Pacific Continental 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES & EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2013.

OR

¨ 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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller Reporting company	¨

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

The number of shares of common stock of the registrant as of November 1, 2013 was 17,888,310

PACIFIC CONTINENTAL CORPORATION

FORM 10-Q

QUARTERLY REPORT

TABLE OF CONTENTS

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	44
ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	66
ITEM 4	Controls and Procedures	66
PART II	OTHER INFORMATION	66
ITEM 1	Legal Proceedings	66
ITEM 1A	Risk Factors	66
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	72
ITEM 3	Defaults Upon Senior Securities	72
ITEM 4	Mine Safety Disclosures	72
ITEM 5	Other Information	72
ITEM 6	Exhibits	72

2

PART I FINANCIAL INFORMATION

ITEM 1 Financial Statements

Pacific Continental Corporation and Subsidiary

Consolidated Balance Sheets

(In thousands)

(Unaudited)

	September 30, 2013		December 31, 2012		September 30, 2012
ASSETS
Cash and due from banks	$	42,555	$	28,607	$	20,840
Interest-bearing deposits with banks		54		94		53
Total cash and cash equivalents		42,609		28,701		20,893
Securities available-for-sale		347,506		389,885		406,175
Loans, less allowance for loan losses and net deferred fees		960,916		854,071		819,922
Interest receivable		4,608		4,520		4,861
Federal Home Loan Bank stock		10,523		10,462		10,557
Property and equipment, net of accumulated depreciation		19,116		19,238		19,478
Goodwill and intangible assets		23,710		22,031		22,068
Deferred tax asset		9,438		6,230		6,803
Taxes receivable		130		—		—
Other real estate owned		16,602		17,972		19,235
Prepaid FDIC assessment		—		1,746		1,998
Bank-owned life insurance		16,008		15,621		15,469
Other assets		3,712		3,010		2,963
Total assets	$	1,454,878	$	1,373,487	$	1,350,422
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest-bearing demand	$	379,598	$	329,825	$	304,016
Savings and interest-bearing checking		565,204		554,693		520,218
Time $100,000 and over		81,569		73,610		77,790
Other time		91,158		88,026		78,138
Total deposits		1,117,529		1,046,154		980,162
Federal funds and overnight funds purchased		—		11,570		9,385
Federal Home Loan Bank borrowings		145,000		118,000		165,000
Junior subordinated debentures		8,248		8,248		8,248
Accrued interest and other payables		4,423		6,134		4,848
Total liabilities		1,275,200		1,190,106		1,167,643
Shareholders’ equity
Common stock, shares authorized: 50,000,000; shares issued and outstanding: 17,888,251 at September 30, 2013, 17,835,088 at December 31, 2012, and 17,900,188 at September 30, 2012		133,597		133,017		133,385
Retained earnings		45,533		44,533		43,113
Accumulated other comprehensive income		548		5,831		6,281
		179,678		183,381		182,779
Total liabilities and shareholders’ equity	$	1,454,878	$	1,373,487	$	1,350,422

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,
	2013		2012		2013			2012
Interest and dividend income
Loans	$	14,028	$	11,971	$	39,793		$	36,089
Taxable securities		1,489		1,490		4,164			4,886
Tax-exempt securities		488		420		1,430			1,162
Federal funds sold & interest-bearing deposits with banks		2		2		7			4
		16,007		13,883		45,394			42,141
Interest expense
Deposits		801		992		2,586			3,149
Federal Home Loan Bank & Federal Reserve borrowings		292		364		905			1,259
Junior subordinated debentures		51		38		140			116
Federal funds purchased		5		4		12			20
		1,149		1,398		3,643			4,544
Net interest income		14,858		12,485		41,751			37,597
Provision for loan losses		—		—		250			1,900
Net interest income after provision for loan losses		14,858		12,485		41,501			35,697
Noninterest income
Service charges on deposit accounts		487		463		1,436			1,359
Other fee income, principally bankcard		432		408		1,217			1,205
Mortgage banking income		—		—		—			72
Bank-owned life insurance income		131		157		387			432
Net loss on sale of investment securities		—		—		(8	)		—
Impairment losses on investment securities (OTTI)		—		—		(16	)		—
Other noninterest income		397		387		1,248			1,290
		1,447		1,415		4,264			4,358
Noninterest expense
Salaries and employee benefits		5,541		4,720		16,344			14,721
Premises and equipment		919		838		2,746			2,553
Data processing		659		538		1,954			1,543
Legal and professional services		421		435		1,460			1,378
Business development		421		411		1,375			1,088
FDIC insurance assessment		231		285		674			814
Bankcard processing		150		147		418			440
Other real estate expense		1,185		466		1,762			1,082
Merger related expense		—		—		1,246			—
Other noninterest expense		879		875		2,708			2,579
		10,406		8,715		30,687			26,198
Income before provision for income taxes		5,899		5,185		15,078			13,857
Provision for income taxes		1,959		1,747		4,963			4,587
Net income	$	3,940	$	3,438	$	10,115		$	9,270
Earnings per share
Basic	$	0.22	$	0.19	$	0.57		$	0.51
Diluted	$	0.22	$	0.19	$	0.56		$	0.51
Weighted average shares outstanding
Basic		17,888,182		17,978,081		17,865,582			18,166,377
Common stock equivalents attributable to stock-based awards		221,100		152,964		191,046			152,957
Diluted		18,109,282		18,131,045		18,056,628			18,319,334

See accompanying notes.

4

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Net income	$	3,940		$	3,438		$	10,115		$	9,270
Other comprehensive income (loss):
Available-for-sale securities:
Unrealized gain (loss) arising during the quarter		528			2,679			(8,998	)		4,420
Reclassification adjustment for losses realized in net income		—			—			24			—
Income tax (expense) benefit		(206	)		(1,026	)		3,500			(1,693	)
Derivative agreements—cash flow hedge
Unrealized (loss) gain arising during the quarter		(38	)		—			313			—
Income tax benefit (expense)		15			—			(122	)		—
Total other comprehensive (loss) income, net of tax		299			1,653			(5,283	)		2,727
Total comprehensive income	$	4,239		$	5,091		$	4,832		$	11,997

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, 2011		18,435,084		$	137,844		$	37,468		$	3,554		$	178,866
Net income		—			—			12,653			—			12,653
Other comprehensive income, net of tax		—			—			—			2,277			2,277
Comprehensive income		—			—			—			—			14,930
Stock issuance		7,987			70			—			—			70
Stock options exercised and related tax benefit		10,666			78			—			—			78
Stock options exercised		18,333			130			—			—			130
Shares exchanged in payment of option exercise consideration		(14,166	)		(129	)		—			—			(129	)
Stock repurchased		(641,637	)		(5,676	)		—			—			(5,676	)
Share based compensation net of vested RSUs surrendered to cover tax consequences		18,821			700			—			—			700
Cash dividends		—			—			(5,588	)		—			(5,588	)
Balance, December 31, 2012		17,835,088		$	133,017		$	44,533		$	5,831		$	183,381
Net income		—			—			10,115			—			10,115
Other comprehensive loss, net of tax		—			—			—			(5,283	)		(5,283	)
Comprehensive income		—			—			—			—			4,832
Stock issuance		10,179			110			—			—			110
Share based compensation net of vested RSUs and SARs surrendered to cover tax consequences		42,984			470			—			—			470
Cash dividends		—			—			(9,115	)		—			(9,115	)
Balance, September 30, 2013		17,888,251		$	133,597		$	45,533		$	548		$	179,678

See accompanying notes.

6

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine months ended September 30,
	2013			2012
Cash flows from operating activities:
Net income	$	10,115		$	9,270
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization, net of accretion		6,798			7,145
Valuation adjustment on foreclosed assets		1,436			1,093
Provision for loan losses		250			1,900
Deferred income taxes		620			2,190
BOLI income		(387	)		(431	)
Share-based compensation		877			654
Other than temporary impairment on investment securities		16			—
Loss on sale of investment securities		8			—
Loss on sale of foreclosed assets		—			(100	)
Excess tax benefit of stock options exercised		—			(11	)
Production of mortgage loans held-for-sale		—			(2,259	)
Proceeds from the sale of mortgage loans held-for-sale		— ��			3,317
Change in:
Interest receivable		162			(136	)
Deferred loan fees		114			90
Accrued interest payable and other liabilities		(1,758	)		(899	)
Income taxes receivable		1,415			—
Other assets		(462	)		(205	)
Net cash provided by operating activities		19,204			21,618
Cash flows from investing activities:
Proceeds from maturities and sales of available-for-sale investment securities		84,788			72,703
Purchase of available-for-sale investment securities		(56,908	)		(133,800	)
Net loan principal originations		(44,425	)		(30,135	)
Net purchase of property and equipment		(835	)		(394	)
Proceeds on sale of foreclosed assets		489			4,206
Purchase of energy tax credits		—			(14	)
Redemption of FHLB stock		293			95
Cash consideration paid, net of cash acquired in merger		(2,891	)		—
Net cash used by investing activities		(19,489	)		(87,339	)
Cash flows from financing activities:
Change in deposits		8,165			14,908
Change in federal funds purchased and FHLB short-term borrowings		6,237,175			72,585
FHLB advances repayment		(6,221,745	)		(53,000	)
Proceeds from FHLB term advances originated		—			41,000
Proceeds from stock options exercised		—			198
Income tax benefit from stock options exercised		—			11
Shares surrendered in exchange for option exercise consideration		—			(129	)
Dividends paid		(9,115	)		(3,625	)
Repurchase of common stock		—			(5,088	)
Vested RSUs surrendered by employee to cover tax consequence		(287	)		(105	)
Net cash provided by financing activities		14,193			66,755
Net decrease in cash and cash equivalents		13,908			1,034
Cash and cash equivalents, beginning of period		28,701			19,859
Cash and cash equivalents, end of period	$	42,609		$	20,893
Supplemental information:
Noncash investing and financing activities:
Transfers of loans to foreclosed assets	$	555		$	13,434
Change in fair value of securities, net of deferred income taxes	$	(5,283	)	$	2,727
Cash paid during the period for:
Income taxes	$	3,550		$	3,159
Interest	$	3,544		$	4,457

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 2012 Form 10-K filed March 14, 2013. The notes below are included due to material changes in the financial statements or to provide the reader with additional information not otherwise available. In preparing these financial statements, the Company has evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements. All dollar amounts in the following notes are expressed in thousands, except per share amounts or where otherwise indicated.

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

NOTE 1 – BASIS OF PRESENTATION

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

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

The balance sheet data as of December 31, 2012, was derived from audited financial statements, but does not include all disclosures contained in the Company’s 2012 Form 10-K. The interim consolidated financial statements should be read in conjunction with the December 31, 2012, consolidated financial statements, including the notes thereto, included in the Company’s 2012 Form 10-K.

8

NOTE 2 – SECURITIES AVAILABLE-FOR-SALE

The amortized cost and estimated fair values of securities available-for-sale at September 30, 2013, 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	$	8,109	$	—	$	(119	)	$	7,990	$	7,990	$	—
Obligations of states and political subdivisions		39,036		—		(2,230	)		36,806		35,831		975
Private-label mortgage-backed securities		2,987		—		(238	)		2,749		1,496		1,253
Mortgage-backed securities		104,093		—		(1,799	)		102,294		76,814		25,480
		154,225		—		(4,386	)		149,839		122,131		27,708
Unrealized Gain Positions
Obligations of U.S. government agencies		18,523		387		—			18,910
Obligations of states and political subdivisions		41,056		1,503		—			42,559
Private-label mortgage-backed securities		3,300		107		—			3,407
Mortgage-backed securities		129,817		2,974		—			132,791
		192,696		4,971		—			197,667
	$	346,921	$	4,971	$	(4,386	)	$	347,506

At September 30, 2013, unrealized losses existed on certain securities classified as obligations of U.S. government agencies, obligations of state and political subdivisions, private-label mortgage-backed securities and mortgage-backed securities. The unrealized losses on agency mortgage-backed securities and securities that are obligations of U.S. government agencies were deemed to be temporary, as these securities retain strong credit ratings, continue to perform adequately, and are backed by various government-sponsored enterprises (“GSEs”). These decreases in fair value are associated with the changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and are not due to concerns regarding the underlying credit of the issuers or the underlying collateral. The decline in value of these securities has resulted from current economic conditions. Although yields on these securities may be below market rates during the period, no loss of principal is expected.

At September 30, 2013, of the 447 investment securities held, there were 184 in unrealized loss positions. The unrealized loss associated with the investments of $27,708 in a continuous unrealized loss position for twelve months or longer was $808, of which $199 was related to private-label mortgage-backed securities, $545 was related to agency mortgage-backed securities, and $64 was related to obligations of states and political subdivisions. 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 2013, management reviewed all of its private-label mortgage-backed securities for the presence of other-than-temporary impairment (“OTTI”) and determined no additional OTTI was required. Management’s evaluation included the use of independently generated third-party credit surveillance reports that analyze the loans underlying each security. These reports include estimates of default rates and severities, life collateral loss rates, and static voluntary prepayment assumptions to generate estimated cash flows at the individual security level. Additionally, management considered factors such as downgraded credit ratings, severity and duration of the impairments, the stability of the issuers, and any discounts paid when the securities were purchased. Management has considered all available information related to the collectability of the impaired investment securities and believes that the estimated credit loss is appropriate.

9

Following is a tabular roll-forward of the amount of credit-related OTTI recognized in earnings during the three and nine months ended September 30, 2013, and 2012:

	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
Balance, beginning of period:	$	220	$	204	$	220	$	204
Additions:
Initial OTTI credit loss		—		—		—		—
Balance, end of period:	$	220	$	204	$	220	$	204

At September 30, 2013, seven of the Company’s private-label mortgage-backed securities with an amortized cost of $2,721 were classified as substandard as their underlying credit was considered impaired. Securities with an amortized cost of $3,281 and $3,261 were classified as substandard at December 31, 2012, and September 30, 2012, respectively.

At September 30, 2013, the projected average life of the securities portfolio was 4.77 years.

The amortized cost and estimated fair values of securities available-for-sale at December 31, 2012, were 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		12,540		—		(137	)		12,403		12,403		—
Private-label mortgage-backed securities		3,130		—		(435	)		2,695		—		2,696
Mortgage-backed securities		95,803		—		(850	)		94,953		77,797		14,155
		111,473		—		(1,422	)		110,051		90,200		16,851
Unrealized Gain Positions
Obligations of U.S. government agencies		17,175		669		—			17,844
Obligations of states and political subdivisions		64,845		4,253		—			69,098
Private-label mortgage-backed securities		5,704		201		—			5,905
Mortgage-backed securities		181,257		5,730		—			186,987
		268,981		10,853		—			279,834
	$	380,454	$	10,853	$	(1,422	)	$	389,885

At December 31, 2012, of the 450 investment securities held, there were 20 in unrealized loss positions. The unrealized loss associated with the investments of $19,851 in a continuous unrealized loss position for twelve months or longer was $604, of which $435 was related to private-label mortgage backed securities, and $169 was related to mortgage-backed securities.

10

The amortized cost and estimated fair values of securities available-for-sale at September 30, 2012, were 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, of the 457 investment securities held, there were 92 in unrealized loss positions, of which $20,129 had been in a continuous loss position for twelve months or longer. The unrealized loss associated with the investments of $20,129 in a continuous unrealized loss position for twelve months or longer was $1,091.

The amortized cost and estimated fair value of securities at September 30, 2013, December 31, 2012, and September 30, 2012, 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, 2013				December 31, 2012				September 30, 2012
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	17,285	$	17,388	$	55,559	$	55,690	$	48,514	$	48,550
Due after one year through 5 years		179,366		181,527		182,156		185,857		190,881		194,534
Due after 5 years through 10 years		140,288		139,523		138,243		143,698		150,947		157,321
Due after 10 years		9,982		9,068		4,496		4,640		5,652		5,770
	$	346,921	$	347,506	$	380,454	$	389,885	$	395,994	$	406,175

Municipal securities with a book value of $1,851 were sold during the first quarter of 2013. These securities were sold at a loss of $8. There were no investment securities sold during the third quarter of 2013 or during 2012.

At September 30, 2013, securities with an aggregate amortized cost of $24,348 (estimated aggregate market value of $23,979) were pledged to secure certain public deposits as required by law. At September 30, 2013, securities with an aggregate amortized cost of $2,501 (estimated aggregate market value of $2,608) were pledged for repurchase accounts. At September 30, 2013, there were no balances outstanding on any repurchase agreements.

11

NOTE 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, 2013			% of gross loans			December 31, 2012			% of gross loans			September 30, 2012			% of gross loans
Real estate secured loans:
Permanent Loans:
Multi-family residential	$	47,795			4.88	%	$	45,212			5.19	%	$	43,080			5.15	%
Residential 1-4 family		49,206			5.03	%		51,437			5.90	%		53,556			6.40	%
Owner-occupied commercial		244,828			25.02	%		219,276			25.17	%		222,374			26.57	%
Nonowner-occupied commercial		164,708			16.83	%		145,315			16.68	%		140,104			16.74	%
Total permanent real estate loans		506,537			51.76	%		461,240			52.94	%		459,114			54.86	%
Construction Loans:
Multi-family residential		22,929			2.34	%		17,022			1.95	%		12,794			1.53	%
Residential 1-4 family		29,880			3.05	%		20,390			2.34	%		18,108			2.16	%
Commercial real estate		24,106			2.46	%		23,235			2.67	%		15,817			1.89	%
Commercial bare land and acquisition & development		11,191			1.14	%		10,668			1.22	%		9,887			1.18	%
Residential bare land and acquisition & development		7,053			0.72	%		8,405			0.96	%		9,108			1.09	%
Total construction real estate loans		95,159			9.72	%		79,720			9.14	%		65,714			7.85	%
Total real estate loans		601,696			61.48	%		540,960			62.08	%		524,828			62.71	%
Commercial loans		372,129			38.02	%		325,604			37.38	%		306,870			36.66	%
Consumer loans		3,660			0.37	%		3,581			0.41	%		3,941			0.47	%
Other loans		1,188			0.12	%		1,112			0.13	%		1,334			0.16	%
Gross loans		978,673			100.00	%		871,257			100.00	%		836,973			100.00	%
Deferred loan origination fees		(955	)					(840	)					(768	)
		977,718						870,417						836,205
Allowance for loan losses		(16,802	)					(16,346	)					(16,283	)
Total loans, net of allowance for loan losses and net deferred fees	$	960,916					$	854,071					$	819,922

At September 30, 2013, outstanding loans to dental professionals totaled $303,911 and represented 31.05% of total outstanding loans compared to dental professional loans of $270,782 or 31.08% of total outstanding loans at December 31, 2012, and $245,606 or 29.30% of total outstanding loans at September 30, 2012. See Note 4 for additional information on the dental loan portfolio. There are no other industry concentrations in excess of 10.00% of the total loan portfolio. However, as of September 30, 2013, approximately 61.48% of the Company’s loan portfolio was collateralized by real estate and is, therefore, susceptible to changes in real estate market conditions.

12

Acquired Loans

On February 1, 2013, the Bank acquired all of the assets and liabilities of Century Bank of Eugene, Oregon. The transaction has been accounted for under the acquisition method of accounting for cash consideration of $13,398, which included the consideration paid for all common shares and outstanding warrants and options. The assets and liabilities were recorded at their estimated fair values as of the acquisition date. The fair value estimates are considered provisional and are subject to change for up to one year after the closing date of the acquisition.

Acquired loans presented below at September 30, 2013, and the acquisition date:

	September 30, 2013			February 1, 2013
Contractually required principal payments	$	49,227		$	65,532
Purchase adjustment for credit and interest rate		(1,461	)		(2,193	)
Balance of acquired loans	$	47,766		$	63,339

The acquisition of Century Bank is not considered significant to the Company’s financial statements, therefore pro forma financial information is not presented.

Allowance for loan losses

A summary of activity in the allowance for loan losses for the three and nine months ended September 30, 2013, and 2012 is as follows:

	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
Balance, beginning of period	$	16,303		$	16,175		$	16,346		$	14,941
Provision charged to income		—			—			250			1,900
Loans charged against allowance		(221	)		(1,140	)		(1,049	)		(2,809	)
Recoveries credited to allowance		720			1,248			1,255			2,251
Balance, end of period	$	16,802		$	16,283		$	16,802		$	16,283

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

The Company performs regular credit reviews of the loan portfolio to determine the credit quality and adherence to underwriting standards. When loans are originated, they are assigned a risk rating that is reassessed periodically during the term of the loan through the credit review process and on an ongoing basis by management. 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.

13

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

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

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

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

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

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

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

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

• Changes in the current and future US political environment, including debt ceiling negotiations, government shutdown and healthcare reform that may affect national, regional and local economic conditions, taxation, or disruption of national or global financial markets.

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

• The quality of the current loan portfolio.

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

• The velocity of migration of losses and potential losses.

• Current economic conditions.

• Loan concentrations.

• Loan growth rates.

• Past-due and nonperforming trends.

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

• Recovery experience.

• Peer comparison loss rates.

During second quarter 2013, after several months of evaluation, the Company changed to full migration analysis from the method of probability of default and loss given default, to determine the appropriate amount of general reserves. The Company believes the change provides a more granular analysis accounting for changes in the composition of the portfolio and credit quality deterioration. This method of analysis involves tracking the loss experience on a rolling population of loans over a period of several quarters and the collection and analysis of historical data to determine what rate of loss the Bank has incurred on similarly criticized loans and how the current portfolio could migrate to loss. The change in methodology did not have a material impact on the allowance for loan losses calculation.

14

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

	For the three months ended September 30, 2013
	Commercial and Other			Real Estate			Construction			Consumer			Unallocated		Total
Beginning balance	$	4,760		$	9,200		$	1,557		$	65		$	721	$	16,303
Charge-offs		(7	)		(206	)		—			(8	)		—		(221	)
Recoveries		713			2			3			2			—		720
Provision		45			(951	)		75			11			820		—
Ending balance	$	5,511		$	8,045		$	1,635		$	70		$	1,541	$	16,802
	For the nine months ended September 30, 2013
	Commercial and Other			Real Estate			Construction			Consumer			Unallocated		Total
Beginning balance	$	3,846		$	9,457		$	1,987		$	70		$	986	$	16,346
Charge-offs		(621	)		(403	)		—			(25	)		—		(1,049	)
Recoveries		952			278			19			6			—		1,255
Provision		1,334			(1,287	)		(371	)		19			555		250
Ending balance	$	5,511		$	8,045		$	1,635		$	70		$	1,541	$	16,802

15

	Balances as of September 30, 2013
	Commercial and Other		Real Estate		Construction		Consumer		Unallocated		Total
Ending allowance: collectively evaluated for impairment	$	5,490	$	8,043	$	1,635	$	70	$	1,541	$	16,779
Ending allowance: individually evaluated for impairment		21		2		—		—		—		23
Total ending allowance	$	5,511	$	8,045	$	1,635	$	70	$	1,541	$	16,802
Ending loan balance: collectively evaluated for impairment	$	368,944	$	500,493	$	94,876	$	3,660	$	—	$	967,973
Ending loan balance: individually evaluated for impairment		4,373		6,044		283		—		—		10,700
Total ending loan balance	$	373,317	$	506,537	$	95,159	$	3,660	$	—	$	978,673
	Balances as of December 31, 2012
	Commercial and Other		Real Estate		Construction		Consumer		Unallocated		Total
Ending allowance: collectively evaluated for impairment	$	3,844	$	9,456	$	1,987	$	70	$	986	$	16,343
Ending allowance: individually evaluated for impairment		2		—		—		—		—		2
Total ending allowance	$	3,846	$	9,456	$	1,987	$	70	$	986	$	16,345
Ending loan balance: collectively evaluated for impairment	$	322,677	$	455,206	$	79,619	$	3,581	$	—	$	861,083
Ending loan balance: individually evaluated for impairment		4,039		6,034		101		—		—		10,174
Total ending loan balance	$	326,716	$	461,240	$	79,720	$	3,581	$	—	$	871,257
	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	$	303,290	$	452,185	$	65,610	$	3,941	$	—	$	825,026
Ending loan balance: individually evaluated for impairment		4,914		6,929		104		—		—		11,947
Total ending loan balance	$	308,204	$	459,114	$	65,714	$	3,941	$	—	$	836,973

Management believes that the allowance for loan losses was adequate as of September 30, 2013. However, future loan losses may exceed the levels provided for in the allowance for loan losses and could possibly result in additional charges to the provision for loan losses.

16

Credit Quality Indicators

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

Pass – Credit exposure in this category ranges 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 as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

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

17

The following tables present the Company’s loan portfolio information by loan type and credit grade at September 30, 2013, December 31, 2012, and September 30, 2012:

Credit Quality Indicators

As of September 30, 2013

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful		Totals
Real estate loans
Multi-family residential	$	46,487	$	—	$	1,308	$	—	$	47,795
Residential 1-4 family		40,181		—		9,025		—		49,206
Owner-occupied commercial		234,794		4,297		5,737		—		244,828
Nonowner-occupied commercial		158,944		—		5,764		—		164,708
Total real estate loans		480,406		4,297		21,834		—		506,537
Construction
Multi-family residential		22,929		—		—		—		22,929
Residential 1-4 family		29,683		—		197		—		29,880
Commercial real estate		22,548		—		1,558		—		24,106
Commercial bare land and acquisition & development		10,980		—		211		—		11,191
Residential bare land and acquisition & development		4,475		—		2,578		—		7,053
Total construction loans		90,615		—		4,544		—		95,159
Commercial and other		360,749		—		12,551		17		373,317
Consumer		3,630		—		30		—		3,660
Totals	$	935,400	$	4,297	$	38,959	$	17	$	978,673

Credit Quality Indicators

As of December 31, 2012

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful		Totals
Real estate loans
Multi-family residential	$	43,883	$	—	$	1,329	$	—	$	45,212
Residential 1-4 family		43,458		—		7,979		—		51,437
Owner-occupied commercial		208,713		—		10,563		—		219,276
Nonowner-occupied commercial		141,762		—		3,553		—		145,315
Total real estate loans		437,816		—		23,424		—		461,240
Construction
Multi-family residential		17,022		—		—		—		17,022
Residential 1-4 family		20,278		—		112		—		20,390
Commercial real estate		21,646		—		1,589		—		23,235
Commercial bare land and acquisition & development		10,668		—		—		—		10,668
Residential bare land and acquisition & development		5,449		—		2,956		—		8,405
Total construction loans		75,063		—		4,657		—		79,720
Commercial and other		317,250		—		9,466		—		326,716
Consumer		3,544		—		37		—		3,581
Totals	$	833,673	$	—	$	37,584	$	—	$	871,257

18

Credit Quality Indicators

As of September 30, 2012

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful		Totals
Real estate loans
Multi-family 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
Multi-family 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

At September 30, 2013, December 31, 2012, and September 30, 2012, the Company had $668, $252 and $232, respectively, in contingent liabilities on its classified loans.

19

Past Due and Nonaccrual Loans

The Company uses the terms “past due” and “delinquent” interchangeably. Amortizing loans are considered past due or delinquent based upon the number of contractually required payments not made. Delinquency status for all contractually matured loans, commercial and commercial real estate loans with non-monthly amortization, and all other extensions of credit is determined based upon the number of calendar months past due.

The following tables present an aged analysis of past due and nonaccrual loans at September 30, 2013, December 31, 2012, and September 30, 2012:

Age Analysis of Loans Receivable

As of September 30, 2013

	30-59 Days Past Due Still Accruing		60-89 Days Past Due Still Accruing		Greater Than 90 days Past Due Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Total Current		Total Loans Receivable
Real estate loans
Multi-family residential	$	—	$	—	$	—	$	—	$	—	$	47,795	$	47,795
Residential 1-4 family		—		—		—		1,206		1,206		48,000		49,206
Owner-occupied commercial		166		166		—		2,235		2,567		242,261		244,828
Nonowner-occupied commercial		1,096		559		—		139		1,794		162,914		164,708
Total real estate loans		1,262		725		—		3,580		5,567		500,970		506,537
Construction
Multi-family residential		—		—		—		—		—		22,929		22,929
Residential 1-4 family		—		—		—		—		—		29,880		29,880
Commercial real estate		—		—		—		—		—		24,106		24,106
Commercial bare land and acquisition & development		—		—		—		—		—		11,191		11,191
Residential bare land and acquisition & development		—		—		—		—		—		7,053		7,053
Total construction loans		—		—		—		—		—		95,159		95,159
Commercial and other		1,292		325		—		2,361		3,978		369,339		373,317
Consumer		5		—		—		—		5		3,655		3,660
Total	$	2,559	$	1,050	$	—	$	5,941	$	9,550	$	969,123	$	978,673

Age Analysis of Loans Receivable

As of December 31, 2012

	30-59 Days Past Due Still Accruing		60-89 Days Past Due Still Accruing		Greater Than 90 days Past Due Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Total Current		Total Loans Receivable
Real estate loans
Multi-family residential	$	—	$	—	$	—	$	—	$	—	$	45,212	$	45,212
Residential 1-4 family		351		318		—		1,140		1,809		49,628		51,437
Owner-occupied commercial		—		—		—		3,805		3,805		215,471		219,276
Nonowner-occupied commercial		1,404		—		—		—		1,404		143,911		145,315
Total real estate loans		1,755		318		—		4,945		7,018		454,222		461,240
Construction
Multi-family residential		—		—		—		—		—		17,022		17,022
Residential 1-4 family		234		—		—		—		234		20,156		20,390
Commercial real estate		—		—		—		—		—		23,235		23,235
Commercial bare land and acquisition & development		—		—		—		—		—		10,668		10,668
Residential bare land and acquisition & development		—		—		—		101		101		8,304		8,405
Total construction loans		234		—		—		101		335		79,385		79,720
Commercial and other		264		—		—		4,315		4,579		322,137		326,716
Consumer		8		—		—		—		8		3,573		3,581
Total	$	2,261	$	318	$	—	$	9,361	$	11,940	$	859,317	$	871,257

20

Age Analysis of 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 Past Due Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Total Current		Total Loans Receivable
Real estate loans
Multi-family 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
Nonowner-occupied commercial		92		—		—		—		92		140,012		140,104
Total real estate loans		300		340		—		6,141		6,781		452,333		459,114
Construction
Multi-family 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

21

Impaired Loans

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

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

22

The following tables display an analysis of the Company’s impaired loans at September 30, 2013, December 31, 2012, and September 30, 2012:

Impaired Loan Analysis

As of September 30, 2013

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Real estate
Multi-family residential	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		1,489		1,840		—		2,203		—
Owner-occupied commercial		3,329		3,800		—		3,363		—
Nonowner-occupied commercial		908		908		—		786		32
Total real estate loans		5,726		6,548		—		6,352		32
Construction
Multi-family residential		—		—		—		—		—
Residential 1-4 family		—		—		—		—		—
Commercial real estate		—		—		—		—		—
Commercial bare land and acquisition & development		—		—		—		178		—
Residential bare land and acquisition & development		283		283		—		457		12
Total construction loans		283		283		—		635		12
Commercial and other		3,839		8,941		—		2,697		81
Consumer		—		—		—		—		—
With an allowance recorded
Real estate
Multi-family residential	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		318		318		2		288		16
Owner-occupied commercial		—		—		—		188		—
Nonowner-occupied commercial		—		—		—		—		—
Total real estate loans		318		318		2		476		16
Construction
Multi-family 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		534		534		21		919		7
Consumer		—		—		—		—		—
Total
Real estate
Multi-family residential	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		1,807		2,158		2		2,491		16
Owner-occupied commercial		3,329		3,800		—		3,551		—
Nonowner-occupied commercial		908		908		—		786		32
Total real estate loans		6,044		6,866		2		6,828		48
Construction
Multi-family residential		—		—		—		—		—
Residential 1-4 family		—		—		—		—		—
Commercial real estate		—		—		—		—		—
Commercial bare land and acquisition & development		—		—		—		178		—
Residential bare land and acquisition & development		283		283		—		457		12
Total construction loans		283		283		—		635		12
Commercial and other		4,373		9,475		21		3,616		88
Consumer		—		—		—		—		—
Total impaired loans	$	10,700	$	16,624	$	23	$	11,079	$	148

23

Impaired Loan Analysis

As of December 31, 2012

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Real estate
Multi-family residential	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		1,447		2,032		—		3,068		—
Owner-occupied commercial		4,229		5,069		—		4,157		21
Nonowner-occupied commercial		358		358		—		153		11
Total real estate loans		6,034		7,459		—		7,378		32
Construction
Multi-family residential		—		—		—		—		—
Residential 1-4 family		—		—		—		544		—
Commercial real estate		—		—		—		1,219		—
Commercial bare land and acquisition & development		—		—		—		5,621		—
Residential bare land and acquisition & development		101		173		—		1,024		—
Total construction loans		101		173		—		8,408		—
Commercial and other		3,921		9,417		—		5,056		2
Consumer		—		—		—		—		—
With an allowance recorded
Real estate
Multi-family residential	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		—		—		—		18		—
Owner-occupied commercial		—		—		—		681		—
Nonowner-occupied commercial		—		—		—		12		—
Total real estate loans		—		—		—		711		—
Construction
Multi-family 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		118		129		2		148		—
Consumer		—		—		—		—		—
Total
Real estate
Multi-family residential	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		1,447		2,032		—		3,086		—
Owner-occupied commercial		4,229		5,069		—		4,838		21
Nonowner-occupied commercial		358		358		—		165		11
Total real estate loans		6,034		7,459		—		8,089		32
Construction
Multi-family residential		—		—		—		—		—
Residential 1-4 family		—		—		—		544		—
Commercial real estate		—		—		—		1,219		—
Commercial bare land and acquisition & development		—		—		—		5,621		—
Residential bare land and acquisition & development		101		173		—		1,024		—
Total construction loans		101		173		—		8,408		—
Commercial and other		4,039		9,546		2		5,204		2
Consumer		—		—		—		—		—
Total impaired loans	$	10,174	$	17,178	$	2	$	21,701	$	34

24

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
Multi-family residential	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		2,517		3,557		—		3,495		—
Owner-occupied commercial		3,746		4,587		—		4,174		17
Nonowner-occupied commercial		220		220		—		59		—
Total real estate loans		6,483		8,364		—		7,728		17
Construction
Multi-family 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		—		—		—		—		—
With an allowance recorded
Real estate
Multi-family residential	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		—		—		—		24		—
Owner-occupied commercial		303		303		—		907		—
Nonowner-occupied commercial		143		143		—		16		—
Total real estate loans		446		446		—		947		—
Construction
Multi-family 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
Real estate
Multi-family residential	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		2,517		3,557		—		3,519		—
Owner-occupied commercial		4,049		4,890		—		5,081		17
Nonowner-occupied commercial		363		363		—		75		—
Total real estate loans		6,929		8,810		—		8,675		17
Construction
Multi-family 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

25

The impaired balances reported above are not adjusted for government guarantees of $1,354, $681, and $1,431 at September 30, 2013, December 31, 2012, and September 30, 2012, respectively. The recorded investment in impaired loans, net of government guarantees, totaled $9,346, $9,493 and $10,516 at September 30, 2013, December 31, 2012, and September 30, 2012, respectively. The specific valuation allowance for impaired loans was $23, $2 and $72 at September 30, 2013, December 31, 2012, and September 30, 2012, 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 following table displays the Company’s TDRs by class at September 30, 2013, December 31, 2012, and September 30, 2012:

	September 30, 2013				Troubled Debt Restructurings as of December 31, 2012				September 30, 2012
	Number of Contracts		Post-Modification Outstanding Recorded Investment		Number of Contracts		Post-Modification Outstanding Recorded Investment		Number of Contracts		Post-Modification Outstanding Recorded Investment
Real estate
Multifamily residential		—	$	—		—	$	—		—	$	—
Residential 1-4 family		8		1,108		8		565		9		1,408
Owner-occupied commercial		5		1,973		5		2,095		5		2,133
Non owner-occupied commercial		2		698		1		140		1		143
Total real estate loans		15		3,779		14		2,800		15		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		101		5		104
Total construction loans		—		—		5		101		5		104
Commercial and other		11		2,406		8		589		7		973
Consumer		—		—		—		—		—		—
		26	$	6,185		27	$	3,490		27	$	4,761

The recorded investment in TDRs in nonaccrual status totaled $1,911, $2,336, and $3,855 at September 30, 2013, December 31, 2012, and September 30, 2012, respectively. The Company’s policy is that loans placed on nonaccrual will typically remain on nonaccrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appears relatively certain. The Company’s policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status.

For the nine months ended September 30, 2013, the Company identified 11 TDRs that were newly considered impaired for which impairment was previously measured under the Company’s general loan loss allowance methodology. At September 30, 2013, the total recorded investment in such receivables was $3,396, and the associated allowance for loan losses was $23.

The types of modifications offered can generally be described in the following categories:

Rate Modification -A modification in which the interest rate is modified.

Term Modification -A modification in which the maturity date, timing of payments, or frequency of payments is changed.

Interest-only Modification -A modification in which the loan is converted to interest-only payments for a period of time.

Combination Modification -Any other type of modification, including the use of multiple types of modifications.

26

The following tables present newly restructured loans that occurred during the nine months ended September 30, 2013, and 2012, respectively:

	Troubled Debt Restructurings Identified during the Nine Months ended September 30, 2013
	Rate Modification		Term Modification		Interest-only Modification		Combination Modification
Real estate
Multi-family residential	$	—	$	—	$	—	$	—
Residential 1-4 family		318		—		—		274
Owner-occupied commercial		—		—		—		—
Nonowner-occupied commercial		559		—		—		—
Total real estate loans		877		—		—		274
Construction
Multi-family 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		—		778		524		680
Consumer		—		—		—		—
	$	877	$	778	$	524	$	954

	Troubled Debt Restructurings Identified during the Nine Months ended September 30, 2012
	Rate Modification		Term Modification		Interest-only Modification		Combination Modification
Real estate
Multi-family residential	$	—	$	—	$	—	$	—
Residential 1-4 family		—		—		—		156
Owner-occupied commercial		—		220		—		1,070
Nonowner-occupied commercial		—		—		—		—
Total real estate loans		—		220		—		1,226
Construction
Multi-family residential		—		—		—		—
Residential 1-4 family		—		—		—		—
Commercial real estate		—		—		—		—
Commercial bare land and acquisition & development		—		—		—		—
Residential bare land and acquisition & development		—		104		—		—
Total construction loans		—		104		—		—
Commercial and other		—		270		65		—
Consumer		—		—		—		—
	$	—	$	594	$	65	$	1,226

27

Subsequent to a loan being classified as a TDR, a borrower may become unwilling or unable to abide by the terms of the modified agreement. In such cases of default, the Company takes appropriate action to recover principal and interest payments including the use of foreclosure proceedings. The following table presents loans receivable modified as TDRs that subsequently defaulted within the first 12 months of restructure during the period:

	Troubled Debt Restructurings That Subsequently Defaulted During the Nine Months ended September 30,
	2013				2012
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Real estate
Multi-family residential		—	$	—		—	$	—
Residential 1-4 family		1		274		2		319
Owner-occupied commercial		1		303		—		—
Nonowner-occupied commercial		1		559		—		—
Total real estate loans		3		1,136		2		319
Construction
Multi-family residential		—		—		—		—
Residential 1-4 family		—		—		—		—
Commercial real estate		—		—		—		—
Commercial bare land and acquisition & development		—		—		—		—
Residential bare land and acquisition & development		—		—		1		104
Total construction loans		—		—		1		104
Commercial and other		4		289		4		335
Consumer		—		—		—		—
		7	$	1,425		7	$	758

At September 30, 2013, December 31, 2012, and September 30, 2012, the Company had no commitments to lend additional funds on loans restructured as TDRs.

NOTE 4 – DENTAL LOAN PORTFOLIO

To assist in understanding the concentrations and risks associated with the Company’s loan portfolio, the following Note has been included to provide additional information relating to the Company’s dental loan portfolio. At September 30, 2013, December 31, 2012, and September 30, 2012, loans to dental professionals totaled $303,911, $270,782, and $245,606, respectively, and represented 31.05%, 31.08% and 29.30% in principal amount of outstanding loans. As of September 30, 2013, December 31, 2012, and September 30, 2012, the dental loans were supported by government guarantees totaling $17,491, $18,834 and $19,623, respectively. These guarantees represented 5.76%, 6.96% and 7.99% in principal amount of the outstanding dental loan balances as of such respective dates. 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.

28

Loan Classification

Major classifications of dental loans at September 30, 2013, December 31, 2012, and September 30, 2012 were as follows:

	September 30, 2013		December 31, 2012		September 30, 2012
Real estate secured loans:
Owner-occupied commercial	$	59,868	$	59,327	$	52,074
Other dental real estate loans		2,021		3,103		3,159
Total permanent real estate loans		61,889		62,430		55,233
Dental construction loans		5,186		2,093		1,400
Total real estate loans		67,075		64,523		56,633
Commercial loans		236,836		206,259		188,973
Gross loans	$	303,911	$	270,782	$	245,606

Market Area

The Bank’s defined “local 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, Oregon; Portland, Oregon; and Seattle, Washington. The Company also makes national dental loans throughout the United States. National loan relationships are maintained and serviced by Bank personnel primarily located in Portland. The following table summarizes the Bank’s dental lending by borrower location:

	September 30, 2013		December 31, 2012		September 30, 2012
Local	$	181,397	$	191,908	$	177,251
National		122,514		78,874		68,355
Total	$	303,911	$	270,782	$	245,606

Allowance

The allowance for loan losses identified for the dental loan portfolio is established as an amount that management considers adequate to absorb possible losses on existing loans within the dental loan portfolio. The allowance related to the dental loan portfolio consists of general and specific components. The general component is based upon all dental loans collectively evaluated for impairment, including qualitative conditions associated with loan type, national location, start-up financing, practice acquisition financing; and specialty practice financing. The specific component is based upon dental loans individually evaluated for impairment.

	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
Balance, beginning of period	$	3,522		$	2,386		$	2,683		$	1,824
Provision		(854	)		350			382			884
Loans charged against allowance		—			(488	)		(444	)		(492	)
Recoveries credited to allowance		20			—			67			32
Balance, end of period	$	2,688		$	2,248		$	2,688		$	2,248

29

Credit Quality

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

The following tables present the Company’s dental loan portfolio by market and credit grade at September 30, 2013, December 31, 2012, and September 30, 2012:

	As of September 30, 2013 Loan Grade
	Pass		Special Mention		Substandard		Doubtful		Totals
Local	$	175,602	$	—	$	5,794	$	—	$	181,396
National		121,757		—		758		—		122,515
Total	$	297,359	$	—	$	6,552	$	—	$	303,911
	As of December 31, 2012 Loan Grade
	Pass		Special Mention		Substandard		Doubtful		Totals
Local	$	184,872	$	—	$	7,036	$	—	$	191,908
National		78,480		—		394		—		78,874
Total	$	263,352	$	—	$	7,430	$	—	$	270,782
	As of September 30, 2012 Loan Grade
	Pass		Special Mention		Substandard		Doubtful		Totals
Local	$	171,696	$	—	$	5,555	$	—	$	177,251
National		67,959		—		396		—		68,355
Total	$	239,655	$	—	$	5,951	$	—	$	245,606

30

Past Due and Nonaccrual Loans

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

The following tables present an aged analysis of the dental loan portfolio by market, including nonaccrual loans, as of September 30, 2013, December 31, 2012, and September 30, 2012:

	As of September 30, 2013
	30-59 Days Past Due Still Accruing		60-89 Days Past Due Still Accruing		Greater Than 90 Days Past Due Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Total Current		Total Loans Receivable
Local	$	1,292	$	346	$	—	$	1,225	$	2,863	$	178,533	$	181,396
National		—		—		—		224		224		122,291		122,515
Total	$	1,292	$	346	$	—	$	1,449	$	3,087	$	300,824	$	303,911
	As of December 31, 2012
	30-59 Days Past Due Still Accruing		60-89 Days Past Due Still Accruing		Greater Than 90 Days Past Due Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Total Current		Total Loans Receivable
Local	$	—	$	—	$	—	$	2,499	$	2,499	$	189,409	$	191,908
National		—		—		—		—		—		78,874		78,874
Total	$	—	$	—	$	—	$	2,499	$	2,499	$	268,283	$	270,782
	As of September 30, 2012
	30-59 Days Past Due Still Accruing		60-89 Days Past Due Still Accruing		Greater Than 90 Days Past Due Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Total Current		Total Loans Receivable
Local	$	317	$	—	$	—	$	2,148	$	2,465	$	174,786	$	177,251
National		—		—		—		—		—		68,355		68,355
Total	$	317	$	—	$	—	$	2,148	$	2,465	$	243,141	$	245,606

31

NOTE 5 – FEDERAL FUNDS AND OVERNIGHT FUNDS PURCHASED

At September 30, 2013, the Company had unsecured federal funds borrowing lines with various correspondent banks totaling $129,000. At September 30, 2013, December 31, 2012, and September 30, 2012, there was $0, $11,570, and $9,385 outstanding on these lines, respectively.

The Company also has a secured overnight borrowing line available from the Federal Reserve Bank that totaled $92,712, $87,740 and $86,881 at September 30, 2013, December 31, 2012, and September 30, 2012, respectively. The Federal Reserve Bank borrowing line is secured through the pledging of approximately $140,416 of commercial loans under the Company’s Borrower-In-Custody program. At September 30, 2013, December 31, 2012, and September 30, 2012, there were no outstanding borrowings on this line.

NOTE 6 – FEDERAL HOME LOAN BANK BORROWINGS

The Company has a borrowing limit with the FHLB equal to 30.00% of total assets, subject to discounted collateral. The Company does have the ability to access the FHLB excess stock pool, thus borrowing is not limited by FHLB stock held. At September 30, 2013, the maximum borrowing line was $436,463; however, the FHLB borrowing line was limited by the discounted value of collateral pledged. The Company had pledged $430,003 in real estate loans to the FHLB that had a discounted value of $225,546. There was $145,000 borrowed on this line at September 30, 2013.

At December 31, 2012, the maximum FHLB borrowing line was $412,046, and the Company had pledged real estate loans and securities to the FHLB with a discounted value of $226,278. There was $118,000 borrowed on this line at December 31, 2012.

At September 30, 2012, the maximum FHLB borrowing line was $405,127 and the Company had pledged real estate loans and securities to the FHLB with a discounted collateral value of $229,058. There was $165,000 borrowed on this line at September 30, 2012.

	Current Rates			September 30, 2013		December 31, 2012		September 30, 2012
Cash Management Advance
2012		N/A		$	—	$	—	$	122,000
2013		0.20% - 0.31	%		104,000		77,000		2,000
2014		N/A			—		—		13,500
2015		0.60% - 1.60	%		13,500		13,500		22,500
2016		1.84% - 2.36	%		22,500		22,500		3,000
2017		2.28	%		3,000		3,000		2,000
Thereafter		3.85	%		2,000		2,000		—
				$	145,000	$	118,000	$	165,000

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NOTE 7 – STOCK BASED COMPENSATION

The Company’s 2006 Stock Option and Equity Compensation Plan (the “2006 SOEC Plan”) authorizes the award of up to 1,550,000 shares in stock-based awards. The awards granted under this plan are performance-based and are subject to vesting. The Compensation Committee of the Board of Directors may impose any terms or conditions on the vesting of an award that it determines to be appropriate. Awards granted generally vest over four years and have a maximum life of ten years. Awards may be granted at exercise prices of not less than 100.00% 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 within the plan. Additionally, non-qualified option awards and restricted stock awards may be granted to directors under the terms of this plan.

Prior to April 2006, 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.

For the nine months ended September 30, 2013, 10,179 restricted shares were granted and issued to directors with no restrictions imposed. Additionally, 145,420 RSUs were granted to employees during the first nine months of 2013. The RSUs vest over four years and shares of common stock will be issued as soon as practicable upon vesting. 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 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, 2013, and 2012:

	Nine months ended September 30,
	2013				2012
	Shares		Fair Market Value		Shares		Fair Market Value
Equity-based awards:
Director restricted stock	$	10,179	$	110	$	7,987	$	70
Employee stock options		—		—		—		—
Employee stock SARs		—		—		—		—
Employee RSUs		145,420		1,366		164,516		1,254
	$	155,599	$	1,476	$	172,503	$	1,324

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The following tables identify the compensation expense recorded and tax benefits received by the Company on its stock-based compensation plans for the three months and nine months ended September 30, 2013, and 2012:

	Three months ended September 30,
	2013				2012
	Compensation Expense		Tax Benefit		Compensation Expense		Tax Benefit
Equity-based awards:
Director restricted stock	$	—	$	—	$	—	$	—
Employee stock options		13		—		30		—
Employee stock SARs		27		10		47		16
Employee RSUs		229		87		143		50
Liability-based awards:
Employee cash SARs		10		4		—		—
	$	279	$	101	$	220	$	67
	Nine months ended September 30,
	2013				2012
	Compensation Expense		Tax Benefit		Compensation Expense		Tax Benefit
Equity-based awards:
Director restricted stock	$	110	$	39	$	70	$	25
Employee stock options		56		—		93		—
Employee stock SARs		100		38		145		51
Employee RSUs		601		228		346		121
Liability-based awards:
Employee cash SARs		10		4		—		—
	$	877	$	309	$	654	$	196

During the three months ended September 30, 2013, 4,664 Employee Stock SARs, with a weighted average exercise price of $11.78, were exercised. The exercise resulted in a net issuance to employees of 306 shares of stock, with an intrinsic value of $4. There were no equity based awards vested during the three months ended September 30, 2013. The exercises during the third quarter represented the first time any of the Company’s Employee Stock SARs have been exercised.

During the three months ended September 30, 2013, 845 Employee Cash SARs, with a weighted average exercise price of $12.07, were exercised. The exercise resulted in a cash payment, net of income taxes, to employees of $1. There were no liability based awards vested during the three months ended September 30, 2013. The exercises during third quarter represented the first time any of the Company’s Employee Cash SARs have been exercised.

At September 30, 2013, the Company had estimated unrecognized compensation expense of approximately $27, $53 and $2,304 for unvested stock options, stock-settled SARs, and RSUs, respectively. These amounts are based on forfeiture rates of 20.00% for all stock options and SARs and 13.00% 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, and RSUs is approximately 0.55, 0.55, and 2.96 years, respectively.

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NOTE 8 – FAIR VALUE

The following table presents estimated fair values of the Company’s financial instruments as of September 30, 2013, December 31, 2012, and September 30, 2012, 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, 2013				December 31, 2012				September 30, 2012
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	42,609	$	42,609	$	28,701	$	28,701	$	20,893	$	20,893
Securities available-for-sale		347,506		347,506		389,885		389,885		406,175		406,175
Loans		977,718		967,188		870,416		871,802		836,205		836,279
Federal Home Loan Bank stock		10,523		10,523		10,462		10,462		10,557		10,557
Accrued interest receivable		4,608		4,608		4,520		4,520		4,861		4,861
Bank-owned life insurance		16,008		16,008		15,621		15,621		15,469		15,469
Financial liabilities:
Deposits		1,117,529		1,117,840		1,046,154		1,046,165	$	980,162	$	983,993
Federal funds and overnight funds purchased		—		—		11,570		11,570		9,385		9,385
Federal Home Loan Bank borrowings		145,000		146,032		118,000		119,517		165,000		165,549
Junior subordinated debentures		8,248		2,235		8,248		2,193		8,248		2,162
Accrued interest payable		195		195		218		218		236		236

Cash and cash equivalents – The carrying amount approximates fair value.

Securities available-for-sale– 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.

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.

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

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

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

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

Federal funds purchased and overnight funds – 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 Federal Home Loan Bank borrowings is estimated by discounting future cash flows at rates currently available for debt with similar terms and remaining maturities.

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

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

The Company also adheres to the FASB guidance with regards to ASC 820, “Fair Value Measures.” This guidance defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The statement requires fair value measurement disclosure of all assets

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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 following table presents information about the level in the fair value hierarchy for the Company’s assets and liabilities not measured and carried at fair value as of September 30, 2013:

	Carrying Amount		Fair Value at September 30, 2013
			Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	42,609	$	42,609	$	—	$	—
Loans		977,718		—		—		967,188
Accrued interest receivable		4,608		4,608		—		—
Federal Home Loan Bank stock		10,523		10,523		—		—
Bank-owned life insurance		16,008		16,008		—		—
Financial liabilities:
Deposits	$	1,117,529	$	—	$	1,117,840	$	—
Federal Home Loan Bank borrowings		145,000		—		146,032		—
Junior subordinated debentures		8,248		—		—		2,235
Accrued interest payable		4,423		4,423		—		—

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The tables below show assets measured at fair value on a recurring basis as of September 30, 2013, December 31, 2012, and September 30, 2012:

September 30, 2013	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	$	26,900	$	—	$	26,900	$	—
Obligations of states and political subdivisions		79,365		—		79,365		—
Agency mortgage-backed securities		235,085		—		235,085		—
Private-label mortgage-backed securities		6,156		—		4,624		1,532
Total available-for-sale securities	$	347,506	$	—	$	345,974	$	1,532
December 31, 2012	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available-for-sale securities
Obligations of U.S. government agencies	$	17,844	$	—	$	17,844	$	—
Obligations of states and political subdivisions		81,501		—		81,501		—
Agency mortgage-backed securities		281,940		—		281,940		—
Private-label mortgage-backed securities		8,600		—		6,918		1,682
Total available-for-sale securities	$	389,885	$	—	$	388,203	$	1,682

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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)
Available-for-sale securities
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

No transfers to or from Levels 1 and 2 occurred on assets measured at fair value on a recurring basis during the nine months ended September 30, 2013, and 2012, or during the year ended December 31, 2012.

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.

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, 2013, and 2012:

	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
Beginning Balance	$	1,589		$	1,606		$	1,682		$	1,719
Transfers to Level 3		—			—			—			—
Transfers out of Level 3		—			—			—			—
Total gains or losses
Included in earnings		—			—			—			—
Included in other comprehensive income		31			174			98			255
Paydowns		(88	)		(77	)		(248	)		(271	)
Purchases, issuances, sales and settlements
Purchases		—			—			—			—
Issuances		—			—			—			—
Sales		—			—			—			—
Settlements		—			—			—			—
Ending Balance	$	1,532		$	1,703		$	1,532		$	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.

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

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

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

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

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

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

The valuation methodology used by asset type includes:

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

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

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

• 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.

The third-party 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 securities portfolio was valued through its independent third-party pricing service using evaluated pricing models and quoted prices based on market data. For further assurance, the Company’s estimate of fair value was compared to an additional independent third-party estimate at July 31, 2013, and the Company obtained key inputs for a sample of securities across sectors and evaluated those inputs for reasonableness. 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, 2013, December 31, 2012, and September 30, 2012:

September 30, 2013	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Loans measured for impairment (net of government guarantees and specific reserves)	$	6,948	$	—	$	—	$	6,948
Other real estate owned		16,602		—		—		16,602
	$	23,550	$	—	$	—	$	23,550
December 31, 2012	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Loans measured for impairment (net of government guarantees and specific reserves)	$	5,877	$	—	$	—	$	5,877
Other real estate owned		17,972		—		—		17,972
	$	23,849	$	—	$	—	$	23,849
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)
Loans measured for impairment (net of government guarantees and specific reserves)	$	7,298	$	—	$	—	$	7,298
Other real estate owned		19,235		—		—		19,235
	$	26,533	$	—	$	—	$	26,533

No transfers to or from Level 3 assets measured at fair value on a nonrecurring basis occurred during the nine months ended September 30, 2013, and 2012, or during the year ended December 31, 2012.

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

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

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

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

NOTE 9 – DERIVATIVE INSTRUMENTS

Derivative instruments are entered into primarily as a risk management tool of the Company to help manage its interest rate risk position. Financial derivatives are recorded at fair value as other assets and other liabilities. The accounting for changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship. For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability are recognized currently in earnings. For a cash flow hedge, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded in accumulated other comprehensive income and subsequently reclassified to earnings as the hedged transaction impacts net income. Any ineffective portion of a cash flow hedge is recognized currently in earnings.

During the second quarter 2013, the Company entered into an interest rate swap agreement with an $8,000 notional amount to convert its variable-rate Junior Subordinated Debenture debt into a fixed rate for a term of approximately 7 years at a rate of 2.73%. The derivative is designated as a cash flow hedge. The hedge meets the definition of highly effective and the Company expects the hedge to be highly effective throughout the remaining term of the swap. The fair value of the derivative instrument at September 30, 2013, was a $313 unrealized gain, which is recorded in the other asset section of the balance sheet, net of the tax effect. No gain or loss was recognized in earnings for the three months ended September 30, 2013, related to interest rate swaps.

The Company maintains written documentation for the hedge. This documentation identifies the hedging objective and strategy, the hedging instrument, the instrument being hedged, the reasoning behind the assertion that the hedge is highly effective and the methodology for measuring ongoing hedge effectiveness and ineffectiveness. The Company pledged $400 under collateral arrangements as of April 22, 2013, to satisfy collateral requirements associated with the interest rate swap contract.

NOTE 10 – 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

41

Company’s 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 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, 2013, the Company and the Bank met all capital adequacy requirements to which they are subject.

As of September 30, 2013, and according to Federal Reserve and FDIC guidelines, the Bank was considered to be well-capitalized. To be categorized as well-capitalized, the Bank must maintain minimum Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table.

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											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2013:
Total capital (to risk weighted assets)
Bank:	$	174,025		16.16	%	$	86,172		8.00	%	$	107,715		10.00	%
Company:	$	176,929		16.42	%	$	86,213		8.00	%	$	107,767		10.00	%
Tier I capital (to risk weighted assets)
Bank:	$	160,517		14.90	%	$	43,086		4.00	%	$	64,629		6.00	%
Company:	$	163,421		15.16	%	$	43,107		4.00	%	$	64,660		6.00	%
Tier I capital (to leverage assets)
Bank:	$	160,517		11.36	%	$	56,520		4.00	%	$	70,650		5.00	%
Company:	$	163,421		11.56	%	$	56,539		4.00	%	$	70,673		5.00	%
As of December 31, 2012:
Total capital (to risk weighted assets)
Bank:	$	173,225		17.90	%	$	77,426		8.00	%	$	96,783		10.00	%
Company:	$	175,671		18.15	%	$	77,411		8.00	%	$	96,764		10.00	%
Tier I capital (to risk weighted assets)
Bank:	$	161,073		16.64	%	$	38,713		4.00	%	$	58,070		6.00	%
Company:	$	163,519		16.90	%	$	38,706		4.00	%	$	58,059		6.00	%
Tier I capital (to leverage assets)
Bank:	$	161,073		12.15	%	$	53,019		4.00	%	$	66,273		5.00	%
Company:	$	163,519		12.33	%	$	53,030		4.00	%	$	66,287		5.00	%
As of September 30, 2012:
Total capital (to risk weighted assets)
Bank:	$	172,595		18.45	%	$	74,853		8.00	%	$	93,567		10.00	%
Company:	$	174,185		18.62	%	$	71,720		8.00	%	$	93,523		10.00	%
Tier I capital (to risk weighted assets)
Bank:	$	160,841		17.19	%	$	37,427		4.00	%	$	56,140		6.00	%
Company:	$	162,431		17.37	%	$	37,409		4.00	%	$	56,114		6.00	%
Tier I capital (to leverage assets)
Bank:	$	160,841		12.41	%	$	51,848		4.00	%	$	64,810		5.00	%
Company:	$	162,431		12.53	%	$	51,861		4.00	%	$	64,826		5.00	%

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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 financial statements and the notes included in this report. Please refer also to our Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in the Company’s 2012 Form 10-K. All dollar amounts, except share and per share data, are expressed in thousands of dollars.

In addition to historical information, this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements regarding projected results for fourth quarter 2013 and full year 2013, the expected interest rate environment and its impact on our business, loan yields and expected prepayments, net interest margin, expectations regarding nonperforming assets, loan growth, earning asset mix, expected cash flows from the securities portfolio, expectations regarding the Company’s securities portfolio and the sale of securities, their value and yields, core deposits and cost, capital levels, liquidity and dividends, expectations regarding certain large depositor relationships, the outcome of legal proceedings, the 2013 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, and our other reports filed with the SEC:

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

• The local housing or real estate market could decline.

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

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

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

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

• Competition among financial institutions could increase significantly.

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

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

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

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

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

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

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

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

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• 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, or may result in substantial uninsured liabilities, which could adversely affect our business, prospects, results of operations and financial condition.

• 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 Part I, Item 1A “Risk Factors” in the Company’s 2012 Form 10-K and Part II, Item 1A, “Risk Factors” in this report and the other risks described in this report and include risks and uncertainties described or referred to in Part I, Item 1 “Business” under the captions “Competition” and “Supervision and Regulation” of the Company’s 2012 Form 10-K and Part II, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. Please take into account that forward-looking statements speak only as of the date of this report or documents incorporated by reference. The Company does not undertake any obligation to publicly correct or update any forward-looking statement whether as a result of new information, future events or otherwise.

SUMMARY OF CRITICAL ACCOUNTING POLICIES

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

The SEC defines “critical accounting policies” as those that require the application of management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. Significant accounting policies are described in Note 1 of theNotes to Consolidated Financial Statements in the Company’s 2012 Form 10-K. Management believes that the following policies and those disclosed in theNotes to Consolidated Financial Statements in the Company’s 2012 Form 10-K should be considered critical under the SEC definition:

Nonaccrual Loans

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

Allowance for Loan Losses and Reserve for Unfunded Commitments

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

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Troubled Debt Restructurings

In the normal course of business, the Company may modify the terms of certain loans, attempting to protect as much of its investment as possible. Management evaluates the circumstances surrounding each modification to determine whether it is a troubled debt restructuring (“TDR”). TDRs exist when 1) the restructuring constitutes a concession, and 2) the debtor is experiencing financial difficulties. Additional information regarding the Company’s 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, 2013, the Company had $23,710 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, 2012.

Share-based Compensation

Consistent with the provisions of FASB ASC 718,Stock Compensation, a revision to the previously issued guidance on accounting for stock options and other forms of equity-based compensation, we recognize expense for the grant-date fair value of stock options and other equity-based forms of compensation issued to employees over the employees’ requisite service period (generally the vesting period). The requisite service period may be subject to performance conditions. The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model. Management assumptions utilized at the time of grant impact the fair value of the option calculated under the Black-Scholes methodology, and ultimately, the expense that will be recognized over the life of the option. Additional information is included in Note 1 of theNotes to Consolidated Financial Statements in Item 8 of the Company’s 2012 Form 10-K.

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. Additional information regarding the Company’s fair value measurements can be found in Note 8 of theNotes to Consolidated Financial Statements in Item 1 of this report.

Recent Accounting Pronouncements

In January 2013, the FASB issued Accounting Standards Update No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” ASU No. 2013-01 clarifies that ASU No. 2011-11 applies only to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. Entities with other types of financial assets and financial liabilities subject to a master netting arrangement or similar agreement are no longer subject to the disclosure requirements in ASU No. 2011-11. The amendments are effective for annual and interim reporting periods beginning on or after January 1, 2013. The adoption of ASU No. 2013-01 did not have a material impact on the Company’s consolidated financial statements.

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In February 2013, the FASB issued Accounting Standards Update No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU No. 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component and to present either on the face of the statement where net income is presented, or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2012. The adoption of ASU No. 2013-02 did not have a material impact on the Company’s consolidated financial statements.

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HIGHLIGHTS FOR THIRD QUARTER 2013

	For the Three Months ended September 30,									For the Nine Months ended September 30,
	2013			2012			% Change			2013			2012			% Change
Net income	$	3,940		$	3,438			14.60	%	$	10,115		$	9,270			9.12	%
Operating revenue(1)	$	16,305		$	13,900			17.30	%	$	46,015		$	41,955			9.68	%
Earnings per share
Basic	$	0.22		$	0.19			15.79	%	$	0.57		$	0.51			11.76	%
Diluted	$	0.22		$	0.19			15.79	%	$	0.56		$	0.51			9.80	%
Assets, period-end	$	1,454,878		$	1,350,422			7.74	%
Gross loans, period-end	$	978,673		$	836,973			16.93	%
Core deposits, period end(2)	$	1,015,651		$	882,614			15.07	%
Deposits, period-end	$	1,117,529		$	980,162			14.01	%
Return on average assets(3)		1.09	%		1.03	%					0.95	%		0.95	%
Return on average equity(3)		8.77	%		7.52	%					7.46	%		6.85	%
Return on average tangible equity(3) (4)		10.12	%		8.56	%					8.58	%		7.81	%

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

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

⁽³⁾  Amounts annualized.

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

The Company earned $3,940 in third quarter 2013, compared to $3,438 in third quarter 2012. The improvement in net income was primarily due to an increase in operating revenue of $2,405 or 17.3%. Improvement in operating revenue was partially offset by a $1,691 increase in noninterest expense. The increase in operating revenue was centered in net interest income, which accounted for $2,373 of the total improvement in operating revenue. Improvement in net interest income was primarily due to increased volumes of earnings assets, primarily loans, due both to organic growth and the acquisition of Century Bank, which closed on February 1, 2013. In addition, during the third quarter 2013, the Company recovered $982 in interest income on two loans charged off in previous periods, which contributed to the growth in net interest income. The increase in noninterest expense was primarily due to higher personnel expense and other real estate expense.

During third quarter 2013, the Company continued to experience organic growth in outstanding loans. Outstanding loans at September 30, 2013, were $978,673 up $18,240 over the prior quarter end. Outstanding loans at September 30, 2013, were up $107,416 over December 31, 2012. Excluding loans acquired in the Century Bank transaction, organic loan growth during the first nine months of 2013 was $59,650 and represented an annualized growth rate of 9.2%. Outstanding core deposits were $1,015 at September 30, 2013, up $56,910 during the third quarter 2013. The growth in core deposits during the second half of the year is a typical seasonal pattern.

Year-to-date September 30, 2013, net income was $10,115, up $845 or 9.1% over the same period last year. Current year income was negatively impacted by $1,246 of merger expenses related to the Century Bank acquisition, which were booked during the first quarter 2013. Excluding the merger-related expenses, net income was $10,950, up $1,680 or 18.1% over the same period last year, due to increased operating revenues and a lower provision for loan losses.

Reconciliation of non-GAAP financial information

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

The Company presents a computation of tangible equity along with tangible book value and return on average tangible equity. The Company defines tangible equity as total shareholders’ equity before goodwill and core deposit intangible assets. Tangible book value is calculated as tangible equity divided by total shares outstanding. Return on average tangible equity is calculated

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as net income divided by average tangible equity. We believe that tangible equity and certain tangible equity ratios are meaningful measures of capital adequacy which may be used when making period-to-period and company-to-company comparisons. Tangible equity and tangible equity ratios are considered to be non-GAAP financial measures and should be viewed in conjunction with total shareholders’ equity, book value and return on average equity. The following table presents a reconciliation of total shareholders’ equity to tangible equity.

	September 30,			December 31,			September 30,
	2013			2012			2012
Total shareholders’ equity	$	179,678		$	183,381		$	182,779
Subtract:
Goodwill		(22,945	)		(22,031	)		(22,031	)
Core deposit intangible assets		(765	)		—			(37	)
Tangible shareholders’ equity (non-GAAP)	$	155,968		$	161,350		$	160,711
Book value per share	$	10.40		$	10.28		$	10.21
Tangible book value per share (non-GAAP)	$	8.72		$	9.05		$	8.98
Year-to-date return on average equity		7.46	%		6.97	%		6.85	%
Year-to-date return on average tangible equity (non-GAAP)		8.58	%		7.94	%		7.81	%

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 measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income is the primary source of the Company’s revenue. Net interest income is the difference between interest income derived from earning assets (principally loans) and interest expense associated with interest-bearing liabilities (principally deposits). The volume and mix of earning assets and funding sources, market rates of interest, demand for loans, and the availability of deposits affect net interest income.

The third quarter 2013 net interest margin of 4.58% was up 38 basis points over the second quarter 2013 net interest margin of 4.20%, and up 42 basis points from the 4.16% reported for the third quarter 2012. The increase in the linked quarter-over-quarter margin and year-over-year net interest margin was affected by the third quarter 2013 recovery of $982 of interest income on loans previously charged off and $151 in recognized accretion on loans acquired in the Century Bank acquisition. The interest recovery contributed 30 basis points to the third quarter 2013 margin while the recognized accretion on acquired loans added an additional 5 basis points. Accretion on acquired loans of $350 and $231 was recognized in the first and second quarters of 2013, respectively. Our core margin, which eliminates the nonrecurring items and the accretion of the acquired loans, for the third quarter 2013, was 4.23%, an improvement of 14 basis points over the core margin of 4.09% for second quarter 2013. The improvement in the core margin was due to loan growth which shifted earning assets into higher yielding loans rather than the securities portfolio. In addition, the margin benefitted from improved yields on the securities portfolio, which were up 43 basis points in third quarter 2013 when compared to second quarter, as the prepayment speeds on our mortgage-backed securities slowed due to higher long-term rates, thus reducing amortization of premiums. The Company also benefited from a reduction in its cost of funds as the cost of interest-bearing liabilities declined 5 basis points in the third quarter 2013 from second quarter 2013 and 16 basis points from the third quarter 2012. On a linked-quarter basis, the Company lowered its cost of interest-bearing core deposits by 2 basis points and the cost of wholesale interest-bearing funds by 8 basis points in third quarter 2013.

The recent steepening of the yield curve may provide some better loan pricing opportunities, but the competition for quality new loans remains very intense, thus rates on new loan production are not expected to be accretive to current portfolio loan yields. However, our anticipation of continued loan growth and the expected subsequent improvement in our mix of earning

49

assets when combined with the accretion of loan marks may mitigate a portion of the expected decline in average loan yields. Additionally we expect our securities portfolio to provide modestly higher yields in the fourth quarter 2013 as yields on mortgage-backed securities should move a bit higher as prepayment on mortgage-backed securities slows, which in turn slows the amortization of premiums paid to acquire the securities. We see limited opportunities to further lower our cost of core deposits and will continue to look for opportunities to extend our wholesale funding maturity structure, which would increase the cost of our interest-bearing wholesale liabilities. Given these many variables and the volatile market interest rates, our suggested outlook for fourth quarter margin is for stable or possibly some improvement in the core net interest margin.

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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, 2013, compared to the quarter ended September 30, 2012:

Table I

Average Balance Analysis of Net Interest Income

(dollars in thousands)

		Three Months Ended September 30, 2013								Three Months Ended September 30, 2012
		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		$	91	$	2			8.72	%	$	69	$	2			11.53	%
Securities available-for-sale:
Taxable			283,700		1,489			2.08	%		334,370		1,491			1.77	%
Tax-exempt(1)			67,745		751			4.40	%		64,785		646			3.97	%
Loans held-for-sale			—		—			0.00	%		—		—			0.00	%
Loans, net of deferred fees and allowance(2)			958,372		14,028			5.81	%		816,694		11,970			5.83	%
Total interest-earning assets(1)			1,309,908		16,270			4.93	%		1,215,918		14,109			4.62	%
Non earning assets
Cash and due from banks			21,389								19,694
Premises and equipment			19,252								19,594
Goodwill & intangible assets			23,726								22,098
Interest receivable and other assets			60,982								49,773
Total nonearning assets			125,349								111,159
Total assets		$	1,435,257							$	1,327,077
Interest-bearing liabilities
Money market and NOW accounts			513,059	$	(382	)		-0.30	%		482,881	$	(479	)		-0.39	%
Savings deposits			42,677		(13	)		-0.12	%		37,982		(13	)		-0.14	%
Time deposits - core (3)			70,059		(120	)		-0.68	%		58,606		(163	)		-1.11	%
Total interest-bearing core deposits	��		625,795		(515	)		-0.33	%		579,469		(655	)		-0.45	%
Time deposits - noncore			105,408		(286	)		-1.08	%		99,852		(337	)		-1.35	%
Federal funds purchased			4,355		(5	)		-0.46	%		3,690		(4	)		-0.43	%
FHLB & FRB borrowings			162,370		(292	)		-0.71	%		149,277		(364	)		-0.97	%
Trust preferred			8,248		(51	)		-2.45	%		8,248		(38	)		-1.83	%
Total interest-bearing wholesale funding			280,381		(634	)		-0.90	%		261,067		(743	)		-1.13	%
Total interest-bearing liabilities			906,176		(1,149	)		-0.50	%		840,536		(1,398	)		-0.66	%
Noninterest-bearing liabilities
Demand deposits			346,692								300,091
Interest payable and other			4,144								4,606
Total noninterest liabilities			350,836								304,697
Total liabilities			1,257,012								1,145,233
Shareholders’ equity			178,245								181,844
Total liabilities and shareholders’ equity		$	1,435,257							$	1,327,077
Net interest income				$	15,121							$	12,711
Net interest margin(1)					4.58	%							4.16	%

(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 $263 and $226 for the three months ended September 30, 2013 and September 30, 2012, respectively.

Net interest margin was positively impacted by 8 basis points in each period.

(2) Interest income includes recognized loan origination fees of $84 and $58 for the three months ended September 30, 2013 and September 30, 2012, respectively.

(3) Defined by the Company as interest checking, money market, savings and 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 increased by 31 basis points in third quarter 2013 to 4.93% from 4.62% in third quarter 2012, primarily attributable to the $982 recovery of interest income on two loans charged off in prior periods. Without the interest recovery, our yield on earning assets would have been 4.63%, an improvement of 1 basis point over third quarter 2012. Excluding the interest recovery, loan yield decreased from 5.83% in the prior year quarter to 5.40% in the current quarter.

The cost of interest-bearing liabilities declined by 16 basis points from 0.66% in third quarter 2012 to 0.50% in third quarter 2013. The decline in rates is evident in each core deposit category as the cost of interest-bearing core deposits fell by 12 basis points from 0.45% in third quarter 2012 to 0.33% in third quarter 2013. The cost of wholesale funding also moved down from 1.13% in third quarter 2012 to 0.90% in third quarter 2013, despite the execution of the trust preferred swap. All categories of wholesale funding showed a decline in rates with the exception of Trust Preferred, which increased due to the swap executed during second quarter 2013.

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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, 2013, and September 30, 2012.

Table II

Analysis of Changes in Interest Income and Interest Expense

(dollars in thousands)

	Three Months Ended September 30, 2013 compared to September 30, 2012 Increase (decrease) due to
	Volume			Rate			Net
Interest earned on:
Federal funds sold and interest-bearing deposits	$	1		$	(1	)	$	—
Securities available-for-sale:
Taxable		(222	)		220			(2	)
Tax-exempt(1)		32			73			105
Loans held-for-sale		—			—			—
Loans, net of deferred fees and allowance		2,115			(59	)		2,056
Total interest-earning assets(1)		1,926			233			2,159
Interest paid on:
Money market and NOW accounts		31			(128	)		(97	)
Savings deposits		2			(2	)		—
Time deposits—core(2)		32			(75	)		(43	)
Total interest-bearing core deposits		65			(205	)		(140	)
Time deposits—noncore		20			(73	)		(53	)
Federal funds purchased		1			—			1
FHLB & FRB borrowings		33			(105	)		(72	)
Trust preferred		—			13			13
Total interest-bearing wholesale funding		54			(165	)		(111	)
Total interest-bearing liabilities		119			(370	)		(251	)
Net interest income(1)	$	1,807		$	603		$	2,410

(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 $263 and $226 for the three months ended September 30, 2013 and September 30, 2012, respectively.

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

The third quarter 2013 rate/volume analysis shows that net interest income increased by $2,410 over third quarter 2012. Third quarter 2013 interest income including loan fees increased by $2,159 from the prior year period with higher volumes of earning assets increasing interest income by $1,926, while higher rates contributed $233 to the overall increase in interest income. The increase in interest income due to higher volumes was the result of both organic loan growth and the acquisition of Century Bank during first quarter 2013, which added approximately $60,000 in loans not included in previous periods. Also, excluding the $982 interest recoveries recorded during the third quarter 2013, the Company would have experienced a $749 decline in the margin due to rate.

Also contributing to the increase in net interest income was a decline in interest expense of $251 in third quarter 2013 when compared to the same quarter last year. The decline in interest expense was related to lower rates on both core deposits and wholesale funding, which was partially offset by increased interest expense due to higher volumes.

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The following table presents the condensed average balance sheet information, together with taxable equivalent interest income and yields on average interest-earning assets, and interest expense and rates paid on average interest-bearing liabilities for the nine months ended September 30, 2013, compared to the same period last year:

Table III

Average Balance Analysis of Net Interest Income

(dollars in thousands)

	Nine Months Ended September 30, 2013								Nine Months Ended September 30, 2012
	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	$	227	$	7			4.12	%	$	95		4			5.62	%
Securities available-for-sale:
Taxable		301,931		4,164			1.84	%		324,483		4,886			2.01	%
Tax-exempt(1)		69,337		2,199			4.24	%		54,760		1,787			4.36	%
Loans held-for-sale		—		—			0.00	%		253		7			3.70	%
Loans, net of deferred fees and allowance(2)		933,112		39,794			5.70	%		812,028		36,082			5.94	%
Total interest earning assets(1)		1,304,607		46,164			4.73	%		1,191,619		42,766			4.79	%
Non earning assets
Cash and due from banks		21,857								18,677
Premises and equipment		19,308								19,834
Goodwill & intangible assets		23,540								22,153
Interest receivable and other assets		59,357								51,043
Total non earning assets		124,062								111,707
Total assets	$	1,428,669							$	1,303,326
Interest-bearing liabilities
Money market and NOW accounts	$	519,534	$	(1,197	)		-0.31	%	$	481,381	$	(1,565	)		-0.43	%
Savings deposits		40,679		(37	)		-0.12	%		37,665		(47	)		-0.17	%
Time deposits—core (3)		73,126		(410	)		-0.75	%		59,602		(519	)		-1.16	%
Total interest-bearing core deposits		633,339		(1,644	)		-0.35	%		578,648		(2,131	)		-0.49	%
Time deposits—non-core		108,363		(943	)		-1.16	%		92,827		(1,018	)		-1.46	%
Federal funds purchased		3,270		(12	)		-0.49	%		5,202		(20	)		-0.51	%
FHLB & FRB borrowings		162,699		(905	)		-0.74	%		142,551		(1,259	)		-1.18	%
Trust preferred		8,248		(139	)		-2.25	%		8,248		(116	)		-1.88	%
Total interest-bearing wholesale funding		282,580		(1,999	)		-0.95	%		248,828		(2,413	)		-1.30	%
Total interest-bearing liabilities		915,919		(3,643	)		-0.53	%		827,476		(4,544	)		-0.73	%
Noninterest-bearing liabilities
Demand deposits		327,643								290,847
Interest payable and other		3,910								4,252
Total noninterest liabilities		331,553								295,099
Total liabilities		1,247,472								1,122,575
Shareholders’ equity		181,197								180,751
Total liabilities and shareholders’ equity	$	1,428,669							$	1,303,326
Net interest income			$	42,521							$	38,222
Net interest margin(1)				4.36	%							4.28	%

(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 $770 and $625 for the YTD period ended September 30, 2013 and 2012, respectively. Net interest margin was positively impacted by 8 and 7 basis points, respectively.

(2) Interest income includes recognized loan origination fees of $361 and $142 for the YTD period ended September 30, 2013 and 2012, respectively.

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

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The net interest margin for the nine months ended September 30, 2013, was 4.36%, up 8 basis points from the 4.28% net interest margin for the same period in 2012. Table III shows that earning asset yields declined by 6 basis points to 4.73% for the first nine months of 2013 from 4.79% for the same period in 2012. However, interest recoveries during the current year added 10 basis points to the year-to-date September 30 2013, net interest margin, thus the net interest margin was relatively unchanged through September 30, 2013, when compared to the same period last year. Excluding nonrecurring interest recoveries, the relatively stable net interest margin was primarily due to lower cost of interest-bearing core deposits and wholesale funding, which were down 14 and 35 basis points, respectively, in third quarter 2013 when compared to third quarter 2012.

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Table IV

Analysis of Changes in Interest Income and Interest Expense

(dollars in thousands)

	Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30,  2012 Increase (decrease) due to
	Volume			Rate			Net
Interest earned on:
Federal funds sold and interest-bearing deposits	$	6		$	(3	)	$	3
Securities available-for-sale:
Taxable		(344	)		(378	)		(722	)
Tax-exempt(1)		474			(62	)		412
Loans held-for-sale		(7	)		—			(7	)
Loans, net of deferred fees and allowance		5,342			(1,630	)		3,712
Total interest earning assets(1)		5,471			(2,073	)		3,398
Interest paid on:
Money market and NOW accounts		122			(490	)		(368	)
Savings deposits		4			(14	)		(10	)
Time deposits—core(2)		117			(226	)		(109	)
Total interest-bearing core deposits		243			(730	)		(487	)
Time deposits—non-core		169			(244	)		(75	)
Federal funds purchased		(7	)		(1	)		(8	)
FHLB & FRB borrowings		177			(531	)		(354	)
Trust preferred		—			23			23
Total interest-bearing wholesale funding		339			(753	)		(414	)
Total interest-bearing liabilities		582			(1,483	)		(901	)
Net interest income(1)	$	4,889		$	(590	)	$	4,299

(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 $770 and $625 for the YTD period ended September 30, 2013 and 2012, respectively. Net interest margin was positively impacted by 8 and 7 basis points, respectively.

(2) Interest income includes recognized loan origination fees of $361 and $142 for the YTD period ended September 30, 2013 and 2012, respectively.

The rate/volume analysis for the nine months ended September 30, 2013, in Table IV, shows that interest income including loan fees increased by $3,398 over the same period in 2012. The increase in interest income due to higher volumes of earning assets was $5,471 and was primarily centered in loans. Higher loan volume was the result of both organic loan growth and the acquisition of Century Bank loans during the first quarter 2013. The increase in interest income due to higher volumes was partially offset by a decline in interest income of $2,073 due to lower rates on earning assets. The decrease in interest income due to rates would have been $3,055 excluding the nonrecurring interest recoveries recorded in third quarter 2013. The rate/volume analysis shows that interest expense through September 30, 2013, decreased by $901 from the same period last year. Overall, lower rates on both interest-bearing core deposits and wholesale funding caused a $1,483 drop in interest expense, which was partially offset by a $582 increase in interest expense due to higher volumes of interest-bearing liabilities.

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Loan Loss Provision and Allowance

Below is a summary of the Company’s allowance for loan losses for the three-month period ended September 30, 2013, and the nine-month period ended September 30, 2013, compared to the same periods in 2012:

	Three months ended						Nine months ended
	September 30,						September 30,
	2013			2012			2013			2012
Balance, beginning of period	$	16,303		$	16,175		$	16,346		$	14,941
Provision charged to income		—			—			250			1,900
Loans charged against allowance		(221	)		(1,140	)		(1,049	)		(2,809	)
Recoveries credited to allowance		720			1,248			1,255			2,251
Balance, end of period	$	16,802		$	16,283		$	16,802		$	16,283

The provision for loan losses for the nine months ended September 30, 2013, was $250, compared to $1,900 for the same period last year. The decrease in the provision was the result of a reduction in the level of nonperforming assets and net loan recoveries during the first nine months of 2013. The Company’s classified assets at September 30, 2013, were 30.25% of regulatory capital compared to 31.18% and 32.43% of regulatory capital at December 31, 2012, and September 30, 2012, respectively. Classified asset levels were temporarily increased by approximately $5,800 as a result of the Century Bank acquisition. Third quarter 2013 classified assets were lower than pre-acquisition levels. Net loan recoveries through September 30, 2013, were $206, which represented an annualized recovery rate of 0.03% of average loans compared to net charge offs of $558, or 0.09% of average loans, recorded for the same period in 2012. The allowance for loan losses for outstanding loans at September 30, 2013, was $16,802, or 1.72% of outstanding loans, compared to 1.88% and 1.95% of outstanding loans at December 31, 2012, and September 30, 2012, respectively. The reduction in the allowance for loan losses to total loans ratio was primarily due to loans acquired in the Century Bank transaction, which were booked net of fair value adjustments, including the fair value adjustment for credit and potential losses. The allowance for loan losses as a percentage of nonperforming loans, net of government guarantees, was 325.94% at September 30, 2013, compared to 193.29% and 167.87% at December 31, 2012 and September 30, 2012, respectively.

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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

	September 30 2013			December 31, 2012			September 30 2012
NONPERFORMING ASSETS
Nonaccrual loans
Real estate secured loans:
Permanent loans:
Multi-family residential	$	—		$	—		$	—
Residential 1-4 family		1,206			1,140			2,517
Owner-occupied commercial		2,235			3,805			3,624
Nonowner-occupied commercial		139			—			—
Total permanent real estate loans		3,580			4,945			6,141
Construction loans:
Multi-family residential		—			—			—
Residential 1-4 family		—			—			—
Commercial real estate		—			—			—
Commercial bare land and acquisition & development		—			—			—
Residential bare land and acquisition & development		—			101			104
Total construction real estate loans		—			101			104
Total real estate loans		3,580			5,046			6,245
Commercial loans		2,361			4,315			4,578
Total nonaccrual loans		5,941			9,361			10,823
90-days past due and accruing interest		—			—			—
Total nonperforming loans		5,941			9,361			10,823
Nonperforming loans guaranteed by government		(786	)		(905	)		(1,123	)
Net nonperforming loans		5,155			8,456			9,700
Other real estate owned		16,602			17,972			19,235
Total nonperforming assets, net of guaranteed loans	$	21,757		$	26,428		$	28,935
ASSET QUALITY RATIOS
Allowance for loan losses as a percentage of total loans outstanding, net of loans held for sale		1.72	%		1.88	%		1.95	%
Allowance for loan losses as a percentage of total nonperforming loans, net of government guarantees		325.94	%		193.31	%		167.87	%
Net loan charge offs as a percentage of average loans, annualized		-0.03	%		0.06	%		0.05	%
Net nonperforming loans as a percentage of total loans		0.53	%		0.97	%		1.16	%
Nonperforming assets as a percentage of total assets		1.50	%		1.92	%		2.14	%
Consolidated classified asset ratio(1)		30.25	%		31.18	%		32.43	%

⁽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.

Nonperforming assets, net of government guarantees at September 30, 2013, declined $4,671 and $7,178 from December 31, 2012 and September 30, 2012, respectively. On a linked-quarter basis, nonperforming assets at September 30, 2013, were down $2,469 from June 30, 2013. A drop in other real estate owned accounted for much of the decline in nonperforming assets as the Company disposed of properties or recorded valuation write-downs on properties. Two properties, a commercial land development loan and a retail strip mall, valued at $10,490 and $3,478, respectively, accounted for 84.13% of total other real estate owned at September 30, 2013. The $728 valuation write-down recorded during the third quarter 2013 was related to the commercial land development loan held in other real estate owned. While the Company is actively marketing both properties, the location and type of these two properties make them susceptible to possible future valuation write-downs as new appraisals become available.

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At September 30, 2013, the Company had impaired loans totaling $9,346, net of government guarantees. A specific allowance of $23 (included in the ending allowance at September 30, 2013) was assigned to these loans. That compares to impaired loans of $9,493 at December 31, 2012, and a specific allowance assigned of $2.

Noninterest Income

Noninterest income for the nine months ended September 30, 2013, was $4,264, down $94 or 2.16% from the same period in 2012. The decrease in 2013 noninterest income when compared to last year was primarily attributable to a $72 reduction in mortgage banking which was discontinued during first quarter 2012. In addition, for the nine months ended September 30, 2013, the Company had $24 in losses on the impairment of and sale of securities, combined with a drop in BOLI income totaling $45. The decline in BOLI income was due to lower yields on invested funds. The BOLI product is a variable rate product in nature in that yields will rise and fall based on market interest rates. The decline in these categories of noninterest income was partially offset by an increase in service charges and income from merchant banking activities.

On a linked-quarter basis, third quarter 2013 noninterest income was down $88 from second quarter 2013 noninterest income. The linked-quarter decline was primarily due to lower rental income from other real estate owned properties. Fourth quarter 2013 noninterest income is expected to be improved over third quarter 2013 levels due to an anticipated seasonal increase in merchant bankcard revenues.

Noninterest Expense

Noninterest expense for the nine months ended September 30, 2013, was $30,687, an increase of $4,489 or 17.13% from the same period in 2012. Excluding merger expenses and FDIC assessments, all categories of noninterest expense through September 30, 2013, were up over last year with increases in other real estate expense, salaries and benefits, premises and equipment, business development, and data processing, accounting for the majority of higher expenses. Other real estate expense was elevated in the third quarter due to a valuation write-down of $728 on a commercial land development property. Salaries and benefits increased $1,623, or 11.03%, primarily due to higher base salaries, equity compensation, and higher accruals for incentives. The increase in base salaries, which was the result of additional staff acquired in the Century Bank transaction and staff additions to the Company’s healthcare lending activities. The increase in equity-based compensation was related to recent restricted stock unit grants to directors and employees of the Company. Bonus expense accruals were up through September 30, 2013, primarily due to additional staffing. Premises and equipment expense showed a $193 increase, which was primarily due to the acquisition of Century Bank and lease payments associated with the former Century Bank building. Business development expenses were up $287 through September 30, 2013 due to increased marketing activities in all of the Company’s markets and also related to the Company’s national healthcare lending activities. Data processing expenses, which were up $411 over last year, reflect monthly processing expenses related to the Century Bank transaction between the closing date of February 1, 2013, and the system conversion date of May 3, 2013, combined with additional maintenance costs on new software.

On a linked-quarter basis, noninterest expense in third quarter 2013 was up $898 over second quarter 2013 primarily due to an increase in other real estate valuation write-downs. Fourth quarter 2013 noninterest expense is expected to decline from third quarter 2013 expense levels, however certain categories of noninterest expense, such as other real estate and legal fees, create significant volatility in quarterly expense levels and can cause actual results to vary from expected results.

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BALANCE SHEET

Loans

At September 30, 2013, outstanding loans were $978,673, up $107,416 from December 31, 2012, and up $141,700 over September 30, 2012. Excluding loans acquired in the Century Bank acquisition, organic loan growth for the first nine months of 2013 was $59,650, or 9.15%, when annualized over December 31, 2013. All loans acquired in the Century Bank transaction are included in the Eugene market loan totals. A summary of outstanding loans by market at September 30, 2013, December 31, 2012, and September 30, 2012, follows:

	Period Ended
	September 30, 2013		December 31, 2012		September 30, 2012
Eugene market gross loans, period-end	$	324,320	$	253,345	$	240,013
Portland market gross loans, period-end		390,014		383,616		375,234
Seattle market gross loans, period-end		136,178		154,229		151,745
National healthcare gross loans, period-end		128,161		80,067		69,981
Total gross loans, period-end	$	978,673	$	871,257	$	836,973

All of the Company’s markets at September 30, 2013, with the exception of Seattle, showed solid loan growth over December 31, 2012, and September 30, 2013. Growth in National healthcare loans accounted for $48,094, or approximately 80%, of the organic loan growth recorded during the first nine months of 2013. The Company defines National healthcare loans as loans to healthcare professionals, primarily dentists located outside of the Company’s primary market area. The Company’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, Oregon; Portland, Oregon; and Seattle, Washington. National healthcare loans, loans east of the Cascade Range and outside Oregon and Washington, are maintained and serviced by personnel primarily located in the Portland market.

Outstanding loans to dental professionals, which are comprised of both local and national loans, at September 30, 2013, totaled $303,911, or 31.05%, of the loan portfolio, compared to $270,782, or 31.08% of the loan portfolio, at December 31, 2012. Growth in national loans accounted for all of the total increase in outstanding dental loans during the first nine months of 2013. At September 30, 2013, $17,491, or 5.76%, of the outstanding dental loans were supported by government guarantees. Loans to dental professionals include loans for such purposes as starting up a practice, acquisition of a practice, equipment financing, owner-occupied facilities, and working capital. National dental loans are limited to acquisition financing and owner-occupied facilities. Additional data on the Company’s dental loan portfolio and the credit quality of this portfolio can be found in Note 4 of theNotes to Consolidated Financial Statementsin this report.Additional information regarding loan concentrations is included in Part II, Item 1A “Risk Factors” of this report under the heading “Loan concentrations within one industry may create additional risk, and we have a significant concentration in loans to dental professionals.”

Detailed credit quality data on the entire loan portfolio can be found in Note 3 of theNotes to Consolidated Financial Statements in this report.

Securities

At September 30, 2013, the securities available-for-sale totaled $347,506, down $9,888 and $42,379 from June 30, 2013, and December 31, 2012, respectively. The cash flow from the securities portfolio was primarily used to fund loan growth during the quarter. The securities portfolio represented 23.89% of total assets at September 30, 2013, down from 30.08% of total assets at September 30, 2012. At September 30, 2013, the portfolio had a pre-tax unrealized taxable gain of $585 compared to an unrealized pre-tax gain of $57 at June 30, 2013. The increase in the pre-tax unrealized gain was primarily due to lower market interest rates at September 30, 2013 when compared to the prior quarter-end and a tightening of spreads on certain elements of the portfolio, specifically municipal securities. During the third quarter 2013, interest income on the portfolio increased due to improved yields on the mortgage-backed securities held in the portfolio. The increase in long-term market interest rates slowed refinancing activity, thus lowering prepayments on mortgage-backed securities and reducing the amortization of premiums paid on the securities. The decline in prepayments on mortgage-backed securities and principal pay-downs on this portion of the portfolio also contributed to the increase in average life and duration of the portfolio to 4.8 and 4.2 years, respectively, compared to 4.5 and 4.0 years at September 30, 2013. The securities portfolio is positioned to provide cash flow over the next 12 months of approximately $42,000 projected in the current rate environment.

At September 30, 2013, the book value of taxable and tax-exempt municipal securities was $80,092 and comprised 23.10% of the total portfolio. At September 30, 2013, the municipal securities held in the Company’s portfolio had an unrealized taxable loss of $727. Management has exercised caution in its purchases of municipals, relying on credit reports, demographic information and general fund balances. A thorough review of municipal investments is made prior to purchase with some areas of the country being avoided because of current economic stress. The portfolio is well diversified with no entity concentrations

60

At September 30, 2013, private-label mortgage-backed securities with a book value of $6,156 represented 1.77% of the total securities portfolio. On a monthly basis, management reviews 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. During the first nine months of 2013, management booked $16 in other-than-temporary-impairment (“OTTI”) expense related to the private-label mortgage-backed securities. Additional 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, at September 30, 2013, the remaining securities in the portfolio in an unrealized loss position were considered only temporarily impaired. The Company has no intent, nor is it more likely than not, that it will be required to sell these securities before their recovery. Management believes that substantially all decreases in fair value of the remaining securities are due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the value of the underlying collateral. The decline in value of these securities has resulted from current economic conditions. Although yields on these securities may be below market rates during the period, no loss of principal is expected.

Goodwill and Intangible Assets

At September 30, 2013, the Company had a recorded balance of $22,945 in goodwill from the November 30, 2005, acquisition of Northwest Business Financial Corporation (“NWBF”) and the February 1, 2013, acquisition of Century Bank. In addition, at September 30, 2013, the Company had $765 of core deposit intangible assets resulting from the acquisition of Century Bank. The Century Bank core deposit intangible was determined to have an expected life of seven years, and is being amortized over that period using the straight-line method. The Century Bank core deposit intangible will be fully amortized in January 2020. 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, but more frequently if an impairment triggering event is deemed to have occurred. The last impairment test was performed at December 31, 2012, at which time no impairment was determined to exist.

Core Deposits

Core deposits, which are defined by the Company as demand, interest checking, money market, savings, and nonpublic local time deposits, including nonpublic local time deposits in excess of $100, were $1,015,651 and represented 90.88% of total deposits, at September 30, 2013. Outstanding core deposits at September 30, 2013, included $59,611 of deposits acquired in the Century Bank transaction. Excluding the acquired Century Bank core deposits, September 30, 2013, core deposits were up $17,411 from December 31, 2012. During the third quarter 2013, outstanding core deposits were up $56,910 over the prior quarter-end. The third quarter 2013 growth in outstanding core deposits is typical of seasonal deposit patterns during the last half of the year.

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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, 2013, December 31, 2012, and September 30, 2012 follows:

	Period ended
	September 30, 2013		December 31, 2012		September 30, 2012
Eugene market core deposits, period-end(1)	$	596,403	$	536,143	$	512,842
Portland market core deposits, period-end(1)		256,710		258,516		226,576
Seattle market core deposits, period-end(1)		162,538		143,970		143,196
Total core deposits, period-end(1)		1,015,651		938,629		882,614
Public and brokered deposits, period-end		101,878		107,525		97,548
Total deposits, period-end	$	1,117,529	$	1,046,154	$	980,162
	Three Months Ended
	September 30, 2013		December 31, 2012		September 30, 2012
Eugene market core deposits, average(1)	$	589,123	$	508,856	$	508,927
Portland market core deposits, average(1)		240,612		236,200		229,913
Seattle market core deposits, average(1)		142,752		132,200		140,720
Total core deposits, average(1)		972,487		877,256		879,560
Public and brokered deposits, average		105,408		95,598		99,852
Total deposits, average	$	1,077,895	$	972,854	$	979,412

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

Public and Brokered Deposits

The Company uses public and brokered deposits to provide short-term and long-term funding sources. The Company defines short-term, as having a contractual maturity of less than one year. The Company uses brokered deposits to help mitigate interest rate risk in a rising rate environment. All long-term brokered deposits have a call feature, which provides the Company the option to redeem the deposits on a quarterly basis, allowing the Company to refinance long-term funding at lower rates should market rates fall. Below is a schedule detailing public and brokered deposits by type, including weighted average rate (“WAR”) and weighted average maturity (“WAM”).

Non-Core Deposit Summary

	Balance September 30, 2013		WAR			WAM
Short-Term Public Time Deposits	$	35,519		0.20	%		41 days
Long-Term Public Time Deposits		3,496		0.86	%		8.36 years
	$	39,015
Short-Term Brokered Time Deposits	$	23,500		0.19	%		75 days
Long-Term Brokered Time Deposits		46,258		1.98	%		5.81 years
	$	69,758

Borrowings

The Company has both secured and unsecured borrowing lines with the Federal Home Loan Bank, Federal Reserve Bank and various correspondent Banks. The Federal Reserve and correspondent borrowings are generally short-term, with a maturity of less than 30 days. The Federal Home Loan Bank borrowings can be either short-term or long-term in nature. See Note 6 of theNotes to Consolidated Financial Statements in item 1 of this report for a full maturity and interest rate schedule for the Federal Home Loan Bank borrowings.

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Junior Subordinated Debentures

The Company had $8,248 in junior subordinated debentures outstanding at September 30, 2013, which were issued in conjunction with the 2005 acquisition of NWBF. The junior subordinated debentures had an interest rate of 6.27% 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. On April 22, 2013, the Bank entered into a cash flow hedge on $8,000 of the trust preferred payment, swapping the variable interest rate for a fixed rate of 2.73% for a seven-year period. At September 30, 2013, the fair value of the interest rate swap on the Company’s subordinated debentures was $313. At September 30, 2013, the $8,000 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. Under final rules, recently adopted by the Federal Reserve Board and the other U.S. Federal Banking agencies, our trust preferred securities would remain as Tier 1 capital since total assets of the Company are less than $15,000,000. Additional information regarding these final capital rules in included in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources” of this report and in Part II, Item 1A “Risk Factors” of the report under the heading “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.”

Additional information regarding the terms of the cash flow hedge, is included in Note 9 of the Notes to Consolidated Financial Statements in item I of this report.

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 equity incentives. Capital formation allows the Company to grow assets and provides flexibility in times of adversity.

Shareholders’ equity at September 30, 2013, was $179,678, down $3,703 from December 31, 2012. The decline in the unrealized gain on the Company’s securities portfolio resulted in a decrease of $5,283 in the other comprehensive income category of Capital. During March 2013, the Company’s Board of Directors authorized the repurchase of up to five percent of the Company’s outstanding common shares, or approximately 892,000 shares, with the purchases to take place over the next 12 months, with the plan commencing on April 1, 2013. The Company did not repurchase any shares during 2013. Over the last six quarters, the Company has used a combination of regular dividends, special dividends, and share repurchases to maintain capital levels comparable with year-end December 31, 2011, capital levels. In future quarters, the Company’s Board of Directors may elect to retain a portion of current earnings and add to capital levels in anticipation of future growth opportunities. For additional details regarding the changes in equity, review the Consolidated Statements of Changes in Shareholders’ Equity in Item 1 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 4.00% Tier 1 capital to leverage assets, 4.00% Tier 1 capital to risk-weighted assets, and 8.00% total capital to risk-weighted assets. In order to be classified as “well-capitalized,” the highest capital rating, by the Federal Reserve and the 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 11.56%, 15.16%, and 16.42%, respectively, at September 30, 2013, all ratios being well above the minimum well-capitalized designation.

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In July 2013, the Federal Reserve Board and the other U.S. federal banking agencies adopted final rules making significant changes to the U.S. regulatory capital framework for U.S. banking organizations and to conform this framework to the Basel Committee’s current international regulatory capital accord (Basel III). These rules, upon their effectiveness, will replace the federal banking agencies’ general risk-based capital rules, advanced approaches rule, market-risk rule, and leverage rules, in accordance with certain transition provisions. Banks, such as Pacific Continental Bank, will become subject to the new rules on January 1, 2015. The new rules implement higher minimum capital requirements, include a new common equity Tier 1 capital requirement, and establish criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital. When fully phased in, the final rules will provide for increased minimum capital ratios as follows: (a) a common equity Tier 1 capital ratio of 4.5%; (b) a Tier 1 capital ratio of 6% (which is an increase from 4.0%); (c) a total capital ratio of 8%; and (d) a Tier 1 leverage ratio to average consolidated assets of 4%. While earlier proposals would have required that our trust preferred securities (TruPS) be phased out of Tier 1 capital, the new rules exempt depository institution holding companies with less than $15 billion in total consolidated assets as of December 31, 2009, such as the Company, from this requirement. These capital instruments, if issued prior to May 19, 2010, and currently in Tier 1 capital, are grandfathered in Tier 1 capital, subject to certain limits. Under the new rules, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements (equal to 2.5% of total risk-weighted assets). The phase-in of the capital conservation buffer will begin January 1, 2016, and be completed by January 1, 2019. The new rules also provide for various adjustments and deductions to the definitions of regulatory capital that will phase in from January 1, 2014 to December 31, 2017. We are currently evaluating the impact of these changes on our regulatory capital.

The Company has regularly paid cash dividends on a quarterly basis, typically in February, May, August and November of each year. The Board of Directors considers the dividend amount quarterly and takes a broad perspective in its dividend deliberations including a review of recent operating performance, capital levels, and concentrations of loans as a percentage of capital, and growth projections. The Board also considers dividend payout ratios, dividend yield, and other financial metrics in setting the quarterly dividend. There can be no assurance that dividends will be paid in the future.

At its July 16, 2013, meeting, the Board of Directors declared a regular cash dividend of $0.09 per share and a special cash dividend of $0.12 per share payable to shareholders of record on July 12, 2013. Subsequent to quarter-end, on October 15, 2013, the Board of Directors increased the regular quarterly cash dividend to $0.10 per share and declared a special cash dividend of $0.12 per share, payable to shareholders of record on November 12, 2013. The Company believes that it has sufficient liquidity to maintain the current level of regular dividends throughout 2013. The Company projects that existing capital will be sufficient to fund anticipated organic asset growth, while maintaining a well-capitalized designation from all regulatory agencies.

OFF-BALANCE SHEET ARRANGEMENTS AND COMMITMENTS

In the normal course of business, the Company commits to extensions of credit and issues letters of credit. The Company uses the same credit policies in making commitments to lend funds and conditional obligations as it does for other credit products. In the event of nonperformance by the customer, the Company’s exposure to credit loss is represented by the contractual amount of the instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established by the contract. Since some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At September 30, 2013, the Company had $182,816 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, 2013, the Company had $1,313 in letters of credit and financial guarantees outstanding.

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 nonpublic 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

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obligations, and requires the Company to maintain a certain amount of liquidity on the asset side of its balance sheet. The Company also prepares quarterly projections of its liquidity position 30 days, 90 days, 180 days, and 1 year into the future. In addition, the Company prepares a Liquidity Contingency Plan at least semi-annually that is strategic in nature and forward-looking to test the ability of the Company to fund a liquidity shortfall arising from various escalating events. The Liquidity Contingency Plan is presented and reviewed by the Company’s Asset and Liability Committee.

Core deposits at September 30, 2013, were $1,015,651 and represented 90.88% of total deposits. During the current quarter, outstanding core deposits increased $56,910. The growth in core deposits during the current quarter was used to fund loan growth and pay down short-term borrowings. 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, 2013, 57 large deposit relationships with the Company accounted for $383,763 or 37.78% of total outstanding core deposits. The single largest client represented 4.41% of outstanding core deposits at September 30, 2013. The loss of this deposit relationship or other large deposit relationships could cause an adverse effect on short-term liquidity. The Company uses a 10-point risk-rating system to evaluate each of its large depositors in order to assist management in its daily monitoring of the volatility of this portion of its core deposit base. The risk-rating system attempts to determine the stability of the deposits of each large depositor, evaluating among other things the length of time the depositor has been with the Company and the likelihood of loss of individual large depositor relationships. Risk ratings on large depositors are reviewed at least quarterly and adjusted if necessary. Company management and officers maintain close relationships and hold regular meetings with its large depositors to assist in management of these relationships. The Company expects to maintain these relationships, 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. There can be no assurance that these large depositor relationships will be maintained or that the loss of one or more of these depositors will not adversely affect the Company’s liquidity.

During the nine months ended September 30, 2013, the Company experienced an increase in outstanding loans, while the securities portfolio declined during the current quarter, thus providing a funding source for loan growth. The securities portfolio represented 23.89% of total assets at September 30, 2013. At September 30, 2013, $26,582 of the securities portfolio was pledged to support public deposits and repurchase agreements, leaving $320,924 of the securities portfolio unencumbered and available-for-sale. In addition, at September 30, 2013, the Company had $39,257 of government guaranteed loans that could be sold in the secondary market to support the Company’s liquidity position.

At September 30, 2013, the Company had secured borrowing lines with the Federal Home Loan Bank of Seattle (“FHLB”) and the Federal Reserve Bank of San Francisco (“FRB”), totaling $318,258. The Company’s secured lines with the FHLB and FRB were limited by the amount of collateral pledged; however, the Company does have the ability to access the FHLB’s excess stock pool and borrow up to the amount of the discounted value of the collateral pledged. At September 30, 2013, the Company had pledged $225,546 in discounted collateral value in commercial real estate loans, first and second lien single-family residential loans, and multi-family loans. Additionally, certain commercial and commercial real estate loans with a discounted value of $92,712 were pledged to the FRB under the Company’s Borrower-In-Custody program. The Company had unsecured correspondent lines totaling $129,000 at September 30, 2013. At September 30, 2013, the Company had $145,000 in borrowings outstanding from the FHLB, $0 outstanding with the FRB, and $0 outstanding on its overnight correspondent bank lines, leaving a total of $302,258 available on its secured and unsecured borrowing lines as of such date.

The Company also has in place a shelf registration statement with the SEC. As of September 30, 2013, $100,000 of stock debt or other securities were available for issuance under the shelf registration statement. We do not have any firm commitment in place to sell securities under the shelf registration statement.

Net cash provided by operating activities was $19,204 during the nine months ended September 30, 2013. Net cash of $19,489 was used in investing activities, consisting principally of a net loan principal increase of $44,425, which was partially offset by net proceeds from investment securities of $84,788. For the nine months ended September 30, 2013, cash provided by financing activities was $14,193.

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ITEM 3 Quantitative and Qualitative Disclosures about Market Risk

There has been no material change in the Company’s exposure to market risk. Readers are referred to the Company’s 2012 Form 10-K and the Annual Report to Shareholders for the year ended December 31, 2012, for additional information.

ITEM 4 Controls and Procedures

Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) for the quarter ended September 30, 2013, that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1 Legal Proceedings

On August 23, 2013, a putative class action lawsuit was filed in the Circuit Court of the State of Oregon for the County of Multnomah on behalf of individuals who placed money with Berjac of Oregon and Berjac of Portland, both currently in Chapter 11 bankruptcy. The lawsuit, which alleges violations of state securities laws and aiding breach of fiduciary duty, names Pacific Continental Bank, along with Holcomb Family Limited Partnership, Fred “Jack” W. Holcomb, Holcomb Family Trust, Jones & Roth, P.C. and Umpqua Bank, as defendants. Claimants seek the return of the money placed with Berjac of Oregon and Berjac of Portland, plus interest, and costs and attorneys’ fees, which are claimed to be in excess of $10 million.

We may from time to time be involved in claims, proceedings and litigation arising from our business and property ownership. We believe, based on currently available information, that the results of such proceedings, including the above-described proceeding, in the aggregate, will not have a material adverse effect on our financial condition.

ITEM 1A Risk Factors

For a discussion of risk factors relating to our business, please refer to Item 1A of Part I of our 2012 Form 10-K, which is incorporated by reference herein, in addition to the following information:

Industry Factors

The continued challenges in the U.S. and our region’s economies 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.

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The national economy and the financial services sector in particular are still facing challenges. A large percentage 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, 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 2012 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 were enacted 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 at the time that its outlook on the long-term rating remained negative; however, in June 2013, Standard & Poor’s revised its outlook on the U.S. credit rating to stable from negative. At the present time, both Fitch Ratings and Moody’s have reaffirmed the U.S.’s “AAA” credit rating; however, Fitch’s Ratings has stated that its outlook on the U.S. is negative while, in July 2013, Moody’s revised its outlook on the U.S. credit rating to stable from 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. On January 2, 2013, the American Taxpayer Relief Act of 2012 (the “Act”) was signed into law by the President. The Act averted the sharp decline in the federal budget deficit that would have occurred beginning in 2013 due to increased taxes and reduced federal government spending as required by previously enacted laws. Many observers had suggested that such a sharp decline in the deficit would have led to a recession and increased unemployment in the U.S. The Act raises additional revenues for the federal government through increases in marginal income tax rates for higher earners, increases in capital gains rates, a phase-out of various tax deductions and credits, an increase in estate tax rates and the expiration of payroll tax cuts. Under the Act, the mandatory reduction in federal spending due to budget sequestration was delayed for two months and the federal debt ceiling was not changed. Following unsuccessful negotiations the mandated federal spending cuts, including with respect to entitlements and defense, became effective on March 1, 2013. In October 2013, following continuing disagreements between the Administration and Congressional Republicans, Congress failed to timely pass the necessary continuing resolution to provide funding for various portions of the

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government’s operations and such operations were suspended from October 1 to 16, 2013. It is presently expected that there will be continuing negotiations between the Administration and Congressional Republicans over the mandated federal spending cuts and federal spending levels in general, regarding tax policy and the levels of the Federal budget deficits and the debt ceiling. The impact of these developments cannot be predicted with any certainty, but could have further adverse consequences for the credit ratings of U.S. sovereign obligations and also present additional challenges for the U.S. economy. 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.

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 the Company’s 2012 Form 10-K, we are subject to extensive regulation, supervision and examination by federal and state banking authorities. In addition, as a publicly traded company, we are subject to regulation by the Securities and Exchange Commission. Any change in applicable regulations or federal, state or local legislation could have a substantial impact on us and our operations. Additional legislation and regulations that could significantly affect our powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on our financial condition and results of operations.

In that regard, sweeping financial regulatory reform legislation in the form of the Dodd-Frank Act 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) has led 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 July 2013, the Federal Reserve Board and the other U.S. federal banking agencies adopted final rules making significant changes to the U.S. regulatory capital framework for U.S. banking organizations and to conform this framework to the Basel Committee’s current international regulatory capital accord (Basel III). These rules, upon their effectiveness, will replace the federal banking agencies’ general risk-based capital rules, advanced approaches rule, market-risk rule, and leverage rules, in accordance with certain transition provisions. Banks, such as Pacific Continental Bank, will become subject to the new rules on January 1, 2015. The new rules implement higher minimum capital requirements, include a new common equity Tier 1 capital requirement, and establish criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital. When fully phased in, the final rules will provide for increased minimum capital ratios as follows: (a) a common equity Tier 1 capital ratio of 4.5%; (b) a Tier 1 capital ratio of 6% (which is an increase from 4.0%); (c) a total capital ratio of 8%; and (d) a Tier 1 leverage ratio to average consolidated assets of 4%. While earlier proposals would have required that our trust preferred securities (TruPS) be phased out of Tier 1 capital, the new rules exempt depository institution holding companies with less than $15 billion in total consolidated assets as of December 31, 2009, such as the Company, from this requirement. These capital instruments, if issued prior to May 19, 2010, and currently in Tier 1 capital, are grandfathered in Tier 1 capital, subject to certain limits. Under the new rules, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements (equal to 2.5% of total risk-weighted assets). The phase-in of the capital conservation buffer will begin January 1, 2016, and be completed by January 1, 2019. The new rules also provide for various adjustments and deductions to the definitions of regulatory capital that will phase in from January 1, 2014 to December 31, 2017. We are currently evaluating the impact of these changes on our regulatory capital. The implementation of these new rules 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 and because of the heightened minimum capital requirements. The newly adopted capital rules could restrict our ability to grow during favorable market conditions, or require us to raise additional capital and liquidity, generally increase our cost of doing business, and impose other restrictions on our operations. The application of more stringent capital requirements would, among other things, result in lower returns on invested capital and result in regulatory sanctions if we were unable to comply with these requirements. As a result, our business, results of operations, financial condition or prospects could be adversely affected. In recent months, the federal bank regulators have announced regulatory enforcement actions against a number of large bank holding companies and banks arising from deficiencies in processes, procedures and controls involving anti-money laundering measures and compliance with the economic sanctions that affect transactions with designated foreign countries, nationals and others as provided for in the regulations of the Office of Foreign Assets Control of the U.S. Treasury Department. These

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actions evidence an intensification of the U.S. government’s expectations for compliance with these regulatory regimes on the part of banks operating in the U.S., including Pacific Continental Bank, and may result in increased compliance costs and increased risks of regulatory sanctions.

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

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

Fluctuating interest rates could adversely affect our profitability.

As is the case with many banks, 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, and has in past years, impacted, our net interest margin, and, in turn, our profitability. This impact could result in a decrease in our interest income relative to interest expense. Increases in interest rates may also adversely impact the value of our securities investment portfolio. At September 30, 2013, our balance sheet was liability sensitive, and an increase in interest rates could cause our net interest margin and our net interest income to decline. For the past several years, the banking industry has operated in an extremely low interest rate environment relative to historical averages, and the Federal Reserve Board has pursued highly accommodative monetary policies (including a very low Federal funds rate and substantial purchases of long-term U.S. Treasury and agency securities) in an effort to facilitate growth in the U.S. economy and a reduction in levels of unemployment. This environment has placed downward pressure on the net interest margins of U.S. banks, including Pacific Continental Bank. We cannot predict with any certainty whether or to what extent these Federal Reserve policies will continue, although various indications from the Federal Reserve Board suggest that aspects of its accommodative monetary policy may begin to taper down later in 2013 or 2014.

Company Factors

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 31.05% in principal amount of our total loan portfolio at September 30, 2013. 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.

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

At September 30, 2013, our nonperforming loans (which include all nonaccrual loans, net of government guarantees) were 0.53% of the loan portfolio. At September 30, 2013, our nonperforming assets (which include foreclosed real estate) were 1.50% of total assets. Nonperforming loans and assets adversely affect our net income in various ways. Until economic and

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market conditions improve, we 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, less estimated selling expenses, 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.

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

On July 16, 2013, we announced a quarterly cash dividend of $0.09 per share, payable to shareholders of record on August 12, 2013, and declared a special cash dividend of $0.12 per share. Subsequent to the end of third quarter 2013, on October 15, 2013, the Board of Directors declared a regular cash dividend of $0.10 per share and a special cash dividend of $0.12 per share payable to shareholders of record on November 12, 2013. 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 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 OTTI each reporting period, as required by 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 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, 2013, we had stock in the FHLB totaling $10,620. The FHLB stock held by us is carried at cost and is subject to recoverability testing under applicable accounting standards. As of September 30, 2013, 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, 2013, we had $22,945 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. The last impairment test was performed at December 31, 2012. At December 31, 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 would impact our operating results and could be material.

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

We are dependent on third-parties and their ability to process and monitor, on a daily basis, a large number of transactions, many of which are highly complex, across numerous and diverse markets. These transactions, as well as the information technology services we provide to clients, often must adhere to client-specific guidelines, as well as legal and regulatory standards. Due to the breadth of our client base and our geographical reach, developing and maintaining our operational systems and infrastructure is challenging, particularly as a result of rapidly evolving legal and regulatory requirements and technological shifts. Our financial, accounting, data processing or other operating systems and facilities may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, such as a spike in transaction volume, cyber-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. The ability of our customers to bank remotely, including online and through mobile devices, requires secure transmission of confidential information and increases the risk of data security breaches, which would expose us to financial claims by customers or others and which could adversely affect our reputation.

Despite the defensive measures we take to manage our internal technological and operational infrastructure, these threats may originate externally from third-parties, such as foreign governments, organized crime and other hackers, and outsource or infrastructure-support providers and application developers, or the threats may originate from within our organization. Given the increasingly high volume of our transactions, certain errors may be repeated or compounded before they can be discovered and rectified.

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

Although we have not experienced a cyber-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 operations, 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. Even if cyber-attacks and similar tactics are not directed specifically at Pacific Continental Bank, such attacks on large financial institutions could disrupt the overall functioning of the financial system and undermine consumer confidence in banks generally, to the detriment of other financial institutions, including the Bank. 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 insurance coverage which we believe provides sufficient protection at a manageable expense for an institution of our size and scope with similar technological systems. However, we cannot assure that this coverage would be sufficient to cover all financial losses, damages and penalties, including lost revenues, should we experience any one or more of our or a third-party’s systems failing or experiencing attack.

Our business and financial results could be impacted materially by adverse results in legal or regulatory proceedings.

As is the case with other banking institutions, we are from time to time subject to claims and proceedings related to our present or previous operations. In addition, we may be the subject of governmental investigations and other forms of regulatory inquiry from time to time. The results of these legal proceedings and governmental investigations and inquiries could lead to

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significant monetary damages or penalties, restrictions on the way in which we conduct our business, or reputational harm, and could involve significant defense or other costs. Although we establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, we do not have accruals for all legal proceedings where we face a risk of loss. In addition, amounts accrued may not represent the ultimate loss to us from the legal proceedings in question. Thus, our ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued for legal loss contingencies. To mitigate the cost of some of these claims, we maintain insurance coverage in amounts and with deductibles that we believe are appropriate for our operations. However, our insurance coverage does not cover any civil money penalties or fines imposed by government authorities and may not cover all other claims that have been or might be brought against us, or continue to be available to us at a reasonable cost. As a result, we may be exposed to substantial uninsured liabilities, which could adversely affect our business, prospects, results of operations and financial condition.

ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds

None

ITEM 3 Defaults Upon Senior Securities

None

ITEM 4 Mine Safety Disclosures

Not applicable

ITEM  5 Other Information

None

ITEM 6 Exhibits

31.1	Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer of the Registrant
31.2	Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer of the Registrant
32*	Furnished statements of the Chief Executive Officer and Chief Financial Officer under 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, 2013, is formatted in XBRL: (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Operations, (iii) the Unaudited Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income, (iv) the Unaudited Consolidated Statements of Cash Flows, and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text.

* In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.

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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, 2013	/s/ Hal Brown
	Hal Brown
	Chief Executive Officer
	(Duly Authorized Officer; Principal Executive Officer)
Dated  November 7, 2013	/s/ Michael A. Reynolds
	Michael A. Reynolds
	Executive Vice President and Chief Financial Officer
	(Duly Authorized Officer; Principal Financial Officer)

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