2017 SHAREHOLDERS’ LETTER
Date: March 28, 2018
Dear Fellow Shareholders:
2017 was a great year for Pacific Financial, continuing our momentum of delivering strong profitability. Excluding
a one-time deferred tax adjustment, non-GAAP earnings increased 23% to a record $8.1 million, or $0.76 per diluted
share, compared to $6.6 million, or $0.62 per share for 2016. The sustained strength of our core earnings resulted
from steady loan growth, an expanding net interest margin and strong non-interest income generation.
Photo of Denise
Portmann, President &
Chief Executive Officer
As displayed in the accompanying audited financial statements, net income for the year on a GAAP basis was $7.0
million, or $0.65 per diluted share. As noted above, net income was impacted by the revaluation of our deferred tax
asset (“DTA”), which triggered an additional tax expense of $1.0 million in the fourth quarter of 2017, to comply
with the Tax Cuts and Jobs Act enacted in December 2017.
We expect to benefit from the corporate tax reduction, and we are optimistic that the new tax law will help to
reinvigorate the economy and support further growth in our markets. With an expected boost to earnings, we
anticipate pursuing additional investments in our franchise, employees, customers and communities. We are
embracing new technologies to help us efficiently reach more customers and deepen our ties with existing
customers. In addition, the productivity initiative we adopted in 2017 is already beginning to enhance operational
efficiencies, reduce expenses and augment revenues. These kinds of initiatives drive long-term growth and create
value for our shareholders.
Below are investments we have made demonstrating our commitment to improving the lives of our employees and
our communities:
We boosted the minimum wage for our lower paid employees, raising the hourly rate to $14.00 per hour
from $11.50 per hour. This increase takes effect on April 1, 2018.
We have increased our matching contributions toward our employees’ 401(k) retirement plan. This
increase will provide strong incentives for our employees to continue to save for retirement.
We believe that increasing wages and increasing the 401(k) match is a more permanent and better way to improve
the long-term earnings and savings power of our employees.
As a further demonstration of the financial success we accomplished in 2017, we raised our annual cash dividend
9% to $0.25 per share which was paid on January 8, 2018. This is the fourth consecutive year we have raised our
annual cash dividend.
Of course, these successes were a direct result of the outstanding dedication and hard work of our amazing
employees who live in the communities we serve. To that end, we will continue to cultivate our client relationships
in Northwestern Washington and Coastal Washington and Oregon as well as expand our reach in Tacoma,
Vancouver, Portland and Salem.
2017 SHAREHOLDERS’ LETTER
Highlights from 2017:
GAAP net income in 2017 grew 6% to $7.0 million, or $0.65 per diluted share, from $6.6 million, or $0.62
per share, in 2016. Achieved record non-GAAP earnings of $8.1 million for the year, excluding a $1.0
million DTA write-down; up 23% from 2016.
At year-end 2017, our total assets were $895.0 million; net loans were $678.2 million; deposits equaled
$777.2 million, with noninterest-bearing demand deposits accounting for 32% of total deposits.
Our net interest margin (NIM) expanded 17 basis points to 4.28%.
Asset quality remained stable at year end, with our adversely classified loans declining 57% to $7.5
million. Nonperforming assets were higher than a year ago at $2.2 million, primarily due to a $738,000
commercial real estate loan that we placed on nonaccrual in the third quarter of 2017.
We remained well reserved at year end, with our allowance for loan losses at 1.32% of total loans.
We continue to streamline our operations by expanding use of technologies, reviewing processes to
improve workflows, and ascertaining other revenue enhancement while prudently managing expenses.
All capital levels exceeded regulatory requirements for a “well-capitalized” financial institution, ending the
year with a total risk-based capital ratio of 12.69%, a Tier 1 risk-based ratio at 11.46% and a leverage ratio
at 9.56%.
We are proud of our proven track record and, as a vibrant local bank, we will continue to focus on lending to
community-based businesses and professionals. Ultimately, we believe this will stimulate and improve economic
growth in our local communities. In fact, a recent research study released by seven Federal Reserve banks, found
that small businesses that apply for loans with community banks are the most successful and the most satisfied with
their borrowing experience, ahead of credit unions, large banks and online lenders.
As we look forward to 2018 and beyond, we will be operating from a position of strength. We look forward to
continuing to grow our franchise and will work hard to create added value for our customers and our shareholders.
Please join us for our annual Shareholders’ meeting on Wednesday, April 25, 2018, at 4:00 pm at 1216 Skyview
Drive, Aberdeen, WA 98520.
Sincerely,
Randy Rognlin
Chairman of the Board
Pacific Financial Corporation
Denise Portmann
President and Chief Executive Officer
Pacific Financial Corporation
Pacific Financial Corporation
Selected Financial Data
The following selected consolidated five year financial data should be read in conjunction with the Company's
audited consolidated financial statements and the accompanying notes presented in this report.
20172016201520142013Operations DataNet interest income$34,049$31,663$29,139$27,033$23,800Loan loss provision (recapture)272998582300(450)Noninterest income10,52311,2259,7998,0799,955Noninterest expense32,97632,84030,85928,15529,502Provision for income taxes⁽¹⁾4,3612,4601,9211,730972Net income$6,963$6,590$5,576$4,927$3,73120172016201520142013Net income per share:Basic$0.67 $0.63 $0.54 $0.48 $0.37 Diluted$0.65 $0.62 $0.53 $0.48 $0.37 Dividends declared$2,622$2,398$2,287$2,178$2,036Dividends declared per share$0.25 $0.23 $0.22 $0.21 $0.20 Dividend payout ratio38%36%41%44%55%Performance RatiosInterest rate spread4.14%3.99%3.99%4.06%3.87%Net interest margin⁽²⁾4.28%4.11%4.10%4.17%4.00%Efficiency ratio⁽³⁾73.98%76.62%79.25%80.19%87.40%Return on average assets0.79%0.77%0.71%0.68%0.55%Return on average equity8.19%8.16%7.35%6.92%5.48%Balance Sheet DataTotal assets$894,953$891,383$824,613$744,807$705,039Loans, net678,227648,611617,019554,746496,307Total deposits777,225779,731714,499639,054607,347Total borrowings21,90622,05624,70624,85623,403Shareholders' equity85,03180,00576,28572,48367,137Book value per share⁽⁴⁾$8.10 $7.67 $7.34 $6.99 $6.59 Tangible book value per share⁽5⁾$6.82 $6.38 $6.03 $5.68 $5.25 Equity to assets ratio9.50%8.98%9.25%9.73%9.52%Asset Quality RatiosNonperforming loans to total loans0.31%0.19%0.24%1.62%1.98%Allowance for loan losses to total loans1.32%1.39%1.33%1.48%1.66%Allowance for loan losses tononperforming loans420.34%747.93%547.89%91.54%115.41%Nonperforming assets to total assets0.25%0.20%0.62%1.36%1.42%(2) Net interest income divided by average earning assets(3) Noninterest expense divided by the sum of net interest income and noninterest income(4) Shareholder equity divided by shares outstanding(5) Shareholder equity less intangibles divided by shares outstanding the net deferred tax asset. revaluation of our deferred tax assets and liabilities to account for the future impact of the decrease in the corporate income tax rate to 21% from 35%. Income tax expense increased $1.0 million as a result of our estimated revaluation of For the Year Ended December 31,(in thousands)For the Year Ended December 31,(dollars in thousands, except per share data)(1) Current year results were impacted by the Tax Cuts and Jobs Act enacted December 22, 2017, which required a
Tel: 509-747-8095
Fax: 509-747-0415
www.bdo.com
601 West Riverside Ave Suite 900
Spokane, WA 99201
Independent Auditor’s Report
Board of Directors
Pacific Financial Corporation
Aberdeen, Washington
We have audited the accompanying consolidated financial statements of Pacific Financial
Corporation and its wholly owned subsidiary, Bank of the Pacific, which comprise the consolidated
statements of financial condition as of December 31, 2017 and 2016, and the related consolidated
statements of income, comprehensive income, shareholders’ equity, and cash flows for the years
then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated
financial statements in accordance with accounting principles generally accepted in the United
States of America; this includes the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of consolidated financial statements that are
free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on
our audits. We conducted our audits in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on the
auditor’s judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit
also includes evaluating the appropriateness of accounting policies used and the reasonableness
of significant accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Pacific Financial Corporation and its subsidiary as of
December 31, 2017 and 2016, and the results of their operations and their cash flows for the years
then ended in accordance with accounting principles generally accepted in the United States of
America.
Spokane, Washington
March 23, 2018
[This page intentionally left blank.]
Pacific Financial Corporation
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
AS S ETS
Cash on hand and in banks
Interest bearing deposits
Cash and cash equivalents
Other interest earning deposits
Investment securities available for sale, at fair value
Investment securities held to maturity (fair value of $751 and $863, respectively)
Loans held for sale
Loans receivable, net
Allowance for loan losses
Total loans receivable, net
FHLB & PCBB stock, at cost
Premises and equipment, net
Other real estate owned
Cash surrender value of life insurance
Accrued interest receivable
Prepaid expenses and other assets
Goodwill
Other intangible assets
Total assets
LIABILITIES AND S HAREHOLDERS ' EQUITY
Deposits
Federal Home Loan Bank advances
Junior subordinated debentures
Accrued expenses and other liabilities
Total liabilities
S hareholders' Equity:
December 31,
2017
December 31,
2016
$
$
$
14,667 $
19,904
34,571
994
110,018
749
10,886
687,319
(9,092)
678,227
2,409
15,876
-
19,786
3,061
4,853
12,168
1,355
894,953 $
777,225 $
8,503
13,403
10,791
809,922
15,707
43,591
59,298
2,231
111,296
859
6,573
657,803
(9,192)
648,611
2,335
16,326
405
19,346
2,885
7,673
12,168
1,377
891,383
779,731
8,653
13,403
9,591
811,378
Preferred Stock, no par value; 5,000,000 shares authorized; no shares issued
or outstanding at December 31, 2017 and December 31, 2016
-
-
Common Stock, $1 par value; 25,000,000 shares authorized, 10,491,892 and 10,424,541
shares issued and outstanding at December 31, 2017 and 2016, respectively
Additional paid-in-capital
Retained earnings
Accumulated other comprehensive loss, net
Total shareholders' equity
Total liabilities and shareholders' equity
$
10,492
43,806
31,078
(345)
85,031
894,953 $
10,425
43,534
26,737
(691)
80,005
891,383
See accompanying Notes to Consolidated Financial Statements.
1
Pacific Financial Corporation
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Twelve Months Ended
December 31,
2017
2016
INTERES T AND DIVIDEND INCOME
Interest and fees on loans
Taxable interest on investment securities
Nontaxable interest on investment securities
Interest and dividends on other interest earning assets
Total interest and dividend income
INTERES T EXPENS E
Deposits
Junior subordinated debentures
Federal Home Loan Bank advances
Other borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after loan loss provision
NONINTERES T INCOME
Service charges on deposits
Gain on sale of loans, net
Gain on sale of investment securities, net
Earnings on bank owned life insurance
Other income
Total noninterest income
NONINTERES T EXPENS E
Compensation and employee benefits
Occupancy
Equipment
Data processing
Professional services
M arketing
Other real estate owned, net
State and local taxes
Federal deposit insurance premium
Other expense
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Basic earnings per common share
Diluted earnings per common share
$
33,786 $
1,184
1,138
336
36,444
1,814
373
208
-
2,395
34,049
272
33,777
1,856
5,303
9
440
2,915
10,523
20,565
2,019
1,100
2,297
1,270
651
109
588
432
3,945
32,976
11,324
4,361
6,963 $
0.67 $
0.65 $
$
$
$
31,828
1,122
922
263
34,135
1,928
304
230
10
2,472
31,663
998
30,665
1,876
6,303
6
467
2,670
11,322
20,884
2,064
1,052
2,047
516
585
535
459
456
4,339
32,937
9,050
2,460
6,590
0.63
0.62
See accompanying Notes to Consolidated Financial Statements.
2
Pacific Financial Corporation
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Net Income
Unrealized gain (loss) from securities:
Twelve Months Ended
December 31,
2017
2016
$
6,963
$
6,590
Change in fair value of investment securities available for sale, net of tax
Reclassification adjustment of net gain from sale of investment
securities available for sale included in income, net of tax
Net unrealized gain (loss) from securities, net of reclassification adjustment
Pension plan liability adjustment:
Unrecognized net actuarial loss during the period, net of tax
Less: amortization of unrecognized net actuarial losses included in income,
net of tax
Pension plan liability adjustment, net
Other comprehensive income (loss), net of tax
424
(5)
419
(104)
31
(73)
346
(852)
(4)
(856)
(48)
113
65
(791)
Comprehensive income
$
7,309
$
5,799
See accompanying Notes to Consolidated Financial Statements.
3
Pacific Financial Corporation
Consolidated Statements of Shareholders’ Equity
(Dollars in thousands, except share amounts)
Balance at December 31, 2015
Net income
Other comprehensive loss, net of tax
Restricted stock awards issued, net of forfeitures
Restricted stock compensation expense
Stock option compensation expense
Exercise of stock options
Cash dividends declared ($0.23 per share)
Balance at December 31, 2016
Net income
Other comprehensive income, net of tax
Restricted stock awards issued, net of forfeitures
Restricted stock compensation expense
Stock option compensation expense
Exercise of stock options
Cash dividends declared ($0.25 per share)
Balance at December 31, 2017
Common
S tock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss),
net
Total
S hareholders'
Equity
10,395 $
43,245 $
-
-
29
-
-
1
-
-
-
(36)
301
24
-
-
10,425 $
43,534 $
-
-
24
-
-
43
-
-
-
11
248
13
-
-
10,492 $
43,806 $
22,545 $
6,590
-
-
-
-
-
(2,398)
26,737 $
6,963
-
-
-
-
-
(2,622)
31,078 $
100 $
-
(791)
-
-
-
-
-
(691) $
-
346
-
-
-
-
-
(345) $
76,285
6,590
(791)
(7)
301
24
1
(2,398)
80,005
6,963
346
35
248
13
43
(2,622)
85,031
Number of
Common
S hares
10,394,828 $
-
-
28,713
-
-
1,000
-
10,424,541 $
-
-
23,933
-
-
43,418
-
10,491,892 $
See accompanying Notes to Consolidated Financial Statements.
4
Pacific Financial Corporation
Consolidated Statements of Cash Flow
(Dollars in thousands)
Cash flows from operating activities:
Net Income
Adjustments to reconcile net income to net cash on hand and in banks from
operating activities
Provision for loan losses
Depreciation and amortization
Deferred income taxes
Originations of loans held for sale
Proceeds from sales of loans
Gain on sale of loans, net
Gain on sale of securities available for sale, net
Loss (gain) on sale of other real estate owned, net
Loss (gain) on sale of premises and equipment
Loss on sale of real estate owned, net
Earnings on bank owned life insurance
Increase in accrued interest receivable
Decrease in accrued interest payable
Other real estate owned write-downs
(Decrease) increase in prepaid expenses
Other operating activities
Net cash provided by operating activities
Cash flows from investing activities:
Loans originated, net of principal payments
Net increase (decrease) in interest bearing balances with banks
M aturities of investment securities held to maturity
M aturities of investment securities available for sale
Purchase of investment securities available for sale
Purchases of FHLB Stock
Purchases of premises and equipment
Proceeds from sales of investment securities available for sale
Proceeds from redemption of FHLB Stock
Proceeds from sale of real estate owned
Proceeds from sales of other real estate owned
Net cash used in investing activities
Cash flows from financing activities:
Net (decrease) increase in deposits
Repayments of FHLB Advances
Net cash from stock option exercises
Taxes paid related to net share settlement for equity awards
Cash dividends paid
Net cash (used in) provided by financing activities
Net decrease in cash and cash equivalents
Cash on hand and in banks at beginning of year
Cash on hand and in banks at end of year
S upplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for taxes
S upplemental non-cash disclosures of cash flow information:
Other real estate owned acquired in settlement of loans
Transfer of loans held for sale to loans held for investment
Vesting of restricted stock awards, net
Financed sale of other real estate owned
Assets transferred to assets held for sale
Twelve Months Ended
December 31,
2017
2016
$
6,963
$
6,590
272
2,962
1,771
(198,234)
207,907
(5,303)
(9)
51
3
34
(440)
(176)
(4)
-
(99)
1,055
16,753
(38,179)
24,924
110
15,064
(30,782)
(660)
(1,242)
16,215
586
804
354
(12,806)
(2,506)
(150)
147
(80)
(2,398)
(4,987)
(1,040)
15,707
14,667
2,400
1,522
-
283
24
-
-
$
$
$
$
$
$
$
$
998
2,722
(161)
(233,610)
245,496
(6,303)
(6)
(97)
(4)
-
(467)
(211)
(3)
71
78
1,103
16,196
(31,167)
(33,249)
838
12,782
(29,156)
(3,215)
(3,013)
2,564
3,226
-
1,932
(78,458)
65,232
(2,650)
5
(11)
(2,287)
60,289
(1,973)
17,680
15,707
2,475
2,199
(219)
439
29
1,518
838
$
$
$
$
$
$
$
$
See accompanying Notes to Consolidated Financial Statements.
5
Pacific Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2017 and December 31, 2016
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization – Pacific Financial Corporation (the “Company”) is a bank holding company headquartered in Aberdeen, Washington.
The Company owns one banking subsidiary, Bank of the Pacific (the “Bank”), which is also headquartered in Aberdeen, Washington.
The Company was incorporated in the State of Washington in February, 1997, pursuant to a holding company reorganization of the
Bank. The Company has two wholly owned subsidiaries, PFC Statutory Trust I and II (the “Trusts”), which do not meet the criteria for
consolidation, and therefore, are not consolidated in the Company’s financial statements.
The Company conducts its banking business through the Bank, which operates fifteen branches located in communities in Grays
Harbor, Pacific, Whatcom, Clark, Skagit and Wahkiakum counties in the state of Washington and three branches in Clatsop County,
Oregon. In addition, the Bank operates three loan production offices in Burlington and DuPont, Washington and Salem Oregon and
has a residential real estate mortgage department.
Basis of presentation – The consolidated financial statements include the accounts of Pacific Financial Corporation and its wholly-
owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation.
The interim consolidated financial statements are not audited, but include all adjustments that Management considers necessary for a
fair presentation of consolidated financial condition and results of operations for the interim periods presented.
Certain prior year amounts have been reclassified to conform with the 2017 presentation. None of these reclassifications have an
effect on net income or net cash flows.
Method of accounting and use of estimates – The Company prepares its consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. This
requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses
during the reporting periods. Actual results could differ from those estimates. Significant estimates made by Management involve the
calculation of the allowance for loan losses, impaired loans, the fair value of available for sale investment securities, deferred tax
assets, and the value of other real estate owned and foreclosed assets.
The Company utilizes the accrual method of accounting, which recognizes income when earned and expenses when incurred.
Subsequent events –The Company performed an evaluation of subsequent events through March 23, 2018, the date these financial
statements were available to be issued. There were no significant subsequent events identified.
Securities available for sale – Securities available for sale consist of debt securities that the Company intends to hold for an
indefinite period, but not necessarily to maturity. Securities available for sale are reported at fair value. Unrealized gains and losses,
net of the related deferred tax effect, are reported net as a separate component of shareholders' equity entitled “accumulated other
comprehensive income (loss).” Realized gains and losses on securities available for sale, determined using the specific identification
method, are included in earnings. Amortization of premiums and accretion of discounts are recognized in interest income over the
period to maturity. For mortgage backed securities, actual maturity may differ from contractual maturity due to principal payments
and amortization of premiums and accretion of discounts may vary due to prepayment speed assumptions.
Securities held to maturity – Debt securities for which the Company has the positive intent and ability to hold to maturity are
reported at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized in interest income over the
period to maturity.
Declines in the fair value of individual securities held to maturity and available for sale that are deemed to be other than temporary are
reflected in earnings when identified. Management evaluates individual securities for other than temporary impairment (“OTTI”) on a
quarterly basis. OTTI is separated into a credit and noncredit component. Noncredit component losses are recorded in other
comprehensive income (loss) when the fair value of the debt security is below the carrying value primarily due to changes in interest
rates, there has not been significant deterioration in the financial condition of the issuer, and it is not more likely than not that the
Company will be required to, nor does it have the intent to sell the security before the anticipated recovery of its remaining carrying
value. Credit component losses are reported in noninterest income.
Federal Home Loan Bank stock – The Company’s investment in Federal Home Loan Bank (“FHLB”) stock is carried at cost. The
6
Company is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding
mortgages, total assets, or FHLB advances. At December 31, 2017 and December 31, 2016 the stock was that of FHLB of Des
Moines.
Pacific Coast Bankers Bank stock – The Company’s investment in Pacific Coast Bankers Bank (“PCBB”) stock is carried at cost.
Loans held for sale – Mortgage loans originated for sale in the foreseeable future in the secondary market are carried at the lower of
aggregate cost or estimated fair value. Gains and losses on sales of loans are recognized at settlement date and are determined by the
difference between the sales proceeds and the carrying value of the loans. Net unrealized losses are recognized through a valuation
allowance established by charges to income. Loans held for sale that are unable to be sold in the secondary market are transferred to
loans receivable when identified.
Loans receivable – Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or
payoff are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses, any deferred
fees or costs on originated loans, and unamortized premiums or discounts on purchased loans. Loan fees and certain direct loan
origination costs are deferred, and the net fee or cost is recognized as an adjustment of yield over the contractual life of the related
loans using the effective interest method.
Interest income on loans is accrued over the term of the loans based upon the principal outstanding. The accrual of interest on loans is
discontinued when, in management’s opinion, the borrower may be unable to meet payments as they come due. When interest accrual
is discontinued, all unpaid accrued interest is reversed against interest income. Interest income is subsequently recognized only to the
extent that cash payments are received until, in management’s judgment, the borrower has the ability to make contractual interest and
principal payments, in which case the loan is returned to accrual status.
Allowance for loan losses – The allowance for loan losses is established through a provision that is charged to earnings as probable
losses are incurred. Losses are charged against the allowance when management believes the collectability of a loan balance is
unlikely. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the
collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may
affect the borrower’s ability to repay, estimated value of underlying collateral and prevailing economic conditions. The evaluation is
inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The
Company’s methodology for assessing the appropriateness of the allowance consists of several key elements, which includes a general
formulaic allowance and a specific allowance on impaired loans. The formulaic portion of the general credit loss allowance is
established by applying a loss percentage factor to the different loan types based on historical loss experience adjusted for qualitative
factors.
A loan is considered impaired when, based on current information and events, it is probable the Company will be unable to collect
principal and interest when due according to the contractual terms of the original loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest
payments when due. Loans that experience insignificant payment delays and payment shortfalls are generally not classified as
impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrowers, including the length of the delay, the reasons for the
delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment
is measured on a loan by loan basis for commercial, construction and real estate loans by either the present value of the expected
future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral less estimated selling costs if the loan
is collateral dependent. When the net realizable value of an impaired loan is less than the book value of the loan, impairment is
recognized by adjusting the allowance for loan losses. Uncollected accrued interest is reversed against interest income. If ultimate
collection of principal is in doubt, all subsequent cash receipts including interest payments on impaired loans are applied to reduce the
principal balance.
For all portfolio segments, a restructuring of a debt constitutes a troubled debt restructuring (“TDR”) if the Company grants a
concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise
consider. TDRs typically present an elevated level of credit risk as the borrowers are not able to perform according to the original
contractual terms. Loans or leases that are reported as TDRs are considered impaired and measured for impairment as described
above.
Premises and equipment – Premises and equipment are stated at cost less accumulated depreciation, which is computed on the
straight-line method over the estimated useful lives of the assets. Asset lives range from 3 to 39 years. Leasehold improvements are
7
amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is less. Gains or losses
on dispositions are reflected in earnings.
Other real estate owned – Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are initially recorded at
the fair value of the properties less estimated costs of disposal. Any write-down to fair value at the time of transfer to other real estate
owned (“OREO”) is charged to the allowance for loan losses. Properties are evaluated regularly to ensure that the recorded amounts
are supported by their current fair values, and that write-downs to reduce the carrying amounts to fair value less estimated costs to
dispose are recorded as necessary. Any subsequent reductions in carrying values, and revenue and expense from the operations of
properties, are charged to operations.
Goodwill and other intangible assets – At December 31, 2017 the Company had $13.5 million in goodwill and other intangible
assets. Goodwill is initially recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net
identified tangible and intangible assets acquired. Goodwill is reviewed for potential impairment during the second quarter on an
annual basis or more frequently if events or circumstances indicate a potential impairment, at the reporting unit level. The Company
has one reporting unit, the Bank, for purposes of computing goodwill. The analysis of potential impairment of goodwill requires a
two-step process. The first step is a comparison of the reporting unit’s fair value to its carrying value. If the reporting unit’s fair value
is less than its carrying value, the Company would be required to progress to the second step. In the second step the Company
calculates the implied fair value of its reporting unit. The Company compares the implied fair value of goodwill to the carrying
amount of goodwill on the Company’s balance sheet. If the carrying amount of the goodwill is greater than the implied fair value of
that goodwill, an impairment loss must be recognized in an amount equal to that excess. The implied fair value of goodwill is
determined in the same manner as goodwill recognized in a business combination. The estimated fair value of the Company is
allocated to all of the Company’s individual assets and liabilities, including any unrecognized identifiable intangible assets, as if the
Company had been acquired in a business combination and the estimated fair value of the Company is the price paid to acquire it. The
allocation process is performed only for purposes of determining the amount of goodwill impairment, as no assets or liabilities are
written up or down, nor are any additional unrecognized identifiable intangible assets recorded as a part of this process.
The results of the Company’s annual impairment test determined the reporting unit’s fair value exceeded its carrying value and no
goodwill impairment existed. As of December 31, 2017 management determined there were no events or circumstances which would
more likely than not reduce the fair value of its reporting unit below its carrying value. No assurance can be given that the Company
will not record an impairment loss on goodwill in the future.
Core deposit intangibles are amortized to noninterest expenses using an accelerated method over ten years. Net unamortized core
deposit intangible totaled $88,000 and $110,000 at December 31, 2017 and 2016, respectively. Amortization expense related to core
deposit intangible totaled $22,000 and $27,000 during the years ended December 31, 2017 and 2016, respectively.
In 2006, the Bank completed a deposit transfer and assumption transaction with an Oregon-based bank for a $1.3 million premium. In
connection with completion of the transaction, the Oregon Department of Consumer and Business Services issued a Certificate of
Authority to the Bank authorizing it to conduct a banking business in the State of Oregon. The premium, and the resultant right to
conduct business in Oregon, is recorded as an indefinite-lived intangible asset.
Impairment of long-lived assets – Management periodically reviews the carrying value of its long-lived assets to determine if
impairment has occurred or whether changes in circumstances have occurred that would require a revision to the remaining useful life,
of which there have been none. In making such determination, management evaluates the performance, on an undiscounted basis, of
the underlying operations or assets which give rise to such amount.
Transfers of financial assets – Transfers of financial assets, including cash, investment securities, loans and loans held for sale, are
accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from
taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control
over the transferred assets through either an agreement to repurchase them before their maturity, or the ability to cause the buyer to
return specific assets.
Income taxes – Deferred tax assets and liabilities result from differences between the financial statement carrying amounts and the tax
bases of assets and liabilities, and are reflected at currently enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. Deferred tax assets are reduced by a valuation allowance when management
determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized. As changes in tax laws
or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
8
In December 2017, the federal government enacted the Tax Cuts and Jobs Act of 2017 (“Tax Act”), which among other provisions,
reduced the federal marginal corporate income tax rate from 35% to 21%. As a result of the passage of the Tax Act, the Company
recorded a $1.0 million charge for the revaluation of its net deferred tax to account for the future impact of the decrease in the
corporate income tax rate and other provisions of the legislation. The charge was recorded as an increase to income tax expense and
reduction of the net deferred asset. The Company’s financial results reflect the income tax effects of the Tax Act for which the
accounting is complete and provisional amounts for those specific income tax effects of the Tax Act for which the accounting is
incomplete but a reasonable estimate could be determined. As a result, these amounts could be adjusted during the measurement
period, which will end in December 2018. The Company did not identify any items for which the income tax effects of the Tax Act
have not been completed and a reasonable estimate could not be determined as of December 31, 2017.
The Company files a consolidated federal income tax return. The Bank provides for income taxes separately and remits to the
Company amounts currently due in accordance with a tax allocation agreement between the Company and the Bank.
As of December 31, 2017, the Company had no unrecognized tax benefits. The Company’s policy is to recognize interest and
penalties on unrecognized tax benefits in “Income Taxes” in the consolidated statements of income. There were no amounts related to
interest and penalties recognized for the year ended December 31, 2017. The tax years that remain subject to examination by federal
and state taxing authorities are the years ended December 31, 2016, 2015 and 2014.
Stock-based compensation – Accounting guidance requires measurement of compensation cost for all stock based awards based on
the grant date fair value and recognition of compensation cost over the service period of stock based awards. The fair value of stock
options is determined using the Black-Scholes valuation model. The Company’s stock compensation plans are described more fully in
Note 15.
Cash equivalents and cash flows – The Company considers all amounts included in the balance sheet caption “Cash and due from
banks” to be cash equivalents. Cash and cash equivalents have a maturity of 90 days or less at the time of purchase. Cash flows from
loans, interest bearing deposits in banks, federal funds sold, short-term borrowings, secured borrowings and deposits are reported net.
The Company maintains balances in depository institution accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts.
Certificates of deposit held for investment – Certificates of deposit held for investments include amounts invested with financial
institutions for a stated interest rate and maturity date. Early withdraw penalties apply, however the Company plans to hold these
investments to maturity.
Earnings per share – Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average
number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if common shares
were issued pursuant to the exercise of options under the Company’s stock option plans. Stock options excluded from the calculation
of diluted earnings per share because they are antidilutive, were 160,611 and 291,034 in 2017 and 2016, respectively.
Comprehensive income – Recognized revenue, expenses, gains and losses are included in net income. Certain changes in assets and
liabilities, such as prior service costs and amortization of prior service costs related to defined benefit plans and unrealized gains and
losses on securities available for sale, are reported within equity in other accumulated comprehensive loss in the consolidated balance
sheet. Such items, along with net income, are components of comprehensive loss. Gains and losses on securities available for sale are
reclassified to net income as the gains or losses are realized upon sale of the securities. Other-than-temporary impairment charges are
reclassified to net income at the time of the charge.
Business segment – The Company operates a single business segment. The financial information that is used by the chief operating
decision maker in allocating resources and assessing performance is only provided for one reportable segment as of December 31,
2017 and 2016.
Recent accounting pronouncements
Financial Accounting Standards Board (“FASB”) Accounting Standards update (“ASU” or “Update”) ASU 2014-09, Revenue from
Contracts with Customers, was issued in May 2014. Under this Update, FASB created a new Topic 606 which is in response to a joint
initiative of FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and to develop a
common revenue standard for U.S. GAAP and international financial reporting standards that would:
1. Remove inconsistencies and weaknesses in revenue requirements.
2. Provide a more robust framework for addressing revenue issues.
3. Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets.
4. Provide more useful information to users of financial statements through improved disclosure requirements.
9
5. Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.
The original effective date for this Update was deferred in FASB ASU 2015-14 below. The Company's primary source of revenue is
interest income, which is recognized when earned and is deemed to be in compliance with this ASU. The Company is currently
evaluating the impact that this Update will have on its Consolidated Financial Statements.
FASB ASU 2015-14, Revenue from Contracts with Customers, was issued in August 2015 and defers the effective date of the above-
mentioned FASB ASU 2014-09 for certain entities. Public business entities, certain not-for-profit entities, and certain employee
benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including
interim reporting periods within that reporting period. Earlier application is now permitted, but only as of annual reporting periods
beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is a public
business entity and did not early adopt the guidance in Update 2014-09 as permitted in this Update.
FASB ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10), was issued in
January 2016, to enhance the reporting model for financial instruments to provide users of financial statements with more decision-
useful information. This Update contains several provisions, including but not limited to 1) requiring equity investments, with certain
exceptions, to be measured at fair value with changes in fair value recognized in net income; 2) simplifying the impairment
assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify
impairment; 3) eliminating the requirement to disclose the method(s) and significant assumptions used to estimate fair value; and 4)
requiring separate presentation of financial assets and liabilities by measurement category and form of financial asset on the balance
sheet or the accompanying notes to the financial statements. The Update also changes certain financial statement disclosure
requirements, including requiring disclosures of the fair value of financial instruments be made on the basis of exit price. The Update
is effective for public entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
The adoption of ASU No. 2016-01 is not expected to have a material impact on the Company's future consolidated financial
statements.
FASB ASU 2016-02, Leases (Topic 842), was issued in February 2016, to increase transparency and comparability of leases among
organizations and to disclose key information about leasing arrangements. The Update sets out the principles for the recognition,
measurement, presentation and disclosure of leases for both lessees and lessors. The Update requires lessees to apply a dual approach,
classifying leases as either a finance or operating lease. This classification will determine whether the lease expense is recognized
based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-
of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. All cash payments
will be classified within operating activities in the statement of cash flows. In transition, lessees and lessors are required to recognize
and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Update is effective
for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Once
adopted, the Company expects to report higher assets and liabilities as a result of including right-of-use assets and lease liabilities
related to certain banking offices and certain equipment under non-cancelable operating lease agreements; however, based on current
leases the adoption of ASU No. 2016-02 is not expected to have a material impact on the Company's future consolidated financial
statements.
FASB ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, was issued in March
2016 and it clarifies the implementation guidance of the above-mentioned FASB ASU 2014-09 as it relates to principal versus agent
considerations. The Update addresses identifying the unit of account and nature of the goods or services as well as applying the
control principle and interactions with the control principle. The amendments to the Update do not change the core principle of the
guidance. The effective date and transition requirements for this Update are the same as FASB ASU 2014-09.
FASB ASU 2016-09, Stock Compensation (Topic 718), issued in March 2016, is intended to simplify several aspects of the accounting
for share-based payment award transactions. For public business entities, the guidance is effective for annual periods after December
15, 2016, including interim periods within those annual periods with early adoption permitted. Certain amendments will be applied
using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the
period in which the guidance is adopted. Other amendments will be applied retroactively (such as presentation of employee taxes paid
on the statement of cash flows) or prospectively (such as recognition of excess tax benefits on the income statement). The Company
adopted this ASU as of December 31, 2017 and the changes are reflected in the Consolidated Financial Statements.
FASB ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, was
issued in April 2016 which clarifies the implementation guidance of the above-mentioned FASB ASU 2014-09 as it relates to
identifying performance obligations and licensing. The effective date and transition requirements for this Update are the same as
FASB ASU 2014-09. The Company is currently evaluating the impact that this Update will have on its Consolidated Financial
Statements.
FASB ASU 2016-13, Financial Instruments: Credit Losses (Topic 326): Measurement of Credit Losses on Financial
10
Instruments, was issued in June 2016. Commonly referred to as the current expected credit loss model ("CECL"), this Update requires
financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit
losses is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the
amount expected to be collected on the financial asset. The measurement of expected credit losses is based on relevant information
about past events including historical experience, current conditions, and reasonable and supportable forecasts that affect the
collectability of the reported amount. The amendment affects loans, debt securities, trade receivables, net investments in leases, off
balance-sheet credit exposures, reinsurance receivables, and any other financial asset not excluded from the scope that have the
contractual right to receive cash. The Update replaces the incurred loss impairment methodology, which generally only considered
past events and current conditions, with a methodology that reflects the expected credit losses and required consideration of a broader
range of reasonable and supportable information to estimate all expected credit losses. For public business entities that are not U.S.
Securities and Exchange Commission filers, the Update is effective for fiscal years beginning after December 15, 2020, including
interim periods within those fiscal years with early adoption permitted for fiscal years after December 15, 2018. An entity will apply
the amendments through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which
the guidance is adopted. A prospective transition approach is required for debt securities. The Company is currently evaluating the
impact that this Update will have on its Consolidated Financial Statements.
FASB ASU 2016-15, Statement of Cash Flows (Topic 213): Classification of Certain Cash Receipts and Cash Payments, was issued
in August 2016. The Update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.
For public business entities, the guidance is effective for fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. Early adoption is permitted and must be applied using a retrospective transitional method to each period
presented. The Company is currently evaluating the impact that this Update will have on its Consolidated Financial Statements.
FASB ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, was issued in
January 2017. The Update simplifies how an entity is required to test goodwill for impairment by eliminating a step from the goodwill
impairment test. The amendments in this update provide that an entity should perform its annual, or interim, goodwill impairment test
by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the
amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total
amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible
goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still has
the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This
Update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. As we
approach the adoption date, we will consult the updated goodwill impairment test steps to determine if an impairment charge should
be recognized.
FASB ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased
Callable Debt Securities was issued in March 2017 and changes the accounting for certain purchased callable debt securities held at a
premium to shorten the amortization period for the premium to the earliest call date rather than to the maturity date. Accounting for
purchased callable debt securities held at a discount does not change. The discount would continue to amortize to the maturity date.
The updated is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company does
not expect the Update will have a material impact on its Consolidated Financial Statements.
FASB ASU 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting was issued in May 2017 to
provide clarity as to when to apply modification accounting when there is a change in the terms or conditions of a share-based
payment award. According to this Update, an entity should account for the effects of a modification unless the fair value, vesting
conditions and balance sheet classification of the award is the same after the modification as compared to the original award prior to
the modification. The Update is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The
Company does not expect the Update will have a material impact on its Condensed Consolidated Financial Statements.
FASB ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income addresses the issue of stranded tax effects within accumulated other comprehensive
income. The amendment allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded
tax effects resulting from the enactment of the Tax Cuts and Jobs Act on December 22, 2017. An entity shall disclose a description of
the accounting policy for reclassifying income tax effects from accumulated other comprehensive income. An entity that elects to
reclassify shall disclose a statement that an election was made to reclassify from accumulated other comprehensive income to retained
earnings. An entity that does not elect to reclassify shall disclosure in the period of adoption a statement that an election was not made
to reclassify the income tax effects from accumulated other comprehensive income to retained earnings. The Update is effective for
reporting periods beginning after December 15, 2018, with early adoption permitted. The Company does not expect the Update will
have a material impact on its Condensed Consolidated Financial Statements.
11
NOTE 2 – RESTRICTED ASSETS
Federal Reserve Board regulations require that the Bank maintain certain minimum reserve balances in cash on hand and on deposit
with the Federal Reserve Bank, based on a percentage of deposits. The required reserve balance at December 31, 2017 and 2016 was
met by holding cash.
NOTE 3 – SECURITIES
Investment securities consist principally of short and intermediate term debt instruments issued by the U.S. Treasury, other U.S.
government agencies, state and local governments, other corporations, and mortgaged backed securities (“MBS”). Investment
securities have been classified according to management’s intent.
The amortized cost of securities and their approximate fair value were as follows:
Available for S ale
Collateralized mortgage obligations: agency issued
Collateralized mortgage obligations: non-agency
M ortgage backed securities: agency issued
U.S. Government and agency securities
M unicipal securities
Other securities
Total available for sale
Held to maturity
M ortgage backed securities: agency issued
M unicipal securities
Total held to maturity
Available for S ale
Collateralized mortgage obligations: agency issued
Collateralized mortgage obligations: non agency
M ortgage backed securities: agency issued
U.S. Government agency securities
M unicipal securities
Total available for sale
Held to maturity
M ortgage backed securities: agency issued
M unicipal securities
Total held to maturity
Amortized
Cost
December 31, 2017
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
40,164 $
257
16,633
1,587
51,448
55
110,144 $
36 $
713
749 $
46 $
1
59
-
703
23
832 $
2 $
-
2 $
489 $
2
121
14
332
-
958 $
- $
-
- $
Amortized
Cost
December 31, 2016
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
35,840 $
336
15,266
7,567
53,047
112,056 $
49 $
810
859 $
63 $
-
48
72
576
759 $
4 $
-
4 $
388 $
5
115
4
1,007
1,519 $
- $
-
- $
$
$
$
$
$
$
$
$
Fair
Value
39,721
256
16,571
1,573
51,819
78
110,018
38
713
751
Fair
Value
35,515
331
15,199
7,635
52,616
111,296
53
810
863
12
Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in
continuous unrealized loss position, as of December 31, 2017 and December 31, 2016, were as follows:
Available for sale
Collateralized mortgage obligations: agency issued
Collateralized mortgage obligations: non agency
M ortgage backed securities: agency issued
U.S. Government agency securities
M unicipal securities
Total
Less Than 12 Months
December 31, 2017
12 Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(in thousands)
$
19,268 $
-
9,083
1,573
12,441
42,365 $
$
162 $
-
70
14
77
323 $
16,169 $
111
3,842
-
9,275
29,397 $
327 $
2
51
-
255
635 $
35,437 $
111
12,925
1,573
21,716
71,762 $
489
2
121
14
332
958
Less Than 12 Months
December 31, 2016
12 Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Available for sale
(in thousands)
Collateralized mortgage obligations: agency issued
Collateralized mortgage obligations: non agency
M ortgage backed securities: agency issued
U.S. Government agency securities
M unicipal securities
$
23,601 $
-
9,905
2,586
30,461
Total
$
66,553 $
279 $
-
101
4
1,007
1,391 $
5,630 $
331
2,825
-
-
8,786 $
109 $
5
14
-
-
128 $
29,231 $
331
12,730
2,586
30,461
75,339 $
388
5
115
4
1,007
1,519
At December 31, 2017, there were 105 investment securities in an unrealized loss position. The unrealized losses on these securities
were caused by changes in interest rates, widening pricing spreads and market illiquidity, leading to a decline in the fair value
subsequent to their purchase. The Company has evaluated the securities shown above and anticipates full recovery of amortized cost
with respect to these securities at maturity or sooner in the event of a more favorable market environment. Based on management’s
evaluation, and because the Company does not have the intent to sell these securities and it is not more likely than not that it will have
to sell the securities before recovery of cost basis, the Company does not consider these investments to be other-than-temporarily
impaired at December 31, 2017.
For collateralized mortgage obligations (“CMOs”) the Company estimates expected future cash flows of the underlying collateral,
together with any credit enhancements. The expected future cash flows of the underlying collateral are determined using the
remaining contractual cash flows adjusted for future expected credit losses (which considers current delinquencies, future expected
default rates and collateral value by vintage) and prepayments. The expected cash flows of the security are then discounted to arrive
at a present value amount. For the years ended December 31, 2017 and 2016, no CMO was determined to be other-than-temporarily-
impaired. The Company has not recorded impairments related to credit losses through earnings for the years ended December 31,
2017 and 2016.
Proceeds from sales of securities available-for-sale were $16.2 million and $2.6 million for the years ended December 31, 2017 and
December 31, 2016, respectively. The following table provides the gross realized gains and losses on the sales of securities for the
periods indicated:
Twelve Months Ended
December 31,
2017
2016
(in thousands)
Gross realized gain on sale of securities
Gross realized loss on sale of securities
Net realized gain on sale of securities
$
$
94 $
85
9 $
8
2
6
13
The Company did not engage in originating subprime mortgage loans, and it does not believe that it has material exposure to subprime
mortgage loans or subprime mortgage backed securities. Additionally, the Company does not own any sovereign debt of Eurozone
nations or structured financial products, such as collateralized debt obligations or structured investment vehicles, which are known by
the Company to have elevated risk characteristics.
The amortized cost and fair value of CMOs and MBS are presented by expected average life, rather than contractual
maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay underlying
loans without prepayment penalties.
The amortized cost and estimated fair value of investment securities at December 31, 2017, by maturity were as follows:
December 31, 2017
Held to Maturity
Available for S ale
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
- $
101
544
104
-
749 $
(in thousands)
- $
103
544
104
751 $
2,050 $
18,817
31,577
52,807
4,893
110,144 $
2,056
18,748
31,698
52,612
4,904
110,018
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Declining balance securities
Total investment securities
$
$
At December 31, 2017 and December 31, 2016, investment securities with an estimated fair value of $72.4 million were pledged to
secure public deposits, certain nonpublic deposits and borrowings.
As required of all members of the FHLB system, the Company maintains an investment in the capital stock of the FHLB in an amount
equal to the greater of $500,000 or 0.5% of home mortgage loans and pass-through securities plus 5.0% of the outstanding balance of
mortgage home loans sold to FHLB under the Mortgage Purchase Program. Participating banks record the value of FHLB stock equal
to its par value at $100 per share. At December 31, 2017 and December 31, 2016, the Company held $1.4 million and $1.3 million in
FHLB stock, respectively.
The Company owns $1.0 million in common stock in PCBB, from which the Company receives a variety of corresponding banking
services through its banking subsidiary Pacific Coast Bankers Bank. An investment by the Company in such an entity is permissible
under 12 CFR 362.3(a)(2)(iv). When evaluating this investment for impairment, the value is determined based on the recovery of the
par value through any redemption by PCBB or from the sale to another eligible purchaser, rather than by recognizing temporary
declines in value. PCBB disclosed that it reported net income for the twelve month period ended December 31, 2017 and maintains
capital ratios that exceed “well capitalized” standards for regulatory purposes.
14
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY
Loans held in the portfolio at December 31, 2017 and December 31, 2016, were as follows:
December 31,
2017
2016
(in thousands)
Commercial and agricultural
$
138,629 $
134,318
Real estate:
Construction and development
Residential 1-4 family
M ulti-family
Commercial real estate -- owner occupied
Commercial real estate -- non owner occupied
Farmland
Total real estate
Consumer
Gross loans
Deferred fees
Loans, net
62,980
88,055
22,333
139,163
139,169
30,196
481,896
67,890
688,415
(1,096)
687,319 $
$
41,983
91,686
29,747
132,449
138,078
25,588
459,531
65,442
659,291
(1,488)
657,803
Allowance for loan losses and credit quality
The allowance for loan losses represents the Company’s estimate as to the probable credit losses inherent in its loan portfolio. The
allowance for loan losses is increased through periodic charges to earnings through provision for loan losses and represents the
aggregate amount, net of loans charged-off and recoveries on previously charged-off loans, that is needed to establish an appropriate
reserve for credit losses. The allowance is estimated based on a variety of factors and using a methodology as described below:
(cid:120)
The Company classifies loans into relatively homogeneous pools by loan type in accordance with regulatory guidelines
for regulatory reporting purposes. The Company regularly reviews all loans within each loan category to establish risk
ratings for them that include Pass, Watch, Special Mention, Substandard, Doubtful and Loss. Pursuant to ASC 310
“Accounting by Creditors for Impairment of a Loan”, the impaired portion of collateral dependent loans is charged-off.
Other risk-related loans not considered impaired have loss factors applied to the various loan pool balances to establish
loss potential for provisioning purposes.
(cid:120) Analyses are performed to establish the loss factors based on historical experience, as well as expected losses based on
qualitative evaluations of such factors as the economic trends and conditions, industry conditions, levels and trends in
delinquencies and impaired loans, levels and trends in charge-offs and recoveries, among others. The loss factors are
applied to loan category pools segregated by risk classification to estimate the loss inherent in the Company’s loan
portfolio pursuant to ASC 450 “Accounting for Contingencies.”
(cid:120) Additionally, impaired loans are evaluated for loss potential on an individual basis in accordance with ASC 310
“Accounting by Creditors for Impairment of a Loan” and specific reserves are established based on thorough analysis of
collateral values where loss potential exists. When an impaired loan is collateral dependent and a deficiency exists in the
fair value of collateral securing the loan in comparison to the associated loan balance, the deficiency is charged-off at
that time or a specific reserve is established. Impaired loans are reviewed no less frequently than quarterly.
(cid:120)
In the event that a current appraisal to support the fair value of the real estate collateral underlying an impaired loan has
not yet been received, but the Company believes that the collateral value is insufficient to support the loan amount, an
impairment reserve is recorded. In these instances, the receipt of a current appraisal triggers an updated review of the
collateral support for the loan and any deficiency is charged-off or reserved at that time. In those instances where a
15
current appraisal is not available in a timely manner in relation to a financial reporting cut-off date, the Company
discounts the most recent third-party appraisal depending on a number of factors including, but not limited to, property
location, local price volatility, local economic conditions, and recent comparable sales. In all cases, the costs to sell the
subject property are deducted in arriving at the fair value of the collateral.
Changes in the allowance for loan losses for the twelve months ended December 31, 2017 and December 31, 2016 were as follows:
Balance at
Beginning
of Year
Twelve Months Ended December 31, 2017
Provision
for Loan
Losses
Charge-offs
Recoveries
(in thousands)
Balance at
End of Year
Commercial and agricultural
Real estate:
Residential 1-4, M ulti family, Const & Dev
Commercial real estate -- owner occupied
Commercial real estate -- non owner occupied
Farmland
Total real estate
Consumer
Unallocated
Total
$
2,268 $
(190) $
46 $
(366) $
1,758
1,260
1,559
1,122
596
4,537
1,772
615
9,192 $
$
(3)
-
-
(56)
(59)
(187)
-
(436) $
11
-
-
-
11
7
-
64 $
24
(348)
75
96
(153)
315
476
272 $
1,292
1,211
1,197
636
4,336
1,907
1,091
9,092
Balance at
Beginning
of Year
Twelve Months Ended December 31, 2016
Provision
for Loan
Losses
Charge-offs
Recoveries
(in thousands)
Balance at
End of Year
Commercial and agricultural
Real estate:
Residential 1-4, M ulti family, Const & Dev
Commercial real estate -- owner occupied
Commercial real estate -- non owner occupied
Farmland
Total real estate
Consumer
Unallocated
Total
$
1,095 $
(8) $
7 $
1,174 $
2,268
905
2,038
1,440
39
4,422
803
1,997
8,317 $
$
(159)
-
-
-
(159)
(108)
-
(275) $
134
-
-
-
134
11
-
152 $
380
(479)
(318)
557
140
1,066
(1,382)
998 $
1,260
1,559
1,122
596
4,537
1,772
615
9,192
16
The allowance for loan losses disaggregated on the basis of the Company's impairment method as of December 31, 2017 and
December 31, 2016 were as follows:
Loans
Individually
Evaluated
for
Impairment
Twelve Months Ended December 31, 2017
Loans
Collectively
Evaluated
for
Impairment
(in thousands)
Total
Allowance
for Loan
Losses
Commercial and agricultural
Real estate:
Residential 1-4, M ulti family, Const & Dev
Commercial real estate -- owner occupied
Commercial real estate -- non owner occupied
Farmland
Total real estate
Consumer
Unallocated
Total
$
$
5 $
-
-
-
-
-
-
-
5 $
1,753 $
1,758
1,292
1,211
1,197
636
4,336
1,907
1,091
9,087 $
1,292
1,211
1,197
636
4,336
1,907
1,091
9,092
Loans
Individually
Evaluated
for
Impairment
Twelve Months Ended December 31, 2016
Loans
Collectively
Evaluated
for
Impairment
(in thousands)
Total
Allowance
for Loan
Losses
Commercial and agricultural
Real estate:
Residential 1-4, M ulti family, Const & Dev
Commercial real estate -- owner occupied
Commercial real estate -- non owner occupied
Farmland
Total real estate
Consumer
Unallocated
Total
$
- $
2,268 $
2,268
-
-
-
-
-
12
-
12 $
1,260
1,559
1,122
596
4,537
1,760
615
9,180 $
1,260
1,559
1,122
596
4,537
1,772
615
9,192
$
17
The recorded investment of loans disaggregated on the basis of the Company’s impairment method as of December 31, 2017 and
December 31, 2016 were as follows:
Twelve Months Ended December 31, 2017
Loans
Collectively
Evaluated
for
Loans
Individually
Evaluated
for
Impairment
Impairment Gross Loans
(in thousands)
Commercial and agricultural
Real estate:
Residential 1-4, M ulti family, Const & Dev
Commercial real estate -- owner occupied
Commercial real estate -- non owner occupied
Farmland
Total real estate
Consumer
Total
$
231 $
138,398 $
138,629
1,000
738
-
161
1,899
399
2,529 $
172,368
138,425
139,169
30,035
479,997
67,491
685,886 $
173,368
139,163
139,169
30,196
481,896
67,890
688,415
$
Twelve Months Ended December 31, 2016
Loans
Collectively
Evaluated
for
Loans
Individually
Evaluated
for
Impairment
Impairment Gross Loans
(in thousands)
Commercial and agricultural
Real estate:
Residential 1-4, M ulti family, Const & Dev
Commercial real estate -- owner occupied
Commercial real estate -- non owner occupied
Farmland
Total real estate
Consumer
Total
Credit Quality Indicators
$
287 $
134,031 $
134,318
791
-
-
-
791
538
1,616 $
162,625
132,449
138,078
25,588
458,740
64,904
657,675 $
163,416
132,449
138,078
25,588
459,531
65,442
659,291
$
Federal regulations require that the Bank periodically evaluate the risks inherent in its loan portfolios. In addition, the Washington
Division of Banks and the Federal Deposit Insurance Corporation (“FDIC”) have authority to identify problem loans and, if
appropriate, require them to be reclassified. There are three classifications for problem loans: Substandard, Doubtful, and Loss. These
terms are used as follows:
(cid:120) “Substandard” loans have one or more defined weaknesses and are characterized by the distinct possibility some loss will be
sustained if the deficiencies are not corrected.
(cid:120) “Doubtful” loans have the weaknesses of loans classified as "Substandard," with additional characteristics that suggest the
weaknesses make collection or recovery in full after liquidation of collateral questionable on the basis of currently existing
facts, conditions, and values. There is a high possibility of loss in loans classified as "Doubtful."
(cid:120) “Loss” loans are considered uncollectible and of such little value that continued classification of the credit as a loan is not
warranted. If a loan or a portion thereof is classified as "Loss," it must be charged-off; meaning the amount of the loss is
charged against the allowance for loan losses, thereby reducing that reserve.
18
The Bank also classifies some loans as “Pass” or Other Loans Especially Mentioned (“OLEM”). Within the “Pass” classification
certain loans are “Watch” rated because they have elements of risk that require more monitoring than other performing loans. “Pass”
grade loans include a range of loans from very high credit quality to acceptable credit quality. These borrowers generally have strong
to acceptable capital levels and consistent earnings and debt service capacity. Loans with higher grades within the “Pass” category
may include borrowers who are experiencing unusual operating difficulties, but have acceptable payment performance to date.
Overall, loans with a “Pass” grade show no immediate loss exposure. Loans classified as OLEM continue to perform but have shown
deterioration in credit quality and require close monitoring.
Credit quality indicators as of December 31, 2017 and December 31, 2016 were as follows:
December 31, 2017
Other Loans
Especially
Mentioned
Pass
S ubstandard
(in thousands)
Doubtful
Total
$
126,871 $
9,133 $
2,625 $
- $
138,629
60,329
85,693
21,944
134,431
138,451
25,081
465,929
67,418
660,218
(1,096)
659,122 $
$
2,101
1,174
-
2,728
718
4,954
11,675
73
20,881
-
20,881 $
550
1,188
389
2,004
-
161
4,292
399
7,316
-
7,316 $
-
-
-
-
-
-
-
-
-
-
- $
62,980
88,055
22,333
139,163
139,169
30,196
481,896
67,890
688,415
(1,096)
687,319
December 31, 2016
Other Loans
Especially
Mentioned
Pass
S ubstandard
(in thousands)
Doubtful
Total
$
121,841 $
3,734 $
8,743 $
- $
134,318
38,344
89,672
29,356
128,903
136,451
24,574
447,300
65,210
634,351
(1,488)
632,863 $
$
-
229
-
1,120
1,627
778
3,754
-
7,488
-
7,488 $
3,639
1,785
391
2,426
-
236
8,477
232
17,452
-
17,452 $
-
-
-
-
-
-
-
-
-
-
- $
41,983
91,686
29,747
132,449
138,078
25,588
459,531
65,442
659,291
(1,488)
657,803
Commercial and agricultural
Real estate:
Construction and development
Residential 1-4 family
M ulti-family
Commercial real estate -- owner occupied
Commercial real estate -- non owner occupied
Farmland
Total real estate
Consumer
Gross Loans
Deferred fees
Loans, net
Commercial and agricultural
Real estate:
Construction and development
Residential 1-4 family
M ulti-family
Commercial real estate -- owner occupied
Commercial real estate -- non owner occupied
Farmland
Total real estate
Consumer
Gross Loans
Deferred fees
Loans, net
19
Impaired Loans
Impaired loans by type as of December 31, 2017 and 2016, and interest income recognized for the twelve months ended December 31,
2017 and 2016, were as follows:
December 31, 2017
Recorded
Investment
With No
S pecific
Valuation
Allowance
Recorded
Investment
With
S pecific
Valuation
Allowance
Total
Recorded
Investment
Unpaid
Contractual
Principal
Balance
(in thousands)
Related
S pecific
Valuation
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
- $
231 $
231 $
231 $
1,000
738
-
161
1,899
399
2,298 $
-
-
-
-
-
-
231 $
1,000
738
-
161
1,899
399
2,529 $
1,622
738
-
217
2,577
399
3,207 $
5 $
-
-
-
-
-
-
5 $
241 $
1,671
746
-
221
2,638
413
3,292 $
12
9
-
-
-
9
-
21
December 31, 2016
Recorded
Investment
With No
S pecific
Valuation
Allowance
Recorded
Investment
With
S pecific
Valuation
Allowance
Total
Recorded
Investment
Unpaid
Contractual
Principal
Balance
(in thousands)
Related
S pecific
Valuation
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
287 $
- $
287 $
287 $
791
-
-
791
355
1,433 $
-
-
-
-
183
183 $
791
-
-
791
538
1,616 $
1,308
-
-
1,308
538
2,133 $
- $
-
-
-
-
12
12 $
322 $
949
56
15
1,020
431
1,773 $
5
86
-
-
86
14
105
$
$
$
$
Commercial and agricultural
Real Estate:
Residential 1-4, M ulti family, Const & Dev
Commercial real estate -- owner occupied
Commercial real estate -- non owner occupied
Farmland
Total real estate
Consumer
Total
Commercial and agricultural
Real Estate:
Residential 1-4, M ulti family, Const & Dev
Commercial real estate -- owner occupied
Commercial real estate -- non owner occupied
Total real estate
Consumer
Total
Insider Loans
Certain related parties of the Company, principally directors and their affiliates, were loan customers of the Bank in the ordinary
course of business during 2017 and 2016. Total related party loans outstanding at December 31, 2017 and 2016 to executive officers
and directors were $3.5 million and $2.2 million, respectively. During 2017 and 2016, new loans of $2.1 million and $324,000,
respectively, were made, and repayments totaled $790,000 and $251,000 respectively. In management’s opinion, these loans and
transactions were on the same terms as those for comparable loans and transactions with non-related parties. No loans to related
parties were on non-accrual, past due or restructured at December 31, 2017.
20
Aging Analysis
The following tables summarize the Company’s loans past due, both accruing and nonaccruing, by type as of December 31, 2017 and
December 31, 2016:
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than
90 Days
Total Past
Due
Non-accrual
Loans
Loans Not
Past Due
Total
Loans
December 31, 2017
Commercial and agricultural
Real estate:
Construction and development
Residential 1-4 family
M ulti-family
Commercial real estate -- owner occupied
Commercial real estate -- non owner occupied
Farmland
Total real estate
Consumer
Deferred fees
Total
$
- $
115 $
(in thousands)
$
115 $
-
113
-
-
-
-
113
25
-
138 $
$
-
-
-
-
-
-
-
-
-
115 $
-
-
-
-
-
-
-
-
-
- $
-
113
-
-
-
-
113
25
-
253 $
December 31, 2016
- $
138,514 $
138,629
550
316
-
738
-
161
1,765
399
-
2,164 $
62,430
87,626
22,333
138,425
139,169
30,035
480,018
67,466
(1,096)
684,902 $
62,980
88,055
22,333
139,163
139,169
30,196
481,896
67,890
(1,096)
687,319
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than
90 Days
$
176 $
- $
-
441
-
-
-
236
677
205
-
1,058 $
$
-
-
-
-
-
-
-
219
-
219 $
Total Past
Due
Non-accrual
Loans
Loans Not
Past Due
Total
Loans
(in thousands)
- $
-
-
-
-
-
-
-
-
-
- $
176 $
38 $
134,104 $
134,318
-
441
-
-
-
236
677
424
-
1,277 $
653
355
-
-
-
-
1,008
183
-
1,229 $
41,330
90,890
29,747
132,449
138,078
25,352
457,846
64,835
(1,488)
655,533 $
41,983
91,686
29,747
132,449
138,078
25,588
459,531
65,442
(1,488)
657,803
Commercial and agricultural
Real estate:
Construction and development
Residential 1-4 family
M ulti-family
Commercial real estate -- owner occupied
Commercial real estate -- non owner occupied
Farmland
Total real estate
Consumer
Deferred fees
Total
Troubled Debt Restructured Loans
A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and
the modification constitutes a concession. There are various types of concessions when modifying a loan, however, forgiveness of
principal is rarely granted by the Company. Commercial and industrial loans modified in a TDR may involve term extensions, below
market interest rates and/or interest-only payments wherein the delay in the repayment of principal is determined to be significant
when all elements of the loan and circumstances are considered. Additional collateral, a co-borrower, or a guarantor is often required.
Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the
loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or
adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment
period. Residential mortgage loans modified in a TDR are primarily comprised of loans where monthly payments are lowered to
accommodate the borrowers’ financial needs. Land loans are typically structured as interest-only monthly payments with a balloon
payment due at maturity. Land loans modified in a TDR typically involve extending the balloon payment by one to three years, and
providing an interest rate concession. Home equity modifications are made infrequently and are uniquely designed to meet the
specific needs of each borrower.
Loans modified in a TDR are considered impaired loans and typically already on non-accrual status. Partial charge-offs have in some
cases already been taken against the outstanding loan balance. Loans modified in a TDR for the Company may have the financial
effect of increasing the specific allowance associated with the loan. An allowance for impaired loans that have been modified in a
21
TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s
observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. The
Company’s practice is to re-appraise collateral dependent loans every six to nine months. During the twelve months ended December
31, 2017, there was no impact on the allowance from TDRs during the period, as the loans classified as TDRs during the period did
not have a specific reserve and were already considered impaired loans at the time of modification and no further impairment was
required upon modification. The Company had no commitments to lend additional funds for loans classified as TDRs at December
31, 2017.
The Company closely monitors the performance of modified loans for delinquency, as delinquency is considered an early indicator of
possible future default. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial
charge-offs may be taken to further write-down the carrying value of the loan.
The following table presents TDRs as of December 31, 2017 and 2016, all of which were modified due to financial stress of the
borrower. There were not any subsequent defaulted TDRs as of December 31, 2017 and 2016. There were no loans modified or
recorded as TDRs during the years ended December 31, 2017 and 2016.
The following tables summarize the Company’s TDRs by type as of December 31, 2017 and December 31, 2016:
Number
of Loans
Commercial and agriculture
Construction and development
Residential 1-4 family
Farmland
Total TDRs (1)
1
1
1
1
4
Number
of Loans
Commercial and agriculture
Construction and development
Residential 1-4 family
Total TDRs (1)
1
1
1
3
December 31, 2017
Pre-TDR
Outstanding
Recorded
Investment
Post-TDR
Outstanding
Recorded
Investment
(dollars in thousands)
335 $
1,109
194
217
1,855 $
135
550
231
161
1,077
December 31, 2016
Pre-TDR
Outstanding
Recorded
Investment
Post-TDR
Outstanding
Recorded
Investment
(dollars in thousands)
335 $
1,000
192
1,527 $
250
654
137
1,041
$
$
$
$
(1) The period end balances are inclusive of all partial pay-downs and charge-offs since the modification date.
22
The following tables present troubled debt restructurings by accrual or nonaccrual status as of December 31, 2017 and 2016:
December 31, 2017
Accrual
S tatus
Non-Accrual
S tatus
(in thousands)
Total
TDRs
Commercial and agriculture
Construction and development
Residential 1-4 family
Farmland
Total TDRs
$
$
135 $
-
231
-
366 $
- $
550
-
161
711 $
135
550
231
161
1,077
December 31, 2016
Accrual
S tatus
Non-Accrual
S tatus
(in thousands)
Commercial and agriculture
Construction and development
Residential 1-4 family
Total TDRs
$
$
250 $
-
137
387 $
- $
654
-
654 $
Total
TDRs
250
654
137
1,041
NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the
twelve months ended December 31, 2017 and December 31, 2016:
Balance, December 31, 2016
Other comprehensive gain (loss) before reclassification
Amounts reclassified from AOCI for gain on sale of
investment securities included in net income
Net current period other comprehensive income (loss)
Balance, December 31, 2017
Balance, December 31, 2015
Other comprehensive gain before reclassifications
Amounts reclassified from AOCI for gain on sale of
investment securities included in net income
Net current period other comprehensive income
Balance, December 31, 2016
Net
Unrealized
Gain (Loss)
on Investment
S ecurities
Defined
Benefit
Plans
(in thousands)
(502) $
424
(5)
419
(83) $
(189) $
(73)
-
(73)
(262) $
Net
Unrealized
Gain (Loss)
on Investment
S ecurities
Defined
Benefit
Plans
(in thousands)
(254) $
65
-
65
(189) $
354 $
(852)
(4)
(856)
(502) $
23
$
$
$
$
Total
(691)
351
(5)
346
(345)
Total
100
(787)
(4)
(791)
(691)
The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for
the twelve months ended December 31, 2017 and December 31, 2016:
Twelve Months Ended
December 31,
2017
2016
(in thousands)
Gain on sales of investments available for sale
Income tax expense
Unrealized gain on investment securities, net of tax
$
$
(9) $
4
(5) $
(6)
2
(4)
The following table presents the components of other comprehensive income for the twelve months ended December 31, 2017 and
December 31, 2016:
Net unrealized gains on investment securities:
Net unrealized gains arising during the period
Less: reclassification adjustments for net gains realized in net income
Net unrealized gains on investment securities
Defined benefit plans:
Net unrecognized actuarial loss
Amortization of net actuarial gains
Net pension plan liability adjustment
Other comprehensive income
Net unrealized losses on investment securities:
Net unrealized losses arising during the period
Less: reclassification adjustments for net gains realized in net income
Net unrealized losses on investment securities
Defined benefit plans:
Net unrecognized actuarial loss
Amortization of unrecognized prior service costs and net actuarial gains
Net pension plan liability adjustment
Other comprehensive loss
Before Tax
Twelve Months Ended December 31, 2017
Tax Effect
Net of Tax
(in thousands)
642 $
(9)
633
(158)
47
(111)
522 $
218 $
(4)
214
(54)
16
(38)
176 $
424
(5)
419
(104)
31
(73)
346
Before Tax
Twelve Months Ended December 31, 2016
Net of Tax
Tax Effect
(in thousands)
(1,291) $
(6)
(1,297)
(73)
171
98
(1,199) $
(439) $
(2)
(441)
(25)
58
33
(408) $
(852)
(4)
(856)
(48)
113
65
(791)
$
$
$
$
24
NOTE 6 – PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, 2017 and 2016 were as follows:
Land and premises
Equipment, furniture and fixtures
Construction in progress
Less accumulated deprecation and amortization
Total premises and equipment
Depreciation expense
Rental expense
December 31,
2017
2016
(in thousands)
20,742 $
9,100
236
30,078
(14,202)
15,876 $
18,766
8,518
2,172
29,456
(13,130)
16,326
December 31,
2017
2016
(in thousands)
1,324 $
661 $
1,213
675
$
$
$
$
Minimum net rental commitments under non-cancelable operating leases having an original or remaining term of more than one year
for future years ending December 31 were as follows (in thousands):
2018 $
2019
2020
2021
2022 - 2026
$
596
515
411
88
215
1,825
Certain leases contain renewal options from five to ten years and escalation clauses based on increases in property taxes and other
costs.
NOTE 7 – OTHER REAL ESTATE OWNED
The following table presents the activity related to OREO for the years ended December 31, 2017 and December 31, 2016:
Other real estate owned, beginning of period
Transfers from outstanding loans
Proceeds from sales
Net (loss) gain on sales
Impairment charges
Total other real estate owned, end of period
$
$
December 31,
2017
2016
(in thousands)
405 $
-
(354)
(51)
-
- $
3,610
219
(3,450)
97
(71)
405
The company had no properties classified as OREO at December 31, 2017 and one commercial real estate owner occupied property
classified as OREO at December 31, 2016.
25
NOTE 8 – DEPOSITS
Time deposits that meet or exceed the FDIC Insurance limit of $250,000 at December 31, 2017 and 2016 were $9.9 million and $18.0
million, respectively.
The composition of deposits at December 31, 2017 and December 31, 2016 was as follows:
Interest-bearing demand ("NOW")
M oney market deposits
Savings deposits
Time deposits ("CDs")
Total interest-bearing deposits
Non-interest bearing demand
Total deposits
$
$
December 31,
2017
2016
(in thousands)
190,216 $
142,491
89,303
103,871
525,881
251,344
777,225 $
179,209
153,570
84,146
129,175
546,100
233,631
779,731
Scheduled maturities of CDs were as follows for future years ending December 31 (in thousands):
2018
2019
2020
2021
2022
Thereafter
Total
Maturities
48,157
33,664
11,000
8,251
2,799
-
103,871
$
$
NOTE 9 – BORROWINGS
Federal funds purchased and short-term advances from the Federal Home Loan Bank generally mature within one to four days from
the transaction date. The following is a summary of these borrowings:
Amount outstanding at end of period
Average balance during the year
Average interest rate during the year
$
$
December 31,
2017
(dollars in thousands)
2016
- $
105 $
1.18%
-
5,091
0.53%
Federal Home Loan Bank advances at December 31, 2017 and 2016 represent longer term advances from the Federal Home Loan
Bank of Des Moines. Advances at December 31, 2017 bear interest from 2.23% to 2.54% with a weighted average rate of 2.41%.
The advances mature in various years as follows (in thousands):
2019 $
2020
2021
2022
2023
2024
$
5,150
2,650
150
150
150
253
8,503
26
NOTE 10 – JUNIOR SUBORDINATED DEBENTURES
At December 31, 2017, two wholly-owned subsidiary grantor trusts established by the Company had outstanding $13.4 million of
Trust Preferred Securities. Trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in
the indentures. The trusts used the net proceeds from the offering of trust preferred securities to purchase a like amount of Junior
Subordinated Debentures (the “Debentures”) of the Company. The Debentures are the sole assets of the trusts. The Company’s
obligations under the Debentures and the related documents, taken together, constitute a full and unconditional guarantee by the
Company of the obligations of the trusts. The trust preferred securities are mandatorily redeemable upon the maturity of the
Debentures, or upon earlier redemption as provided in the indentures. The Company has the right to redeem the Debentures in whole
or in part, at a redemption price specified in the indentures plus any accrued but unpaid interest to the redemption date.
The Debentures issued by the Company to the grantor trusts totaling $13.0 million are reflected in the consolidated balance sheet in
the liabilities section under the caption “junior subordinated debentures.” The Company records interest expense on the corresponding
junior subordinated debentures in the consolidated statements of income. The Company recorded $403,000 in the consolidated balance
sheet at December 31, 2017 and December 31, 2016, respectively, for the common capital securities issued by the issuer trusts.
As of December 31, 2017 and December 31, 2016, regular accrued interest on junior subordinated debentures totaled $63,000 and
$54,000, respectively, and is included in accrued expenses and other liabilities on the balance sheet.
The terms of the junior subordinated debentures as of December 31, 2017 are:
Trust Name
Issue Date
Issued
Amount
(dollars in thousands)
Rate
Pacific Financial Corporation
Statutory Trust I
December
2005
$
5,000
LIBOR + 1.45% (1)
Pacific Financial Corporation
Statutory Trust II
June
2006
8,000
13,000
$
LIBOR + 1.60% (2)
Maturity
Date
M arch
2036
July
2036
(1) Pacific Financial Corporation Statutory Trust I securities incurred interest at the fixed rate of 6.39% until mid M arch
2011, at which the rate changed to a variable rate of 3-month LIBOR (1.59% at December 13, 2017) plus 1.45%
or 3.04%, adjusted quarterly, through the final maturity date in M arch 2036.
(2) Pacific Financial Corporation Statutory Trust II securities incur interest at a variable rate of 3-month LIBOR (1.40%
at October 12, 2017) plus 1.60% or 3.0%, adjusted quarterly, through the final maturity date in July 2036.
NOTE 11 – INCOME TAXES
The Company recorded an income tax provision for the twelve months ended December 31, 2017 and 2016. The amount of the
provision for each period was commensurate with the estimated tax liability associated with the net income earned during the period.
As of December 31, 2017, the Company believes that it is more likely than not that it will be able to fully realize its deferred tax asset
and therefore has not recorded a valuation allowance.
The Company's provision for income taxes includes both federal and state income taxes and reflects the application of federal and
state statutory rates to the Company's income before taxes. The principal difference between statutory tax rates and the Company's
effective tax rate is the benefit derived from investing in tax-exempt securities and bank owned life insurance.
Income taxes are accounted for using the asset and liability method. Under this method, a deferred tax asset or liability is determined
based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax
basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of
a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to
reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not that all or some portion of the
potential deferred tax asset will not be realized.
In December 2017, the federal government enacted the Tax Cuts and Jobs Act of
2017 (“Tax Act”), which among other provisions, reduced the federal marginal corporate income tax rate from 35% to 21%. As a
result of the passage of the Tax Act, the Company recorded a $1.0 million charge for the revaluation of its net deferred tax asset to
account for the future impact of the decrease in the corporate income tax rate and other provisions of the legislation.
27
The Company applies the provisions of FASB ASC 740, Income Taxes, relating to the accounting for uncertainty in income taxes.
The Company periodically reviews its income tax positions based on tax laws and regulations, and financial reporting considerations,
and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’ examinations of
the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax
environment. The Company did not have any uncertain tax positions as of December 31, 2017.
Income taxes for the years ended December 31, 2017 and December 31, 2016 was as follows:
Current
Deferred
Total income tax expense
December 31,
2017
2016
(in thousands)
$
$
2,590 $
1,771
4,361 $
2,621
(161)
2,460
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities and net deferred tax
assets are recorded in prepaid expenses and other assets in the consolidated financial statements at December 31, 2017 and December
31, 2016 are:
Deferred Tax Assets
$
Allowance for loan losses
Deferred compensation
Supplemental executive retirement plan
Unrealized loss on securities available for sale
OREO write-downs
Compensation expense
Other
Total deferred tax assets
Deferred Tax Liabilities
Depreciation
Loan fees/costs
Prepaid expenses
FHLB Stock
Other
Total deferred tax liabilities
Net deferred tax assets
$
$
$
December 31,
2017
2016
(in thousands)
1,992 $
42
923
28
-
61
188
3,234 $
249 $
1,134
103
-
72
1,558
1,676 $
3,170
77
1,352
260
257
239
245
5,600
219
1,457
137
20
89
1,922
3,678
28
The following is a reconciliation between the statutory and effective federal income tax rate for the years ended December 31, 2017
and December 31, 2016:
December 31,
2017
2016
Percent
of Pre-tax
Income
(dollars in thousands)
Amount
Percent
of Pre-tax
Income
Amount
$
3,963
35.0% $
3,167
35.0%
Income tax at statutory rate
Adjustments resulting from:
Tax-exempt income
Net earnings on life insurance policies
Low income housing tax credit
Deferred tax asset rate revaluation
Other
Total income tax expense
$
(608)
(150)
-
1,032
124
4,361
-5.4%
-1.3%
0.0%
9.1%
1.1%
38.5% $
(488)
(195)
(18)
-
(6)
2,460
-5.4%
-2.2%
0.2%
0.2%
0.1%
27.2%
NOTE 12 – EMPLOYEE BENEFITS
Incentive Compensation Plan – The Bank has a plan that provides incentive compensation to key employees if the Bank meets
certain performance criteria established by the Board of Directors. The cost of this plan was $965,000 and $958,000 in 2017 and
2016, respectively.
401(k) Plans – The Bank has established a 401(k) profit sharing plan for those employees who meet the eligibility requirements set
forth in the plan. During any calendar year, eligible employees may contribute up to an amount of salary compensation as allowed by
applicable IRS code. Matching contributions by the Bank are at the discretion of the Board of Directors. Contributions totaled
$420,000 and $290,000 for 2017 and 2016, respectively.
Director and Employee Deferred Compensation Plans – The Company has director and employee deferred compensation plans.
Under the terms of the plans, a director or employee may participate upon approval by the Board. The participant may then elect to
defer a portion of his or her earnings (directors’ fees or salary) as designated at the beginning of each plan year. Payments begin upon
retirement, termination, death or permanent disability, sale of the Company, the ten-year anniversary of the participant’s participation
date, or at the discretion of the Company. There are currently no participants in the director or employee deferred compensation plan.
There were no deferrals or ongoing expense to the Company for these plans in 2017 and 2016.
The directors of a bank acquired by the Company in 1999 adopted two deferred compensation plans for directors. One plan provides
retirement income benefits for all directors and the other, a deferred compensation plan, covers only those directors who have chosen
to participate in the plan. At the time of adopting these plans, the Bank purchased life insurance policies on directors participating in
both plans which may be used to fund payments to them under these plans. Cash surrender values on these policies were $3.9 million
and $4.2 million at December 31, 2017 and 2016, respectively. In 2017 and 2016, the net benefit recorded from these plans, including
the cost of the related life insurance, was $198,000 and $324,000, respectively. Both of these plans were fully funded and frozen as of
September 30, 2001. Plan participants were given the option to either remain in the plan until reaching the age of 70 or to receive a
lump-sum distribution. Participants electing to remain in the plan will receive annual payments over a ten-year period upon reaching
70 years of age. The liability associated with these plans totaled $193,000 and $224,000 at December 31, 2017 and 2016,
respectively.
Executive Long-Term Compensation Agreements – The Company has executive long-term compensation agreements to selected
employees that provide incentive for those covered employees to remain employed with the Company for a defined period of time.
The cost of these agreements was $172,000 and $147,000 for the years ended December 31, 2017 and 2016, respectively.
Supplemental Executive Retirement Plan – Effective January 1, 2007, the Company adopted a non-qualified Supplemental
Executive Retirement Plan (“SERP”) that provides retirement benefits to its executive officers. The SERP is unsecured and unfunded
and there are no plan assets. The post-retirement benefit provided by the SERP is designed to supplement a participating officer’s
retirement benefits from social security, in order to provide the officer with a certain percentage of final average income at retirement
age. The benefit is generally based on average earnings, years of service and age at retirement. At the inception of the SERP, the
Company recorded a prior service cost to accumulated other comprehensive income of $704,000. The Company has purchased bank
owned life insurance covering all participants in the SERP. The cash surrender value of these policies totaled $6.3 million and $6.2
million at December 31, 2017 and 2016, respectively.
29
The following table sets forth the net periodic pension cost and obligation assumptions used in the measurement of the benefit
obligation for the years ended December 31, 2017 and 2016:
Net periodic pension cost:
Service cost
Interest cost
Amortization of prior service cost
Amortization of net loss
Net periodic pension cost
$
$
Weighted average assumptions:
Discount rate
Rate of compensation increase
December 31,
2017
2016
(dollars in thousands)
57 $
110
-
31
198 $
99
111
91
23
324
3.74%
n/a
3.91%
n/a
The following table sets forth the change in benefit obligation at December 31, 2017 and December 31, 2016:
Change in benefit obligation:
Benefit obligation at the beginning of year $
Service cost
Interest cost
Benefits paid
Actuarial loss
Benefit obligation at end of year
$
December 31,
2017
2016
(in thousands)
3,049 $
57
110
(150)
104
3,170 $
3,045
99
111
(254)
48
3,049
Amounts recognized in accumulated other comprehensive income at December 31, 2017 and December 31, 2016 was as follows:
Loss
Prior service cost
Total recognized in AOCI
December 31,
2017
2016
(in thousands)
262 $
-
262 $
189
-
189
$
$
The following table summarizes the projected and accumulated benefit obligations at December 31, 2017 and December 31, 2016:
December 31,
2017
2016
(in thousands)
Projected benefit obligation
Accumulated benefit obligation
$
$
3,170 $
3,170 $
3,049
3,049
30
Estimated future benefit payments as of December 31, 2017 were as follows (in thousands):
2018 $
2019
2020
2021
2022
2023-2027
$
234
234
234
234
234
1,172
2,342
NOTE 13 – COMMITMENTS AND CONTINGENCIES
The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend credit and standby letters of credit, and involve, to varying
degrees, elements of credit risk in excess of the amount recognized on the consolidated balance sheets.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same
credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments. A summary of the
Bank’s off-balance sheet commitments at December 31, 2017 and December 31, 2016 is as follows:
December 31,
2017
2016
(in thousands)
Commitments to extend credit $
$
Standby letters of credit
194,206 $
2,213 $
181,034
2,205
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
contract. Many of the commitments expire without being drawn upon; therefore total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the customer.
Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate, and income-
producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Certain executive officers have entered into employment contracts with the Bank which provide for contingent payments subject to
future events.
In connection with certain loans held for sale, the Bank typically makes representations and warranties that the underlying loans
conform to specified guidelines. If the underlying loans do not conform to the specifications, the Bank may have an obligation to
repurchase the loans or indemnify the purchaser against loss. The Bank believes that the potential for loss under these arrangements is
remote. Accordingly, no contingent liability is recorded in the consolidated financial statements.
At December 31, 2017, the Bank had $8.5 million in outstanding borrowings against its $178.2 million in established borrowing
capacity with the FHLB, as compared to $8.7 million outstanding against a borrowing capacity of $170.3 million at December 31,
2016. The Bank’s borrowing facility with the FHLB is subject to collateral and stock ownership requirements. The Bank also had an
available discount window primary credit line with the Federal Reserve Bank of San Francisco of approximately $49.2 million,
subject to collateral requirements, and $16.0 million from correspondent banks, with no balance outstanding on any of these facilities.
The Company is currently not party to any material pending litigation. However, because of the nature of its activities, the Company
may be subject to or threatened with legal actions in the ordinary course of business. In the opinion of management, liabilities arising
from these claims, if any, will not have a material effect on the results of operations or financial condition of the Company.
31
NOTE 14 – SIGNIFICANT CONCENTRATION OF CREDIT RISK
Most of the Bank’s business activity is with customers and governmental entities located in the states of Washington and Oregon,
including investments in state and municipal securities. Loans to any single borrower or group of borrowers are generally limited by
state banking regulations to 20% of the Bank’s shareholders’ equity, excluding accumulated other comprehensive income (loss).
Standby letters of credit were granted primarily to commercial borrowers. The Bank, as a matter of practice, generally does not
extend credit to any single borrower or group of borrowers in excess of $9.0 million.
NOTE 15 – STOCK BASED COMPENSATION
The Company’s 2011 Equity Incentive Plan, as amended (the “2011 Plan”), provides for the issuance of up to 900,000 shares in
connection with incentive and nonqualified stock options, restricted stock, restricted stock units and other equity-based awards. Prior
to adoption of the 2011 Plan, the Company made equity-based awards under the Company’s 2000 Stock Incentive Plan, which expired
January 1, 2011.
Stock Options
The 2011 Plan authorizes the issuance of incentive and non-qualified stock options, as defined under current tax laws, to key
personnel. Options granted under the 2011 Plan either become exercisable ratably over five years or in a single installment five years
from the date of grant.
The Company uses the Black-Scholes option pricing model to calculate the fair value of stock option awards based on assumptions in
the following table. Expected volatility is based on historical volatility of the Company’s common stock. The expected term of stock
options granted is based on the simplified method, which is the simple average between contractual term and vesting period. The risk-
free rate is based on the expected term of stock options and the applicable U.S. Treasury yield in effect at the time of grant.
Expected
Life
6.5 years
6.5 years
Risk Free
Interest
Rate
2.07%
1.50%
Expected
S tock
Price
Volatility
23.58%
22.70%
Dividend
Yield
2.46%
3.08%
Grant period ended
December 31, 2017
December 31, 2016
Weighted
Average
Fair
Value of
Options
Granted
$
1.82
$
1.13
32
The following tables summarize the stock option activity for the years ended December 31, 2017 and 2016:
Outstanding at December 31, 2015
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2016
Granted
Exercised
Forfeited
Expired
Outstanding at December 31, 2017
S hares
471,500 $
16,000
(1,000)
(11,325)
(40,975)
434,200 $
17,000
(109,050)
(12,700)
(63,250)
266,200 $
Vested and expected to vest at December 31, 2017
266,200 $
Exercisable at December 31, 2017
201,300 $
Weighted
Average
Remaining
Contractual
Term
(in Years)
Weighted
Average
Exercise
Price
7.72
7.14
5.00
7.07
13.77
7.15
9.41
6.10
5.85
13.77
6.22
6.22
6.07
4.63
4.63
3.82
Information related to the stock option plan during each year follows:
Intrinsic value of options exercised
Cash received from option exercises
2017
2016
(in thousands)
$
$
328 $
147 $
5
5
The Company accounts for stock based compensation in accordance with GAAP, which requires measurement of compensation cost
for all stock-based awards based on grant date fair value and recognition of compensation cost over the service period of each award.
The following information summarizes information about stock option compensation expense for the years ended December 31, 2017
and 2016:
Compensation Expense
Tax Effect
Compensation Expense, net
Twelve Months Ended
December 31,
2017
2016
(in thousands)
$
$
13 $
4
9 $
24
8
16
As of December 31, 2017, there was $39,000 of total unrecognized compensation cost related to stock options. The cost is expected to
be recognized over a weighted-average period of 2.8 years.
Restricted Stock Units
The Company grants restricted stock units (“RSUs”) to employees qualifying for awards under the Company’s Annual Incentive
Compensation Plan. Recipients of RSUs will be issued a specified number of shares of common stock under the 2011 Plan upon the
33
lapse of applicable restrictions. Outstanding RSUs are subject to forfeiture if the recipient’s employment terminates prior to
expiration.
The following table summarizes RSU activity during the twelve months ended December 31, 2017 and 2016:
Weighted
Average
Grant
Date Fair
Value
6.76
9.66
Outstanding at December 31, 2015
Granted
Vested
Forfeited
Outstanding at December 31, 2016
Granted
Vested
Forfeited
Outstanding at December 31, 2017
S hares
83,430
55,825 $
(28,712)
(11,564)
98,979
10,950 $
(30,745)
(4,585)
74,599
The following table summarizes RSU compensation expense during the twelve months ended December 31, 2017 and 2016:
Compensation Expense
Tax Effect
Compensation Expense, net
Twelve Months Ended
2017
2016
(in thousands)
248 $
84
164 $
301
102
199
$
$
As of December 31, 2017, there was $92,000 of total unrecognized compensation cost related to nonvested RSUs. The cost is
expected to be recognized over a weighted-average period of 1.4 years.
NOTE 16 – REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by the 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 material adverse effect on the Company’s consolidated financial statements. Under capital
adequacy guidelines on the regulatory framework for prompt corrective action, the Bank must meet specific capital adequacy
guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank’s capital classification is also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), the Bank became subject to
new capital adequacy requirements approved by the Federal Reserve and the FDIC that implement the revised standards of the Basel
Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act. Pursuant to
minimum capital requirements of the FDIC effective on January 1, 2015, all FDIC-insured financial institutions are required to
maintain a minimum common equity Tier 1 risk-based capital to risk-weighted assets ratio of 4.5%, a minimum Tier 1 leverage ratio
to average assets of 4.0% and minimum risk-based capital ratios of Tier 1 capital to risk-weighted assets and total capital to risk-
weighted assets of 6.0% and 8.0%, respectively.
Although new capital requirements were effective on January 1, 2015, certain provisions of the new rule will be phased-in from the
effective date through 2019, including, among others, a new capital conservation buffer requirement, which requires financial
institutions to maintain a common equity capital ratio more than 2.5% above the required minimum levels in order to avoid limitations
on capital distributions, including dividend payments, and certain discretionary bonus payments based on percentages of eligible
retained income that could be utilized for such actions. The new capital conservation buffer requirement began to be phased-in on
January 1, 2016 at 0.625% of risk-weighted assets, and will continue to increase by 0.625% on each subsequent January 1, until it
34
reaches 2.5% on January 1, 2019. At December 31, 2017, the capital conservation buffer was 5.8% and 5.5% for the Company and the
Bank, respectively.
As of December 31, 2017 and 2016, the Bank was well capitalized under the regulatory framework for prompt corrective action. 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 table. There are no conditions or events since that notification that management believes have changed the institution’s
category.
Actual capital amounts and ratios for December 31, 2017 and 2016 are presented in the table below.
Actual
Minimum Capital
Adequacy
Minimum Capital
Adequacy With
Capital Buffer
Amount
Ratio
Amount
Ratio
Amount
Ratio
(dollars in thousands)
To be Well
Capitalized Under
Prompt Correction
Action Regulations
Amount
Ratio
As of December 31, 2017
Company
Common equity Tier 1 capital to
risk-weighted assets
Tier 1 leverage capital to average assets
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
$
Bank
Common equity Tier 1 capital to
risk-weighted assets
Tier 1 leverage capital to average assets
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
As of December 31, 2016
Company
Common equity Tier 1 capital to
risk-weighted assets
Tier 1 leverage capital to average assets
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
$
Bank
Common equity Tier 1 capital to
risk-weighted assets
Tier 1 leverage capital to average assets
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
72,125
85,125
85,125
94,216
84,568
84,568
84,568
93,660
67,703
80,703
80,703
89,631
79,964
79,964
79,964
88,876
NOTE 17 – FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
9.7% $
9.6%
11.5%
12.7%
11.4%
9.5%
11.4%
12.6%
9.5% $
9.3%
11.3%
12.6%
11.2%
9.2%
11.2%
12.5%
33,460
35,469
44,413
59,349
31,157
35,608
44,509
59,467
32,070
34,711
42,851
56,909
29,987
34,767
42,838
56,881
4.5% $
4.0%
6.0%
8.0%
43,126
N/A
54,036
68,993
5.8%
N/A
7.3%
9.3%
N/A
N/A
N/A
N/A
4.2%
4.0%
6.0%
8.0%
40,800
N/A
54,153
69,130
5.5% $
N/A
7.3%
9.3%
48,219
44,509
59,346
74,333
4.5% $
4.0%
6.0%
8.0%
36,346
N/A
47,136
61,177
5.1%
N/A
6.6%
8.6%
N/A
N/A
N/A
N/A
4.2%
4.0%
6.0%
8.0%
34,270
N/A
47,122
61,147
4.8% $
N/A
6.6%
8.6%
46,408
43,459
57,117
71,101
N/A
N/A
N/A
N/A
6.5%
5.0%
8.0%
10.0%
N/A
N/A
N/A
N/A
6.5%
5.0%
8.0%
10.0%
The Company uses an established hierarchy for measuring fair value that is intended to maximize the use of observable inputs and
minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as
follows:
Level 1 – Valuations based on quoted prices in active exchange markets for identical assets or liabilities; also includes certain
corporate debt securities actively traded in over-the-counter markets.
Level 2 – Valuations of assets and liabilities traded in less active dealer or broker markets. Valuations include quoted prices for
similar assets and liabilities traded in the same market; quoted prices for identical or similar instruments in markets that are not active;
and model–derived valuations whose inputs are observable or whose significant value drivers are observable. Valuations may be
35
obtained from, or corroborated by, third-party pricing services. This category generally includes certain U.S. Government, agency and
non-agency securities, state and municipal securities, mortgage backed securities, corporate securities, and residential mortgage loans
held for sale.
Level 3 – Valuation based on unobservable inputs supported by little or no market activity for financial instruments whose value is
determined using pricing models, discounted cash flow methodologies, yield curves and similar techniques, as well as instruments for
which the determination of fair value requires significant management judgment or estimation. Level 3 valuations incorporate certain
assumptions and projections in determining the fair value assigned to such assets or liabilities, but in all cases are corroborated by
external data, which may include third-party pricing services.
Investment Securities Available for Sale
The Company uses an independent pricing service to assist management in determining fair values of investment securities available
for sale. This service provides pricing information by utilizing evaluated pricing models supported with market based information.
Standard inputs include benchmark yields, reported trades, broker/dealer quotes, credit ratings, bids and offers, relative credit
information and reference data from market research publications. Investment securities that are deemed to have been trading in
illiquid or inactive markets may require the use of significant unobservable inputs.
The pricing service provides quoted market prices when available. Quoted prices are not always available due to bond market
inactivity. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using
discounted cash flows. Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate
loss severities, volatility, credit spread and optionality. Additionally, the pricing service may obtain a broker quote when sufficient
information is not available to produce a valuation. Valuations and broker quotes are non-binding and do not represent quotes on
which one may execute the disposition of the assets.
The Company generally obtains one value from its primary external third-party pricing service. The Company’s third-party pricing
service has established processes for us to submit inquiries regarding quoted prices. The Company’s third-party pricing service will
review the inputs to the evaluation in light of any new market data presented by us. The Company’s third-party pricing service may
then affirm the original quoted price or may update the evaluation on a going forward basis.
On a quarterly basis, management reviews the pricing information received from the third party-pricing service through a combination
of procedures that include an evaluation of methodologies used by the pricing service, analytical reviews and performance analyses of
the prices against statistics and trends and maintenance of an investment watch list. Based on this review, management determines
whether the current placement of the security in the fair value hierarchy is appropriate or whether transfers may be warranted. As
necessary, the Company compares prices received from the pricing service to discounted cash flow models or through performing
independent valuations of inputs and assumptions similar to those used by the pricing service in order to ensure prices represent a
reasonable estimate of fair value. Although the Company does identify differences from time to time as a result of these validation
procedures, the Company did not make any significant adjustments as of December 31, 2017 or December 31, 2016.
The following table presents the balances of assets measured at fair value on a recurring basis at December 31, 2017 and December
31, 2016.
At December 31, 2017
Quoted
Prices in
Active
Markets for
Identical
Assets
Other
Observable
Inputs
Description
Fair Value
(Level 1)
(Level 2)
Available-for-sale securities:
(in thousands)
Collateralized mortgage obligations: agency issued
$
39,721 $
- $
39,721 $
Collateralized mortgage obligations: non agency
M ortgage-backed securities: agency issued
U.S. Government agency securities
M unicipal securities
Other securities
256
16,571
1,573
51,819
78
-
-
1,573
-
78
256
16,571
-
50,078
-
Total assets measured at fair value
$
110,018 $
1,651 $
106,626 $
36
S ignificant
Unobservable
Inputs
(Level 3)
-
-
-
-
1,741
-
1,741
At December 31, 2016
Quoted
Prices in
Active
Markets for
Identical
Assets
Other
Observable
Inputs
Description
Fair Value
(Level 1)
(Level 2)
Available-for-sale securities:
(in thousands)
Collateralized mortgage obligations: agency issued
$
35,515 $
- $
35,515 $
Collateralized mortgage obligations: non agency
M ortgage-backed securities: agency issued
U.S. Government agency securities
State and municipal securities
Total assets measured at fair value
331
15,199
7,635
52,616
111,296 $
$
-
-
-
-
- $
331
15,199
7,635
50,741
109,421 $
S ignificant
Unobservable
Inputs
(Level 3)
-
-
-
-
1,875
1,875
As of December 31, 2017 and December 31, 2016, the Company had four available-for-sale securities classified as Level 3
investments which consist of non-rated municipal bonds for which the Company is the sole owner of the entire bond issue. The
valuation of these securities is supported by analysis prepared by an independent third party. Their approach to determining fair value
involves using recently executed transactions and market quotations for similar securities. As these securities are not rated by the
rating agencies and there is no trading volume, management determined that these securities should be classified as Level 3 within the
fair value hierarchy.
The following table presents a reconciliation of assets that are measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the twelve months ended December 31, 2017 and 2016, respectively. Transfers between level
categorizations may occur due to changes in the availability of market observable inputs, which generally are caused by changes in
market conditions such as liquidity, trading volume or bid-ask spreads. Transfers between level categorizations may also occur due to
changes in the valuation source. For example, in situations where a fair value quote is not provided by the Company’s independent
third-party valuation service provider and as a result the price is stale, the security is transferred into Level 3. There were no transfers
in or out of Level 3 during the years ended December 31, 2017 and December 31, 2016.
Balance beginning of period
Transfers in to level 3
Change in FV (included in other comprehensive income)
Balance end of period
$
$
Twelve Months Ended
December 31,
2017
2016
(in thousands)
1,875 $
-
(134)
1,741 $
2,026
-
(151)
1,875
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for
impairment and other real estate owned. The following methods were used to estimate the fair value of each such class of financial
instrument:
Impaired loans – A loan is considered impaired when, based on current information and events, it is probable that the Company will
be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement. Impaired
loans are classified as Level 3 in the fair value hierarchy and are measured based on the present value of expected future cash flows or
by the net realizable value of the collateral if the loan is collateral dependent. In determining the net realizable value of the underlying
collateral, we consider third party appraisals by qualified licensed appraisers, less estimated costs to sell. These appraisals may utilize
a single valuation approach or a combination of approaches including comparable sales and the income approach.
Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and
income data available and include consideration for variations in location, size, and income production capacity of the property. The
income approach commonly utilizes a discount or cap rate to determine the present value of expected future cash flows. Additionally,
37
the appraisals are periodically further adjusted by the Company in consideration of charges that may be incurred in the event of
foreclosure and are based on management’s historical knowledge, changes in business factors and changes in market conditions. Such
discounts are typically significant, and may range from 10% to 30%.
Impaired loans are reviewed and evaluated quarterly for additional impairment and adjusted accordingly, based on the same factors
identified above. Because of the high degree of judgment required in estimating the fair value of collateral underlying impaired loans
and because of the relationship between fair value and general economic conditions, we consider the fair value of impaired loans to be
highly sensitive to changes in market conditions.
Other real estate owned – OREO is initially recorded at the fair value of the property less estimated costs to sell. This amount
becomes the property’s new basis. Management considers third party appraisals in determining the fair value of particular properties.
These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income
approach.
Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and
income data available and include consideration for variations in location, size, and income production capacity of the property.
Additionally, the appraisals are periodically further adjusted by the Company based on management’s historical knowledge, changes
in business factors and changes in market conditions. Such adjustments are typically downward, and may range from 10% to 25%.
Any write-downs based on the property fair value less estimated costs to sell at the date of acquisition are charged to the allowance for
loan losses. Management periodically reviews OREO to ensure the property is carried at the lower of its new basis or fair value, net of
estimated costs to sell. Any additional write-downs based on re-evaluation of the property fair value are charged to non-interest
expense. Because of the high degree of judgment required in estimating the fair value of OREO and because of the relationship
between fair value and general economic conditions, we consider the fair value of OREO to be highly sensitive to changes in market
conditions.
The following tables present the Company’s assets that were held at the end of December 31, 2017 and December 31, 2016 that were
measured at fair value on a nonrecurring basis:
Description
Fair Value
At December 31, 2017
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
S ignificant
Unobservable
Inputs
(Level 3)
(in thousands)
Loans measured for impairment, net of specific reserves $
$
Total assets measured on a nonrecurring basis
231
$
231 $
-
$
- $
- $
- $
231
231
Description
Fair Value
Other real estate owned
Loans measured for impairment, net of specific reserves
Total assets measured on a nonrecurring basis
$
$
405 $
172
577 $
At December 31, 2016
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
S ignificant
Unobservable
Inputs
(Level 2)
(Level 3)
(in thousands)
- $
-
- $
- $
-
- $
405
172
577
38
The following table presents quantitative information about Level 3 inputs for financial instruments measured at fair value on a
nonrecurring basis at December 31, 2017 (dollars in thousands):
Description
Loans measured for impairment, net of specific
reserves
Fair Value of Financial Instruments
Fair
Value
Valuation
Technique
S ignificant Unobservable Inputs
Range
(Weighted
Average)
$
231
Income approach
Probability of default, discount rate
4.0%, 4.75%
The following methods and assumptions were used by the Company in estimating the fair values of financial instruments disclosed in
these consolidated financial statements:
Cash and due from banks, interest bearing deposits in banks, and certificates held for investment
The carrying amounts of cash, interest bearing deposits at other financial institutions approximate their fair value.
Investment securities available for sale and held to maturity
The fair value of all investment securities are based upon the assumptions market participants would use in pricing the
security. Such assumptions include observable and unobservable inputs such as quoted market prices, dealer quotes and
analysis of discounted cash flows.
Federal Home Loan Bank stock
FHLB stock is not publically traded; thus, it is not practicable to determine the fair value of FHLB stock due to restrictions
placed on its transferability. At December 31, 2017 and December 31, 2016 the stock was stock of the FHLB of Des Moines
Pacific Coast Bankers’ Bank stock
PCBB stock is carried at cost which approximates fair value and equals its par value based on a third-party valuation opinion
as of December 31, 2017.
Loans receivable, net and loans held for sale
The fair value of loans is estimated based on comparable market statistics for loans with similar credit ratings. An additional
liquidity discount is also incorporated to more closely align the fair value with observed market prices. Fair values of loans
held for sale are based on a discounted cash flow calculation using interest rates currently available on similar loans. The fair
value was based on an aggregate loan basis.
Deposits
The fair value of deposits with no stated maturity date is included at the amount payable on demand. Fair values for fixed
rate certificates of deposit are estimated using a discounted cash flow calculation based on interest rates currently offered on
similar certificates.
Borrowings
The fair values of the Company’s long-term borrowings is estimated using discounted cash flow analysis based on the
Company’s incremental borrowing rates for similar types of borrowing arrangements.
Junior Subordinated Debentures
The fair value of the Junior Subordinated Debentures and trust preferred securities is estimated using discounted cash flow
analysis based on interest rates currently available for Junior Subordinated Debentures.
Off-balance sheet instruments
The fair value of commitments to extend credit and standby letters of credit was estimated using the rates currently charged
to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness
of the customers. Since the majority of the Company’s off-balance-sheet instruments consist of non-fee producing, variable-
rate commitments, the Company has determined they do not have a material fair value.
39
The estimated fair value of the Company’s financial instruments at December 31, 2017 and December 31, 2016 was as follows:
As of December 31, 2017
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Carrying
Value
Other
Observable
Inputs
(Level 2)
(in thousands)
S ignificant
Unobservable
Inputs
(Level 3)
Total Fair
Value
$
34,571 $
34,571 $
- $
- $
34,571
994
110,018
749
1,409
1,000
10,886
678,227
994
-
-
N/A
-
-
-
-
108,277
353
N/A
1,000
10,886
-
-
1,741
398
N/A
-
-
666,641
994
110,018
751
N/A
1,000
10,886
666,641
$
777,225 $
8,503
13,403
- $
-
-
778,507 $
8,648
-
- $
-
8,972
778,507
8,648
8,972
As of December 31, 2016
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Carrying
Value
Other
Observable
Inputs
(Level 2)
(in thousands)
S ignificant
Unobservable
Inputs
(Level 3)
Total Fair
Value
$
59,298 $
59,298 $
- $
- $
59,298
2,231
111,296
859
1,335
1,000
6,573
648,611
2,231
-
-
N/A
-
-
-
-
109,421
465
N/A
1,000
6,573
-
-
1,875
398
N/A
-
-
638,726
2,231
111,296
863
N/A
1,000
6,573
638,726
$
779,731 $
8,653
13,403
- $
-
-
778,705 $
8,723
-
- $
-
8,521
778,705
8,723
8,521
Financial assets:
Cash and cash equivalents
Interest-bearing certificates of deposit
(original maturities greater than 90 days)
Investment securities available-for-sale
Investment securities held-to-maturity
Federal Home Loan Bank stock
Pacific Coast Bankers Bank stock
Loans held-for-sale
Loans receivable, net
Financial liabilities:
Deposits
Long-term borrowings
Junior subordinated debentures
Financial assets:
Cash and cash equivalents
Interest-bearing certificates of deposit
(original maturities greater than 90 days)
Investment securities available-for-sale
Investment securities held-to-maturity
Federal Home Loan Bank stock
Pacific Coast Bankers Bank stock
Loans held-for-sale
Loans receivable, net
Financial liabilities:
Deposits
Long-term borrowings
Junior subordinated debentures
NOTE 18 – EARNINGS PER SHARE
The Company’s basic earnings per common share is computed by dividing net income available to common shareholders (net income
less dividends declared by the weighted average number of common shares outstanding during the period). The Company’s diluted
earnings per common share is computed similar to basic earnings per common share except that the numerator is equal to net income
available to common shareholders and the denominator is increased to include the number of additional common shares that would
have been outstanding if dilutive potential common shares had been issued. Included in the denominator are the dilutive effects of
stock options computed under the treasury stock method and outstanding warrants as if converted to common stock.
40
The following table illustrates the computation of basic and diluted earnings per share:
Basic:
Net income (numerator)
Weighted average shares outstanding (denominator)
Basic earnings per share
Diluted:
Net income (numerator)
Weighted average shares outstanding
Effect of dilutive stock options
Weighted average shares outstanding assuming dilution (denominator)
Diluted earnings per share
Shares subject to outstanding options
For the Year Ended
December 31,
2017
2016
(dollars in thousands, except
per share amounts)
6,963 $
10,452,014
0.67 $
6,590
10,416,162
0.63
6,963 $
10,452,014
195,265
10,647,279
0.65 $
6,590
10,416,162
172,562
10,588,724
0.62
$
$
$
$
For the Year Ended
December 31,
2017
2,200
2016
66,550
As of December 31, 2017 and 2016, the shares subject to outstanding options included some options that had exercise prices in excess
of the current market value. Those specific shares are not included in the table above, as exercise of these options would not be
dilutive to shareholders.
NOTE 19 – CONDENSED FINANCIAL INFORMATION – PARENT COMPANY ONLY
Pacific Financial Corporation – Parent Company Only
Consolidated Statements of Financial Condition
(in thousands)
December 31,
2017
December 31,
2016
$
$
$
$
2,740
97,475
905
101,120
13,403
2,623
63
16,089
85,031
101,120
$
$
$
$
2,645
92,266
1,037
95,948
13,403
2,398
142
15,943
80,005
95,948
AS S ETS
Cash and cash equivalents:
Investment in bank
Other assets
Total assets
LIABILITIES AND S HAREHOLDERS ' EQUITY
Junior subordinated debentures
Dividends payable
Other liabilities
Total liabilities
Total shareholders' equity
Total liabilities and shareholders' equity
41
Pacific Financial Corporation – Parent Company Only
Consolidated Statements of Income
(in thousands)
INTERES T EXPENS E
Junior subordinated debentures
Total interest expense
NONINTERES T INCOME
Dividends from subsidiary bank
Equity in undistributed income from subsidiary bank
Other income
Total noninterest income
NONINTERES T EXPENS E
Other expense
Total noninterest income
Income before income taxes
Income tax benefit
Net income
Twelve Months Ended
December 31,
2017
2016
$
$
373 $
373
2,796
4,863
11
7,670
531
531
6,766
197
6,963 $
304
304
2,600
4,198
9
6,807
291
291
6,212
378
6,590
Pacific Financial Corporation – Parent Company Only
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Net Income
$
Change in fair value of securities available for sale
Reclassification adjustment of net loss (gain) from sale of
investment securities available for sale included in income
Defined benefit plan
Other comprehensive income (loss), net of tax
Comprehensive income
$
Twelve Months Ended
December 31,
2017
2016
6,963 $
424
(5)
(73)
346
7,309 $
6,590
(852)
(4)
65
(791)
5,799
42
Pacific Financial Corporation – Parent Company Only
Consolidated Statements of Cash Flows
(Dollars in thousands)
Cash flows from operating activities:
Net Income
Adjustments to reconcile net income to cash and cash equivalents from operating activities
$
6,963
$
6,590
Twelve Months Ended
December 31,
2017
2016
Equity in undistributed income of subsidiary
Net change in other assets
Net change in other liabilities
Stock compensation expense
Net cash provided by operating activities
Cash flows from financing activities:
Net cash from stock option exercises
Taxes paid related to net share settlement for equity awards
Cash dividends paid
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
NOTE 20 – SELECTED DATA
Results of operations on a quarterly basis were as follows (unaudited):
(4,863)
144
(79)
261
2,426
147
(80)
(2,398)
(2,331)
95
2,645
2,740
$
$
(4,198)
(369)
(12)
325
2,336
5
(11)
(2,287)
(2,293)
43
2,602
2,645
Interest and dividend income
Interest expense
Net interest income
Loan loss provision
Noninterest income
Noninterest expense
Income before provision for income taxes
Provision for income taxes
Net income
Earnings per common share
Basic
Diluted
$
$
$
$
Year Ended December 31, 2017
First
Quarter
S econd
Quarter
Third
Quarter
Fourth
Quarter
(dollars in thousands, except per share amounts)
8,678 $
620
8,058
122
2,281
8,150
2,067
476
1,591 $
8,988 $
588
8,400
-
2,955
8,649
2,706
845
1,861 $
9,283 $
594
8,689
150
2,662
8,164
3,037
884
2,153 $
9,495
593
8,902
-
2,625
8,013
3,514
2,156
1,358
0.15 $
0.15 $
0.18 $
0.17 $
0.21 $
0.20 $
0.13
0.13
43
Interest and dividend income
Interest expense
Net interest income
Loan loss provision
Noninterest income
Noninterest expense
Income before provision for income taxes
Provision for income taxes
Net income
Earnings per common share
Basic
Diluted
Year Ended December 31, 2016
First
Quarter
S econd
Quarter
Third
Quarter
Fourth
Quarter
(dollars in thousands, except per share amounts)
$
$
$
$
8,529 $
607
7,922
262
2,531
8,270
1,921
545
1,376 $
8,394 $
628
7,766
276
3,026
7,982
2,534
773
1,761 $
8,518 $
616
7,902
276
3,194
8,178
2,642
649
1,993 $
0.13
0.12
$
$
0.17
0.17
$
$
0.19
0.19
$
$
8,694
621
8,073
184
2,571
8,507
1,953
493
1,460
0.14
0.14
44
GENERAL CORPORATE AND SHAREHOLDER INFORMATION
Administrative Headquarters
1216 Skyview Drive
Aberdeen, WA 98520
(360) 533-8870
Independent Accountants
BDO USA LLP
Spokane, Washington
Transfer Agent and Registrar
Computershare
P.O. BOX 30170
College Station, TX 77842-3170.
Telephone: 1-877-870-2422
Outside the U.S: 201-680-6578
Hearing Impaired: 800-952-9245
www.computershare.com/investor
Shareholder Services
Computershare, our transfer agent, maintains the records for our registered shareholders and can help you with a variety of
shareholder related services at no charge including:
Change of name or address Lost stock certificates
Consolidation of accounts Transfer of stock to another person
Duplicate mailings Additional administrative services
As a Pacific Financial Corporation shareholder, you are invited to take advantage of our convenient shareholder services or
request more information about Pacific Financial Corporation. Access your account directly through Investor Center at
www.computershare.com/investor.
Annual Meeting
The annual meeting of shareholders will be held on April 25, 2018 at 4 p.m. at 1216 Skyview Drive, Aberdeen, WA 98520.
Annual Report
This annual report, including accompanying financial statements and schedules, is available without charge to shareholders or
beneficial owners of our common stock upon written request to Sandra Clark, Corporate Secretary, Pacific Financial
Corporation, 1216 Skyview Drive, Aberdeen, Washington 98520. It is also furnished upon request to customers of Bank of the
Pacific pursuant to the requirements of the FDIC to provide an annual disclosure statement. This statement has not been
reviewed or confirmed for accuracy or relevance by the FDIC.
BOARD OF DIRECTORS
Randy W. Rognlin, Chairman
Co-Owner
Rognlins, Inc
Douglas M. Schermer, Vice Chairman
Owner and President
Schermer Construction Inc. & Wishkah Rock Products
Denise Portmann
President & CEO
Pacific Financial Corporation and Bank of the Pacific
Randy J. Rust
Private Investor
Susan C. Freese
Pharmacist
Dwayne M. Carter
Retired President & General Manager
Brooks Manufacturing Co.
Edwin W. Ketel
Retired Owner
Oceanside Animal Clinic
Kristi Gundersen
Partner & Chief Financial Officer
Knutzen Farms, LP
Dan J. Tupper
Vice President & General Manager
Crown Distributing Co. of Aberdeen, Inc.
John Van Dijk
Retired President & COO
Bank of the Pacific
45
OFFICERS
Denise J. Portmann
President & CEO
Pacific Financial Corporation and Bank of the Pacific
Douglas N. Biddle
Treasurer
Executive Vice President & CFO, Bank of the Pacific
Daniel E. Kuenzi
Executive Vice President & CCO, Bank of the Pacific
Edward T. Eng
Executive Vice President & CAO, Bank of the Pacific
Sandra P. Clark
Corporate Secretary
SUBSIDIARIES
Bank of the Pacific
1216 Skyview Drive
Aberdeen, WA 98520
360-533-8870
www.bankofthepacific.com