year. The other expense category through September 30, 2012, was $5,407, down $124 or 2% from the same period last year. The drop in the other expense category was primarily due to a decrease in legal fees related to problem assets. Offsetting a portion of these declines in noninterest expense was a $585 or 4% increase in personnel expense. Within the personnel expense category, base salaries, equity-based compensation, bonus expense and group insurance increased $252, $221, $178, and $256, respectively. The increase in these areas was partially offset by increased loan origination costs of $456, which are booked as a reduction of salary expense.

On a linked-quarter basis, third quarter 2012 noninterest expense was down $50 from second quarter 2012 as an increase in other real estate expense was more than offset by a decline in personnel expense. Looking forward to the fourth quarter 2012, noninterest expense is expected to be flat with or down from third quarter 2012 levels as other real estate expense is expected to decline.

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BALANCE SHEET

Loans

At September 30, 2012, outstanding loans, net of deferred fees, were $836,205, up $16,053 from December 31, 2011, and up $8,393 from September 30, 2011. A summary of outstanding loans by market at September 30, 2012, December 31, 2011, and September 30, 2011, follows:

Summary of Outstanding Loans

(dollars in thousands)

	September 30,		December 31,		September 30,
	2012		2011		2011
Eugene market gross loans, period end	$	239,245	$	236,256	$	248,525
Portland market gross loans, period end		375,234		380,071		374,322
Seattle market gross loans, period end		151,745		159,767		167,112
Out of market dental gross loans, period end		69,981		44,058		37,853
Total gross loans, period end	$	836,205	$	820,152	$	827,812

The Eugene market showed an increase in outstanding loans during the first nine months of 2012, while the Portland and Seattle markets contracted slightly. The growth in the Eugene market was the result of an increase in commercial and industrial and owner-occupied commercial real estate loans. Both Portland and Seattle also experienced an increase in commercial and industrial and owner-occupied loans, but growth in this area was offset continued contraction in construction loans and non-owner occupied loans. All three markets continued to increased loan activity and loan production pipelines are improving. 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.

Outstanding loans to dental professionals at September 30, 2012, totaled $245,606 and represented 29.3% of total outstanding loans compared to dental professional loans of $208,489 or 25.4% at December 31, 2011, and $196,094 or 23.7% at September 30, 2011.

The fastest growing area of lending for the Company is out-of-market dental loans, comprised solely of loans to dental practitioners. During 2011, the Company expanded its lending to dental professionals nationally in selected markets. Out-of-market health care loans grew by $25,923 or 58.8% during the first nine months of 2012 and were up $32,128 or 84.9% over the same period in 2011. The Company expects growth in this area of lending to continue to expand during fourth quarter 2012 and in 2013.

Securities

At September 30, 2012, the securities available-for-sale totaled $406,175, up $18,797 over the prior quarter end, and up $59,633 over December 31, 2011. The securities portfolio represented 30.0% of total assets at September 30, 2012, up from 27.2% at September 30, 2011. At September 30, 2012, the portfolio had a pre-tax unrealized gain of $10,180 compared to a pre-tax unrealized gain of $5,760 at December 31, 2011. During the first nine months of 2012, the Company purchased $133,800 in new securities, while receiving $72,703 in cash flow from the portfolio. There were no securities sales during the first nine months of 2012. Purchases through September 30, 2012, were high-quality U.S. government agencies, agency mortgage-backed securities and longer-term tax-exempt municipals. At September 30, 2012, taxable and tax-exempt municipal securities were $79,796 and comprised 19.7% of the total portfolio. Management believes that it exercised caution in its purchases of municipals, relying on credit reports, demographic information, population growth, unemployment levels, changes in housing prices, and general fund and reserve balances. The Company does not have material exposure to any single municipality. The 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 $84,100, primarily from the mortgage-backed portion of the portfolio. At September 30, 2012, the portfolio had an average life of 4.0 years and

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duration of 3.5 years, relatively 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.

At September 30, 2012, $9,023 or 2.2% of the total securities portfolio was composed of private-label mortgage-backed securities. At September 30, 2012, $3,261 of the Company’s private-label mortgage-backed securities were classified as substandard. 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 the first nine months of 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 were considered only temporarily impaired at September 30, 2012. The Company presently 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 were 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 resulted from current economic conditions. Although yields on these securities may be below market rates during the period, no loss of principal is presently expected.

Goodwill and Intangible Assets

At September 30, 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 September 30, 2012, the Company had $37 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 GAAP, 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 non-public local time deposits, including non-public local time deposits in excess of $100, were $882,614 and represented 90% of total deposits at September 30, 2012. Outstanding core deposits at September 30, 2012, were down $3,229 from December 31, 2011, and up $1,887 over September 30, 2011, respectively. The decline in core deposits during the first nine months of 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 withdrawn from the bank shortly after year-end. The large depositors are primarily in the Eugene and Portland markets, both of which show a decline in core deposits during the first nine months of 2012. The Seattle market showed an increase of $21,511 or 17.7% and $19,236 or 15.5% over December 31, 2011 and September 30, 2011, respectively. Growth of Seattle market core deposits was primarily centered in the nonprofit segment.

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A summary of outstanding core deposits and average core deposits by market and other deposits classified as wholesale funding at September 30, 2012, December 31, 2011, and September 30, 2011 follows:

Summary of Outstanding Core Deposits

(dollars in thousands)

	Period Ended
	September 30,		December 31,		September 30,
	2012		2011		2011
Eugene market core deposits, period end(1)	$	512,842	$	526,928	$	514,453
Portland market core deposits, period end(1)		226,576		237,230		242,341
Seattle market core deposits, period end(1)		143,196		121,685		123,933
Total core deposits, period end(1)		882,614		885,843		880,727
Other deposits, period end		97,548		79,411		70,890
Total deposits, period end	$	980,162	$	965,254	$	951,617
	Three months ended
	September 30,		December 31,		September 30,
	2012		2011		2011
Eugene market core deposits, average(1)	$	508,927	$	509,882	$	507,644
Portland market core deposits, average(1)		229,913		239,459		252,903
Seattle market core deposits, average(1)		140,720		123,421		126,837
Total cor1e deposits, average(1)		879,560		872,762		887,384
Other deposits, average		99,852		73,988		71,940
Total deposits, average	$	979,412	$	946,750	$	959,324

⁽¹⁾  Core deposits include all demand, savings, and interest checking accounts, plus all local time deposits including local time deposits in excess of $100, 000. time deposits in excess of $100.

Junior Subordinated Debentures

The Company had $8,248 in junior subordinated debentures at September 30, 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 September 30, 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 Report on 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 September 30, 2012, was $182,779, up $3,913 from December 31, 2011, and up $1,709 from September 30, 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 a 12-month period. During the third quarter 2012, the Company repurchased 166,612 shares at a weighted average price of $9.00 per share including commissions. Since the inception of the plan, the Company has repurchased 576,537 shares at a weighted average price of $8.82. Total shares repurchased to date amount to 3.1% of the total outstanding shares at the commencement of the repurchase plan. During the remainder of 2012, the Company plans to use the repurchase plan, regular dividends, and special dividends if necessary in order to maintain capital at levels similar to December 31, 2011. For additional details regarding the changes in equity, please see the Consolidated Statements of Changes in Shareholders’ Equity 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 12.53%, 17.37%, and 18.62%, respectively, at September 30, 2012, all ratios being well above the minimum “well-capitalized” designation.

In June 2012, the federal banking agencies each issued notices of proposed rule-making that would revise regulatory capital rules for U.S. banking organizations and align them with the Basel III capital framework issued by the Basel Committee on Banking Supervision. The proposed rules will be phased in over the next 10 years, beginning January 1, 2013. The proposed revisions to the agencies’ capital rules include, among other things, revised risk-based and leverage capital requirements, implementation of a new common equity Tier 1 minimum capital requirement, and a higher minimum Tier 1 capital requirement. Under the proposed rules, our trust preferred securities would be phased out of Tier 1 capital at a rate of 10% per year over a 10-year period. Please refer to Item 1A “Risk Factors” for more information about these proposed rules. The proposed rules are not yet final and are subject to further modification by the federal banking agencies. The Company is evaluating the impact that the proposed rules would have on its capital management policy and expects to exceed the minimum capital requirements within the prescribed implementation timelines.

In general, the Company has generally paid cash dividends on a quarterly basis. During the third quarter 2012, the Company announced a change in its dividend schedule. Going forward, cash dividends, when and if declared, will be declared and announced simultaneously with the Company’s quarterly earnings releases in January, April, July, and October each year with dividends to be paid in February, May, August, and November. 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 July 24, 2012, meeting, approved a regular cash dividend of $0.06 per share and a special dividend of $0.03 per share that was paid on August 13, 2012. Through the end of the third quarter 2012, the Company has paid regular cash dividends to shareholders totaling $0.18 per share and special cash dividends to shareholders of $0.03 per share. Subsequent to the end of the quarter, on October 16, 2012, the Company increased its regular quarterly cash dividend to $0.07 per share and declared a special cash dividend of $0.04 per share both to be paid on November 13, 2012. The Company presently projects that existing capital will be sufficient to fund anticipated organic asset growth, while maintaining a “well-capitalized” designation from all regulatory agencies.

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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 September 30, 2012, the Company had $153,996 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 September 30, 2012, the Company had $1,845 in letters of credit and financial guarantees written.

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 one 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 (ALCO).

Core deposits at September 30, 2012, were $882,614 and represented 90% of total deposits. Core deposits at September 30, 2012 were relatively unchanged from December 31, 2011, primarily as a result of temporary balances of approximately $20,000 held by a single large depositor at the Company on December 31, 2011, which were withdrawn shortly following year-end. During the third quarter 2012, the Company experienced growth in outstanding core deposits of $30,833 over the prior quarter-end. The Company experienced its typical seasonal core deposit pattern in 2012, where outflows historically occur during the first six months of the year followed by growth during the second half of the year. The Company experienced an increase in outstanding loans and the securities portfolio during the third quarter 2012, which was funded through core deposit growth and 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 represented 30% of total assets at September 30, 2012, compared to 27% at September 30, 2011. At September 30, 2012, $20,071 of the securities portfolio was pledged to support public deposits, leaving $386,104 of the securities portfolio unencumbered and available-for-sale at such date. The securities portfolio is also available to fund loan growth as $84,100 in cash flows are projected from the portfolio over the next 12 months. In addition, at September 30, 2012, the Company had $40,136 of government guaranteed loans that could be sold within 30 days 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 September 30, 2012, 34 large deposit relationships with the Company accounted for $304,798 or 34.5% of total outstanding core deposits. The single largest client represented 5.1% of outstanding core deposits at September 30, 2012. The loss of this deposit relationship or other large deposit relationships could cause an adverse effect on short-term liquidity. The Company

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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 the Company’s 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 September 30, 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 $423,939. The Company’s secured lines with the FHLB and FRB were limited by the amount of collateral pledged. At September 30, 2012, the Company had pledged $229,058 in discounted collateral value in commercial real estate loans, first and second lien single-family residential loans, multi-family loans, to the FHLB. Additionally, certain commercial and commercial real estate loans with a discounted value of $86,881 were pledged to the FRB under the Company’s Borrower-In-Custody program. The Company’s unsecured correspondent bank lines were $108,000. At September 30, 2012, the Company had $165,000 in borrowings outstanding from the FHLB, $0 outstanding with the Federal Reserve Bank of San Francisco, and $9,385 outstanding on its overnight correspondent bank lines, leaving a total of $249,554 available on its secured and unsecured borrowing lines at such date.

As disclosed in the Consolidated Statements of Cash Flows in Item 1 of this Report, net cash provided by operating activities was $21,618 during the nine months ended September 30, 2012. The difference between cash provided by operating activities and net income largely consisted of non-cash items including a $1,900 provision for loan losses and depreciation and amortization of $7,145. Net cash of $87,339 was used in investing activities, during the nine months ended September 30, 2012, consisting principally of $133,800 in purchases of investment securities and a net loan principal increase of $30,135, which was partially offset by proceeds from maturities of investment securities of $72,703. Cash provided by financing activities was $66,754, during the nine months ended September 30, 2012 and primarily consisted of an increase in deposits and FHLB borrowings.

Item 3 Quantitative and Qualitative Disclosures About Market Risk

Management believes there has been no material change in the Company’s exposure to market risk. Readers are referred to the Company’s 2011 Annual Report on Form 10-K, 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 September 30, 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 third 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.

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PART II OTHER INFORMATION

Item 1 Legal Proceedings

During the second quarter 2012, a total of $2,758 in funds disbursed to Pacific Continental Bank by Order of the United States Bankruptcy Court for the District of Arizona in the case In re Washington Coast I, L.L.C., Structural Investments & Planning IV, L.L.C., pending appeal to the 9th Circuit Bankruptcy Appellate Panel of the Final Judgment in adversary matter Pacific Continental Bank v. Resource Funding, Inc. These funds were applied as a reduction to nonperforming loans during the quarter. Management believes that the outcome of the appeal should be in favor of Pacific Continental Bank; however, if the Final Judgment is overturned, reversed or vacated, Pacific Continental Bank will be required to return the disbursed funds to the Court Clerk.

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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; there can be no assurance that U.S. governmental measures responding to these challenges will successfully address these circumstances; the U.S. government continues to face significant fiscal and budgetary challenges which if not resolved, may further exacerbate U.S. economic conditions.

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.

• 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 earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. Refer to “Supervision and Regulation” in Item 1 of our 2011 Annual Report on Form 10-K for discussion of certain of these measures. In response to the adverse financial and economic developments that have, since 2008, impacted the U.S. and global economies and financial markets, and presented challenges for the banking and financial services industry, various significant economic and monetary stimulus measures have been enacted and considered by the U.S. Congress. It cannot be predicted whether these or other U.S. governmental actions will result in lasting improvement in financial and economic conditions affecting the U.S. banking industry and the U.S. economy. It also cannot be predicted whether and to what extent the efforts of the U.S. government to combat the mixed economic conditions will continue. If, notwithstanding the government’s fiscal and monetary measures, the U.S. economy were to deteriorate, this would present significant challenges for the U.S. banking and financial services industry and for our Company.

The challenges to the level of economic activity in the U.S., and, therefore, to the banking industry, have also been exacerbated by the extensive political disagreements regarding the statutory debt limit on U.S. federal government obligations and measures to address the substantial federal deficits. Following enactment of federal legislation in August 2011 which averted a default by the U.S. federal government on its sovereign obligations by raising the statutory debt limit and which established a process whereby cuts in federal spending may be accomplished, Standard & Poor’s Ratings Services (Standard & Poor’s) lowered its long-term sovereign credit rating on the U.S. to “AA+” from “AAA” while affirming its highest rating on short-term U.S. obligations. Standard & Poor’s also stated that its outlook on the long-term rating remained negative. At the present time, the other two major U.S. credit rating agencies have not lowered their credit rating on the U.S.; however, both of them have stated that their outlook on the U.S. is negative. Although it is not possible to predict the long-term impact of these developments on the U.S. economy in general and the banking industry in particular, the downgrade by Standard & Poor’s and any further downgrades by it or other rating agencies could increase over time the U.S. federal government’s cost of borrowing which may worsen its fiscal challenges, as well as generating upward pressure on interest rates generally in the U.S. which could, in turn, have adverse consequences for borrowers and the level of business activity. As a result of the August 2011 federal budget legislation, unless Congress and the President agree on new budget legislation by the

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end of 2012, automatic federal spending cuts of some $1.2 trillion over nine years, to be spread between defense and non-defense spending, will be triggered. In addition, absent further federal tax legislation, the federal income tax reductions instituted during the Bush Administration will expire at the end of 2012. Any of the foregoing developments could generate further uncertainties and challenges for the U.S. economy which, in turn, could adversely affect the prospects of the banking industry in the U.S. and our business.

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 further 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). 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 29.3% of our total loan portfolio at September 30, 2012. While we apply credit practices which we believe to be prudent to these loans as well as all the other loans in our portfolio, 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 September 30, 2012, our nonperforming loans (which include all nonaccrual loans, net of government guarantees) were 1.16% percent of the loan portfolio. At September 30, 2012, our nonperforming assets (which include foreclosed real estate) were 2.14% 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 at an acceptable cost for continued loan growth 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 funding 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 funding 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 which would adversely affect our results of operations.

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.

On October 17, 2012, we announced a quarterly dividend of $0.07 per share, payable November 13, 2012, an increase of $0.01 per share over the prior quarter’s dividend and declared a special cash dividend of $0.04 per share. Through September 30, 2012, the Company has paid total cash dividends of $0.22 per share. For the year ended December 31, 2011, the Company paid $0.10 per share in dividends. Our ability to pay dividends on our common stock depends on a variety of factors. It is possible in the future that we may not be able to continue paying

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quarterly dividends commensurate with historic levels, if at all. As a holding company, a substantial portion of our cash flow typically comes from dividends our bank subsidiary pays to us. Cash dividends will depend on sufficient earnings to support them and adherence to bank regulatory requirements. If the Bank is not able to pay dividends to the Company, the Company may not be able to pay dividends on its common stock. Consequently, the inability to receive dividends from the Bank could adversely affect the Company’s financial condition, results of operations and prospects.

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 September 30, 2012, we had stock in the FHLB totaling $10,557. The FHLB stock held by us is carried at cost and is subject to recoverability testing under applicable accounting standards. On September 24, 2012, FHLB redeemed $95 of the bank’s FHLB stock. As of September 30, 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 September 30, 2012, we had $22,031 of goodwill on our balance sheet. In accordance with GAAP, 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. At September 30, 2012, we did not recognize an impairment charge related to our goodwill. Future evaluations of goodwill may result in findings of impairment and write downs, which could be material.

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 the effects of recent and pending federal legislation or of changes in, or supervisory enforcement of, banking or other laws and regulations could adversely affect us.

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

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regulation by the Securities and Exchange Commission. Any change in applicable regulations or federal, state or local legislation could have a substantial impact on us and our operations. Additional legislation and regulations that could significantly affect our powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of operations.

In that regard, 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.

In June 2012, the Federal Reserve and the other federal banking agencies issued notices of proposed rule-making to implement the third installment of the Basel Accords (the “Basel III”) for U.S. financial institutions. The proposed rules will be phased in over the next 10 years, beginning January 1, 2013. Basel III sets forth more robust global regulatory standards on capital adequacy, leverage ratios, market liquidity risk, and stress testing, which may pose to be stricter than standards currently in place. This proposal is generally consistent with Basel III and also would implement aspects of the Dodd-Frank Act. The proposed revisions to the agencies’ capital rules include, among other things, revised risk-based and leverage capital requirements, implementation of a new common equity Tier 1 minimum capital requirement, and a higher minimum Tier 1 capital requirement. Under the proposed rules, our trust preferred securities would be phased out of Tier 1 capital at a rate of 10% per year over a 10-year period. The implementation of these new standards could have an adverse impact on our financial position and future earnings due to the inclusion of Tier 1 capital as a core capital component of Basel III and because of the heightened minimum capital requirements that will be implemented. While the ultimate implementation of these proposals is subject to the discretion of the federal bank regulators and there is no assurance that these proposals will be adopted in their current form, these proposals, if adopted, could restrict our ability to grow during favorable market conditions or require us to raise additional capital and liquidity. The application of more stringent capital requirements would, among other things, result in lower returns on invested capital and result in regulatory actions if we were unable to comply with said requirements. As a result, our business, results of operations, financial condition or prospects could be adversely affected.

We are also part of the FDIC’s Transaction Account Guarantee (TAG) program, which began in December 2008 and has been extended several times over the last several years. Under the TAG program, all noninterest-bearing transaction accounts with participating institutions, such as ours, are fully guaranteed by the FDIC for the full amount of the account. The TAG program is currently scheduled to terminate on December 31, 2012. If the program is terminated, such accounts would return to being covered under the standard FDIC general deposit insurance rules. If the unlimited FDIC guarantee of demand deposit accounts is not extended by Congress, some existing or prospective deposit customers of banks generally, including the Bank, may be inclined to pursue other investment alternatives, which could adversely affect our financial condition and results of operations.

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.

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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. Recently, the banking industry has operated in an extremely low interest rate environment relative to historical averages and the Federal Reserve’s current monetary policies are expected to encourage the continuation of persistently low short-term and long-term interest rates for the next few years, which would place downward pressure on our net interest margin.

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.

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-security 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-security 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.

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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-security 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-security 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.

Risks associated with potential acquisitions and expansion activities may disrupt our business and adversely affect our operating results.

We regularly evaluate potential acquisitions and expansion opportunities. We have in the past, and may in the future, seek to expand our business by acquiring other businesses which we believe will enhance our business. We cannot predict the frequency, size or timing of our acquisitions, as this will depend on the availability of prospective target opportunities at valuation levels we find attractive and the competition for such opportunities from other parties. There can be no assurance that our acquisitions will have the anticipated positive results, including results related to: the total cost of integration; the retention of key personnel; the time required to complete the integration; the amount of longer-term cost savings; continued growth; or the overall performance of the acquired company or combined entity. We also may encounter difficulties in obtaining required regulatory approvals and unexpected contingent liabilities can arise from the businesses we acquire. Further, the asset quality or other financial characteristics of a business or assets we may acquire may deteriorate after an acquisition agreement is signed or after an acquisition closes, which could result in impairment or other expenses and charges which would reduce our operating results. If we are not able to integrate successfully past or future acquisitions, there is a risk that results of operations could be adversely affected. 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.

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

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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

The Company adopted a repurchase plan to purchase up to five percent of the Company’s outstanding shares. For the nine months ended September 30, 2012, the Company purchased a total of 576,537 shares of common stock at a weighted average price of $8.82 per share.

Period	Average Price Paid Per Share		Total Number of Shares Purchased as part of Publicly Announced Plan1		Maximum Number of Shares that May Yet Be Purchased Under the Plan
January 1 – 31, 2012		n/a		—		—
February 1 – 29, 2012	$	8.48		128,045		793,955
March 1 – 31, 2012	$	8.78		114,124		679,831
April 1 – 30, 2012	$	9.01		26,094		653,737
May 1 – 31, 2012	$	8.94		64,673		589,064
June 1 – 30, 2012	$	8.92		76,989		512,075
July 1 – 31, 2012	$	9.00		65,189		446,886
August 1 – 31, 2012	$	9.04		51,740		395,146
September 1 – 30, 2012	$	8.98		49,683		345,463

(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

Not applicable

Item 5 Other Information

None

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 September 30, 2012, is formatted in XBRL: (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Income, (iii) the Unaudited Consolidated Statements of Comprehensive Income, (iv) the Unaudited Consolidated Statements of Changes in Shareholders’ Equity (v) the Unaudited Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements.

* 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.

	PACIFIC CONTINENTAL CORPORATION (Registrant)
Dated    November 7, 2012	/s/ Hal Brown
	Hal Brown
	Chief Executive Officer
Dated    November 7, 2012	/s/ Michael A. Reynolds
	Michael A. Reynolds
	Executive Vice President and Chief Financial Officer

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