Pacific Continental 10-Q 2014 Q1 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 endedMarch 31, 2014.

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 No)

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 outstanding as of May 1, 2014 was 17,981,028

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	41
ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	58
ITEM 4	Controls and Procedures	58
PART II	OTHER INFORMATION	59
ITEM 1	Legal Proceedings	59
ITEM 1A	Risk Factors	59
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	61
ITEM 3	Defaults Upon Senior Securities	61
ITEM 4	Mine Safety Disclosures	61
ITEM 5	Other Information	61
ITEM 6	Exhibits	61

2

PART I FINANCIAL INFORMATION

ITEM 1 Financial Statements

Pacific Continental Corporation and Subsidiary

Consolidated Balance Sheets

(In thousands)

(Unaudited)

	March 31,		December 31,		March 31,
	2014		2013		2013
ASSETS
Cash and due from banks	$	24,455	$	19,410	$	20,059
Interest-bearing deposits with banks		3,129		1,698		6,002
Total cash and cash equivalents		27,584		21,108		26,061
Securities available-for-sale		341,992		347,386		379,766
Loans, less allowance for loan losses and net deferred fees		1,004,751		977,928		933,771
Interest receivable		4,693		4,703		5,085
Federal Home Loan Bank stock		10,327		10,425		10,718
Property and equipment, net of accumulated depreciation		18,621		18,836		19,245
Goodwill and intangible assets		23,585		23,616		23,770
Deferred tax asset		8,572		9,598		7,015
Taxes receivable		—		80		—
Other real estate owned		11,531		16,355		17,772
Prepaid FDIC assessment		—		—		1,545
Bank-owned life insurance		16,253		16,136		15,747
Other assets		3,682		3,555		3,163
Total assets	$	1,471,591	$	1,449,726	$	1,443,658
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest-bearing demand	$	340,464	$	366,891	$	314,798
Savings and interest-bearing checking		588,822		559,632		566,555
Core time deposits		61,647		63,792		79,390
Total core deposits		990,933		990,315		960,743
Other deposits		106,422		100,666		106,952
Total deposits		1,097,355		1,090,981		1,067,695
Federal funds and overnight funds purchased		5,620		5,150		4,450
Federal Home Loan Bank borrowings		175,000		160,000		178,000
Junior subordinated debentures		8,248		8,248		8,248
Accrued interest and other payables		3,970		6,163		2,807
Total liabilities		1,290,193		1,270,542		1,261,200
Shareholders’ equity
Common stock, shares authorized: 50,000,000; shares issued and outstanding: 17,909,906 at March 31, 2014, 17,891,687 at December 31, 2013, and 17,835,088 at March 31, 2013		134,293		133,835		133,236
Retained earnings		45,503		45,250		44,129
Accumulated other comprehensive income		1,602		99		5,093
		181,398		179,184		182,458
Total liabilities and shareholders’ equity	$	1,471,591	$	1,449,726	$	1,443,658

See accompanying notes.

3

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Income

(In thousands, except share and per share amounts)

(Unaudited)

	Three months ended March 31,
	2014		2013
Interest and dividend income
Loans	$	13,174	$	12,699
Taxable securities		1,532		1,437
Tax-exempt securities		483		467
Federal funds sold & interest-bearing deposits with banks		2		3
		15,191		14,606
Interest expense
Deposits		806		885
Federal Home Loan Bank & Federal Reserve borrowings		280		308
Junior subordinated debentures		56		34
Federal funds purchased		5		4
		1,147		1,231
Net interest income		14,044		13,375
Provision for loan losses		—		250
Net interest income after provision for loan losses		14,044		13,125
Noninterest income
Service charges on deposit accounts		518		460
Other fee income, principally bankcard		217		372
Bank-owned life insurance income		117		126
Net gain (loss) on sale of investment securities		63		(8	)
Impairment losses on investment securities (OTTI)		—		(16	)
Other noninterest income		408		346
		1,323		1,280
Noninterest expense
Salaries and employee benefits		5,819		5,479
Premises and equipment		943		890
Data processing		670		623
Legal and professional services		487		457
Business development		375		495
FDIC insurance assessment		220		221
Bankcard processing		3		126
Other real estate expense		223		424
Merger related expense		—		1,246
Other noninterest expense		771		809
		9,511		10,770
Income before provision for income taxes		5,856		3,635
Provision for income taxes		2,024		1,185
Net income	$	3,832	$	2,450
Earnings per share
Basic	$	0.21	$	0.14
Diluted	$	0.21	$	0.14
Weighted average shares outstanding
Basic		17,897,593		17,835,088
Common stock equivalents attributable to stock-based awards		228,595		151,431
Diluted		18,126,188		17,986,519

See accompanying notes.

4

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Comprehensive Income

(In thousands, except share and per share amounts)

(Unaudited)

	Three months ended
	March 31,
	2014			2013
Net income	$	3,832		$	2,450
Other comprehensive income (loss):
Available-for-sale securities:
Unrealized gain (loss) arising during the quarter		2,607			(1,220	)
Reclassification adjustment for (gains) or losses realized in net income		(63	)		8
Reclassification adjustment for impairment losses (OTTI) realized in net income		—			16
Income tax (expense) benefit		(992	)		458
Derivative agreements - cash flow hedge
Unrealized loss arising during the quarter		(80	)		—
Income tax benefit		31			—
Total other comprehensive income (loss), net of tax		1,503			(738	)
Total comprehensive income	$	5,335		$	1,712

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, 2012		17,835,088	$	133,017	$	44,533		$	5,831		$	183,381
Net income						13,767						13,767
Other comprehensive loss, net of tax									(5,732	)		(5,732	)
Comprehensive income												8,035
Stock issuance		10,179		110								110
Share based compensation net of vested RSUs and SARs surrendered to cover tax consequences		46,420		708								708
Cash dividends						(13,050	)					(13,050	)
Balance, December 31, 2013		17,891,687	$	133,835	$	45,250		$	99		$	179,184
Net income						3,832						3,832
Other comprehensive income, net of tax									1,503			1,503
Comprehensive income												5,335
Option exercise and related tax benefit		16,779		203								203
Share-based compensation net of vested RSUs and SARs surrendered to cover tax consequences		1,440		255								255
Cash dividends						(3,579	)					(3,579	)
Balance, March 31, 2014		17,909,906	$	134,293	$	45,503		$	1,602		$	181,398

See accompanying notes.

6

Pacific Continental Corporation and Subsidiary

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Three months ended
	March 31,
	2014			2013
Cash flows from operating activities:
Net income	$	3,832		$	2,450
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization, net of accretion		1,816			2,417
Valuation adjustment on foreclosed assets		—			200
Provision for loan losses		—			250
Deferred income taxes		65			(214	)
BOLI income		(117	)		(126	)
Share-based compensation		324			219
(Gain) loss on sale of investment securities		(63	)		8
Other than temporary impairment on investment securities		—			16
Loss on sale from foreclosed assets		(7	)		—
Excess tax benefit of stock options exercised		14			—
Change in:
Interest receivable		10			(315	)
Deferred loan fees		46			(96	)
Accrued interest payable and other liabilities		(2,235	)		(3,364	)
Income taxes receivable		80			—
Other assets		(208	)		125
Net cash provided by operating activities		3,557			1,570
Cash flows from investing activities:
Proceeds from maturities and sales of available-for-sale investment securities		38,652			30,064
Purchase of available-for-sale investment securities		(32,062	)		(23,023	)
Net loan principal originations		(26,868	)		(16,515	)
Net purchase of property and equipment		(159	)		(300	)
Proceeds on sale of foreclosed assets		4,831			—
Redemption of FHLB stock		98			98
Cash consideration paid, net of cash acquired in merger		—			(2,891	)
Net cash used by investing activities		(15,508	)		(12,567	)
Cash flows from financing activities:
Change in deposits		6,375			(41,669	)
Change in federal funds purchased and FHLB short-term borrowings		15,470			54,880
Proceeds from FHLB term advances originated		—			(2,000	)
Proceeds from stock options exercised		189			—
Excess tax benefit from stock options exercised		(14	)		—
Dividends paid		(3,579	)		(2,854	)
Vested SARs surrendered by employee to cover tax consequence		(14	)		—
Net cash provided by financing activities		18,427			8,357
Net change in cash and cash equivalents		6,476			(2,640	)
Cash and cash equivalents, beginning of period		21,108			28,701
Cash and cash equivalents, end of period	$	27,584		$	26,061
Supplemental information:
Noncash investing and financing activities:
Change in fair value of securities, net of deferred income taxes	$	1,552		$	(738	)
Cash paid during the period for:
Income taxes	$	2,145		$	2,176
Interest	$	1,081		$	1,198

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 2013 Form 10-K filed March 14, 2014. 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 consolidated 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, 2013, was derived from audited financial statements, but does not include all disclosures contained in the Company’s 2013 Form 10-K. The interim consolidated financial statements should be read in conjunction with the December 31, 2013, consolidated financial statements, including the notes thereto, included in the Company’s 2013 Form 10-K.

8

NOTE 2 – SECURITIES AVAILABLE-FOR-SALE

The amortized cost and estimated fair values of securities available-for-sale at March 31, 2014, 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	$	26,622	$	—	$	(267	)	$	26,355	$	26,355	$	—
Obligations of states and political subdivisions		30,436		—		(1,118	)		29,318		20,676		8,642
Private-label mortgage-backed securities		2,187		—		(133	)		2,054		841		1,213
Mortgage-backed securities		72,462		—		(1,126	)		71,336		47,988		23,348
SBA variable rate pools		5,425		—		(52	)		5,373		5,373		—
	$	137,132	$	—	$	(2,696	)	$	134,436	$	101,233	$	33,203
Unrealized Gain Positions
Obligations of U.S. government agencies	$	10,023	$	92	$	—		$	10,115
Obligations of states and political subdivisions		46,912		1,991		—			48,903
Private-label mortgage-backed securities		2,911		96		—			3,007
Mortgage-backed securities		139,104		2,798		—			141,902
SBA variable rate pools		3,608		21		—			3,629
		202,558		4,998		—			207,556
	$	339,690	$	4,998	$	(2,696	)	$	341,992

At March 31, 2014, 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, mortgage-backed securities and SBA variable rate pools. The unrealized losses on 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. 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 March 31, 2014, of the 385 investment securities held, there were 125 in unrealized loss positions. The unrealized loss associated with the investments of $33,203 in a continuous unrealized loss position for twelve months or longer was $1,255, of which $127 was related to private-label mortgage-backed securities, $542 was related to mortgage-backed securities, and $586 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 first quarter 2014, 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 months ended March 31, 2014, and 2013:

	Three months ended March 31,
	2014		2013
Balance, beginning of period:	$	227	$	204
Additions:
Initial OTTI credit loss		—		16
Balance, end of period:	$	227	$	220

At March 31, 2014, seven of the Company’s private-label mortgage-backed securities with an amortized cost of $2,515 were classified as substandard as their underlying credit was considered impaired. Securities with an amortized cost of $2,593 and $3,110 were classified as substandard at December 31, 2013, and March 31, 2013, respectively.

At March 31, 2014, the projected average life of the securities portfolio was 4.38 years.

The amortized cost and estimated fair values of securities available-for-sale at December 31, 2013, 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	$	17,268	$	—	$	(276	)	$	16,992	$	16,992	$	—
Obligations of states and political subdivisions		40,408		—		(2,180	)		38,228		36,873		1,356
Private-label mortgage-backed securities		2,679		—		(245	)		2,434		1,256		1,178
Mortgage-backed securities		103,851		—		(1,928	)		101,923		68,647		33,275
SBA variable rate pools		3,722		—		(44	)		3,678		3,678		—
	$	167,928	$	—	$	(4,673	)	$	163,255	$	127,446	$	35,809
Unrealized Gain Positions
Obligations of U.S. government agencies	$	13,515	$	340	$	—		$	13,855
Obligations of states and political subdivisions		39,210		1,357		—			40,567
Private-label mortgage-backed securities		2,790		90		—			2,880
Mortgage-backed securities		119,181		2,616		—			121,797
SBA variable rate pools		5,004		28		—			5,032
		179,700		4,431		—			184,131
	$	347,628	$	4,431	$	(4,673	)	$	347,386

At December 31, 2013, of the 445 investment securities held, there were 187 in unrealized loss positions. The unrealized loss associated with the investments of $35,809 in a continuous unrealized loss position for twelve months or longer was $947, of which $201 was related to private-label mortgage-backed securities, $619 was related to mortgage-backed securities, and $127 was related to obligations of states and political subdivisions.

10

The amortized cost and estimated fair values of securities available-for-sale at March 31, 2013, 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		15,557		—		(305	)		15,252		15,252		—
Private-label mortgage-backed securities		2,601		—		(325	)		2,276		593		1,683
Mortgage-backed securities		95,266		—		(687	)		94,579		81,628		12,951
	$	113,424	$	—	$	(1,317	)	$	112,107	$	97,473	$	14,634
Unrealized Gain Positions
Obligations of U.S. government agencies	$	17,164	$	628	$	—		$	17,792
Obligations of states and political subdivisions		61,322		3,897		—			65,219
Private-label mortgage-backed securities		5,658		171		—			5,829
Mortgage-backed securities		173,850		4,969		—			178,819
		257,994		9,665		—			267,659
	$	371,418	$	9,665	$	(1,317	)	$	379,766

At March 31, 2013, of the 451 investments held there were 122 investment securities in unrealized loss positions. The unrealized loss associated with the investments of $14,634 in a continuous unrealized loss position for twelve months or longer was $412, of which $318 was related to private-label mortgage-backed securities, and $94 was related to mortgage-backed securities.

The amortized cost and estimated fair value of securities at March 31, 2014, December 31, 2013, and March 31, 2013, by maturity are shown below. Obligations of U.S. government agencies and states and political subdivisions are shown by contractual maturity. Mortgage-backed securities and SBA variable pools are shown by projected average life.

	March 31, 2014				December 31, 2013				March 31, 2013
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	11,746	$	11,934	$	18,707	$	18,870	$	48,849	$	49,152
Due after one year through 5 years		212,733		214,846		217,713		219,375		164,062		166,681
Due after 5 years through 10 years		76,269		76,537		66,103		65,432		153,157		158,573
Due after 10 years		38,942		38,675		45,105		43,709		5,350		5,360
	$	339,690	$	341,992	$	347,628	$	347,386	$	371,418	$	379,766

During the first quarter 2014, a total of 71 securities with a book value of $25,276 were sold. These securities were sold at a gain of $63. During first quarter 2013, four municipal securities with a book value of $1,851 were sold. These securities were sold at a loss of $8.

At March 31, 2014, securities with an aggregate amortized cost of $25,869 (estimated aggregate market value of $25,821) were pledged to secure certain public deposits as required by law. At March 31, 2014, securities with an aggregate amortized cost of $2,473 (estimated aggregate market value of $2,500) were pledged for repurchase accounts. At March 31, 2014, 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 are as follows:

	March 31, 2014			% of gross loans			December 31, 2013			% of gross loans			March 31, 2013			% of gross loans
Real estate secured loans:
Permanent Loans:
Multi-family residential	$	51,182			5.01	%	$	46,217			4.65	%	$	43,805			4.61	%
Residential 1-4 family		46,557			4.56	%		46,438			4.67	%		54,615			5.74	%
Owner-occupied commercial		250,211			24.50	%		249,311			25.06	%		234,083			24.62	%
Nonowner-occupied commercial		168,888			16.54	%		158,786			15.96	%		164,725			17.32	%
Total permanent real estate loans		516,838			50.61	%		500,752			50.34	%		497,228			52.29	%
Construction Loans:
Multi-family residential		22,717			2.22	%		23,419			2.35	%		23,162			2.44	%
Residential 1-4 family		25,859			2.53	%		26,512			2.67	%		22,550			2.37	%
Commercial real estate		34,936			3.42	%		30,516			3.07	%		25,866			2.72	%
Commercial bare land and acquisition & development		11,456			1.12	%		11,473			1.15	%		10,874			1.14	%
Residential bare land and acquisition & development		7,011			0.71	%		6,990			0.70	%		9,000			0.95	%
Total construction real estate loans		101,979			10.00	%		98,910			9.94	%		91,452			9.62	%
Total real estate loans		618,817			60.61	%		599,662			60.28	%		588,680			61.91	%
Commercial loans		397,738			38.95	%		390,301			39.24	%		357,089			37.56	%
Consumer loans		3,518			0.34	%		3,878			0.39	%		4,020			0.42	%
Other loans		1,042			0.10	%		928			0.09	%		1,039			0.11	%
Gross loans		1,021,115			100.00	%		994,769			100.00	%		950,828			100.00	%
Deferred loan origination fees		(970	)					(924	)					(745	)
		1,020,145						993,845						950,083
Allowance for loan losses		(15,394	)					(15,917	)					(16,312	)
Total loans, net of allowance for loan losses and net deferred fees	$	1,004,751					$	977,928					$	933,771	��

At March 31, 2014, outstanding loans to dental professionals totaled $305,755 and represented 29.94% of total outstanding loans compared to dental professional loans of $307,268 or 30.89% of total outstanding loans at December 31, 2013, and $279,980 or 29.45% of total outstanding loans at March 31, 2013. 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 March 31, 2014, 60.61% of the Company’s loan portfolio was collateralized by real estate and is, therefore, susceptible to changes in real estate market conditions.

12

Allowance for loan losses

A summary of activity in the allowance for loan losses for the three months ended March 31, 2014, and 2013 is as follows:

	Three months ended March 31,
	2014			2013
Balance, beginning of period	$	15,917		$	16,345
Provision charged to income		—			250
Loans charged against allowance		(601	)		(597	)
Recoveries credited to allowance		78			314
Balance, end of period	$	15,394		$	16,312

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,

• 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, and

• 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.

13

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, and

• Peer comparison loss rates.

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

	For the three months ended March 31, 2014
	Commercial and Other			Real Estate			Construction			Consumer			Unallocated			Total
Beginning balance	$	5,113		$	7,668		$	1,493		$	68		$	1,575		$	15,917
Charge-offs		(417	)		(24	)		(155	)		(5	)		—			(601	)
Recoveries		72			1			3			2			—			78
Provision (reclassification)		635			(416	)		242			(2	)		(459	)		—
Ending balance	$	5,403		$	7,229		$	1,583		$	63		$	1,116		$	15,394

	For the three months ended March 31, 2013
	Commercial and Other			Real Estate			Construction		Consumer			Unallocated			Total
Beginning balance	$	3,846		$	9,456		$	1,987	$	70		$	986		$	16,345
Charge-offs		(591	)		(5	)		—		(1	)		—			(597	)
Recoveries		101			202			9		2			—			314
Provision (reclassification)		764			(605	)		97		(1	)		(5	)		250
Ending balance	$	4,120		$	9,048		$	2,093	$	70		$	981		$	16,312

14

	Balances as of March 31, 2014
	Commercial and Other		Real Estate		Construction		Consumer		Unallocated		Total
Ending allowance: collectively evaluated for impairment	$	5,286	$	7,229	$	1,457	$	63	$	1,116	$	15,151
Ending allowance: individually evaluated for impairment		117		—		126		—		—		243
Total ending allowance	$	5,403	$	7,229	$	1,583	$	63	$	1,116	$	15,394
Ending loan balance: collectively evaluated for impairment	$	392,976	$	511,951	$	101,609	$	3,518	$	—	$	1,010,054
Ending loan balance: individually evaluated for impairment		5,804		4,887		370		—		—		11,061
Total ending loan balance	$	398,780	$	516,838	$	101,979	$	3,518	$	—	$	1,021,115

	Balances as of December 31, 2013
	Commercial and Other		Real Estate		Construction		Consumer		Unallocated		Total
Ending allowance: collectively evaluated for impairment	$	5,095	$	7,667	$	1,455	$	68	$	1,575	$	15,860
Ending allowance: individually evaluated for impairment		18		1		38		—		—		57
Total ending allowance	$	5,113	$	7,668	$	1,493	$	68	$	1,575	$	15,917
Ending loan balance: collectively evaluated for impairment	$	386,332	$	495,924	$	98,627	$	3,878	$	—	$	984,761
Ending loan balance: individually evaluated for impairment		4,897		4,828		283		—		—		10,008
Total ending loan balance	$	391,229	$	500,752	$	98,910	$	3,878	$	—	$	994,769

	Balances as of March 31, 2013
	Commercial and Other		Real Estate		Construction		Consumer		Unallocated		Total
Ending allowance: collectively evaluated for impairment	$	4,118	$	9,040	$	2,093	$	70	$	981	$	16,302
Ending allowance: individually evaluated for impairment		2		8		—		—		—		10
Total ending allowance	$	4,120	$	9,048	$	2,093	$	70	$	981	$	16,312
Ending loan balance: collectively evaluated for impairment	$	354,355	$	489,751	$	90,876	$	4,020	$	—	$	939,002
Ending loan balance: individually evaluated for impairment		3,773		7,477		576		—		—		11,826
Total ending loan balance	$	358,128	$	497,228	$	91,452	$	4,020	$	—	$	950,828

Management believes that the allowance for loan losses was adequate as of March 31, 2014. However, future loan losses may exceed the levels provided for in the allowance for loan losses and could possibly result in additional charges to the provision for loan losses.

15

Credit Quality Indicators

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

Pass – Credit exposure in this category 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.

16

The following tables present the Company’s loan portfolio information by loan type and credit grade at March 31, 2014, December 31, 2013, and March 31, 2013:

Credit Quality Indicators

As of March 31, 2014

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful		Totals
Real estate loans
Multi-family residential	$	49,648	$	—	$	1,534	$	—	$	51,182
Residential 1-4 family		38,433		—		8,124		—		46,557
Owner-occupied commercial		240,330		4,254		5,627		—		250,211
Nonowner-occupied commercial		163,401		—		5,487		—		168,888
Total real estate loans		491,812		4,254		20,772		—		516,838
Construction
Multi-family residential		22,717		—		—		—		22,717
Residential 1-4 family		25,425		—		434		—		25,859
Commercial real estate		33,398		—��		1,538		—		34,936
Commercial bare land and acquisition & development		11,234		—		222		—		11,456
Residential bare land and acquisition & development		4,378		—		2,633		—		7,011
Total construction loans		97,152		—		4,827		—		101,979
Commercial and other		385,605		—		12,216		959		398,780
Consumer		3,499		—		19		—		3,518
Totals	$	978,068	$	4,254	$	37,834	$	959	$	1,021,115

Credit Quality Indicators

As of December 31, 2013

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful		Totals
Real estate loans
Multi-family residential	$	44,677	$	—	$	1,540	$	—	$	46,217
Residential 1-4 family		37,831		—		8,607		—		46,438
Owner-occupied commercial		239,539		4,278		5,494		—		249,311
Nonowner-occupied commercial		153,055		—		5,731		—		158,786
Total real estate loans		475,102		4,278		21,372		—		500,752
Construction
Multi-family residential		23,419		—		—		—		23,419
Residential 1-4 family		26,145		—		367		—		26,512
Commercial real estate		28,978		—		1,538		—		30,516
Commercial bare land and acquisition & development		11,223		—		250		—		11,473
Residential bare land and acquisition & development		4,346		—		2,644		—		6,990
Total construction loans		94,111		—		4,799		—		98,910
Commercial and other		378,828		—		12,401		—		391,229
Consumer		3,856		—		22		—		3,878
Totals	$	951,897	$	4,278	$	38,594	$	—	$	994,769

17

Credit Quality Indicators

As of March 31, 2013

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful		Totals
Real estate loans
Multi-family residential	$	42,483	$	—	$	1,322	$	—	$	43,805
Residential 1-4 family		44,337		—		10,278		—		54,615
Owner-occupied commercial		224,212		—		9,871		—		234,083
Nonowner-occupied commercial		159,589		—		5,136		—		164,725
Total real estate loans		470,621		—		26,607		—		497,228
Construction
Multi-family residential		23,162		—		—		—		23,162
Residential 1-4 family		22,368		—		182		—		22,550
Commercial real estate		24,286		—		1,580		—		25,866
Commercial bare land and acquisition & development		10,682		—		192		—		10,874
Residential bare land and acquisition & development		5,585		—		3,415		—		9,000
Total construction loans		86,083		—		5,369		—		91,452
Commercial and other		349,999		—		8,129		—		358,128
Consumer		3,964		—		56		—		4,020
Totals	$	910,667	$	—	$	40,161	$	—	$	950,828

At March 31, 2014, December 31, 2013, and March 31, 2013, the Company had $420, $532 and $136, respectively, in contingent liabilities on its classified loans.

18

Past Due and Nonaccrual Loans

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

The following tables present an aged analysis of past due and nonaccrual loans at March 31, 2014, December 31, 2013, and March 31, 2013:

Age Analysis of Loans Receivable

As of March 31, 2014

	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	$	—	$	—	$	—	$	—	$	—	$	51,182	$	51,182
Residential 1-4 family		198		—		—		752		950		45,607		46,557
Owner-occupied commercial		—		—		—		1,651		1,651		248,560		250,211
Nonowner-occupied commercial		1,068		—		—		136		1,204		167,684		168,888
Total real estate loans		1,266		—		—		2,539		3,805		513,033		516,838
Construction
Multi-family residential		—		—		—		—		—		22,717		22,717
Residential 1-4 family		—		—		—		—		—		25,859		25,859
Commercial real estate		—		—		—		—		—		34,936		34,936
Commercial bare land and acquisition & development		—		—		—		—		—		11,456		11,456
Residential bare land and acquisition & development		—		—		—		—		—		7,011		7,011
Total construction loans		—		—		—		—		—		101,979		101,979
Commercial and other		747		—		—		2,623		3,370		395,410		398,780
Consumer		1		5		—		—		6		3,512		3,518
Total	$	2,014	$	5	$	—	$	5,162	$	7,181	$	1,013,934	$	1,021,115

Age Analysis of Loans Receivable

As of December 31, 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	$	—	$	—	$	—	$	—	$	—	$	46,217	$	46,217
Residential 1-4 family		137		—		—		636		773		45,665		46,438
Owner-occupied commercial		488		—		—		1,685		2,173		247,138		249,311
Nonowner-occupied commercial		1,188		—		—		136		1,324		157,462		158,786
Total real estate loans		1,813		—		—		2,457		4,270		496,482		500,752
Construction
Multi-family residential		—		—		—		—		—		23,419		23,419
Residential 1-4 family		—		—		—		—		—		26,512		26,512
Commercial real estate		—		—		—		—		—		30,516		30,516
Commercial bare land and acquisition & development		—		—		—		—		—		11,473		11,473
Residential bare land and acquisition & development		—		—		—		—		—		6,990		6,990
Total construction loans		—		—		—		—		—		98,910		98,910
Commercial and other		436		—		—		2,886		3,322		387,907		391,229
Consumer		5		1		—		—		6		3,872		3,878
Total	$	2,254	$	1	$	—	$	5,343	$	7,598	$	987,171	$	994,769

19

Age Analysis of Loans Receivable

As of March 31, 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	$	—	$	—	$	—	$	—	$	—	$	43,805	$	43,805
Residential 1-4 family		421		80		—		1,269		1,770		52,845		54,615
Owner-occupied commercial		—		—		—		3,148		3,148		230,935		234,083
Nonowner-occupied commercial		—		—		—		—		—		164,725		164,725
Total real estate loans		421		80		—		4,417		4,918		492,310		497,228
Construction
Multi-family residential		—		—		—		—		—		23,162		23,162
Residential 1-4 family		234		—		—		—		234		22,316		22,550
Commercial real estate		—		—		—		—		—		25,866		25,866
Commercial bare land and acquisition & development		—		—		—		—		—		10,874		10,874
Residential bare land and acquisition & development		—		—		—		101		101		8,899		9,000
Total construction loans		234		—		—		101		335		91,117		91,452
Commercial and other		1,118		38		—		3,344		4,500		353,628		358,128
Consumer		6		5		—		—		11		4,009		4,020
Total	$	1,779	$	123	$	—	$	7,862	$	9,764	$	941,064	$	950,828

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.

20

The following tables display an analysis of the Company’s impaired loans at March 31, 2014, December 31, 2013, and March 31, 2013:

Impaired Loan Analysis

As of March 31, 2014

	Recorded Investment With No Specific Allowance Valuation		Recorded Investment With Specific Allowance Valuation		Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Related Specific Allowance Valuation
Real estate
Multi-family residential	$	—	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		1,019		317		1,336		1,764		1,260		1
Owner-occupied commercial		2,723		—		2,723		2,956		2,737		—
Nonowner-occupied commercial		828		—		828		830		829		—
Total real estate loans		4,570		317		4,887		5,550		4,826		1
Construction
Multi-family residential		—		—		—		—		—		—
Residential 1-4 family		—		—		—		—		—		—
Commercial real estate		—		—		—		—		—		—
Commercial bare land and acquisition & development		—		—		—		—		—		—
Residential bare land and acquisition & development		—		370		370		370		372		125
Total construction loans		—		370		370		370		372		125
Commercial and other		4,320		1,484		5,804		11,523		5,394		117
Consumer		—		—		—		—		—		—
Total impaired loans	$	8,890	$	2,171	$	11,061	$	17,443	$	10,592	$	243

21

Impaired Loan Analysis

As of December 31, 2013

	Recorded Investment With No Specific Allowance Valuation		Recorded Investment With Specific Allowance Valuation		Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Related Specific Allowance Valuation
Real estate
Multi-family residential	$	—	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		912		317		1,229		1,633		2,229		1
Owner-occupied commercial		2,767		—		2,767		3,000		3,359		—
Nonowner-occupied commercial		832		—		832		835		799		—
Total real estate loans		4,511		317		4,828		5,468		6,387		1
Construction
Multi-family residential		—		—		—		—		—		—
Residential 1-4 family		—		—		—		—		—		—
Commercial real estate		—		—		—		—		—		—
Commercial bare land and acquisition & development		—		—		—		—		133		—
Residential bare land and acquisition & development		—		283		283		373		413		38
Total construction loans		—		283		283		373		546		38
Commercial and other		4,368		529		4,897		10,627		4,100		18
Consumer		—		—		—		—		—		—
Total impaired loans	$	8,879	$	1,129	$	10,008	$	16,468	$	11,033	$	57

22

Impaired Loan Analysis

As of March 31, 2013

	Recorded Investment With No Specific Allowance Valuation		Recorded Investment With Specific Allowance Valuation		Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Related Specific Allowance Valuation
Real estate
Multi-family residential	$	—	$	—	$	—	$	—	$	—	$	—
Residential 1-4 family		2,674		318		2,992		4,001		2,876		8
Owner-occupied commercial		3,571		—		3,571		4,144		3,492		—
Nonowner-occupied commercial		914		—		914		914		532		—
Total real estate loans		7,159		318		7,477		9,059		6,900		8
Construction
Multi-family residential		—		—		—		—		—		—
Residential 1-4 family		—		—		—		—		—		—
Commercial real estate		—		—		—		—		—		—
Commercial bare land and acquisition & development		192		—		192		253		170		—
Residential bare land and acquisition & development		384		—		384		547		608		—
Total construction loans		576		—		576		800		778		—
Commercial and other		3,643		130		3,773		9,055		3,777		2
Consumer		—		—		—		—		—		—
Total impaired loans	$	11,378	$	448	$	11,826	$	18,914	$	11,455	$	10

The impaired balances reported above are not adjusted for government guarantees of $2,194, $1,532, and $1,122 at March 31, 2014, December 31, 2013, and March 31, 2013, respectively. The recorded investment in impaired loans, net of government guarantees, totaled $8,867, $8,476 and $10,704 at March 31, 2014, December 31, 2013, and March 31, 2013, respectively.

23

Troubled Debt Restructurings

In the normal course of business, the Company may modify the terms of certain loans, attempting to protect as much of its investment as possible. Management evaluates the circumstances surrounding each modification to determine whether it is a troubled debt restructuring (“TDR”). TDRs exist when 1) the restructuring constitutes a concession, and 2) the debtor is experiencing financial difficulties. The Company adopted the amendments of Accounting Standards Update No. 2012-02, “Receivables – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” during the third quarter 2012. The Update requires retrospective application to the beginning of the annual period of adoption.

The following table displays the Company’s TDRs by class at March 31, 2014, December 31, 2013, and March 31, 2013:

	Troubled Debt Restructurings as of
	March 31, 2014				December 31, 2013				March 31, 2013
	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		7		805		7		819		10		868
Owner-occupied commercial		5		1,925		5		1,949		5		2,050
Non owner-occupied commercial		2		714		2		714		2		699
Total real estate loans		14		3,444		14		3,482		17		3,617
Construction
Multifamily residential		—		—		—		—		—		—
Residential 1-4 family		—		—		—		—		—		—
Commercial real estate		—		—		—		—		—		—
Commercial bare land and acquisition & development		—		—		—		—		—		—
Residential bare land and acquisition & development		—		—		—		—		5		101
Total construction loans		—		—		—		—		5		101
Commercial and other		10		2,488		10		2,379		9		597
Consumer		—		—		—		—		—		—
		24	$	5,932		24	$	5,861		31	$	4,315

The recorded investment in TDRs on nonaccrual status totaled $1,475, $1,597, and $2,144 at March 31, 2014, December 31, 2013, and March 31, 2013, respectively. The Bank’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 three months ended March 31, 2014, the Company identified two TDRs that were newly considered impaired for which impairment was previously measured under the Company’s general loan loss allowance methodology. At March 31, 2014, the total recorded investment in such receivables was $781, and the associated allowance for loan losses was $0.

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.

24

The following tables present newly restructured loans that occurred during the three months ended March 31, 2014, and 2013, respectively:

	Troubled Debt Restructurings Identified during the three months ended March 31, 2014
	Rate Modification		Term Modification		Interest-only Modification		Combination Modification
Real estate
Multi-family residential	$	—	$	—	$	—	$	—
Residential 1-4 family		—		—		—		—
Owner-occupied commercial		—		—		—		—
Nonowner-occupied commercial		—		—		—		—
Total real estate loans		—		—		—		—
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		—		285		496		—
Consumer		—		—		—		—
	$	—	$	285	$	496	$	—

	Troubled Debt Restructurings Identified during the three months ended March 31, 2013
	Rate Modification		Term Modification		Interest-only Modification		Combination Modification
Real estate
Multi-family residential	$	—	$	—	$	—	$	—
Residential 1-4 family		318		—		—		—
Owner-occupied commercial		—		—		—		—
Nonowner-occupied commercial		—		—		—		559
Total real estate loans		318		—		—		559
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		—		—		—		145
Consumer		—		—		—		—
	$	318	$	—	$	—	$	704

25

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. During the three months ended March 31, 2014 and 2013 there were no loans receivable modified as TDRs that subsequently defaulted within the first 12 months of restructure.

At March 31, 2014, December 31, 2013, and March 31, 2013, 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 March 31, 2014, December 31, 2013, and March 31, 2013, loans to dental professionals totaled $305,755, $307,268, and $279,980, respectively, and represented 29.94%, 30.89% and 29.45% in principal amount of total outstanding loans. As of March 31, 2014, December 31, 2013, and March 31, 2013, the dental loans were supported by government guarantees totaling $15,210, $16,470 and $18,124, respectively. These guarantees represented 4.97%, 5.36% and 6.47% 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.

Loan Classification

Major classifications of dental loans at March 31, 2014, December 31, 2013, and March 31, 2013, were as follows:

	March 31,		December 31,		March 31,
	2014		2013		2013
Real estate secured loans:
Owner-occupied commercial	$	60,220	$	59,279	$	58,315
Other dental real estate loans		2,994		1,967		2,248
Total permanent real estate loans		63,214		61,246		60,563
Dental construction loans		4,058		5,810		2,830
Total real estate loans		67,272		67,056		63,393
Commercial loans		238,483		240,212		216,587
Gross loans	$	305,755	$	307,268	$	279,980

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:

	March 31,		December 31,		March 31,
	2014		2013		2013
Local	$	172,022	$	178,673	$	189,784
National		133,733		128,595		90,196
Total	$	305,755	$	307,268	$	279,980

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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 March 31,
	2014			2013
Balance, beginning of period	$	3,730		$	2,683
Provision		578			783
Loans charged against allowance		(416	)		(437	)
Recoveries credited to allowance		9			14
Balance, end of period	$	3,901		$	3,043

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 March 31, 2014, December 31, 2013, and March 31, 2013:

As of March 31, 2014

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful		Totals
Local	$	167,172	$	—	$	4,850	$	—	$	172,022
National		131,999		—		1,734		—		133,733
Total	$	299,171	$	—	$	6,584	$	—	$	305,755

As of December 31, 2013

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful		Totals
Local	$	172,708	$	—	$	5,965	$	—	$	178,673
National		127,842		—		753		—		128,595
Total	$	300,550	$	—	$	6,718	$	—	$	307,268
			��

As of March 31, 2013

	Loan Grade
	Pass		Special Mention		Substandard		Doubtful		Totals
Local	$	185,253	$	—	$	4,531	$	—	$	189,784
National		89,290		—		906		—		90,196
Total	$	274,543	$	—	$	5,437	$	—	$	279,980

27

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 March 31, 2014, December 31, 2013, and March 31, 2013:

As of March 31, 2014

	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	$	601	$	—	$	—	$	1,924	$	2,525	$	169,497	$	172,022
National		—		—		—		224		224		133,509		133,733
Total	$	601	$	—	$	—	$	2,148	$	2,749	$	303,006	$	305,755

As of December 31, 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	$	—	$	—	$	—	$	2,176	$	2,176	$	176,497	$	178,673
National		—		—		—		224		224		128,371		128,595
Total	$	—	$	—	$	—	$	2,400	$	2,400	$	304,868	$	307,268

As of March 31, 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	$	295	$	—	$	—	$	814	$	1,109	$	188,675	$	189,784
National		396		—		—		511		907		89,289		90,196
Total	$	691	$	—	$	—	$	1,325	$	2,016	$	277,964	$	279,980

28

NOTE 5 – FEDERAL FUNDS AND OVERNIGHT FUNDS PURCHASED

At March 31, 2014, the Company had unsecured federal funds borrowing lines with various correspondent banks totaling $129,000. At March 31, 2014, December 31, 2013, and March 31, 2013, there was $5,620, $5,150, and $4,450 outstanding on these lines, respectively.

The Company also has a secured overnight borrowing line available from the Federal Reserve Bank that totaled $96,615, $92,579 and $89,208 at March 31, 2014, December 31, 2013, and March 31, 2013, respectively. The Federal Reserve Bank borrowing line is secured through the pledging of approximately $142,363 of commercial loans under the Company’s Borrower-In-Custody program. At March 31, 2014, December 31, 2013, and March 31, 2013, 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 the value of discounted collateral pledged. The Company does have the ability to access the FHLB excess stock pool, thus borrowing is not limited by FHLB stock held. At March 31, 2014, the maximum borrowing line was $441,477; however, the FHLB borrowing line was limited by the discounted value of collateral pledged. The Company had pledged $452,415 in real estate loans to the FHLB that had a discounted value of $237,868. There was $175,000 borrowed on this line at March 31, 2014.

At December 31, 2013, the maximum FHLB borrowing line was $434,963, and the Company had pledged real estate loans and securities to the FHLB with a discounted value of $229,547. There was $160,000 borrowed on this line at December 31, 2013.

At March 31, 2013, the maximum FHLB borrowing line was $433,097, and the Company had pledged real estate loans and securities to the FHLB with a discounted collateral value of $243,685. There was $178,000 borrowed on this line at March 31, 2013.

	Current	March 31,		December 31,		March 31,
	Rates	2014		2013		2013
Cash Management Advance	NA	$	—	$	—	$	—
2013	—		—		—		137,000
2014	0.23% - 0.26%		134,000		119,000		—
2015	0.60% - 1.60%		13,500		13,500		13,500
2016	1.84% - 2.36%		22,500		22,500		22,500
2017	2.28%		3,000		3,000		3,000
2018	—		—		—		—
Thereafter	3.85%		2,000		2,000		2,000
		$	175,000	$	160,000	$	178,000

29

NOTE 7 – SHARE BASED COMPENSATION

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

The following table identifies the compensation expense recorded and tax benefits received by the Company on its share-based compensation plans for the three months ended March 31, 2014, and 2013:

	Three months ended
	March 31,
	2014				2013
	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		18
Employee RSUs		229		87		142		54
Liability-based awards:
Employee cash SARs		55		21		—		—
	$	324	$	118	$	219	$	72

There were no equity awards granted during the three months ended March 31, 2014, and 2013.

During the three months ended March 31, 2014, 16,779 stock options, with a weighted average exercise price of $11.29 per share and an intrinsic value of $57, were exercised. There were no options exercised in the three months ended March 31, 2013. No equity awards were exercised during the first three months of 2013.

During the three months ended March 31, 2014, 12,179 employee stock SARs, with a weighted average exercise price of $11.92, were exercised. The exercise resulted in a net issuance to employees of 1,440 shares of stock, with an intrinsic value of $22. There were no employee stock SARs exercised in the three months ended March 31, 2013. There were no equity-based awards vested during the three months ended March 31, 2014, and 2013.

During the three months ended March 31, 2014, 4,226 employee cash SARs, with a weighted average exercise price of $12.28, were exercised. The exercise resulted in a cash payment, net of income taxes, to employees of $5. There were no employee stock SARs exercised in the three months ended March 31, 2013. There were no liability-based awards vested during the three months ended March 31, 2014, and 2013.

30

At March 31, 2014, the Company had estimated unrecognized compensation expense of approximately $1,912 for unvested RSUs. 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 RSUs is approximately 2.5 years.

NOTE 8 – FAIR VALUE

The following table presents estimated fair values of the Company’s financial instruments as of March 31, 2014, December 31, 2013, and March 31, 2013, in accordance with the provisions of FASB ASC 825 “Financial Instruments.” The use of different assumptions and estimation methods could have a significant effect on the reported fair value amounts. Accordingly, the estimates of fair value herein are not necessarily indicative of the amounts that might be realized in a current market exchange.

	March 31, 2014				December 31, 2013				March 31, 2013
	Carrying				Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value		Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	27,584	$	27,584	$	21,108	$	21,108	$	26,061	$	26,061
Securities available-for-sale		341,992		341,992		347,386		347,386		379,766		379,766
Loans		1,020,145		1,005,718		993,845		980,334		950,083		947,321
Federal Home Loan Bank stock		10,327		10,327		10,425		10,425		10,718		10,718
Interest receivable		4,693		4,693		4,703		4,703		5,085		5,085
Bank-owned life insurance		16,253		16,253		16,136		16,136		15,747		15,747
Swap derivative		325		325		405		405		—		—
Financial liabilities:
Deposits	$	1,097,355	$	1,097,614	$	1,090,981	$	1,091,355	$	1,067,695	$	1,067,790
Federal funds and overnight funds purchased		5,620		5,620		5,150		5,150		4,450		4,450
Federal Home Loan Bank borrowings		175,000		175,978		160,000		160,984		178,000		179,633
Junior subordinated debentures		8,248		2,254		8,248		2,265		8,248		2,187
Accrued interest payable		201		201		193		193		217		217

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.

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

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

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

Swap Derivative – Fair value is based on quoted market prices.

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

31

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

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

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

The Company also adheres to the FASB guidance with regards to ASC 820, “Fair Value Measures.” This guidance defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The statement requires fair value measurement disclosure of all assets and liabilities that are carried at fair value on either a recurring or nonrecurring basis. The Company determines fair value based upon quoted prices when available or through the use of alternative approaches, such as matrix or model pricing, when market quotes are not readily accessible or available. The valuation techniques used are based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:

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

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

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

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

The 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 March 31, 2014, December 31, 2013, and March 31, 2013:

	Carrying Amount		Fair Value at March 31, 2014
			Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	27,584	$	27,584	$	—	$	—
Loans		1,020,145		—		—		1,005,718
Federal Home Loan Bank stock		10,327		10,327		—		—
Interest receivable		4,693		4,693		—		—
Bank-owned life insurance		16,253		16,253		—		—
Financial liabilities:
Deposits	$	1,097,355	$	—	$	1,097,614	$	—
Federal funds and overnight funds purchased		5,620		5,620		—		—
Federal Home Loan Bank borrowings		175,000		—		175,978		—
Junior subordinated debentures		8,248		—		2,254		—
Accrued interest payable		201		201		—		—

32

	Carrying Amount		Fair Value at December 31, 2013
			Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	21,108	$	21,108	$	—	$	—
Loans		993,845		—		—		980,334
Federal Home Loan Bank stock		10,425		10,425		—		—
Accrued interest receivable		4,703		4,703		—		—
Bank-owned life insurance		16,136		16,136		—		—
Financial liabilities:
Deposits	$	1,090,981	$	—	$	1,091,355	$	—
Federal funds and overnight funds purchased		5,150		5,150		—		—
Federal Home Loan Bank borrowings		160,000		—		160,984		—
Junior subordinated debentures		8,248		—		2,265		—
Accrued interest payable		193		193		—		—

	Carrying Amount		Fair Value at March 31, 2013
			Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	26,061	$	26,061	$	—	$	—
Loans		950,083		—		—		947,321
Federal Home Loan Bank stock		10,718		10,718		—		—
Accrued interest receivable		5,085		5,085		—		—
Bank-owned life insurance		15,747		15,747		—		—
Financial liabilities:
Deposits	$	1,067,695	$	—	$	1,067,790	$	—
Federal funds and overnight funds purchased		4,450		4,450		—		—
Federal Home Loan Bank borrowings		178,000		—		179,633		—
Junior subordinated debentures		8,248		—		2,187		—
Accrued interest payable		217		217		—		—

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The tables below show assets measured at fair value on a recurring basis as of March 31, 2014, December 31, 2013, and March 31, 2013:

March 31, 2014	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	$	36,470	$	—	$	36,470	$	—
Obligations of states and political subdivisions		78,221		—		78,221		—
Mortgage-backed securities		213,238		—		213,238		—
Private-label mortgage-backed securities		5,061		—		3,287		1,774
SBA variable rate pools		9,002		—		9,002		—
Swap derivative		325		—		325		—
Total assets measured on a recurring basis	$	342,317	$	—	$	340,543	$	1,774

December 31, 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	$	30,847	$	—	$	30,847	$	—
Obligations of states and political subdivisions		78,795		—		78,795		—
Mortgage-backed securities		223,720		—		223,720		—
Private-label mortgage-backed securities		5,314		—		3,528		1,786
SBA variable rate pools		8,710		—		8,710		—
Swap derivative		405		405		—		—
Total assets measured on a recurring basis	$	347,791	$	405	$	345,600	$	1,786

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March 31, 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	$	17,792	$	—	$	17,792	$	—
Obligations of states and political subdivisions		80,471		—		80,471		—
Mortgage-backed securities		273,398		—		273,398		—
Private-label mortgage-backed securities		8,105		—		6,447		1,658
Total assets measured on a recurring basis	$	379,766	$	—	$	378,108	$	1,658

No transfers to or from Levels 1 and 2 occurred on assets measured at fair value on a recurring basis during the three months ended March 31, 2014, and 2013, or during the year ended December 31, 2013.

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 months ended March 31, 2014, and 2013:

	Three months ended
	March 31,
	2014			2013
Beginning Balance	$	1,786		$	1,682
Transfers to Level 3		—			—
Transfers out of Level 3		—			—
Total gains or losses
Included in earnings		—			—
Included in other comprehensive income		50			72
Paydowns		(62	)		(96	)
Purchases, issuances, sales and settlements
Purchases		—			—
Issuances		—			—
Sales		—			—
Settlements		—			—
Ending Balance	$	1,774		$	1,658

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

The Company utilizes FTN Financial 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.

• SBA variable pools – 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.

• SBA variable pools – 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 March 31, 2014, December 31, 2013, and March 31, 2013:

March 31, 2014	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)	$	5,452	$	—	$	—	$	5,452
Other real estate owned		11,531		—		—		11,531
	$	16,983	$	—	$	—	$	16,983

December 31, 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)	$	5,749	$	—	$	—	$	5,749
Other real estate owned		16,355		—		—		16,355
	$	22,104	$	—	$	—	$	22,104

March 31, 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)	$	7,987	$	—	$	—	$	7,987
Other real estate owned		17,772		—		—		17,772
	$	25,759	$	—	$	—	$	25,759

No transfers to or from Level 3 assets measured at fair value on a nonrecurring basis occurred during the three months ended March 31, 2014, and 2013, or during the year ended December 31, 2013.

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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 March 31, 2014, was a $325 unrealized gain, which is recorded in the other asset section of the consolidated balance sheet, net of the tax effect. No gain or loss was recognized in earnings for the three months ended March 31, 2014, 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.

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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 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 March 31, 2014, the Company and the Bank met all capital adequacy requirements to which they are subject.

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As of March 31, 2014, 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.

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2014:
Total capital (to risk weighted assets)
Bank:	$	174,838		15.93	%	$	87,806		8.00	%	$	109,757		10.00	%
Company:	$	177,952		16.21	%		NA					NA
Tier I capital (to risk weighted assets)
Bank:	$	161,095		14.68	%	$	43,903		4.00	%	$	65,854		6.00	%
Company:	$	164,209		14.95	%		NA					NA
Tier I capital (to leverage assets)
Bank:	$	161,095		11.22	%	$	57,429		4.00	%	$	71,786		5.00	%
Company:	$	164,209		11.44	%		NA					NA
As of December 31, 2013:
Total capital (to risk weighted assets)
Bank:	$	174,311		15.89	%	$	87,744		8.00	%	$	109,680		10.00	%
Company:	$	177,209		16.15	%		NA					NA
Tier I capital (to risk weighted assets)
Bank:	$	160,572		14.64	%	$	43,872		4.00	%	$	65,808		6.00	%
Company:	$	163,470		14.90	%		NA					NA
Tier I capital (to leverage assets)
Bank:	$	160,572		11.29	%	$	56,887		4.00	%	$	71,109		5.00	%
Company:	$	163,470		11.49	%		NA					NA
As of March 31, 2013:
Total capital (to risk weighted assets)
Bank:	$	171,741		16.34	%	$	84,075		8.00	%	$	105,094		10.00	%
Company:	$	174,600		16.62	%		NA					NA
Tier I capital (to risk weighted assets)
Bank:	$	158,737		15.10	%	$	42,037		4.00	%	$	63,056		6.00	%
Company:	$	161,596		15.38	%		NA					NA
Tier I capital (to leverage assets)
Bank:	$	158,737		11.51	%	$	55,188		4.00	%	$	68,985		5.00	%
Company:	$	161,596		11.71	%		NA					NA

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

The following discussion is intended to provide a more comprehensive review of the Company’s operating results and financial condition than can be obtained from reading the Consolidated Financial Statements alone. The discussion should be read in conjunction with the consolidated financial statements and the notes included in this report. Please refer also to our Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in the Company’s 2013 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 second quarter 2014 and full year 2014, 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 2014 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.

• 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.

41

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 2013 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 2013 Form 10-K and Part I, 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 2013 Form 10-K. Management believes that the following policies and those disclosed in theNotes to Consolidated Financial Statements in the Company’s 2013 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.

42

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 Part I of this report.

Goodwill and Intangible Assets

At March 31, 2014, the Company had $23,585 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, 2013, the date the most recent analysis was performed.

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 Part II of the Company’s 2013 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 Part I 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.

In July 2013, the FASB issued ASU No. 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. ASU No. 2013-10 permits the use of the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge account purposes. The amendment is effective prospectively for qualifying new or redesiginated hedging relationships entered into on or after July 17, 2013. The adoption of ASU No. 2013-10 did not have a material impact on the Company’s consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11,Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU No. 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. No new recurring disclosures are required. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2013 and are to be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of ASU No. 2013-11 is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2014, the FASB issued ASU No. 2014-01,Accounting for Investments in Qualified Affordable Housing Projects.ASU 2014-04 permit an entity to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense (benefit). The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2014 and should be applied prospectively. The Company is currently reviewing the requirements of ASU No. 2014-01, but does not expect the ASU to have a material impact on the Company’s consolidated financial statements.

In January 2014, the FASB issued ASU No. 2014-04,Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. ASU 2014-04 clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2014 and can be applied with a modified retrospective transition method or prospectively. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Company’s consolidated financial statements.

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HIGHLIGHTS FOR FIRST QUARTER

	For the three months ended March 31,
	2014			2013			% Change
Net income	$	3,832		$	2,450			56.41	%
Operating revenue(1)	$	15,367		$	14,405			6.68	%
Earnings per share
Basic	$	0.21		$	0.14			50.00	%
Diluted	$	0.21		$	0.14			50.00	%
Assets, period-end	$	1,471,591		$	1,443,658			1.93	%
Gross loans, period-end	$	1,021,115		$	950,828			7.39	%
Core deposits, period end(2)	$	990,933		$	960,743			3.14	%
Deposits, period-end	$	1,097,355		$	1,067,695			2.78	%
Return on average assets(3)		1.06	%		0.70	%
Return on average equity(3)		8.61	%		5.43	%
Return on average tangible equity(3) (4)		9.90	%		6.21	%

⁽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 $3,832 or $0.21 per diluted share in first quarter 2014, up $1,382 or 56.41% over first quarter 2013. The improvement in net income was due to increased operating revenues, consisting of net interest income plus noninterest income, and lower noninterest expense, including no provision for loan losses. Improvement in operating revenues resulted from a higher net interest margin in first quarter 2014 compared to first quarter 2013, combined with growth in earning asset volumes, specifically loans. The reduction in noninterest expense was primarily due to $1,246 of pre-tax merger expenses related to the Century Bank transaction recorded during the first quarter 2013.

During first quarter 2014, the Company continued to experience organic growth in outstanding loans. Outstanding loans at March 31, 2014, were $1,021,115, up $26,346 over December 31, 2013, outstanding loans. Annualized first quarter loan growth was 10.74% and represented an expansion in core lending segments such as permanent real estate loans and commercial & industrial loans. Outstanding core deposits at March 31, 2014, were $990,933, relatively unchanged from December 31, 2013, reflecting a typical seasonal pattern for the first quarter.

Period-end assets at March 31, 2014, were $1,471,591, up $27,933 over March 31, 2013, as growth in outstanding loans was partially offset by a decline in securities available-for-sale. Outstanding core deposits at March 31, 2014, were $990,933, an increase of $30,190 compared to March 31, 2013. The deposit pipelines for all three markets significantly increased during the quarter.

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 Part I of this report.

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

	March 31, 2014			December 31, 2013			March 31, 2013
Total shareholders’ equity	$	181,398		$	179,184		$	182,458
Subtract:
Goodwill		(22,881	)		(22,881	)		(22,945	)
Core deposit intangible assets		(704	)		(735	)		(825	)
Tangible shareholders’ equity (non-GAAP)	$	157,813		$	155,568		$	158,688
Book value per share	$	10.13		$	10.01		$	10.23
Tangible book value per share (non-GAAP)	$	8.81		$	8.69		$	8.90
Year-to-date return on average equity		8.61	%		7.61	%		5.43	%
Year-to-date return on average tangible equity (non-GAAP)		9.90	%		8.75	%		6.21	%

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 net interest margin for first quarter 2014 was 4.32%, a decline of 6 basis points from the fourth quarter 2013 margin of 4.38%, but a 4 basis point improvement over the 4.28% reported for first quarter 2013. The decline in the linked-quarter net interest margin was due to nonrecurring interest recoveries recorded during the fourth quarter 2013 that positively impacted the reported net interest margin by 7 basis points. The improvement in the first quarter 2014 net interest margin over first quarter 2013 was due to the following factors: 1) an improvement in the earning asset mix as average higher yielding loans were a larger portion of earning assets versus lower yielding securities; 2) increased yield on the securities portfolio; and 3) a lower cost of funds as the cost of both interest-bearing core deposits and wholesale funding were down from last year.

The prolonged historically low interest rate environment, highly competitive pricing on new, existing loans, and declining yields available in the Company’s securities portfolio, and the fact that core deposits are priced at or near virtual floors, suggests long-term margin compression. However, the Company anticipates continued loan growth and to the extent higher yielding loans replace lower yielding securities, thus the Company believes that some stabilization or potential improvement of the net interest margin may be possible during 2014.

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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 March 31, 2014, compared to the quarter ended March 31, 2013:

Table I

Average Balance Analysis of Net Interest Income

(dollars in thousands)

	Three Months Ended								Three Months Ended
	March 31, 2014								March 31, 2013
	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	$	3,059	$	2			0.27	%	$	3,723	$	3			0.33	%
Securities available-for-sale:
Taxable		278,634		1,532			2.23	%		316,961		1,437			1.84	%
Tax-exempt(1)		69,081		743			4.36	%		70,052		718			4.16	%
Loans, net of deferred fees and allowance(2)		992,655		13,174			5.38	%		901,081		12,699			5.72	%
Total interest-earning assets(1)		1,343,429		15,451			4.66	%		1,291,817		14,857			4.66	%
Non earning assets
Cash and due from banks		17,995								19,452
Premises and equipment		18,735								19,300
Goodwill & intangible assets		23,601								23,135
Interest receivable and other assets		57,335								58,284
Total nonearning assets		117,666								120,171
Total assets	$	1,461,095							$	1,411,988
Interest-bearing liabilities
Money market and NOW accounts		536,309	$	(383	)		-0.29	%		523,369	$	(409	)		-0.32	%
Savings deposits		48,029		(17	)		-0.14	%		39,321		(12	)		-0.12	%
Time deposits - core (3)		62,776		(90	)		-0.58	%		73,448		(146	)		-0.81	%
Total interest-bearing core deposits		647,114		(490	)		-0.31	%		636,138		(567	)		-0.36	%
Time deposits - noncore		101,421		(316	)		-1.26	%		110,939		(318	)		-1.16	%
Federal funds purchased		2,947		(5	)		-0.69	%		2,918		(4	)		-0.56	%
FHLB & FRB borrowings		170,186		(280	)		-0.67	%		159,142		(308	)		-0.78	%
Trust preferred		8,248		(56	)		-2.75	%		8,248		(34	)		-1.67	%
Total interest-bearing wholesale funding		282,802		(657	)		-0.94	%		281,247		(664	)		-0.96	%
Total interest-bearing liabilities		929,916		(1,147	)		-0.50	%		917,385		(1,231	)		-0.54	%
Noninterest-bearing liabilities
Demand deposits		345,369								307,176
Interest payable and other		5,280								4,413
Total noninterest liabilities		350,649								311,589
Total liabilities		1,280,565								1,228,974
Shareholders’ equity		180,530								183,014
Total liabilities and shareholders’ equity	$	1,461,095							$	1,411,988
Net interest income			$	14,304							$	13,626
Net interest margin(1)				4.32	%							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 $260 and $263 for the three months ended March 31, 2014 and March 31, 2013, respectively.

Net interest margin was positively impacted by 8 and 8 basis point, respectively.

⁽²⁾ Interest income includes recognized loan origination fees of $129 and $154 for the three months ended March 31, 2014 and March 31, 2013, respectively.

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

Table I shows that earning asset yields in first quarter 2014 were 4.66% and unchanged from first quarter 2013. The stable yield on earning assets was attributable to an increase in the weighted average yield on securities portfolio from 2.26% in first quarter 2013 to 2.65% in first quarter 2014, which partially offset a 34 basis point decline in the yield on the loan portfolio. Also contributing to the stable earning asset yield was the change in the mix of earning assets as higher yielding loans averaged 73.89% of earning assets during first quarter 2014 compared to 69.75% during first quarter 2013.

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The cost of interest-bearing liabilities declined by 4 basis points from 0.54% in first quarter 2013 to 0.50% in first quarter 2014. Rates on both interest-bearing core deposits and interest-bearing wholesale funding declined. The cost of core deposits fell by 5 basis points in first quarter 2014 from first quarter 2013, with the majority of the decline associated with time deposits. The cost of wholesale funding fell by 2 basis points primarily due to the lower cost of FHLB borrowings. The cost of non-core time deposits, which consists of callable brokered time deposits, increased by 10 basis points from 1.16% to 1.26%, which reflects the Company’s strategy to lengthen the maturity structure of its liabilities to mitigate interest rate risk in a rising rate environment. The cost of trust preferred also showed an increase in the wholesale funding section moving from 1.67% in first quarter 2013 to 2.73% in first quarter 2014 as a result of an interest rate swap executed during second quarter 2013, which converted the Company’s variable-rate Junior Subordinated Debenture debt into a fixed rate for a term of approximately 7 years.

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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 March 31, 2014, and March 31, 2013.

Table II

Analysis of Changes in Interest Income and Interest Expense

(dollars in thousands)

	Three Months Ended March 31, 2014 compared to March 31, 2013 Increase (decrease) due to
	Volume			Rate			Net
Interest earned on:
Federal funds sold and interest-bearing deposits	$	(1	)		—		$	(1	)
Securities available-for-sale:
Taxable		(174	)		269		$	95
Tax-exempt(1)		(10	)		35		$	25
Loans, net of deferred fees and allowance		1,291			(816	)	$	475
Total interest-earning assets(1)		1,106			(512	)		594
Interest paid on:
Money market and NOW accounts		10			(36	)		(26	)
Savings deposits		3			2			5
Time deposits - core(2)		(21	)		(35	)		(56	)
Total interest-bearing core deposits		(8	)		(69	)		(77	)
Time deposits - noncore		(27	)		25			(2	)
Federal funds purchased		—			1			1
FHLB & FRB borrowings		21			(49	)		(28	)
Trust preferred		—			22			22
Total interest-bearing wholesale funding		(6	)		(1	)		(7	)
Total interest-bearing liabilities		(14	)		(70	)		(84	)
Net interest income(1)	$	1,120		$	(442	)	$	678

(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 $260 and $263 for the three months ended March 31, 2014 and March 31, 2013, respectively.

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

The first quarter 2014 rate/volume analysis shows that net interest income increased by $678 over first quarter 2013. First quarter 2014 interest income including loan fees increased by $594 from the same quarter last year with higher volumes of earning assets increasing interest income by $1,106, which was partially offset by a $512 decline in interest income due to lower rates, specifically lower rates on the loan portfolio. Also contributing to the increase in net interest income was a decline in interest expense of $84 in first quarter 2014 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, combined with a change in the mix of both core deposits and wholesale funding.

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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 periods ended March 31, 2014, and 2013:

	Three months ended
	March 31,
	2014			2013
Balance, beginning of period	$	15,917		$	16,345
Provision charged to income		—			250
Loans charged against allowance		(601	)		(597	)
Recoveries credited to allowance		78			314
Balance, end of period	$	15,394		$	16,312

The Company booked no provision for loan losses through March 31, 2014, compared to a provision for loan losses of $250 for the same period last year. The decrease in the provision was primarily the result of a reduction in the level of classified loans and nonperforming assets. The Company’s classified assets at March 31, 2014, were 26.82% of regulatory capital compared to 29.02% and 32.83% of regulatory capital at December 31, 2013, and March 31, 2013, respectively. Net charge offs through March 31, 2014, were $523 or annualized 0.21% of average loans, compared to net charge offs of $283 or 0.13% of average loans recorded for the same period in 2013. The allowance for loan losses for outstanding loans at March 31, 2014, was $15,394 or 1.51% of outstanding loans compared to 1.60% and 1.72% of outstanding loans at December 31, 2013, and March 31, 2013, respectively. The decline in the allowance as a percentage of outstanding loans is also reflective of improved credit quality of the loan portfolio. In addition, the allowance as a percentage of net nonperforming loans was 339.15%, down slightly from 345.42% at December 31, 2013 and up from 233.56% at March 31, 2013.

At March 31, 2014, $8,867 of loans (net of government guarantees) were classified as impaired. A specific allowance of $243 (included in the ending allowance at March 31, 2014) was assigned to these loans. That compares to impaired loans of $8,476 and a specific allowance assigned of $57 at December 31, 2013.

Total nonperforming assets, net of government guarantees, were $16,070, or 1.09% of total assets at March 31, 2014. That compares to nonperforming assets of $20,963 or 1.45% of total assets at December 31, 2013, and $24,756 or 1.71% of total assets at March 31, 2013. Nonperforming assets at March 31, 2014, consisted of $4,539 in nonaccrual loans (net of government guarantees), $0 in loans 90 days past due and still accruing interest, and $11,531 in other real estate owned.

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

Nonperforming Assets and Asset Quality Ratios

	March 31,			December 31,			March 31,
	2014			2013			2013
NONPERFORMING ASSETS
Nonaccrual loans
Real estate secured loans:
Permanent loans:
Multi-family residential	$	—		$	—		$	—
Residential 1-4 family		752			636			1,269
Owner-occupied commercial		1,651			1,685			3,148
Nonowner-occupied commercial		136			136			—
Total permanent real estate loans		2,539			2,457			4,417
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
Total construction real estate loans		—			—			101
Total real estate loans		2,539			2,457			4,518
Commercial loans		2,623			2,886			3,344
Total nonaccrual loans		5,162			5,343			7,862
90-days past due and accruing interest		—			—			—
Total nonperforming loans		5,162			5,343			7,862
Nonperforming loans guaranteed by government		(623	)		(735	)		(878	)
Net nonperforming loans		4,539			4,608			6,984
Other real estate owned		11,531			16,355			17,772
Total nonperforming assets, net of guaranteed loans	$	16,070		$	20,963		$	24,756
ASSET QUALITY RATIOS
Allowance for loan losses as a percentage of total loans outstanding, net of loans held for sale		1.51	%		1.60	%		1.72	%
Allowance for loan losses as a percentage of total nonperforming loans, net of government guarantees		339.15	%		345.42	%		233.56	%
Net loan charge offs as a percentage of average loans, annualized		0.21	%		0.35	%		0.13	%
Net nonperforming loans as a percentage of total loans		0.44	%		0.46	%		0.74	%
Nonperforming assets as a percentage of total assets		1.09	%		1.45	%		1.71	%
Consolidated classified asset ratio(1)		26.82	%		29.02	%		32.83	%

⁽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 at March 31, 2014, declined $8,686 from the same period last year, and on a linked-quarter basis declined $4,893 from the end of fourth quarter 2013. The majority of the decline in nonperforming assets from year-end and one year ago occurred in other real estate owned and resulted from the sale of a commercial property in first quarter 2014, carried in other real estate owned and valued at approximately $3,500. Other real estate owned at March 31, 2014, consisted of

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five properties, one of which is a commercial land development project valued at $10,040 and made up 87.07% of the other real estate owned category. The Company is actively marketing this property; however the location and nature of the property make it susceptible to possible future valuation write-downs as new appraisals become available.

Noninterest Income

Noninterest income for first quarter 2014 was $1,323, up $43 or 3.36% over first quarter 2013. The increase in 2014 noninterest income when compared to last year was primarily attributable to higher service charges on deposit accounts, gain on the sale of securities, and an increase in the other income category of noninterest income. The increase in service charges was due to the implementation of new account analysis fees that was effective January 1, 2014. The gain on the sale of securities of $63 during the quarter resulted from the repositioning of the securities portfolio. The increase in the other income category was the result of higher business credit card interchange due to increased transaction volume and revenue from rents on other real estate owned. Offsetting the improvement in these categories was a decline of $155 in merchant bankcard processing fees due to the outsourcing of merchant bankcard processing, which occurred during fourth quarter 2013. This outsourcing also resulted in the elimination of bankcard processing expense.

Noninterest Expense

First quarter 2014 noninterest expense was $9,511, a decrease of $1,259 or 11.69% from first quarter 2013. When merger expenses of $1,246 are excluded in first quarter 2013, noninterest expense in first quarter 2014 is virtually unchanged from the same quarter last year. Generally, a $340 or 6.21% increase in personnel expense in first quarter 2014 over first quarter 2013 was offset by declines in other real estate expense of $201 and bankcard processing expense of $123.

BALANCE SHEET

Loans

At March 31, 2014, outstanding loans were $1,021,115, up $26,346 from December 31, 2013, and up $70,287 from March 31, 2013. Annualized first quarter loan growth was 10.74% and represented a diverse expansion in several core lending segments. Growth experienced during the first quarter 2014 represented an annualized growth rate of 10.74 %. A summary of outstanding loans by market at March 31, 2014, December 31, 2013, and March 31, 2013, follows:

	Period Ended
	March 31,		December 31,		March 31,
	2014		2013		2013
Eugene market gross loans, period-end	$	347,233	$	334,511	$	324,009
Portland market gross loans, period-end		400,537		391,295		388,979
Seattle market gross loans, period-end		131,492		132,488		146,860
National healthcare gross loans, period-end		141,853		136,475		90,980
Total gross loans, period-end	$	1,021,115	$	994,769	$	950,828

All of the Company’s primary markets, with the exception of the Seattle market, had an increase in outstanding loans at March 31, 2014, when compared to the prior quarter-end. While loans contracted in the Seattle market during the quarter, the Seattle team funded $8,600 in new commercial real estate and commercial and industrial loans. The loss of eight dental loans to competition offset this growth. However, net loan growth is expected in 2014 in the Seattle market due to the addition of a new experienced market lender with a solid pipeline, a resurgent regional economy and recent growth in commercial lending. The increase in Eugene and Portland market loans was related to an increase in permanent real estate loans and commercial and industrial loans. The increase in non-owner occupied investor financing represented recourse loans to a diverse range of properties with solid cash flows. Loan to value percentage ranged from 49.7% to 74%. In addition, the four largest commercial and industrial loans booked during the quarter were to non-dental healthcare related entities, ranging from veterinarians to healthcare finance providers.

Outstanding loans to dental professionals, which are comprised of both local and national loans, at March 31, 2014, totaled $305,755 or 29.94% of the loan portfolio, compared to $307,268 or 30.89% of the loan portfolio at December 31, 2013. This

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quarter marked the first time the overall dental portfolio contracted. While the Bank’s national dental loans expanded by $5,138 and are now represented in 30 states, local dental loans contracted due to amortization of the existing portfolio and intense pricing competition from an out of state. At March 31, 2014, $15,210 or 4.97% 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 only to acquisition of a seasoned practice by experienced dental professionals and owner-occupied real estate loans.

In addition to loan growth in the dental industry, growth was also experienced in the wider healthcare field with loans to physicians, surgeons, optometrists, family practitioners, and medical specialists. The healthcare portfolio, other than dental, experienced growth during the quarter. As of March 31, 2014, this segment grew 6.8% over year-end to end the period at $66,100. The majority of the expansion was in veterinary lending in both practice acquisition and owner occupied real estate financing.

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.

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 March 31, 2014, the balance of securities available-for-sale was $341,992, down $5,394 from December 31, 2013. At March 31, 2014, the portfolio had an unrealized pre-tax gain of $2,302 compared to an unrealized pre-tax loss of $242, at December 31, 2013. The improvement in the unrealized gain or market value of the securities portfolio during the first quarter 2014 was primarily due to a decline in longer-term interest rates. The average life and duration of the portfolio at March 31, 2014, was 4.4 years and 4.0 years, both up slightly from of 4.2 and 3.8, respectively, at December 31, 2013. At March 31, 2014, $25,821 of the securities portfolio were pledged as collateral for public deposits in Oregon and Washington and for repurchase agreements.

During the first quarter 2014, the Company repositioned a portion of its securities portfolio, which included the sale of approximately $25,300 in securities and purchases of approximately $23,000 in new securities. This repositioning of the portfolio resulted in a net gain on sale of securities totaling $63 during the first quarter 2014. Included in the securities sold during the current quarter were approximately $9,300 of bullet agencies that had rolled down the yield curve and were sold at a gain of approximately $350. The Company offset most of the gain on the sale of the agencies through the sale of approximately $16,000 of underperforming securities in the portfolio, including some mortgage-backed securities and tax-exempt municipal securities. The proceeds from this sale were reinvested in new securities designed to continue to provide steady cash flow and to improve the overall performance and yield on the portfolio.

The Company continued to structure the portfolio to provide consistent cash flow and reduce the volatility of the portfolio in a rising rate environment in light of the Company’s current liability sensitive position. The portfolio is structured to generate sufficient cash flow to allow reinvestment at higher rates should interest rates move up or to fund loan growth as was the case in 2013. In a stable rate environment, approximately $46,000 in cash flow is anticipated during 2014. Going forward, purchases will be dependent upon core deposit growth, loan growth, and the Company’s interest rate risk position. During the first half of 2014, purchases of new securities are expected to be somewhat limited as cash flow from the portfolio is expected to fund new loan growth.

At March 31, 2014, $5,061 or 1.48% of the total securities portfolio was composed of private-label mortgage-backed securities. Management has booked an other-than-temporary-impairment (“OTTI”) in previous years on this portion of the portfolio totaling approximately $227. Management reviews monthly all available information, including current and projected default rates and current and projected loss severities, related to the collectability of its potentially impaired investment securities to determine if an additional OTTI is required. No additional OTTI was recorded during the first quarter 2014. Recognition of additional 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.

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

Goodwill and Intangible Assets

At March 31, 2014, the Company had a recorded balance of $22,881 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 March 31, 2014, the Company had $704 of core deposit intangible assets resulting from the acquisition of Century Bank. The 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 and will be fully amortized in January 2020. In accordance with generally accepted accounting principles, the Company does not amortize goodwill or other intangible assets with indefinite lives, but instead periodically tests these assets for impairment. Management performs an impairment analysis of the intangible assets with indefinite lives at least annually, but more frequently if an impairment triggering event is deemed to have occurred. The last impairment test was performed at December 31, 2013, 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 $990,933 and represented 90.30% of total deposits at March 31, 2014. Core deposits at March 31, 2014, were virtually unchanged from December 31, 2013, which is typical of first quarter seasonal patterns.

A summary of outstanding core deposits and average core deposits by market and other deposits classified as wholesale funding at March 31, 2014, December 31, 2013, and March 31, 2013, follows:

	Period ended
	March 31,		December 31,		March 31,
	2014		2013		2013
Eugene market core deposits, period-end(1)	$	604,505	$	588,158	$	598,157
Portland market core deposits, period-end(1)		234,631		249,050		232,431
Seattle market core deposits, period-end(1)		151,797		153,107		130,156
Total core deposits, period-end(1)		990,933		990,315		960,744
Other deposits, period-end		106,422		100,666		106,951
Total deposits, period-end	$	1,097,355	$	1,090,981	$	1,067,695

	Three Months Ended
	March 31,		December 31,		March 31,
	2014		2013		2013
Eugene market core deposits, average(1)	$	602,977	$	592,179	$	569,331
Portland market core deposits, average(1)		236,945		242,855		241,491
Seattle market core deposits, average(1)		152,561		152,173		132,493
Total core deposits, average(1)		992,483		987,207		943,315
Other deposits, average		101,421		101,263		110,938
Total deposits, average	$	1,093,904	$	1,088,470	$	1,054,253

⁽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.

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Other 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 March 31, 2014		WAR			WAM
Short-Term Public Time Deposits	$	30,519		0.19	%		32 days
Long-Term Public Time Deposits		30		0.90	%		7.89 years
	$	30,549
Short-Term Brokered Time Deposits	$	16,000		0.20	%		100 days
Long-Term Brokered Time Deposits		58,538		1.98	%		5.45 years
	$	74,538

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 Part I, item 1 of this report for a full maturity and interest rate schedule for the Federal Home Loan Bank borrowings.

Junior Subordinated Debentures

The Company had $8,248 in junior subordinated debentures outstanding at March 31, 2014, 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 approximately seven years. At March 31, 2014, the fair value of the interest rate swap on the Company’s subordinated debentures was $325. At March 31, 2014, 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 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 is 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 Part I, 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 or other equity securities whether through stock offerings or through the exercise of equity awards. Capital

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formation allows the Company to grow assets and provides flexibility in times of adversity. Shareholders’ equity at March 31, 2014, was $181,398, up $2,214 from December 31, 2013. The increase in shareholders’ equity was due to the improvement in the market value of the Company’s securities available-for-sale, which positively impacted accumulated other comprehensive income.

In March 2013, the Company’s Board of Directors authorized the repurchase of up to 5.00% of the Company’s outstanding common shares, or approximately 892,000 shares, with the purchases authorized to occur over a 12 months, with the plan commencing on April 1, 2013. The Company did not repurchase any shares during first quarter 2014. Over the last eight 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. For additional details regarding the changes in equity, review the Consolidated Statements of Changes in Shareholders’ Equity in Part I of 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 11.44%, 14.95%, and 16.21%, respectively, at March 31, 2014, all ratios being well above the minimum “well-capitalized” designation.

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 establish more restrictive capital definitions, create additional categories and higher risk-weightings for certain asset classes and off-balance sheet exposures, higher leverage ratios and capital conservation buffers that will be added to the minimum capital requirements and must be met for banking organizations to avoid being subject to certain limitations on dividends and discretionary bonus payments to executive officers. The new rules also 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 4.50%; (b) a Tier 1 capital ratio of 6.00% (which is an increase from 4.00%); (c) a total capital ratio of 8.00%; and (d) a Tier 1 leverage ratio to average consolidated assets of 4.00%. 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 2.50% 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.

On January 12, 2014, the Basel Committee issued its near final version of its leverage ratio and disclosure guidance (the “Basel III Leverage Ratio”). The Basel III Leverage Ratio will be subject to further calibration until 2017, with final implementation expected by January 18, 2018. The Basel III Leverage Ratio makes a number of significant changes to the Basel Committee’s June 2013 consultative paper (“Consultative Paper”) by easing the approach to measuring the exposures of off-balance sheet items. These changes address the financial services industry’s concern that the Consultative Paper’s definition of exposure was too expansive, i.e., that the leverage ratio’s denominator was too large. The changes eliminate many, but not all, differences between the Basel III Leverage Ratio and the U.S. supplemental leverage ratio, which is currently set at a minimum of three percent and applies to U.S. firms with over $250 billion in assets.

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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.

Subsequent to the end of first quarter 2014, the Company declared a regular quarterly cash dividend of $0.10 per share and a special cash dividend of $0.11 per share to be paid on May 12, 2014 to shareholders of record as of April 28, 2014.

OFF-BALANCE SHEET ARRANGEMENTS AND COMMITMENTS

In the normal course of business, the Company commits to extensions of credit and issues letters of credit. The Company uses the same credit policies in making commitments to lend funds and conditional obligations as it does for other credit products. In the event of nonperformance by the customer, the Company’s exposure to credit loss is represented by the contractual amount of the instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established by the contract. Since some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At March 31, 2014, the Company had $159,691 in commitments to extend credit.

Letters of credit written are conditional commitments issued by the Company to guarantee performance of a customer to a third party. The credit risk involved is essentially the same as that involved in extending loan facilities to customers. At March 31, 2014, the Company had $1,478 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 obligations, and requires the Company to maintain a certain amount of liquidity on the asset side of its balance sheet. The Company also prepares quarterly projections of its liquidity position 30 days, 90 days, 180 days, and 1 year into the future. In addition, the Company prepares a Liquidity Contingency Plan at least semi-annually that is strategic in nature and forward-looking to test the ability of the Company to fund a liquidity shortfall arising from various escalating events. The Liquidity Contingency Plan is presented and reviewed by the Company’s Asset and Liability Committee.

Core deposits at March 31, 2014, were $990,933 and represented 90.30% of total deposits. Core deposits at March 31, 2014, were virtually unchanged from December 31, 2013, reflecting a typical seasonal pattern for the first quarter. The Company experienced an increase in outstanding loans of $26,347 during the first quarter 2014, which was funded by cash flow from the securities portfolio and wholesale funding. It is anticipated the securities portfolio and growth in core deposits will provide a significant portion of the funding during 2014 as loans are expected to continue to grow. The securities portfolio represented 23.24% of total assets at March 31, 2014. At March 31, 2014, $25,821 of the securities portfolio was pledged to support public deposits, leaving $316,171 of the securities portfolio unencumbered and available-for-sale. In addition, at March 31, 2014, the Company had $36,015 of government guaranteed loans that could be sold in the secondary market to support the Company’s liquidity position.

Due to its strategic focus to market to specific segments, the Company has been successful in developing deposit relationships with several large clients, which are generally defined as deposit relationships of $1,000 or more, which are closely monitored by management and Company officers. At March 31, 2014, 55 large deposit relationships with the Company accounted for $384,720 or 38.82% of total outstanding core deposits. The single largest client represented 6.16% of outstanding core deposits at March 31, 2014. 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

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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 events will not adversely affect the Company’s liquidity.

At March 31, 2014, the Company had secured borrowing lines with the Federal Home Loan Bank of Seattle (“FHLB”) and the Federal Reserve Bank of San Francisco (“FRB”), along with unsecured borrowing lines with various correspondent banks totaling $463,483. The Company’s secured lines with the FHLB and FRB were limited by the amount of collateral pledged. At March 31, 2014, the Company had pledged $237,868 in discounted collateral value in commercial real estate loans, first and second lien single-family residential loans, multi-family loans, and securities to the FHLB. Additionally, certain commercial and commercial real estate loans with a discounted value of $96,615 were pledged to the FRB under the Company’s Borrower-In-Custody program. The Company’s unsecured correspondent bank lines totaled $129,000. At March 31, 2014, the Company had $175,000 in borrowings outstanding from the FHLB, $0 outstanding with the FRB, and $4,450 outstanding on its overnight correspondent bank lines, leaving a total of $288,483 available on its secured and unsecured borrowing lines as of such date.

Net cash provided by operating activities was $3,557 during the three months ended March 31, 2014. Net cash of $15,508 was used in investing activities, consisting principally of a net loan principal increase of $26,868, which was partially offset by net proceeds from investment securities of $6,590. For the three months ended March 31, 2014, cash provided by financing activities was $18,427 and primarily consisted of an increase in FHLB borrowings and wholesale deposits.

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 2013Form 10-K and the Annual Report to Shareholders for the year ended December 31, 2013, 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 March 31, 2014, that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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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 2013 Form 10-K, which is incorporated by reference herein, in addition to the following information:

Industry Factors

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 March 31, 2014, 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 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. During the first quarter of 2014, in light of improving conditions in the labor market, the Federal Reserve began to reduce the rate of its purchases of long-term U.S. Treasury and agency securities. The Federal Reserve also indicated that further reductions in the pace of its asset purchases will be likely if the economic indicators show ongoing improvement in labor market conditions and rate of inflation moving back toward the Federal Reserve’s longer-term objective of two percent. However, the Federal Reserve further indicated that it expected that the current very low target range for the federal funds rate of zero to ¹⁄₄ percent likely would continue for a considerable period of time after its asset purchase program ended, especially if current and projected inflation rates remain below the longer-term objective.

Company Factors

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

Bank regulatory authorities and investors generally view significant loan concentrations within any particular industry as carrying higher inherent risk than a loan portfolio without any significant concentration in one industry. We have a significant concentration of loans to dental professionals, which represented 29.94% in principal amount of our total loan portfolio at March 31, 2014 (see Note 4 in theNotes to Consolidated Financial Statements included in this Form 10-Q). 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

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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 March 31, 2014, our nonperforming loans (which include all nonaccrual loans, net of government guarantees) were 0.44% of the loan portfolio. At March 31, 2014, our nonperforming assets (which include foreclosed real estate) were 1.09% of total assets. Nonperforming loans and assets adversely affect our net income in various ways. 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 April 16, 2014, we announced a quarterly cash dividend of $0.10 per share, payable to shareholders of record on April 28, 2014, and declared a special cash dividend of $0.11 per share. 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 other than temporary impairment (“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 March 31, 2014, we had stock in the FHLB totaling $10,327. The FHLB stock held by us is carried at cost and is subject to recoverability testing under applicable accounting standards. As of March 31, 2014, we did not recognize an impairment charge related to our FHLB stock holdings. Beginning in 2013 the FHLB began redemption of small portions of FHLB stock. Future negative changes to the financial condition of the FHLB could require us to recognize an impairment charge with respect to such holdings.

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

At March 31, 2014, we had $22,881 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, 2013. At December 31, 2013, 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.

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 March 31, 2014, 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	May 9, 2014	/s/ Hal Brown
		Hal Brown
		Chief Executive Officer
		(Duly Authorized Officer; Principal Executive Officer)
Dated	May 9, 2014	/s/ Michael A. Reynolds
		Michael A. Reynolds
		Executive Vice President and Chief Financial Officer (Duly Authorized Officer; Principal Financial Officer)

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