PCBK Form 10-Q 09-30-05

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

PART I	FINANCIAL INFORMATION	Page

Item 1.	Financial Statements

	Consolidated Statements of Income:	3
	Three and nine months ended September 30, 2005, and September 30, 2004

	Consolidated Statements of Comprehensive Income:	4
	Three and nine months ended September 30, 2005 and September 30, 2004

	Consolidated Balance Sheets:	5
	September 30, 2005, December 31, 2004 and September 30, 2004

	Consolidated Statements of Cash Flows:	6
	Nine months ended September 30, 2005 and September 30, 2004

	Notes to Consolidated Financial Statements	7


Item 2.	Management’s Discussion and Analysis of Financial	9
	Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16

Item 4.	Controls and Procedures	16


PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	none

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	none

Item 3.	Defaults Upon Senior Securities	none

Item 4.	Submission of Matters to a Vote of Security Holders	none

Item 5.	Other Information	none

Item 6.	Exhibits	17

SIGNATURES		18

	Three months ended September 30,					Nine months ended September 30,
	2005			2004		2005			2004
Interest income
Loans	$	9,513		$	7,259	$	27,155		$	20,453
Securities		262			209		732			656
Dividends on Federal Home Loan Bank stock		0			22		(12	)		69
Federal funds sold		16			2		21			12
		9,791			7,492		27,896			21,190

Interest expense
Deposits		1,892			819		4,848			2,242
Federal Home Loan Bank borrowings		426			197		1,269			751
Federal funds purchased		5			84		86			139
		2,323			1,100		6,203			3,132

Net interest income		7,468			6,392		21,693			18,058

Provision for loan losses		250			125		800			300
Net interest income after provision		7,218			6,267		20,893			17,758

Noninterest income
Service charges on deposit accounts		337			389		1,040			1,218
Other fee income, principally bankcard		357			347		1,045			1,024
Loan servicing fees		39			46		118			144
Mortgage banking income and gains on loan sales		262			274		735			749
Loss on sale of securities		(11	)		0		(11	)		(13	)
Other noninterest income		66			76		186			239
		1,050			1,132		3,113			3,361

Noninterest expense
Salaries and employee benefits		2,672			2,533		8,016			7,245
Premises and equipment		535			445		1,561			1,425
Bankcard processing		122			107		366			329
Business development		222			180		887			727
Other noninterest expense		702			800		2,113			2,114
		4,253			4,065		12,943			11,840

Income before income taxes		4,015			3,334		11,063			9,279
Provision for income taxes		1,546			1,276		4,238			3,550

Net income	$	2,469		$	2,058	$	6,825		$	5,730

	Three months ended						Nine months ended
	September 30						September 30,
		2005			2004			2005			2004
Net income	$	2,469		$	2,058		$	6,825		$	5,730
Other comprehensive income:
Unrealized gains (losses) arising during the period		(197	)		299			(281	)		(75	)
Reclassification for (gains) losses included in
statement of income		11			0			11			13
		(187	)		299			(270	)		(62	)
Income tax (expense) benefit		72			(115	)		104			24
Net unrealized gains (losses) on securities available for sale		(115	)		184			(166	)		(38	)
Comprehensive Income	$	2,340		$	2,242		$	6,659		$	5,692

	September 30,			December, 31,			September 30,
	2005			2004			2004

Assets
Cash and due from banks	$	18,982		$	15,650		$	15,077
Federal funds sold		3,816			432			2,277
Total cash and cash equivalents		22,798			16,082			17,354

Securities available-for-sale		28,661			27,558			27,853
Loans held for sale		902			2,072			1,148
Loans, less allowance for loan losses		499,207			451,744			423,396
Interest receivable		2,165			1,969			1,524
Federal Home Loan Bank stock		2,819			2,808			2,806
Property, net of accumulated depreciation		15,412			13,182			12,740
Foreclosed assets		400			262			0
Deferred income taxes		432			258			273
Other assets		1,296			695			769

Total assets	$	574,092		$	516,630		$	487,863


Liabilities and stockholders' equity
Deposits
Noninterest-bearing demand	$	156,686		$	132,249		$	134,625
Savings and interest-bearing checking		249,492			219,681			202,662
Time $100,000 and over		52,311			31,115			37,226
Other time		19,300			20,746			20,660
		477,789			403,791			395,173

Federal funds purchased		0			10,290			16,080
Federal Home Loan Bank term advances		38,500			51,000			27,500
Accrued interest and other liabilities		2,614			2,157			1,907
Total liabilities		518,903			467,238			440,660

Stockholders' equity
Common stock		29,055			28,076			27,541
Retained earnings		26,414			21,430			19,730
Accumulated other comprehensive loss		(280	)		(114	)		(68	)
Total stockholders' equity		55,189			49,392			47,203

	$	574,092		$	516,630		$	487,863

	For nine months ended September 30,
	2005			2004

Net cash provided by operating activities	$	8,596		$	7,811

Cash flows from investing activities
Proceeds from sales and maturities of securities		7,063			6,482
Purchase of securities		(8,034	)		(4,118	)
Net purchases of loans		(8,489	)		0
Loans made net of principal collections		(39,774	)		(73,907	)
Purchase of property		(2,934	)		(380	)

Net cash used in investing activities		(52,168	)		(71,923	)

Cash flows from financing activities
Net increase in deposits		73,998			39,074
Increase (decrease) in fed funds purchased		(10,290	)		16,080
Increase (decrease) in Federal Home Loan Bank borrowings		(12,500	)		1,500
Proceeds from stock options exercised		920			921
Dividends paid		(1,840	)		(1,645	)

Net cash provided by financing activities		50,288			55,930

Net increase (decrease) in cash and cash equivalents		6,716			(8,182	)

Cash and cash equivalents, beginning of period		16,082			25,536

Cash and cash equivalents, end of period	$	22,798		$	17,354

A complete set of the Notes to Consolidated Financial Statements is a part of the Company’s 2004 Form 10-K filed in March 2005. The notes below are included because of material changes in the financial statements or to provide the reader with additional information not otherwise available. All numbers in the following notes are expressed in thousands of dollars, except per share data.

The accompanying interim condensed 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 (which owns and operates bank-related real estate) and PCB Loan Services Corporation (presently inactive). All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying condensed 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 condensed 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, 2004 was derived from audited financial statements, but does not include all disclosures contained in the Company’s 2004 Form 10-K. The interim condensed consolidated financial statements should be read in conjunction with the December 31, 2004 consolidated financial statements, including the notes thereto, included in the Company’s 2004 Form 10-K.

The Company applies the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock issued to Employees, in accounting for its stock option plans. Accordingly, no stock-based employee compensation expense is reflected in net income as all options were granted at an exercise price equal to the market value of the underlying common stock on the date of the grant. The following tables illustrate the effect on net income and earnings per share for the nine months ended September 30, 2005 and for the three months ended September 30, 2005 if the Company had applied the optional fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

	Sept. 30, 2005			Sept. 30, 2004
Net income - as reported	$6,825			$5,730
Deduct total stock-based employee compensation expense determined under fair value for all awards, net of related tax effects		(399	)		(330	)
Net income - pro forma	$	6,426		$	5,400

Earnings per share
Basic - as reported	$	0.78		$	0.67
Basic - pro forma	$	0.74		$	0.63
Diluted - as reported	$	0.76		$	0.65
Diluted - pro forma	$	0.71		$	0.62

	Sept. 30, 2005			Sept. 30, 2004
Net income - as reported	$	2,469		$	2,058
Deduct total stock-based employee compensation expense determined under fair value for all awards, net of related tax effects		(123	)		(110	)
Net income - pro forma	$	2,346		$	1,948

Earnings per share
Basic - as reported	$	0.28		$	0.24
Basic - pro forma	$	0.27		$	0.23
Diluted - as reported	$	0.27		$	0.23
Diluted - pro forma	$	0.26		$	0.22

	September 30, 2005			December 31, 2004			September 30, 2004
Commercial loans	$	117,836		$	107,538		$	99,915
Real estate loans		378,360			341,111			318,710
Consumer loans		10,580			10,380			12,069
		506,776			459,029			430,694
Deferred loan origination fees		(1,978	)		(2,061	)		(2,019	)
		504,798			456,968			428,675
Allowance for loan losses		(5,591	)		(5,224	)		(5,279	)
	$	499,207		$	451,744		$	423,396

The recorded investment in restructured and other impaired loans totaled $1,232 and $3,450 at September 30, 2005 and 2004, respectively. The specific valuation allowance for loan losses related to these impaired loans was $310 and $699 at September 30, 2005 and 2004, respectively, and is included in the ending allowance for loan losses shown above. The average recorded investment for the first nine months of 2005 and 2004 respectively, was approximately $1,465 and $3,500. Interest income recognized on restructured and impaired loans was $27 and $94 during the first nine months of 2005 and 2004, respectively.

A substantial portion of the loan portfolio is collateralized by real estate, and is, therefore, susceptible to changes in local market conditions. Management believes that the loan portfolio is diversified among industry groups. At September 30, 2005, outstanding residential construction loans totaled $64,341 and represented 12.7% of total outstanding loans. In addition, at September 30, 2005, unfunded loan commitments for residential construction totaled approximately $56,659. Outstanding residential loans at December 31, 2004 were $67,938 or 14.7% of total outstanding loans, and unfunded commitments for residential construction totaled approximately $19,008. At September 30, 2005, there were no nonaccrual loans, nor any impaired loans represented by the construction loan segment of the portfolio. There are no other industry concentrations in excess of 10% of total outstanding loans. It is management’s opinion that the allowance for loan losses is adequate to absorb known and inherent risks in the loan portfolio. However, actual results may differ from estimates.

In December 2004, the FASB issued Statement No. 123(R) “Share-Based Payment.” This statement replaces existing requirements under SFAS No. 123 “Accounting for Stock-Based Compensation,” and eliminates the ability to account for share-based compensation transactions under APB Opinion No. 25 “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires stock-based transactions to be recognized as compensation expense in the income statement based on their fair values at the date of grant. The fair value should be estimated using option-pricing models such as the Black-Scholes model or a binomial model. This statement is effective beginning January 1, 2006. At this time, the Company does not believe the future impact on earnings to be materially different than what has historically been reported as the pro forma effect to income in Note 2 included herein and in Note 1 to the Company’s December 31, 2004, consolidated financial statements contained in Form 10-K. The impact to operating and financing cash flows is not considered to be material to the consolidated financial statements

The following discussion contains a review of Pacific Continental Corporation and its wholly owned subsidiary Pacific Continental Bank’s operating results and financial condition for the nine and three months ended September 30, 2005. When warranted, comparisons are made to the same period in 2004 and to the previous year ended December 31, 2004. The discussion should be read in conjunction with the financial statements (unaudited) and related notes contained elsewhere in this report. The reader is assumed to have access to the Company’s Form 10-K for the previous year ended December 31, 2004, which contains additional statistics and explanations. All numbers, except per share data, are expressed in thousands of dollars.

In addition to historical information, this report contains ``forward-looking statements'' within the meaning of the Private Securities Litigation Reform Act of 1995 (``PSLRA''). Such “forward-looking” statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected, including but not limited to the following: the concentration of loans of the Company’s banking subsidiary , particularly with respect to commercial and residential real estate lending; changes in the regulatory environment and increases in associated costs, particularly on-going compliance expenses and resource allocation needs in response to the Sarbanes-Oxley Act and related rules and regulations; vendor quality and efficiency; employee recruitment and retention, specifically in the Bank’s Portland market; the company’s ability to control risks associated with rapidly changing technology both from an internal perspective as well as for external providers; increased competition among financial institutions; fluctuating interest rate environments; and similar matters. With regard to the proposed NWB Financial Corporation transaction, specific risks include that it may be more difficult, costly or time-consuming to combine the two companies than the parties anticipate, thereby creating disruption and difficulties during the integration process.

In addition, the combined company may fail to realize projected cost savings and revenue enhancement and the accretive effect of the acquisition on the Company’s earnings. Readers are cautioned not to place undue reliance on the forward-looking statements. Pacific Continental Corporation undertakes no obligation to publicly revise or update the forward-looking statements to reflect events or circumstances that arise after the date of this release. Readers should also carefully review any risk factors described in its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and other documents, including any Current Reports on Form 8-K furnished to or filed from time-to-time with the Securities Exchange Commission. This statement is included for the express purpose of invoking PSLRA's safe harbor provisions.

On August 17, 2005, the Company and the Bank entered into a Plan and Agreement of Merger with NWB Financial Corporation (“NWBF”) and its wholly-owned subsidiary, Northwest Business Bank, both located in Seattle, Washington. Terms of the agreement call for the Company to pay approximately $14.5 million in cash and issue approximately 1.4 million shares of its common stock. Based upon the Company’s August 17, 2005 closing price, the value of the stock consideration is approximately $22.2 million. The terms also provide for NWBF outstanding stock options to be rolled into options to purchase the Company’s stock. Combined, the stock and cash transactions, including the value of rolling outstanding NWBF options, is valued at approximately $39.0 million. Pursuant to the terms of the transaction, NWBF will merge with and into the Company and Northwest Business Bank will merge with and into the Bank upon approval of their shareholders and regulatory agencies. Northwest Business Bank operates two offices, its main office in Seattle, Washington and a branch office in Bellevue, Washington both of which will operate as branches of Pacific Continental Bank at closing. The transaction is expected to close in the fourth quarter of 2005.

	2005			2004			% Change			2005			2004			% Change
Net income	$	2,469		$	2,058			20	%	$	6,825		$	5,730			19	%

Earnings per share (1)
Basic	$	0.28		$	0.24			17	%	$	0.78		$	0.67			16	%
Diluted	$	0.27		$	0.23			17	%	$	0.76		$	0.65			17	%

Loans, at period end (2)										$	505,700		$	429,863			18	%
Deposits, at period end										$	477,789		$	395,173			21	%

Return on assets (3)		1.75	%		1.72	%					1.67	%		1.70	%
Return on equity (3)		17.90	%		17.51	%					17.25	%		16.96	%
Net interest margin (3)		5.68	%		5.74	%					5.68	%		5.75	%

The Company earned $2,469 in the third quarter of 2005, a 20% increase over net income of $2,058 for the same quarter last year. The improvement in net income was primarily the result of increased operating revenues, which consist of net interest income plus noninterest income. Operating revenues were up $994 in the third quarter 2005 compared to third quarter 2004. Operating revenue growth was driven by an 18% increase in average earning assets, primarily loans, which resulted in a 17% increase in net interest income. Improvement in net interest income was partially offset by an $82 or 7% decline in noninterest income.

Through September 30, 2005, the Company reported net income of $6,825, a 19% increase over net income of $5,730 for the comparable period last year. Earnings per diluted share were $0.76 for the first nine months of the current year compared to $0.65 for the same period last year. The improvement in year-to-date income was similar to the quarter-over-quarter growth as operating revenues increased by $3,387 or 16% primarily due to increased loan volumes.

Outstanding loans and deposits at September 30, 2005 showed growth rates of 18% and 21%, respectively, over September 30, 2004. Core deposits, which are defined as demand deposits, interest checking, money market accounts, and local time deposits, totaled $444,358 or 93% of September 30, 2005 outstanding deposits compared to $363,580 and 92% at September 30, 2004. Demand deposits were $156,686 or 33% of total deposits at September 30, 2005.

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

Third quarter net interest income, prior to the provision for loan losses, increased $1,076, or 17%, over same period in 2004. This increase was the result of growth of earning assets, primarily loans. Average earning assets in the current quarter increased 18% from $442,769 in the third quarter 2004 to $522,091 in the third quarter 2005.

The net interest margin (calculated by dividing annualized net interest income by average earning assets) was 5.68% in the third quarter 2005 compared to 5.74% in the third quarter 2004, a decline of 6 basis points. The net interest margin has remained very stable throughout the first nine months of 2005 as evidenced by the 5.68% net interest margin reported in the third quarter 2005 compared to 5.71% and 5.65% margins reported for the second and first quarters of 2005. Earning asset yields in the third quarter 2005 were 7.44% compared to 6.73% in the third quarter 2004, an increase of 71 basis points. Loan fees in the third quarter 2005 were $369, and contributed 28 basis points to earning asset yields during the quarter. That compares to loan fees of $347 reported for the 31 quarter 2004 or 31 basis points. The improvement in earning asset yields was offset by an increase in the cost of funds, which moved from 1.00% in third quarter 2004 to 1.77% in third quarter 2005.

The year-to-date net interest margin as a percentage of earning assets through September 30, 2005 showed results similar to the quarter-to-quarter comparison. For the first nine months of 2005, net interest income, prior to the provision for loan loss, totaled $21,693, an increase of 20% over $18,058 for the same period in 2004. Year-to-date average earning assets increased 22% as compared to the same period in 2004, while net interest income as a percent of earning assets declined from 5.75% in 2004 to 5.68% in 2005. The decrease resulted from the Bank’s cost of funds rising faster than yields on earning assets. Through September 30, 2005, the Bank’s cost of funds has increased 65 basis points when compared to September 30, 2004, while earning asset yields have increased 57 basis points. A detailed rate and volume analysis shows that the interest income component increased by $6,706, a $4,527 improvement due to higher volumes, combined with a $2,179 improvement due to higher rates. The year-to-date September 30, 2005 interest expense component was $3,071 higher than the same period last year. The increase in interest expense shows $1,216 was due to increased volumes and the mix of funding and $1,855 was due to an increase in rates.

In the rising rate environment experienced during 2005, the Bank has experienced some margin compression due to the cost of funds rising faster than earning asset yields. The Company’s asset and liability modeling indicates that the balance sheet is asset sensitive, meaning the net interest margin should improve in a rising rate environment, yet like many other bank holding companies, the Company has not seen significant improvement in its net interest margin despite the 275 basis point increase in short-term market interest rates. This is the result of a flattening yield curve (long-term rates rising at a slower rate than short-term rates) keeping yields on fixed rate loans lower and the timing lag between increases in short-term money market rates and increases in the Company’s prime-lending rate.

The Bank’s outlook with respect to its net interest margin for the fourth quarter 2005 is stable to higher when compared to the net interest margin achieved during the first nine months of 2005. For example, the net interest margin for the month of September 2005 rose to 5.80%, which is an indication of improving margins for the remainder of the year and anticipated increases in market interest rates during the fourth quarter are expected to lead to modest improvement in the margin. However, the Bank does anticipate strong loan growth during the remainder of the year. Improvement in the margin will require core deposit growth commensurate with loan growth. Use of alternative or wholesale funding during the fourth quarter to fund anticipated loan growth could negatively impact the net interest margin. In addition, the Bank has experienced higher costs on approximately $104,000 in money market accounts indexed to the 91-day Treasury bill. This key market interest rate has been moving upward, increasing rates on the Bank’s money market accounts, in advance of increases in the Bank’s prime-lending rate, thus creating net interest margin compression. Further increases in market rates are expected to temporarily increase cost of funds faster than loan yields.

The third quarter 2005 provision for loan losses was $250, compared to $125 for the same quarter last year. Through September 30, 2005, the provision for loan losses was $800 compared to $300 for the same period last year. The higher provision during the first nine months of 2005 reflects loan growth during the period. The loan loss provision for the fourth quarter is expected to increase and is primarily dependent upon future loan growth as there is expected to be little change in the overall strong credit quality of the portfolio.

The allowance for loan losses at September 30, 2005 was 1.11% of period end loans compared to 1.14% and 1.23% at December 31, 2004 and September 30, 2004, respectively. At September 30, 2005, the Bank also has reserved $182 for possible losses on unfunded loan commitments, which is classified in other liabilities on the balance sheet. At September 30, 2005, the allowance for loan losses as a percentage of net nonperforming loans was 733% or 7.3 times the level of net nonperforming loans. That compares to 468% and 335% at December 31, 2004 and September 30, 2004, respectively. The allowance at September 30, 2005 includes $310 in specific allowance (included in the ending allowance above) for impaired loans, which total $1,232. Impaired loans include $701 nonaccrual loans (net of government guarantees) and three loans totaling $531 that are performing under revised terms. At December 31, 2004, the Company had $2,799 of restructured and impaired loans with a specific allowance of $510 assigned. At September 30, 2004, the Company had $3,450 of restructured and impaired loans with a specific allowance of $699 assigned.

During the third quarter 2005, the Bank transferred a single commercial real estate property located in the Portland area market into foreclosed assets at a value of $400. A loan loss of $111 was recognized upon the transfer into other real estate. The Bank is in the process of engaging a broker for the sale of this property, which is not anticipated until the first half of 2006.

	Sept. 30, 2005			Dec. 31, 2004			Sept. 30, 2004
Nonaccrual loans	$	940		$	1,004		$	1,870
90 days past due and accruing interest		48			213			20
Total nonperforming loans		988			1,217			1,891
Nonperforming loans guaranteed by the government		(225	)		(101	)		(316	)
Net nonperforming loans		763			1,116			1,575
Foreclosed assets		400			262			0
Total nonperforming asset, net of guaranteed loans	$	1,163		$	1,378		$	1,574

Year-to-date September 30, 2005 noninterest income was $3,113, a decrease of $248 or 7% from the same period in 2004. Year-to-date noninterest income was primarily impacted by declines in four categories: account service charges; non-sufficient funds and overdraft fees; residential mortgage fees; and merchant bankcard revenues. The $153 decline experienced in account service charges was the result of the increase in short-term market interest rates, which increased the earnings credit on analyzed business demand accounts and, correspondingly reduced fee income charged on these accounts. Although NSF/OD fees were increased by $2 per item in November 2004, the number of items on which fees were charged declined resulting in a $59 drop in these fees. Year-to-date September 30, 2005 revenues from the origination of residential mortgages of $731, which constitutes 23% of noninterest income, were down $18 from the same period one year ago. Merchant bankcard processing fees for the first nine months of 2005 were down $38 from last year, as pricing pressures and the loss of a few merchant clients impacted transaction volumes.

On the expectation that both short-term and long-term market interest rates will continue to rise during the fourth quarter 2005, noninterest income is expected to be flat or down slightly from that experienced last year in the same period. Improvement in noninterest income during the fourth quarter of 2005 is partially dependent upon long-term interest rates and their effect on the level of residential mortgage originations.

Year-to-date September 30, 2005 noninterest expense was $12,943, an increase of $1,103 or 9% over the same period in 2004. Growth in noninterest expense was primarily attributable to four categories: personnel expense; premises and equipment; business development; and net other real estate income/expense. Comparing the first nine months 2005 to the same period last year 2004, the largest increase was in personnel expense, which grew by $771 or 11% over last year, reflecting personnel costs for bankers added during late 2004 and during the first half of 2005, and increased group insurance costs. Salaries and commissions accounted for $400 of the increase in personnel costs, while increased group insurance costs accounted for $260 of additional personnel expense. Year-to-date September 30, 2005 occupancy and equipment expense totaled $1,561, an increase of $136 or 10% over last year. This increase related to additional expenses related for extensive remodeling of the Company’s Olive Street office during the first quarter 2005. During 2005, the Bank introduced new media advertising. The production costs associated with this campaign, combined with a planned increase in the Bank’s Portland market advertising expenditures, resulted in an increase of $160 in business development expense when compared to last year through September 30, 2004. Net other real estate expense through September 30, 2005 was up $50 when compared to the same period last year.

Continuing a long-term trend, the Company’s noninterest expense as a percentage of average assets continued to decline. For the third quarter 2005, annualized noninterest expense as a percentage of average assets was 3.01%, a 40 basis point improvement over the 3.41% reported for third quarter 2004. This improvement combined with the strong growth in operating revenue has improved the Company’s efficiency ratio from 54.03% for the third quarter 2004 to 49.93% for the third quarter of 2005. The year-to-date September 30, 2005 efficiency ratio was 52.18%, a 3.10% improvement over the 55.28% reported for the same period last year.

For the fourth quarter 2005, the Company expects a higher rate of growth in noninterest expenses than last year in anticipation of increased staffing and marketing expenses related to the opening of the Bank’s fourth metropolitan Portland office. The new Convention Center office is expected to open during the fourth quarter 2005.

Outstanding loans (including loans held for sale) at period-end September 30, 2005 were up $17,149 or 4% over June 30, 2005 outstanding loans, and up $75,877 or 18% over September 30, 2004. While loan growth accelerated during the third quarter 2005 when compared to the second quarter of 2005, high levels of payoffs during the quarter accelerated and continued to lower the rate of growth in outstanding loans when compared to the previous year. New loan production during the third quarter reached record levels for the Bank at approximately $85,000. That compares to $74,000 and $68,000 in new loan production for the first and second quarters of 2005, respectively. For the first nine months of 2005, outstanding loans have grown by $46,660, an annualized growth rate of 14%, with $27,057 of that growth occurring in the first quarter 2005, $2,454 during the second quarter 2005, and $17,149 during the third quarter 2005. That compares to growth of $73,746 in outstanding loans for the first nine months of 2004, an annualized growth rate of 28%.

At September 30, 2005, outstanding core deposits totaled $444,358, up $62,757 since December 31, 2004, an annualized growth rate of 22%. Growth during the first nine months of the current year has been stronger than historical growth during this time period. The Bank’s core deposit pipeline is strong and continued solid growth is expected. The Bank historically has experienced its strongest core deposit growth during the last six months of the year. Therefore it is expected that core deposit growth will fund a substantial portion of anticipated loan growth during fourth quarter of 2005.

Looking forward, the Bank’s prospects for continued growth in loans and core deposits in the fourth quarter appear good. Client borrowings on previously advanced construction lines typically begin repaying in the fourth quarter as the construction season winds down, and the Bank expects to receive significant pay downs on these lines. Nevertheless, the Bank expects positive growth in outstanding loans in the fourth quarter as the pipeline for new loan business remains strong. With respect to core deposits, the Bank historically has experienced strong core deposit growth during the fourth quarter and because of the strong deposit pipeline of new client relationships, management expects this trend to continue in the fourth quarter of 2005.

Liquidity is the term used to define the Company’s ability to meet its financial commitments. The Company maintains sufficient liquidity to ensure funds are available for both lending needs and the withdrawal of deposit funds. The Company derives liquidity primarily through core deposit growth, the maturity of investment securities, and loan payments. Core deposits include demand, interest checking, money market, savings and local time deposits, including local time deposits in excess of $100. Additional liquidity is provided through sales of loans, sales of securities, and access to alternative funding sources. National time deposits, public deposits, Federal Home Loan Bank borrowings, and unsecured overnight fed funds borrowings are referred to as alternative funding sources.

Core deposits represented 93% of total deposits at September 30, 2005 compared to 92% at September 30, 2004. Core deposit growth has been very strong at nearly $63,000 during the first nine months of 2005. Historically, the Company experienced slow growth of core deposits in the first half of the year due to seasonal construction and economic activity and client payment of various tax obligations. However, during the first six months of 2005, the Company experienced a $34,437 increase in core deposits from December 31, 2004, and achieved growth of $28,320 in outstanding core deposits during the third quarter over June 30, 2005 core deposit totals. Through September 30, 2005, core deposit growth has funded more than 100% of loan growth and has allowed the Company to significantly reduce its level of alternative funding from December 31, 2004 levels. At September 30, 2005, alternative sources were funding 12.5% of total Company assets. That compares to 13.7% alternative funding to total assets at December 31, 2004. Alternative funding has averaged in the range of 12% to 17% of total Bank assets for the last five years.

The Bank has a borrowing limit with the Federal Home Loan Bank of Seattle (the “FHLB”) equal to 25% of total assets. At September 30, 2005, the borrowing line was approximately $143,000 and, there was $38,500 advanced on this line. The borrowing line at the FHLB is limited to discounted pledged collateral, which totaled approximately $124,599 at September 30, 2005. In addition to the borrowing line at the FHLB, the Bank has established unsecured overnight lines totaling $62,000 with various correspondent banks and the Federal Reserve Bank of San Francisco. At September 30, 2005, the Bank had all $62,000 of the overnight lines available with correspondent banks. Other sources of liquidity available to the Bank include funding available through the State of Oregon time deposit program with community banks and a portion of the Bank’s loan portfolio, which contains nearly $27,000 in marketable government guaranteed loans.

Capital is the stockholder’s investment in the Company. Capital grows through the retention of earnings and the issuance of new stock through the exercise of stock options and decreases through the payment of dividends and share repurchase programs. Capital formation allows the Company to grow assets and provides flexibility in times of adversity.

Banking regulations require the Company to maintain minimum levels of capital. The Company manages its capital to maintain a “well capitalized” designation (the FDIC’s highest rating). A “well-capitalized” rating from the FDIC requires that the Bank maintain risk-based capital levels of 10% of total risk-based assets. At September 30, 2005, the Company’s total capital to risk-weighted assets was 11.61%, compared to 11.53% at September 30, 2004.

The Company’s board of directors reviews its dividend considerations so that cash dividends, when and if declared by the Company, would typically be paid in mid-March, June, September, and December of each year. During the first three quarters of 2005, the Company declared quarterly dividends of $0.07 per share paid on March 15, 2005, June 15, 2005, and September 15, 2005. The Company expects to maintain the $0.07 per share dividend per quarter for the fourth quarter of 2005, which would result in an annual dividend of $0.28 per share, and would equate to an 11.2% increase over the prior year, when adjusted for the 5-for-4 stock split declared in September 2004.

Companies frequently apply certain critical accounting policies requiring management to make subjective or complex judgments, often as a result of the need to estimate the effect of matters that are inherently uncertain. The Company considers its only material critical accounting policy to relate to the adequacy of the allowance for loan losses for outstanding loans and unfunded loan commitments. The allowance for outstanding loans is classified as a reserve 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 balance 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 fund loans. 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.

In the normal course of business, the Bank commits to extensions of credit and issues letters of credit. The Bank uses the same credit policies in making commitments to lend funds and conditional obligations as it does for other credit products. In the event of nonperformance by the customer, the Bank’s exposure to credit loss is represented by the contractual amount of the instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established by the contract. Since some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At September 30, 2005, the Bank had $146,356 in commitments to extend credit.

Letters of credit written are conditional commitments issued by the Bank to guarantee performance of a customer to a third party. The credit risk involved is essentially the same as that involved in extending loan facilities to customers. At September 30, 2005, the Bank had $6,753 in letters of credit and financial guarantees written.

The Bank also has internal guidance lines of credit established for certain borrowers, primarily in the residential construction industry. These guidance lines are not contractual commitments to extend credit, and may be terminated by the Bank for any reason without any obligation to the borrower. These lines provide the Bank’s lenders limits on future extensions of credit to certain borrowers. The Bank uses the same credit policies in establishing internal guidance lines as it does for other credit products. At September 30, 2005, the Bank had established unused guidance lines totaling approximately $29,342.

The Company has entered into an employment agreement with its President and Chief Executive Officer, Hal Brown. The agreement provides for a minimum aggregate annual base salary of $216, plus performance adjustments, life insurance coverage, and other perquisites commonly found in such agreements. During second quarter 2005, Mr. Brown’s contract was extended one year and expires in 2008.

The Company’s Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-15(e) and 15d-15(e)) as of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective and timely, providing them with material information relating to the Company required to be disclosed in the reports we file or submit under the Exchange Act.

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

Weighted average shares outstanding
Basic	8,782	8,592	8,743	8,550
Common stock equivalents attributable to stock options	220	275	246	228
Diluted	9,002	8,867	8,989	8,7778

	2005			2004
Balance, January 1	$	5,224		$	5,225
Provision charged to income		800			300
Loans charged against allowance		(504	)		(355	)
Loans recovered against allowance		71			109
Balance, September 30	$	5,591		$	5,279

	2005			2004
Balance, December 31, 2004	$	5,224		$	5,225
Provision charged to income		800			300
Loans charged off		(504	)		(355	)
Recoveries credited to allowance		71			109

Balance, September 30, 2005	$	5,591		$	5,279