CMYCMMYCYCMYKai158137964071_BOP 2019 Annual Report - Final.pdf 1 2/10/2020 4:07:26 PM 2019 SHAREHOLDERS’ LETTER
March 27, 2020
Dear Fellow Shareholders:
2019 marked Pacific Financial Corporation’s most profitable year in its history, earning $13.8 million for the year ended
December 31, 2019, supported by an above industry average net interest margin of 4.58% for the year, and a 39% growth
in noninterest income, which was boosted by increased mortgage lending activity. We also ended the year with total assets
of $929.4 million, a solid diversified loan portfolio of $685.3 million and an excellent core deposit base of $798.6 million,
with 31% in non-interest bearing deposits.
We are proud of the value Pacific Financial has created for its shareholders in 2019. As we head into 2020, we will continue
to drive shareholder value by remaining focused on our key strategies of growing our loan portfolio and deposit base,
running a cost-efficient franchise, and enhancing our customers’ overall banking experience.
In addition to delivering stellar financial results, 2019 has been an exciting year for PFLC as we continue the momentum
of enhancing our visibility in the vibrant Pacific Northwest. In October 2019, we expanded our franchise with the opening
of a new commercial banking center in Eugene, Oregon. We have a team of experienced lenders in place who are highly
focused on commercial banking along the I-5 corridor in the greater Willamette Valley market. With our depth of talent
and broad industry knowledge, rich employee culture and outstanding financial performance, our company is emerging as
one of the premier community banks in the Northwest.
5-Year EPS
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2015 2016 2017 2018 2019
During 2019, we also launched the person-to-person payment platform Zelle,
which allows our customers to send or receive money in a fast, easy and safe
manner from people they know and trust with just an email address or mobile
phone number within minutes. Expanding our digital capabilities and enhancing
access is in line with our ongoing long-term effort to stay current with the emerging
world of digital banking and meeting the rapidly changing needs of our customers.
In 2020, we will explore instant issue debit cards, on-line account opening,
interactive teller machines and a contact center which may allow for extended
service hours.
Additionally, implementing a deposit growth strategy in our newer metro markets
is a high priority for us in 2020 and beyond. To that end, we are looking to capture
new business deposits, and deepen our existing relationships, which in turn will
drive strong account and volume growth in our fee income lines of business.
2019 SHAREHOLDERS’ LETTER
Significant Milestones and Financial Highlights from 2019:
Earnings reached another all-time high of $13.8 million, or $1.29 per diluted share, for the full year of 2019, an
increase of 21% from $11.3 million, or $1.06 per diluted share for 2018.
Noninterest income grew 39% to $13.9 million for the full year of 2019, compared to $10.0 million for 2018.
Net interest margin remained solid at 4.58% for the full year of 2019, compared to 4.52% for 2018.
Delivered above industry peer profitability metrics with annualized return on average assets of 1.50%, and
annualized return on average equity of 13.70%.
Total assets grew by $21.5 million to $929.4 million at year-end 2019; gross loans were $685.3 million; deposits
totaled $798.6 million, with noninterest-bearing deposits accounting for 31% of total deposits.
Asset quality remained solid with nonperforming assets to total assets at 0.11% at December 31, 2019. Allowance
for loan losses were 1.31% of total loans.
All capital levels exceeded regulatory requirements for a “well-capitalized” financial institution, ending the year
with a total risk-based capital ratio of 14.72%, a Tier 1 risk-based ratio at 13.54% and a leverage ratio at 11.17%.
As a result of our growing franchise generating solid profitability, in 2019 our shareholders enjoyed a 40% increase
in cash dividends on PFLC stock resulting in a premium return for our loyal shareholders. In fact, our recent dividend
yield of 3.68% was well above our peer average for SNL MicroCap U. S. Banks.
The Company transitioned to a quarterly cash dividend, with a half-year cash dividend of $0.20 per common share
paid on August 26, 2019, a third quarter dividend of $0.11 per common share paid on November 25, 2019, and a
fourth quarter dividend of $0.11 per common share paid on February 26, 2020, for a total of $0.42 per common
share, compared to $0.30 per share in the prior year.
The Company authorized a stock repurchase plan of up to $2.63 million of the outstanding common stock of the
Company. We believe our stock is an attractive investment and having the ability to repurchase stock provides a
means to build long-term value for our shareholders.
The Company up-listed to the OTCQX Best Markets during 2019, improving transparency with the goal of
increasing liquidity for our investors. U.S. Investors can find current financials and real-time level 2 quotes for the
company on www.otcmarkets.com.
We would not have achieved our success without the commitment and dedication of our entire staff at Pacific Financial and
the communities we serve. As we head into 2020, we expect some headwinds as a result of the declining interest rate
environment and net interest margin pressure; however, we are optimistic about the future of our franchise and look forward
to serving our customers. We will continue to execute upon our strategic initiatives that we anticipate benefitting our
shareholders, customers, employees and communities. Please join us for our annual Shareholders’ meeting on April 29,
2020, at 4:00 p.m. via live webcast.
Sincerely,
Randy Rognlin
Chairman of the Board
Pacific Financial Corporation
Denise Portmann
President and Chief Executive Officer
Pacific Financial Corporation
Operations Data
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense⁽¹⁾
Net income
Net income per share:
Basic
Diluted
Dividends declared per share⁽²⁾
Dividends declared
Dividend payout ratio
Performance Ratios
Return on average equity
Return on average assets
Net interest margin⁽3⁾
Efficiency ratio⁽4⁾
Balance Sheet Data
Total assets
Loans, net
Total deposits
Total borrowings
Shareholders' equity
Equity to assets ratio
Book value per share⁽5⁾
Tangible book value per share⁽6⁾
Asset Quality Ratios
Allowance for loan losses to total loans
Allowance for loan losses to
nonperforming loans
Nonperforming loans to total loans
Nonperforming assets to total assets
2019
For the Year Ended December 31,
2018
2016
2017
(dollars in thousands, except per share data)
2015
$
$
$
$
$
$
$
$
$
41,570 $
2,928
38,642
-
13,895
35,556
16,981
3,223
13,758 $
1.30
1.29
$
$
$
0.31
3,288 $
24%
13.70%
1.50%
4.58%
67.68%
40,060 $
2,590
37,470
-
10,031
33,793
13,708
2,378
11,330 $
1.07
1.06
$
$
$
0.30
3,170 $
28%
36,444 $
2,395
34,049
272
10,523
32,976
11,324
4,361
6,963 $
0.67
0.65
$
$
$
0.25
2,622 $
38%
34,135 $
2,472
31,663
998
11,225
32,840
9,050
2,460
6,590 $
0.63
0.62
$
$
$
0.23
2,398 $
36%
12.63%
1.26%
4.52%
71.14%
8.19%
0.79%
4.28%
8.16%
0.77%
4.11%
74.00%
76.60%
929,415 $
675,445
798,638
16,606
105,293
907,929 $
694,054
783,549
21,756
92,483
894,953 $
678,227
777,225
21,906
85,031
891,383 $
648,611
779,731
22,056
80,005
11.33%
10.19%
9.50%
8.98%
9.90
8.64
$
$
8.75
7.47
$
$
8.10
6.82
$
$
7.67
6.38
$
$
31,340
2,201
29,139
582
9,671
30,731
7,497
1,921
5,576
0.54
0.53
0.22
2,287
41%
7.35%
0.71%
4.10%
79.30%
824,613
617,019
714,499
24,706
76,285
9.25%
7.34
6.03
1.31%
1.29%
1.32%
1.39%
1.33%
873.96%
0.15%
0.11%
838.65%
0.15%
0.12%
420.00%
0.31%
0.25%
748.00%
0.19%
0.20%
548.00%
0.24%
0.62%
(1) 2017 results were impacted by the Tax Cuts and Jobs Act enacted December 22, 2017, which required a
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
the net deferred tax asset.
(2) In 2019, the Company transitioned to a quarterly cash dividend. The fourth quarter dividend of $0.11 per common share
paid on February 26, 2020. This fourth quarter dividend is not included in the 2019 dividend declared number, as it was
not declared until January 2020.
(3) Net interest income divided by average earning assets
(4) Noninterest expense divided by the sum of net interest income and noninterest income
(5) Shareholder equity divided by shares outstanding
(6) Shareholder equity less intangibles divided by shares outstanding
CliftonLarsonAllen LLP
CLAconnect.com
INDEPENDENT AUDITORS’ REPORT
Board of Directors
Pacific Financial Corporation
Aberdeen, Washington
Report on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of Pacific Financial Corporation
and its subsidiary, Bank of the Pacific, (the Company), which comprise the consolidated statement of
financial condition as of December 31, 2019, and the related consolidated statements of income,
comprehensive income, shareholders’ equity, and cash flows for the year then ended, and the related
notes to the consolidated financial statements.
Management’s Responsibility for the Consolidated 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.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audit. We conducted our audit 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 auditors’ 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 Company’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 Company’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.
Board of Directors
Pacific Financial Corporation
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,
2019, and the results of their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
Other Matters
The 2018 consolidated financial statements were audited by other auditors, whose report dated
March 21, 2019, expressed an unmodified opinion on those statements.
a
CliftonLarsonAllen LLP
Bellevue, Washington
March 18, 2020
Pacific Financial Corporation
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
ASSETS
Ca s h on ha nd a nd i n ba nks
Interes t bea ri ng depos i ts
Federa l Funds Sol d
Ca s h a nd ca s h equi va l ents
Other i nteres t ea rning depos i ts
Inves tment s ecuriti es a va i l a bl e for s a l e, a t fa i r va l ue
Inves tment s ecuriti es held to ma turi ty (fa i r va l ue of $1,056 a nd $1,227, res pectivel y)
Loa ns held for s a l e
Loa ns , net of deferred fees
All owa nce for l oa n los s es
Tota l loa ns , net
Nonma rketa ble equi ty s ecuriti es
Premi s es a nd equipment, net
Opera ti ng l ea s e ri ght-of-us e a s s ets
Ca s h s urrender va l ue of l ife ins ura nce
Goodwil l
Other i nta ngibl e a s s ets , net
Accrued i nteres t recei va bl e
Prepa id expens es a nd other a s s ets
Tota l a s s ets
LIABILITIES AND SHAREHOLDERS' EQUITY
Depos i ts
Federa l Home Loa n Ba nk a dva nces
Juni or s ubordina ted debentures
Opera ti ng l ea s e l i a bi l i ties
Accrued expens es a nd other l ia bil i ti es
Tota l l i a bi li ties
Shareholders' Equity:
Preferred Stock, no pa r va l ue; 5,000,000 s ha res a uthorized; no s ha res is s ued
or outs ta ndi ng a t December 31, 2019 a nd December 31, 2018
Common Stock, $1 pa r va l ue; 25,000,000 s ha res a uthorized, 10,632,058 a nd 10,568,720
s ha res i s s ued a nd outs ta nding a t December 31, 2019 a nd 2018, res pecti vel y
Addi ti ona l pa id-i n-ca pita l
Reta ined ea rni ngs
Accumul a ted other comprehens ive income (l os s ), net
Tota l s ha rehol ders ' equi ty
Tota l li a bi l iti es a nd s ha reholders ' equi ty
December 31,
2019
December 31,
2018
12,264 $
24,458
41,210
77,932
3,250
102,159
1,056
10,108
684,439
(8,993)
675,446
2,217
14,799
1,294
20,807
12,168
1,301
3,074
3,803
929,414 $
798,638 $
3,203
13,403
1,301
7,576
824,121
15,899
6,289
-
22,188
3,250
121,383
1,227
6,204
703,103
(9,049)
694,054
2,407
15,376
-
20,218
12,168
1,321
3,321
4,812
907,929
783,549
8,353
13,403
-
10,141
815,446
-
-
10,632
43,735
49,723
1,203
105,293
929,414 $
10,569
43,635
39,253
(974)
92,483
907,929
$
$
$
$
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,
2019
2018
INTEREST AND DIVIDEND INCOME
Interes t a nd fees on l oa ns
Ta xa bl e i nteres t on i nves tment s ecuri ti es
Nonta xa bl e i nteres t on i nves tment s ecuri ti es
Interes t a nd di vi dends on other i nteres t ea rni ng a s s ets
Tota l i nteres t a nd di vi dend i ncome
INTEREST EXPENSE
Depos i ts
Juni or s ubordina ted debentures
Federa l Home Loa n Ba nk a dva nces
Tota l i nteres t expens e
Net i nteres t i ncome
Provi s i on for l oa n l os s es
Net i nteres t i ncome a fter l oa n l os s provi s i on
NONINTEREST INCOME
Servi ce cha rges on depos i ts
Ga i n on s a l e of l oa ns , net
Ga i n on s a l e of i nves tment s ecuri ti es , net
Ea rni ngs on ba nk owned l i fe i ns ura nce
Other i ncome
Tota l noni nteres t i ncome
NONINTEREST EXPENSE
Compens a ti on a nd empl oyee benefi ts
Occupa ncy
Equi pment
Da ta proces s i ng
Profes s i ona l s ervi ces
Ma rketi ng
Other rea l es ta te owned, net
Sta te a nd l oca l ta xes
Federa l depos i t i ns ura nce premi um
Other expens e
Tota l noni nteres t expens e
Income before i ncome ta xes
Income ta x expens e
Net i ncome
Ba s i c ea rni ngs per common s ha re
Di l uted ea rni ngs per common s ha re
$
$
$
$
37,835 $
1,861
947
927
41,570
2,267
540
121
2,928
38,642
-
38,642
2,055
7,204
102
667
3,867
13,895
22,553
2,125
1,009
2,912
1,436
690
-
515
103
4,213
35,556
16,981
3,223
13,758 $
1.30
1.29
$
$
36,769
1,413
1,210
668
40,060
1,873
505
212
2,590
37,470
-
37,470
2,034
4,103
-
432
3,462
10,031
21,100
2,207
1,087
2,862
756
662
6
360
365
4,388
33,793
13,708
2,378
11,330
1.07
1.06
See accompanying Notes to Consolidated Financial Statements.
2
Pacific Financial Corporation
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Net Income
Other comprehens i ve i ncome (l os s ), net of ta x:
Securi ti es a va i l a bl e for s a l e, net of ta x
Defi ned benefi t pl a ns , net of ta x
Tota l other comprehens i ve i ncome (l os s ), net of ta x
Twelve Months Ended
December 31,
2019
2018
$
13,758
$
11,330
2,437
(260)
2,177
(816)
187
(629)
Comprehens i ve i ncome
$
15,935
$
10,701
See accompanying Notes to Consolidated Financial Statements.
3
Pacific Financial Corporation
Consolidated Statements of Shareholders’ Equity
(Dollars in thousands, except share amounts)
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss) Income,
net
Total
Shareholders'
Equity
31,078 $
11,330
15
-
-
-
-
(3,170)
39,253 $
13,758
-
-
-
-
-
(3,288)
49,723 $
(345) $
-
(629)
-
-
-
-
-
(974) $
-
2,177
-
-
-
-
-
1,203 $
85,031
11,330
(614)
(243)
99
20
30
(3,170)
92,483
13,758
2,177
(19)
77
13
92
(3,288)
105,293
Balance at December 31, 2017
Net i ncome
Other comprehens i ve i ncome (l os s ), net of ta x
Res tri cted s tock a wa rds i s s ued, net of forfei tures
Res tri cted s tock compens a ti on expens e
Stock opti on compens a ti on expens e
Exerci s e of s tock opti ons
Ca s h di vi dends decl a red ($0.30 per s ha re)
Number of
Common
Shares
10,491,892
-
-
46,681
-
-
30,147
-
$
10,492 $
43,806 $
-
-
47
-
-
30
-
-
-
(290)
99
20
-
-
Balance at December 31, 2018
10,568,720
$
10,569 $
43,635 $
Net i ncome
Other comprehens i ve i ncome, net of ta x
Res tri cted s tock a wa rds i s s ued, net of forfei tures
Res tri cted s tock compens a ti on expens e
Stock opti on compens a ti on expens e
Exerci s e of s tock opti ons
Ca s h di vi dends decl a red ($0.31 per s ha re)
-
-
6,312
-
-
57,026
-
-
-
6
-
-
57
-
-
-
(25)
77
13
35
-
Balance at December 31, 2019
10,632,058
$
10,632 $
43,735 $
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
Adjus tments to reconci le net i ncome to net ca s h on ha nd a nd in ba nks
from opera ti ng a cti vi ti es
Twelve Months Ended
December 31,
2019
2018
$
13,758
$
11,330
Provi s i on for loa n los s es
Depreci a tion a nd a mortiza ti on
Deferred i ncome ta xes
Origi na ti ons of l oa ns hel d for s a l e
Proceeds from s a les of l oa ns
Ga i n on s a le of l oa ns , net
Ga i n on s a le of s ecuri ties a va i l a bl e for s a le, net
Los s on s a l e of premi s es a nd equi pment
Ea rni ngs on ba nk owned l ife ins ura nce
Net cha nge in i n a ccrued i nteres t receiva bl e
Increa s e i n a ccrued i nteres t pa ya ble
Net cha nge in prepa i d expens es
Other opera ti ng a ctivi ti es
Net ca s h provi ded by opera ting a ctivi ties
Cash flows from investing activities:
Loa ns ori gi na ted, net of pri ncipa l pa yments
Net i ncrea s e in certifi ca tes of depos i ts hel d for inves tment
Ma turi ti es of i nves tment s ecuriti es hel d to ma turi ty
Ma turi ti es a nd pa ydowns of i nves tment s ecuriti es a va il a bl e for s a l e
Purcha s e of inves tment s ecuri ties a va i l a bl e for s a le
Purcha s es of nonma rketa bl e equi ty s ecuriti es
Purcha s e of ba nk owned li fe i ns ura nce
Purcha s es of premi s es a nd equi pment
Proceeds from s a l es of i nves tment s ecuriti es a va il a bl e for s a l e
Proceeds from s a l es of nonma rketa bl e equi ty s ecuri ti es
Proceeds from ba nk owned l ife ins ura nce dea th benefit
Proceeds from s a l es of premis es a nd equipment
Proceeds from s a l es of other rea l es ta te owned
Net ca s h provi ded by (us ed i n) i nves ti ng a cti viti es
Cash flows from financing activities:
Net i ncrea s e in depos i ts
Repa yments of FHLB Adva nces
Net ca s h from s tock opti on exerci s es
Ta xes rel a ted to net s ha re s ettlement for equity a wa rds
Ca s h divi dends pa i d
Net ca s h provi ded by fi na nci ng a cti vi ti es
Net increa s e (decrea s e) in ca s h a nd ca s h equi va lents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information:
Ca s h pa i d for i nteres t
Ca s h pa i d for ta xes
Supplemental non-cash disclosures of cash flow information:
Other rea l es ta te owned a cqui red i n s ettl ement of loa ns
Ini tia l recogni ti on of opera ti ng lea s e ri ght-of-us e a s s ets
Ini tia l recogni ti on of opera ti ng lea s e l i a bi li ty
Tra ns fer of l oa ns hel d for s a le to loa ns held for i nves tment
Tra ns fer from s ecuri ties a va i l a bl e for s a le to s ecuri ties hel d to ma turi ty
$
$
$
$
$
$
$
$
See accompanying Notes to Consolidated Financial Statements.
5
-
2,075
316
(295,983)
298,070
(7,204)
(102)
-
(667)
247
9
61
666
11,246
19,985
-
171
25,142
(30,387)
(640)
(1,480)
(1,373)
26,810
830
1,558
338
-
40,954
15,089
(5,150)
194
(131)
(6,458)
3,544
55,744
22,188
77,932
2,919
1,780
-
2,013
(2,013)
1,213
-
$
$
$
$
$
$
$
$
-
2,968
283
(164,962)
172,683
(4,103)
-
30
(432)
(260)
17
(147)
(1,434)
15,973
(14,811)
(2,256)
402
14,113
(28,494)
(1,974)
-
(1,091)
-
1,976
-
-
150
(31,985)
6,324
(150)
13
64
(2,622)
3,629
(12,383)
34,571
22,188
2,573
2,590
150
-
-
1,064
880
Pacific Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019 and December 31, 2018
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 fourteen branches located in communities in Grays
Harbor, Pacific, Whatcom, Clark, Skagit and Wahkiakum counties in the state of Washington and two branches in Clatsop County,
Oregon. In addition, the Bank operates three loan production offices in Burlington, Washington and Salem and Eugene, 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 2019 presentation. These reclassifications did not change
previously reported net income or stockholders’ equity.
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, the identification of impaired loans, the fair value of available for sale investment securities
and the identification of deferred tax assets.
The Company utilizes the accrual method of accounting, which recognizes income when earned and expenses when incurred.
Subsequent events – Subsequent to year end, the World Health Organization declared the spread of Coronavirus Disease (COVID-19)
a worldwide pandemic. The COVID-19 pandemic is having significant effects on global markets, supply chains, businesses, and
communities. Specific to the Company, COVID-19 may impact various parts of its 2020 operations and financial results including but
not limited to additional loan loss reserves, costs for emergency preparedness, or potential shortages of personnel. The Company
believes it is taking appropriate actions to mitigate the negative impact. However, the full impact of COVID-19 is unknown and cannot
be reasonably estimated as these events occurred subsequent to year end and are still developing.
During the period from January 1, 2020 through March 18, 2020, both domestic and international equity markets have experienced
significant declines. These losses are not reflected in the financial statements as of and for the year ended December 31, 2019 as
these events occurred subsequent to year end and are still developing.
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.
6
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.
Nonmarketable equity securities – The Company’s investment in Federal Home Loan Bank (“FHLB”) stock is carried at cost and cash
and stock dividends are recorded as income. The Company’s investment in Pacific Coast Bankers Bank ("PCBB”) stock is carried at
cost, less impairment and plus or minus observable prices, if any, and cash and stock dividends are recorded as income. Nonmarketable
equity securities are periodically evaluated for impairment based on ultimate recovery of par value.
The 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, 2019 and December 31, 2018 the stock was that of FHLB of Des Moines.
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
7
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
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.
Operating lease right-of-use assets –The Company’s leases are classified as operating leases, and therefore, were previously not
recognized on the Company’s consolidated financial statements. With the adoption of FASB ASU 2016-02, Leases (Topic 842), operating
lease agreements are required to be recognized on the consolidated financial statements as a right-of-use (“ROU”) asset and a
corresponding lease liability. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or
less), or equipment leases (deemed immaterial) on the consolidated financial statements.
The calculated amount of the ROU assets and lease liabilities are impacted by the length of the lease term and the discount rates used
to calculate the present value the minimum lease payments. For the discount rate the Company utilizes its incremental borrowing rate
at lease inception over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as
of January 1, 2019 was used.
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.
Bank-owned life insurance – Bank owned life insurance is carried at the amount due upon surrender of the policy, which is also the
estimated fair value. This amount was provided by the insurance companies based on the terms of the underlying insurance contract.
Off-balance-sheet credit related financial instruments – In the ordinary course of business, the Company has entered into
commitments to extend credit, including commitments under credit arrangements, commercial letters of credit, and standby letters
of credit. Such financial instruments are recorded when they are funded. The Company maintains a separate allowance for off-balance-
sheet commitments. Management estimates anticipated losses using historical data and utilization assumptions. The allowance for
off-balance-sheet commitments is included in accrued expenses and other liabilities.
Goodwill and other intangible assets – At December 31, 2019 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 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. Prior to 2019, the analysis of potential impairment of goodwill was a two-step process. The first step
was a comparison of the reporting unit’s fair value to its carrying value. If the reporting unit’s fair value was 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. In 2019, the Company elected to early adopt FASB ASU 2017-04, Intangibles -
Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The guidance removed Step 2 of the goodwill
8
impairment test. Goodwill will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the
carrying amount of goodwill. All other goodwill impairment guidance remained largely unchanged.
For the years ended December 31, 2019 and December 31, 2018, the Company’s goodwill impairment evaluation, based on its
qualitative assessment, indicated there was no impairment. 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 $34,000 and $53,000 at December 31, 2019 and 2018, respectively. Amortization expense related to core
deposit intangible totaled $19,000 and $35,000 during the years ended December 31, 2019 and 2018, 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.
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, 2019, 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, 2019. The tax years that remain subject to examination by federal and
state taxing authorities are the years ended December 31, 2018, 2017 and 2016.
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.
9
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 182,243 and 113,994 in 2019 and 2018, 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,
2019 and 2018.
Revenue Recognition – The Company recognizes revenue as it is earned based on contractual terms, as transactions occur, or as
services are provided and collectability is reasonably assured. The principal source of revenue is interest income from loans and
investments. The Company also earns non-interest income from various banking services offered to its customers. Gain on sales of
loans, investment securities, earnings on bank-owned life insurance, and other income are not within the scope of ASU 606. The
Company’s revenue from contracts with customers within the scope of ASU 606 is recognized in non-interest income. Certain specific
policies related to those in scope with revenue streams income include the following:
Service Charges on Deposit Accounts – The Company earns fees from its deposit customers by providing contractual transaction-
based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop
payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed at the point in time the
company fulfills the customer’s request for product or service. Fees, which relate primarily to deposit account maintenance, are earned
over the course of a month, representing the period over which the company satisfies its performance obligation. Fees for performing
that service are then assessed at the close of the statement period. Overdraft fees are recognized at the point in time that the overdraft
is created by the payment of a check against a deposit account in which there are not sufficient funds to pay that item. Service charges
on deposits are collected directly from the customer’s account balance per the terms of the contract with the depositor.
Interchange and Other Fees – The Company earns interchange fees from debit or credit cardholder transactions, from cards issued
by the company to its customers or processed for non-customers, conducted through various card payment networks. Interchange
fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently
with the transaction processing services provided to the cardholder. Other service charges include revenue from processing wire
transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for interchange and other
service charges are largely satisfied, and related revenue recognized, when completion of the services are rendered at a point in time.
The following table presents the Company’s noninterest income by revenue stream and reportable segment for the years ended
December 31, 2019 and December 31, 2018. Items outside the scope of ASC 606 are noted as such.
Twelve Months Ended
December 31,
2019
2018
(in thous a nds )
2,055 $
2,034
$
7,204
102
667
3,641
226
13,895 $
4,103
-
432
3,331
131
10,031
Servi ces cha rges on depos its
Ga in on s a l e of loa ns , net (1)
Ga in on s a l es of i nves tment s ecuri ti es , net (1)
Ea rni ngs on bank owned l i fe ins ura nce (1)
Interchange a nd Other fees
Other (1)
Tota l noni nteres t i ncome $
(1) Not withi n the s cope of ASC 606
10
Recent accounting pronouncements – adopted
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.
5. Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.
The overall effect of the adoption of ASU No. 2014-09 as of January 1, 2018 did not have a material impact on the Company's
consolidated financial statements, as described in significant accounting policies.
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 as of January 1, 2018 did not have a material impact on the Company's 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.
The Company adopted the provisions of this standard retrospectively during the year 2019, recorded a right-of-use asset and
corresponding lease liability, and made relevant disclosures in Footnote 7.
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 adoption of ASU No. 2016-15 as of January 1, 2018 did not have a material impact on the Company's 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. The early adoption of ASU No. 2017-04 as of January 1, 2019 did not have a material impact on the Company's consolidated
financial statements.
11
FASB ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost was issued in March 2017 to improve the presentation of net periodic pension cost and net
periodic postretirement benefit cost in the income statement, and to narrow the amounts eligible for capitalization in assets. The
updated is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. The adoption of ASU No.
2017-07 as of January 1, 2018 did not have a material impact on the Company's consolidated financial statements.
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 adoption of ASU No. 2017-
08 as of January 1, 2018 did not have a material impact on the Company's 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
adoption of ASU No. 2017-09 as of January 1, 2018 did not have a material impact on the Company's 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 adoption of ASU No.
2018-02 as of January 1, 2019 did not have a material impact on the Company's consolidated financial statements.
Recent accounting pronouncements – not yet effective
FASB ASU 2016-13, Financial Instruments: Credit Losses (Topic 326): Measurement of Credit Losses on Financial
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. In October 2019, the FASB voted to
approve amendments to the effective date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-
SEC reporting entities. The amendment delays the effective date for the Company until interim and annual periods beginning after
December 15, 2022. 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 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair
Value Measurement was issued in August 2018 and modifies the disclosure requirements on fair value measurements in Topic 820.
The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019. The Company does not expect the Update will have a material impact on its Consolidated Financial
Statements.
12
FASB ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging,
and Topic 825, Financial Instruments, was issued in April 2019 and affects a variety of topics in the Codification and applies to all
reporting entities within the scope of the affected accounting guidance. This update is not expected to have a significant impact on
the Company’s consolidated financial statements.
FASB ASU 2019-05, Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief, was issued in May 2019 to provide
entities with an option to irrevocably elect the fair value option applied on an instrument-by-instrument basis for eligible instruments.
This guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2019. This update
is not expected to have a significant impact on the Company’s consolidated financial statements.
FASB ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, was issued in December 2019, which
simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments
also improve consistent application of and simplify GAAP for the areas of Topic 740 by clarifying and amending existing guidance. This
guidance is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2020. Early adoption
of the amendments is permitted, including adoption in any interim period for which financial statements have not yet been issued.
Depending on the amendment, adoption may be applied on the retrospective, modified retrospective, or prospective basis. The
Company is currently reviewing the provisions of this new pronouncement, but does not expect adoption of this guidance to have a
material impact on the Company’s consolidated financial statements.
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, 2019 and 2018 was
met by holding cash.
13
NOTE 3 – INVESTMENT SECURITIES AND NONMARKETABLE INVESTMENT SECURITIES
Investment 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 Sale
Col l a teral i zed mortga ge obl i ga ti ons
Mortga ge ba cked s ecuri ti es
Muni ci pa l s ecuri ti es
Corpora te debt s ecuri ti es
Tota l a va i l a bl e for s al e
Held to maturity
Mortga ge ba cked s ecuri ti es
Muni ci pa l s ecuri ti es
Tota l hel d to ma turi ty
Available for Sale
Col l a teral i zed mortga ge obl i ga ti ons
Mortga ge ba cked s ecuri ti es
U.S. Government a nd agency s ecuri ti es
Muni ci pa l s ecuri ti es
Corpora te debt s ecuri ti es
Tota l a va i l a bl e for s al e
Held to maturity
Mortga ge ba cked s ecuri ti es
Muni ci pa l s ecuri ti es
Tota l hel d to ma turi ty
Amortized
Cost
44,665 $
18,795
34,720
2,003
100,183 $
15 $
1,041
1,056 $
Amortized
Cost
41,004 $
23,169
3,577
53,785
1,000
122,535 $
24 $
1,202
1,226 $
$
$
$
$
$
$
$
$
December 31, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(i n thous ands )
628 $
362
1,277
2
2,269 $
- $
-
- $
152 $
27
113
1
293 $
- $
-
- $
December 31, 2018
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(i n thous ands )
111 $
95
-
413
-
619 $
1 $
-
1 $
691 $
259
28
752
41
1,771 $
- $
-
- $
Fair
Value
45,141
19,130
35,884
2,004
102,159
15
1,041
1,056
Fair
Value
40,424
22,945
3,549
53,446
959
121,383
25
1,202
1,227
14
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, 2019 and December 31, 2018, were as follows:
Available for sale
(i n thous a nds )
Less Than 12 Months
December 31, 2019
12 Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Col l a tera l i zed mortga ge obl i ga ti ons
Mortga ge ba cked s ecuri ti es
Muni ci pa l s ecuri ti es
Corpora te debt s ecuri ti es
Tota l
Available for sale
Col l a tera l i zed mortga ge obl i ga ti ons
Mortga ge ba cked s ecuri ti es
U.S. Government a gency s ecuri ti es
Muni ci pa l s ecuri ti es
Corpora te debt s ecuri ti es
$
$
$
6,598 $
691
6,158
1,000
14,447 $
45 $
1
113
1
160 $
10,466 $
2,883
-
-
13,349 $
107 $
26
-
-
133 $
17,064 $
3,574
6,158
1,000
27,796 $
152
27
113
1
293
Less Than 12 Months
December 31, 2018
12 Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(i n thous a nds )
1,650 $
6,537
1,985
6,840
960
9 $
32
2
37
41
29,035 $
10,183
1,564
25,303
-
682 $
227
26
715
-
30,685 $
16,720
3,549
32,143
960
691
259
28
752
41
Tota l
$
17,972 $
121 $
66,085 $
1,650 $
84,057 $
1,771
At December 31, 2019, there were 57 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, 2019.
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, 2019 and 2018, 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,
2019 and 2018.
Proceeds from sales of securities available-for-sale were $26.8 million and $0 for the years ended December 31, 2019 and December
31, 2018, 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,
2019
2018
(i n thous a nds )
Gros s rea l i zed ga i n on s a l e of s ecuri ti es
Gros s rea l i zed l os s on s a l e of s ecuri ti es
$
Net rea l i zed ga i n on s a l e of s ecuri ti es $
284 $
182
102 $
-
-
-
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
15
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, 2019, by maturity were as follows:
December 31, 2019
Held to Maturity
Available for Sale
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
- $
15
1,041
-
-
1,056 $
(i n thous a nds )
- $
15
1,041
-
-
1,056 $
5,981 $
6,851
30,611
51,077
5,663
100,183 $
6,014
6,872
31,503
52,086
5,684
102,159
Due i n one yea r or l es s
Due a fter one yea r through fi ve yea rs
Due a fter fi ve yea rs through ten yea rs
Due a fter ten yea rs
Decl i ni ng ba l a nce s ecuri ti es
Tota l i nves tment s ecuri ti es
$
$
At December 31, 2019 and December 31, 2018, investment securities with an estimated fair value of $75.1 million and $67.3 million
were pledged to secure public deposits, certain nonpublic deposits and borrowings, respectively.
Nonmarketable investment securities
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, 2019 and December 31, 2018, the Company held $1.2 million and $1.4 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. 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, 2019 and maintains capital ratios that exceed “well capitalized” standards for regulatory purposes.
16
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY
Loans held in the portfolio at December 31, 2019 and December 31, 2018, were as follows:
Commerci a l a nd a gri cul tura l
$
132,167 $
140,167
December 31,
2019
2018
(i n thous a nds )
Rea l es ta te:
Cons tructi on a nd devel opment
Res i denti a l 1-4 fa mi l y
Mul ti -fa mi l y
Commerci a l rea l es ta te -- owner occupi ed
Commerci a l rea l es ta te -- non owner occupi ed
Fa rml a nd
Tota l rea l es ta te
Cons umer
Gros s l oa ns
Deferred fees
Loa ns , net
45,227
85,711
29,865
147,049
153,866
32,370
494,088
59,014
685,269
(830)
684,439 $
$
47,291
89,091
30,948
142,761
152,017
28,876
490,984
72,946
704,097
(994)
703,103
Commercial and Agricultural. The Company's commercial and agricultural loans consist primarily of secured revolving operating lines
of credit, equipment financing, accounts receivable and inventory financing and business term loans, some of which may be partially
guaranteed by the Small Business Administration or the U.S. Department of Agriculture. The Company’s credit policies determine
advance rates against the different forms of collateral that can be pledged against commercial loans. Typically, the majority of loans
will be limited to a percentage of the underlying collateral values such as equipment, eligible accounts receivable and finished
inventory. Individual advance rates may be higher or lower depending upon the financial strength of the borrower, quality of the
collateral and/or term of the loan.
Real Estate. The Company originates owner occupied and non-owner occupied commercial real estate and multifamily loans within
its primary market areas. Underwriting standards require that commercial and multifamily real estate loans not exceed 65-80% of the
lower of appraised value at origination or cost of the underlying collateral, depending upon specific property type. The cash flow
coverage to debt servicing requirement is generally that annual cash flow be a minimum of between 1.25-1.35 times debt service for
commercial real estate loans and 1.35 times debt service for multifamily loans. Cash flow coverage is calculated using a market interest
rate.
Commercial real estate and multifamily loans typically involve a greater degree of risk than single-family residential mortgage loans.
Payments on loans secured by multifamily and commercial real estate properties are dependent on successful operation and
management of the properties and repayment of these loans is affected by adverse conditions in the real estate market or the
economy. The Company seeks to minimize these risks by scrutinizing the financial condition of the borrower, the quality and value of
the collateral, and the management of the property securing the loan. In addition, commercial real estate loan portfolios are reviewed
annually to evaluate the performance of individual loans greater than $500,000 and for potential changes in interest rates, occupancy,
and collateral values.
Non-owner occupied commercial real estate loans are loans in which less than 50% of the property is occupied by the owner and
include loans such as apartment complexes, hotels and motels, retail centers and mini-storage facilities. Repayment of non-owner
occupied commercial real estate loans is dependent upon the lease or resale of the subject property. Loan amortizations range from
10 to 30 years, although terms typically do not exceed 10 years. Interest rates can be either floating or fixed. Floating rates are
typically indexed to the prime rate or Federal Home Loan Bank advance rates plus a defined margin. Fixed rates are generally set for
periods of three to five years with either a rate reset provision or a payment due at maturity. Prepayment penalties are often sought
on term commercial real estate loans.
The Company originates single-family residential construction loans for custom homes where the home buyer is the borrower. It has
also provided financing to builders for the construction of pre-sold homes and, in selected cases, to builders for the construction of
speculative residential property. The Company endeavors to limit construction lending risks through adherence to specific
17
underwriting guidelines and procedures. Repayment of construction loans is dependent upon the sale of individual homes to
consumers or in some cases to other developers. Construction loans are generally short-term in nature and most loans mature in one
to two years. Interest rates are usually floating and fully indexed to a short-term rate index. The Company's credit policies address
maximum loan to value, cash equity requirements, inspection requirements, and overall credit strength.
The majority of one-to-four family residential loans are secured by single-family residences located in the Company’s primary market
areas. Single-family portfolio loans are generally owner-occupied and underwriting standards require that loan amounts not exceed
80% of the lower of appraised value at origination or cost of the underlying collateral. Terms typically range from 15 to 30 years.
Repayment of these loans comes from the borrower’s personal cash flows and liquidity, and collateral values are a function of
residential real estate values in the markets we serve. These loans include primary residences, second homes, rental homes and home
equity loans and home equity lines of credit.
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
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.
18
Changes in the allowance for loan losses for the twelve months ended December 31, 2019 and December 31, 2018 were as follows:
Commerci a l and a gricul tura l
Rea l es ta te:
Res i denti a l 1-4, Mul ti fa mi l y, Cons t & Dev
Commercia l rea l es ta te -- owner occupi ed
Commercia l rea l es ta te -- non owner occupi ed
Farml and
Tota l rea l es ta te
Cons umer
Una l located
Tota l
Twelve Months Ended December 31, 2019
Balance at
Beginning of
Year
Charge-offs
Recoveries
(in thous a nds )
Provision for
Loan Losses
Balance at
End of Year
$
1,847 $
(30) $
56 $
(391) $
1,482
983
926
1,311
680
3,900
1,986
1,316
9,049 $
$
Balance at
Beginning of
Year
-
-
-
-
-
(139)
-
(169) $
34
-
-
-
34
23
-
113 $
42
(10)
(55)
362
339
(149)
201
- $
1,059
916
1,256
1,042
4,273
1,721
1,517
8,993
Twelve Months Ended December 31, 2018
Charge-offs
Recoveries
(in thous a nds )
Provision for
Loan Losses
Balance at
End of Year
Commerci a l and a gricul tura l
Rea l es ta te:
Res i dentia l 1-4, Multi fa mi ly, Cons t & Dev
Commerci a l rea l es ta te -- owner occupi ed
Commercia l rea l es ta te -- non owner occupi ed
Farml and
Tota l rea l es ta te
Cons umer
Una l located
Tota l
$
1,758 $
(4) $
77 $
16 $
1,847
1,292
1,211
1,197
636
4,336
1,907
1,091
9,092 $
$
-
-
-
-
-
(177)
-
(181) $
-
-
-
-
-
61
-
138 $
(309)
(285)
114
44
(436)
195
225
- $
983
926
1,311
680
3,900
1,986
1,316
9,049
19
The allowance for loan losses disaggregated on the basis of the Company's impairment method as of December 31, 2019 and
December 31, 2018 were as follows:
Loans
Individually
Evaluated
for
Impairment
Twelve Months Ended December 31, 2019
Loans
Collectively
Evaluated
for
Impairment
(i n thous a nds )
1,475 $
Total
Allowance
for Loan
Losses
1,482
7 $
-
-
-
-
-
-
-
7 $
1,059
916
1,256
1,042
4,273
1,721
1,517
8,986 $
1,059
916
1,256
1,042
4,273
1,721
1,517
8,993
Loans
Individually
Evaluated
for
Impairment
Twelve Months Ended December 31, 2018
Loans
Collectively
Evaluated
for
Impairment
(i n thous a nds )
1,843 $
Total
Allowance
for Loan
Losses
1,847
4 $
-
-
-
-
-
-
-
4 $
983
926
1,311
680
3,900
1,986
1,316
9,045 $
983
926
1,311
680
3,900
1,986
1,316
9,049
Commerci a l a nd a gri cul tura l
Rea l es ta te:
Res i denti a l 1-4, Mul ti fa mi l y, Cons t & Dev
Commerci a l rea l es ta te -- owner occupi ed
Commerci a l rea l es ta te -- non owner occupi ed
Fa rml a nd
Tota l rea l es ta te
Cons umer
Una l l oca ted
Tota l
Commerci a l a nd a gri cul tura l
Rea l es ta te:
Res i denti a l 1-4, Mul ti fa mi l y, Cons t & Dev
Commerci a l rea l es ta te -- owner occupi ed
Commerci a l rea l es ta te -- non owner occupi ed
Fa rml a nd
Tota l rea l es ta te
Cons umer
Una l l oca ted
Tota l
$
$
$
$
20
The recorded investment of loans disaggregated on the basis of the Company’s impairment method as of December 31, 2019 and
December 31, 2018 were as follows:
Loans
Individually
Evaluated
for
Impairment
Twelve Months Ended December 31, 2019
Loans
Collectively
Evaluated
for
Impairment
(i n thous a nds )
131,651 $
516 $
Gross Loans
132,167
826
-
-
-
826
7
1,349 $
159,977
147,049
153,866
32,370
493,262
59,007
683,920 $
160,803
147,049
153,866
32,370
494,088
59,014
685,269
Loans
Individually
Evaluated
for
Impairment
Twelve Months Ended December 31, 2018
Loans
Collectively
Evaluated
for
Impairment
(i n thous a nds )
139,956 $
211 $
Gross Loans
140,167
413
-
-
21
434
399
1,044 $
166,917
142,761
152,017
28,855
490,550
72,547
703,053 $
167,330
142,761
152,017
28,876
490,984
72,946
704,097
Commerci a l a nd a gri cul tura l
Rea l es ta te:
Res i denti a l 1-4, Mul ti fa mi l y, Cons t & Dev
Commerci a l rea l es ta te -- owner occupi ed
Commerci a l rea l es ta te -- non owner occupi ed
Fa rml a nd
Tota l rea l es ta te
Cons umer
Tota l
Commerci a l a nd a gri cul tura l
Rea l es ta te:
Res i denti a l 1-4, Mul ti fa mi l y, Cons t & Dev
Commerci a l rea l es ta te -- owner occupi ed
Commerci a l rea l es ta te -- non owner occupi ed
Fa rml a nd
Tota l rea l es ta te
Cons umer
Tota l
$
$
$
$
Credit Quality Indicators
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.
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
21
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, 2019 and December 31, 2018 were as follows:
Commerci a l a nd a gri cul tura l
Rea l es ta te:
Cons tructi on a nd devel opment
Res i denti a l 1-4 fa mi l y
Mul ti -fa mi l y
Commerci a l rea l es ta te -- owner occupi ed
Commerci a l rea l es ta te -- non owner occupi ed
Fa rml a nd
Tota l rea l es ta te
Cons umer
Gros s Loa ns
Deferred fees
Loa ns , net
Commerci a l a nd a gri cul tura l
Rea l es ta te:
Cons tructi on a nd devel opment
Res i denti a l 1-4 fa mi l y
Mul ti -fa mi l y
Commerci a l rea l es ta te -- owner occupi ed
Commerci a l rea l es ta te -- non owner occupi ed
Fa rml a nd
Tota l rea l es ta te
Cons umer
Gros s Loa ns
Deferred fees
Loa ns , net
December 31, 2019
Other Loans
Especially
Mentioned
Pass
Substandard
(i n thous a nds )
Doubtful
Total
$
125,052 $
5,285 $
1,830 $
- $
132,167
44,990
83,534
29,865
144,863
151,951
24,661
479,864
58,968
663,884
(830)
663,054 $
$
-
66
-
1,012
-
3,460
4,538
4
9,827
-
9,827 $
237
2,111
-
1,174
1,915
4,249
9,686
42
11,558
-
11,558 $
December 31, 2018
-
-
-
-
-
-
-
-
-
-
- $
45,227
85,711
29,865
147,049
153,866
32,370
494,088
59,014
685,269
(830)
684,439
Other Loans
Especially
Mentioned
Pass
Substandard
(i n thous a nds )
Doubtful
Total
$
132,874 $
5,180 $
2,113 $
- $
140,167
47,291
87,221
30,560
139,379
150,998
25,756
481,205
72,534
686,613
(994)
685,619 $
$
-
978
-
1,510
768
1,479
4,735
13
9,928
-
9,928 $
-
892
388
1,872
251
1,641
5,044
399
7,556
-
7,556 $
-
-
-
-
-
-
-
-
-
-
- $
47,291
89,091
30,948
142,761
152,017
28,876
490,984
72,946
704,097
(994)
703,103
22
Impaired Loans
Impaired loans by type as of December 31, 2019 and 2018, and interest income recognized for the twelve months ended December
31, 2019 and 2018, were as follows:
December 31, 2019
Recorded
Investment
With No
Specific
Valuation
Allowance
Recorded
Investment
With Specific
Valuation
Allowance
Total
Recorded
Investment
Unpaid
Contractual
Principal
Balance
(i n thous a nds )
Related
Specific
Valuation
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
325 $
191 $
516 $
516 $
Commerci a l a nd a gri cul tura l
Rea l Es ta te:
Res i denti a l 1-4, Mul ti fa mi l y, Cons t & Dev
Commerci a l rea l es ta te -- owner occupi ed
Commerci a l rea l es ta te -- non owner occupi ed
Fa rml a nd
Tota l rea l es ta te
Cons umer
Tota l
Commerci a l a nd a gri cul tura l
Rea l Es ta te:
Res i denti a l 1-4, Mul ti fa mi l y, Cons t & Dev
Commerci a l rea l es ta te -- owner occupi ed
Commerci a l rea l es ta te -- non owner occupi ed
Fa rml a nd
Tota l rea l es ta te
Cons umer
Tota l
Insider Loans
$
$
$
826
-
-
-
826
7
1,158 $
-
-
-
-
-
-
191 $
826
-
-
-
826
7
1,349 $
918
-
-
-
918
7
1,441 $
December 31, 2018
7 $
-
-
-
-
-
-
7 $
531 $
933
-
-
-
933
7
1,471 $
-
-
-
-
-
-
-
-
Recorded
Investment
With No
Specific
Valuation
Allowance
Recorded
Investment
With Specific
Valuation
Allowance
Total
Recorded
Investment
Unpaid
Contractual
Principal
Balance
(i n thous a nds )
Related
Specific
Valuation
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
- $
211 $
211 $
211 $
413
-
-
21
434
399
833 $
-
-
-
-
-
-
211 $
413
-
-
21
434
399
1,044 $
482
-
-
91
573
399
1,183 $
4 $
-
-
-
-
-
-
4 $
221 $
491
-
-
188
679
399
1,299 $
-
-
-
-
-
-
-
-
Certain related parties of the Company, principally directors and their affiliates, were loan customers of the Bank in the ordinary course
of business during 2019 and 2018. Total related party loans outstanding at December 31, 2019 and 2018 to executive officers and
directors were $2.8 million and $4.7 million, respectively. During 2019 and 2018, new loans of $2.0 million and $2.0 million,
respectively, were made, and repayments totaled $3.9 million and $940,000 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, 2019.
23
Aging Analysis
The following tables summarize the Company’s loans past due, both accruing and nonaccruing, by type as of December 31, 2019 and
December 31, 2018:
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than
90 Days
$
377 $
- $
122
58
-
-
244
-
424
64
-
865 $
$
-
238
-
-
-
-
238
3
-
241 $
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than
90 Days
$
675 $
- $
239
203
-
1,099
-
-
1,541
146
-
2,362 $
$
-
48
-
-
-
-
48
88
-
136 $
December 31, 2019
Total Past
Due
Non-accrual
Loans
Loans Not
Past Due
Total
Loans
(i n thous ands )
- $
-
-
-
-
-
-
-
-
-
- $
377 $
325 $
131,465 $
132,167
122
296
-
-
244
-
662
67
-
1,106 $
237
460
-
-
-
697
7
-
1,029 $
44,868
84,955
29,865
147,049
153,622
32,370
492,729
58,940
(830)
682,304 $
45,227
85,711
29,865
147,049
153,866
32,370
494,088
59,014
(830)
684,439
December 31, 2018
Total Past
Due
Non-accrual
Loans
Loans Not
Past Due
Total
Loans
(i n thous ands )
- $
-
-
-
-
-
-
-
-
-
- $
675 $
- $
139,492 $
140,167
239
251
-
1,099
-
-
1,589
234
-
2,498 $
-
281
-
-
-
21
302
399
-
701 $
47,052
88,559
30,948
141,662
152,017
28,855
489,093
72,313
(994)
699,904 $
47,291
89,091
30,948
142,761
152,017
28,876
490,984
72,946
(994)
703,103
Commerci a l a nd a gri cul tura l
Rea l es ta te:
Cons tructi on a nd devel opment
Res i denti al 1-4 fa mi l y
Mul ti -fa mi l y
Commerci al rea l es ta te -- owner occupi ed
Commerci al rea l es ta te -- non owner occupi ed
Fa rml a nd
Tota l rea l es ta te
Cons umer
Deferred fees
Tota l
Commerci a l a nd a gri cul tura l
Rea l es ta te:
Cons tructi on a nd devel opment
Res i denti al 1-4 fa mi l y
Mul ti -fa mi l y
Commerci al rea l es ta te -- owner occupi ed
Commerci al rea l es ta te -- non owner occupi ed
Fa rml a nd
Tota l rea l es ta te
Cons umer
Deferred fees
Tota l
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
24
of increasing the specific allowance associated with the loan. An allowance for impaired loans that have been modified in a 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, 2019, 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,
2019.
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, 2019 and 2018, all of which were modified due to financial stress of the
borrower. There were not any subsequent defaulted TDRs as of December 31, 2019 and 2018. There were no loans modified or
recorded as TDRs during the years ended December 31, 2019 and 2018.
The following tables summarize the Company’s TDRs by type as of December 31, 2019 and December 31, 2018:
December 31, 2019
Pre-TDR
Outstanding
Recorded
Investment
Post-TDR
Outstanding
Recorded
Investment
Number
of Loans
Commerci a l a nd a gri cul ture
Res i denti a l 1-4 fa mi l y
Tota l TDRs (1)
1
1
2
$
335 $
194
529 $
(dol l a rs i n thous a nds )
$
191
129
320
Number
of Loans
Commerci a l a nd a gri cul ture
Res i denti a l 1-4 fa mi l y
Fa rml a nd
Tota l TDRs (1)
1
1
1
3
December 31, 2018
Pre-TDR
Outstanding
Recorded
Investment
Post-TDR
Outstanding
Recorded
Investment
(dol l a rs i n thous a nds )
$
335 $
194
217
$
746 $
211
132
21
364
(1) The peri od end ba l a nces a re i ncl us i ve of a l l pa rti a l pa y-downs a nd
cha rge-offs s i nce the modi fi ca ti on da te.
25
The following tables present troubled debt restructurings by accrual or nonaccrual status as of December 31, 2019 and 2018:
Accrual
Status
December 31, 2019
Non-Accrual
Status
(i n thous a nds )
Total TDRs
191 $
129
320 $
- $
-
- $
191
129
320
Accrual
Status
December 31, 2018
Non-Accrual
Status
(i n thous a nds )
Total TDRs
211 $
132
-
343 $
- $
-
21
21 $
211
132
21
364
$
$
$
$
Commerci a l a nd a gri cul ture
Res i denti a l 1-4 fa mi l y
Tota l TDRs
Commerci a l a nd a gri cul ture
Res i denti a l 1-4 fa mi l y
Fa rml a nd
Tota l TDRs
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, 2019 and December 31, 2018:
Ba l a nce, December 31, 2018
Cha nge i n fa i r va l ue of i nves tment s ecuri ti es a va i l a bl e for s a l e
Recl a s s i fi ca ti on a djus tment of net l os s from s a l e of i nves tment s ecuri ti es
a va i l a bl e for s a l e i ncl uded i n i ncome, net of ta x
Unrecogni zed net a ctua ri a l l os s duri ng the peri od, net of ta x
Amorti za ti on of net a ctua ri a l ga i n a nd pri or s ervi ce cos t i ncl uded i n i ncome
Net current peri od other comprehens i ve i ncome (l os s )
Ba l a nce, December 31, 2019
Ba l a nce, December 31, 2017
Cha nge i n fa i r va l ue of i nves tment s ecuri ti es a va i l a bl e for s a l e
Recl a s s i fi ca ti on a djus tment of net l os s from s a l e of i nves tment s ecuri ti es
a va i l a bl e for s a l e i ncl uded i n i ncome, net of ta x
Unrecogni zed net a ctua ri a l ga i n during the peri od, net of ta x
Amorti za ti on of net a ctua ri a l ga i n a nd pri or s ervi ce cos t i ncl uded i n i ncome
Net current peri od other comprehens i ve (l os s ) i ncome
Ba l a nce, December 31, 2018
26
$
$
$
$
Investment
Securities
Defined
Benefit
Plans
(i n thous a nds )
(75) $
-
(899) $
2,498
(61)
-
-
2,437
1,538 $
-
(268)
8
(260)
(335) $
Investment
Securities
Defined
Benefit
Plans
(i n thous a nds )
(262) $
-
(83) $
(816)
-
-
-
(816)
(899) $
-
161
26
187
(75) $
Total
(974)
2,498
(61)
(268)
8
2,177
1,203
Total
(345)
(816)
-
161
26
(629)
(974)
The following table presents the components of other comprehensive income for the twelve months ended December 31, 2019 and
December 31, 2018:
Net unrea l i zed ga i ns on i nves tment s ecuri ti es :
Net unrea l i zed ga i ns a ri s i ng duri ng the peri od
Les s : recl a s s i fi ca ti on a djus tments for net ga i ns rea l i zed i n net i ncome
$
Net unrea l i zed ga i ns on i nves tment s ecuri ti es
Before Tax
Twelve Months Ended December 31, 2019
Net of Tax
Tax Effect
(i n thous a nds )
664 $
(41)
623
3,162 $
(102)
3,060
2,498
(61)
2,437
Defi ned benefi t pl a ns :
Net unrecogni zed a ctua ri a l l os s
Amorti za ti on of net a ctua ri a l ga i ns
Net pens i on pl a n l i a bi l i ty a djus tment
Other comprehens i ve i ncome
(339)
10
(329)
2,731 $
$
(71)
2
(69)
554 $
(268)
8
(260)
2,177
Before Tax
Twelve Months Ended December 31, 2018
Net of Tax
Tax Effect
(i n thous a nds )
Net unrea l i zed l os s es on i nves tment s ecuri ti es :
Net unrea l i zed l os s es a ri s i ng duri ng the peri od
Les s : recl a s s i fi ca ti on a djus tments for net ga i ns rea l i zed i n net i ncome
Net unrea l i zed l os s es on i nves tment s ecuri ti es
Defi ned benefi t pl a ns :
Net unrecogni zed a ctua ri a l l os s
Amorti za ti on of unrecogni zed pri or s ervi ce cos ts a nd net a ctua ri a l ga i ns
Net pens i on pl a n l i a bi l i ty a djus tment
Other comprehens i ve l os s
$
(1,033) $
-
(1,033)
204
33
237
(796) $
$
(217) $
-
(217)
43
7
50
(167) $
(816)
-
(816)
161
26
187
(629)
NOTE 6 – PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, 2019 and 2018 were as follows:
La nd a nd premi s es
Equi pment, furni ture a nd fi xtures
Cons tructi on i n progres s
Les s a ccumul a ted depreca ti on a nd a morti za ti on
Tota l premi s es a nd equi pment
December 31,
2019
2018
(i n thous a nds )
$
$
19,714 $
9,835
632
30,181
(15,382)
14,799 $
20,679
9,304
525
30,508
(15,132)
15,376
Depreciation expense was $1.1 million and $1.3 million for the years ending December 31, 2019 and December 31, 2019, respectively.
27
NOTE 7 – OPERATING LEASE RIGHT-OF-USE ASSET
Future minimum payments for operating leases with initial or remaining terms of one year or more as of December 31, 2019 are as
follows:
2020
2021
2022
2023
Therea fter
$
Tota l future mi ni mum l ea s e pa yments $
Amounts repres enti ng i nteres t
Tota l opera ti ng l ea s e l ia bi l i ti es $
December 31,
2019
(i n thous a nds )
637
260
156
159
177
1,389
(88)
1,301
At December 31, 2019 the weighted-average remaining lease term was 3.5 years and the weighted-average discount rate was 2.92%.
Operating lease cost, interest on lease liabilities and amortization of ROU assets was $799,000 for the year ending December 31, 2019.
NOTE 8 – OTHER REAL ESTATE OWNED
The following table presents the activity related to OREO for the years ended December 31, 2019 and December 31, 2018:
December 31,
Other rea l es ta te owned, begi nni ng of peri od $
Tra ns fers from outs ta ndi ng l oa ns
Proceeds from s a l es
Net (l os s ) ga i n on s a l es
Impa i rment cha rges
Tota l other rea l es ta te owned, end of peri od $
2018
2019
(i n thous a nds )
- $
-
-
-
-
- $
-
150
(150)
-
-
-
The company had no properties classified as OREO at December 31, 2019 and December 31, 2018.
28
NOTE 9 – DEPOSITS
Time deposits that meet or exceed the FDIC Insurance limit of $250,000 at December 31, 2019 and 2018 were $17.1 million and $12.4
million, respectively.
The composition of deposits at December 31, 2019 and December 31, 2018 was as follows:
December 31,
2019
2018
(i n thous a nds )
Interes t-bea ri ng dema nd ("NOW") $
Money ma rket depos i ts
Sa vi ngs depos i ts
Ti me depos i ts ("CDs ")
Tota l i nteres t-bea ri ng depos i ts
Non-i nteres t bea ri ng dema nd
Tota l depos i ts
$
228,579 $
149,510
104,871
70,668
553,628
245,010
798,638 $
191,530
162,238
101,408
86,188
541,364
242,185
783,549
Scheduled maturities of CDs were as follows for future years ending December 31 (in thousands):
2020
2021
2022
2023
2024
Therea fter
Tota l
Maturities
48,361
11,101
3,593
3,462
4,131
20
70,668
$
$
NOTE 10 – 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 outs ta ndi ng a t end of peri od
Avera ge ba l a nce duri ng the yea r
Avera ge i nteres t ra te duri ng the yea r
$
$
December 31,
2018
2019
(dol l a rs i n thous a nds )
- $
115 $
2.77%
-
415
2.05%
Federal Home Loan Bank advances at December 31, 2019 and 2018 represent longer term advances from the Federal Home Loan Bank
of Des Moines. Advances at December 31, 2019 bear interest from 2.23% to 2.54% with a weighted average rate of 2.42%. The
advances mature in various years as follows (in thousands):
Maturities
2,650
150
150
150
103
3,203
2020
2021
2022
2023
2024
$
Tota l
$
29
NOTE 11 – JUNIOR SUBORDINATED DEBENTURES
At December 31, 2019, 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, 2019 and December 31, 2018, respectively, for the common capital securities issued by
the issuer trusts.
As of December 31, 2019 and December 31, 2018, regular accrued interest on junior subordinated debentures totaled $78,000 and
$86,000, respectively, and is included in accrued expenses and other liabilities on the consolidated balance sheet.
The terms of the junior subordinated debentures as of December 31, 2019 and December 31, 2018 are:
Trust Name
Issue Date
Issued
Amount
(dol l a rs i n thous a nds )
Rate
Pa ci fi c Fi na nci a l Corpora ti on
December
Sta tutory Trus t I
Pa ci fi c Fi na nci a l Corpora ti on
Sta tutory Trus t II
2005
June
2006
$
5,000
LIBOR + 1.45% (1)
8,000
13,000
$
LIBOR + 1.60% (2)
Maturity
Date
Ma rch
2036
Jul y
2036
(1) Pa ci fi c Fi na nci a l Corpora ti on Sta tutory Trus t I s ecuri ti es i ncurred i nteres t a t the fi xed ra te of 6.39% unti l mi d Ma rch
2011, a t whi ch the ra te cha nged to a va ri a bl e ra te of 3-month LIBOR (1.92% a t December 13, 2019 a nd 2.78% a t
December 31, 2019) pl us 1.45%, a djus ted qua rterl y, through the fi na l ma turi ty da te i n Ma rch 2036.
(2) Pa ci fi c Fi na nci a l Corpora ti on Sta tutory Trus t II s ecuri ti es i ncur i nteres t a t a va ri a bl e ra te of 3-month LIBOR (1.92%
a t December 31, 2019 a nd 2.78% a t December 31, 2018) pl us 1.60%, a djus ted qua rterl y, through the fi na l ma turi ty
da te i n Jul y 2036.
NOTE 12 – INCOME TAXES
The Company recorded an income tax provision for the twelve months ended December 31, 2019 and 2018. 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, 2019, 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.
30
The Company applies the provisions of 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, 2019.
Income taxes for the years ended December 31, 2019 and December 31, 2018 was as follows:
Current
Deferred
Tota l i ncome ta x expens e
December 31,
2019
2018
(i n thous a nds )
2,907 $
316
3,223 $
2,095
283
2,378
$
$
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, 2019 and December
31, 2018 are:
Deferred Tax Assets
Al l owa nce for l oa n l os s es
Deferred compens a ti on
Suppl ementa l executi ve reti rement pl a n
Unrea l i zed l os s on s ecuri ties a va i l a bl e for s a l e
Compens a ti on expens e
Other
Tota l deferred ta x a s s ets
Deferred Tax Liabilities
Depreci a ti on
Loa n fees /cos ts
Unrea l i zed ga i n on s ecuri ti es a va i l a ble for s a l e
Prepa i d expens es
Other
Tota l deferred ta x li a bi l i ti es
Net deferred tax assets
$
$
$
$
December 31,
2019
2018
(i n thous a nds )
1,991 $
17
887
-
26
269
3,190 $
2,003
19
874
256
27
182
3,361
410 $
1,438
367
143
151
2,509
681 $
231
1,311
-
130
69
1,741
1,620
31
The following is a reconciliation between the statutory and effective federal income tax rate for the years ended December 31, 2019
and December 31, 2018:
December 31,
2019
2018
Amount
3,566
120
(275)
(121)
(67)
3,223
$
$
Percent
of Pre-tax
Income
Amount
(dol l a rs i n thous a nds )
21.0% $
2,879
0.7%
-1.6%
-0.7%
-0.4%
19.0% $
120
(380)
(90)
(151)
2,378
Percent
of Pre-tax
Income
21.0%
0.9%
-2.8%
-0.7%
-1.1%
17.3%
Income ta x a t s ta tutory ra te
Adjus tments res ul ti ng from:
Sta te i ncome ta xes , net of federa l benefi t
Ta x-exempt i ncome
Net ea rni ngs on l i fe i ns ura nce pol i ci es
Other
Tota l i ncome ta x expens e
NOTE 13 – 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 $1.2 million and $1.3 million in 2019 and 2018,
respectively.
401(k) Plans – The Bank has established a 401(k) 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 $658,000 and $537,000
for 2019 and 2018, 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 2019 and 2018.
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 $2.9 million
and $4.0 million at December 31, 2019 and 2018, respectively. In 2019 and 2018, the net benefit recorded from these plans, including
the cost of the related life insurance, was $164,000 and $174,000, 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 $76,000 and $87,000 at December 31, 2019 and 2018, 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 $87,000 and $96,000 for the years ended December 31, 2019 and 2018, 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 key 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 $7.8 million at December 31, 2019 and $6.3
million at 2018.
32
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, 2019 and 2018:
December 31,
2019
2018
Net peri odi c pens i on cos t:
Servi ce cos t
Interes t cos t
Amorti za ti on of pri or s ervi ce cos t
Amorti za ti on of net l os s
Net peri odi c pens i on cos t
Wei ghted a vera ge a s s umpti ons :
Di s count ra te
Ra te of compens a ti on i ncrea s e
$
$
43 $
(dol l a rs i n thous a nds )
46
102
-
26
174
112
-
8
163 $
4.01%
n/a
3.33%
n/a
The following table sets forth the change in benefit obligation at December 31, 2019 and December 31, 2018:
Cha nge i n benefi t obl i ga ti on:
Benefi t obl i ga ti on a t the begi nni ng of yea r $
Servi ce cos t
Interes t cos t
Benefi ts pa i d
Actua ri a l l os s (ga i n)
Benefi t obl i ga ti on a t end of yea r
$
December 31,
2019
2018
(i n thous a nds )
2,923 $
43
112
(234)
268
3,112 $
3,170
46
102
(234)
(161)
2,923
Amounts recognized in accumulated other comprehensive income at December 31, 2019 and December 31, 2018 was as follows:
Los s
Prior s ervi ce cos t
Tota l recogni zed i n AOCI
December 31,
2019
2018
(i n thous a nds )
$
$
335 $
-
335 $
75
-
75
The following table summarizes the projected and accumulated benefit obligations at December 31, 2019 and December 31, 2018:
Projected benefi t obl i ga ti on
Accumul ated benefi t obl i ga ti on
$
$
December 31,
2019
2018
(i n thous a nds )
3,112 $
3,112 $
2,923
2,923
Estimated future benefit payments as of December 31, 2019 were as follows (in thousands):
234
234
234
234
234
1,360
2,530
$
2020
2021
2022
2023
2024
2025-2029
Tota l $
33
NOTE 14 – 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, 2019 and December 31, 2018 is as follows:
December 31,
2019
2018
Commi tments to extend credi t $
$
Sta ndby l etters of credi t
(i n thous a nds )
$
$
186,397
1,090
186,445
1,131
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, 2019, the Bank had $3.2 million in outstanding borrowings against its $181.0 million in established borrowing capacity
with the FHLB, as compared to $8.4 million outstanding against a borrowing capacity of $178.2 million at December 31, 2018. 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 $53.0 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.
NOTE 15 – 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 $12.0 million.
34
NOTE 16 – 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.
Grant period ended
December 31, 2019
December 31, 2018
Expected
Life
6.5 yea rs
6.5 yea rs
Risk Free
Interest
Rate
1.81%
2.80%
Expected
Stock
Price
Volatility
12.44%
23.70%
Dividend
Yield
3.10%
2.19%
Weighted
Average
Fair Value
of Options
Granted
$
0.95
$
2.50
The following tables summarize the stock option activity for the years ended December 31, 2019 and 2018:
Outs ta ndi ng a t December 31, 2017
Gra nted
Exerci s ed
Forfei ted or ca ncel ed
Expi red
Outs ta ndi ng a t December 31, 2018
Gra nted
Exerci s ed
Forfei ted or ca ncel ed
Expi red
Outs ta ndi ng a t December 31, 2019
Shares
268,700
17,500
(30,147)
(58,953)
(1,650)
195,450
140,000
(101,500)
(13,000)
-
220,950
Ves ted a nd exerci s a bl e a t December 31, 2019
57,600
Weighted
Average
Remaining
Contractual
Term
(in Years)
Weighted
Average
Exercise
Price
$
$
$
$
6.23
11.42
6.56
6.42
11.27
6.60
12.58
5.87
11.10
-
10.49
5.90
7.60
4.04
35
The following table summarizes nonvested stock option activity for the years ended December 31, 2019 and 2018:
Nonves ted Outs ta ndi ng a t December 31, 2017
Gra nted
Ves ted
Forfei ted
Nonves ted Outs ta ndi ng a t December 31, 2018
Gra nted
Ves ted
Forfei ted
Nonves ted Outs ta ndi ng a t December 31, 2019
Weighted
Average
Grant Date
Fair Value
1.05
2.41
0.78
1.54
1.85
0.95
1.32
2.39
1.08
Shares
70,400
17,500
(36,700)
(2,500)
48,700
140,000
(13,350)
(12,000)
163,350
$
$
$
Information related to the stock option plan during each year follows:
Intri ns i c va l ue of opti ons exerci s ed
Ca s h recei ved from opti on exerci s es
$
$
544 $
194 $
157
13
2018
2019
(i n thous a nds )
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, 2019
and 2018:
Compens a ti on Expens e
Ta x Effect
Compens a ti on Expens e, net
Twelve Months Ended
December 31,
2019
2018
(i n thous a nds )
$
$
13 $
3
10 $
20
4
16
As of December 31, 2019, there was $167,000 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.
36
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
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, 2019 and 2018:
Weighted
Average
Grant
Date Fair
Value
$
10.98
$
11.28
Outs ta ndi ng a t December 31, 2017
Gra nted
Ves ted
Forfei ted
Outs ta ndi ng a t December 31, 2018
Gra nted
Ves ted
Forfei ted
Outs ta ndi ng a t December 31, 2019
Shares
73,567
13,141
(46,681)
(16,372)
23,655
7,100
(8,721)
(2,500)
19,534
The following table summarizes RSU compensation expense during the twelve months ended December 31, 2019 and 2018:
Twelve Months Ended
2019
2018
(in thous a nds )
Compens a ti on Expens e
Ta x Effect
Compens a ti on Expens e, net
$
$
77 $
16
61 $
99
21
78
As of December 31, 2019, there was $103,000 of total unrecognized compensation cost related to nonvested RSUs. The cost is
expected to be recognized over a weighted-average period of 1.5 years.
NOTE 17 – 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 were phased-in from the
effective date through 2019, including, among others, a new capital conservation buffer requirement, which requires financial
37
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 increased by 0.625% on each subsequent January 1, until it reached 2.5% on
January 1, 2019.
As of December 31, 2019 and 2018, 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, 2019 and 2018 are presented in the table below.
Actual
Minimum
Requirements
Well-Capitalized
Requirements
Amount
Ratio
Amount
Ratio
Amount
Ratio
(dol l a rs i n thous a nds )
As of December 31, 2019
Compa ny
Common equi ty Ti er 1 ca pi ta l to
ri s k-wei ghted a s s ets
Ti er 1 l evera ge ca pi ta l to a vera ge a s s ets
Ti er 1 ca pi ta l to ri s k-wei ghted a s s ets
Tota l ca pi ta l to ri s k-wei ghted a s s ets
$
Ba nk
Common equi ty Ti er 1 ca pi ta l to
ri s k-wei ghted a s s ets
Ti er 1 l evera ge ca pi ta l to a vera ge a s s ets
Ti er 1 ca pi ta l to ri s k-wei ghted a s s ets
Tota l ca pi ta l to ri s k-wei ghted a s s ets
As of December 31, 2018
Compa ny
Common equi ty Ti er 1 ca pi ta l to
ri s k-wei ghted a s s ets
Ti er 1 l evera ge ca pi ta l to a vera ge a s s ets
Ti er 1 ca pi ta l to ri s k-wei ghted a s s ets
Tota l ca pi ta l to ri s k-wei ghted a s s ets
$
Ba nk
Common equi ty Ti er 1 ca pi ta l to
ri s k-wei ghted a s s ets
Ti er 1 l evera ge ca pi ta l to a vera ge a s s ets
Ti er 1 ca pi ta l to ri s k-wei ghted a s s ets
Tota l ca pi ta l to ri s k-wei ghted a s s ets
90,621
103,621
103,621
112,614
102,606
102,606
102,606
111,782
79,968
92,968
92,968
102,016
92,224
92,224
92,224
101,456
11.8% $
11.2%
13.5%
14.7%
13.4%
11.1%
13.4%
14.5%
10.5% $
10.2%
12.2%
13.4%
12.1%
10.1%
12.1%
13.3%
34,559
37,008
46,054
61,287
32,160
36,975
45,943
61,673
34,272
36,458
45,722
60,905
32,012
36,524
45,731
61,026
4.5%
4.0%
6.0%
8.0%
N/A
N/A
N/A
N/A
4.2% $
4.0%
6.0%
8.0%
49,772
46,219
61,257
77,091
4.5%
4.0%
6.0%
8.0%
N/A
N/A
N/A
N/A
4.2% $
4.0%
6.0%
8.0%
49,542
45,655
60,975
76,283
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%
38
NOTE 18 – FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
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 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, 2019 or December 31, 2018.
39
The following table presents the balances of assets measured at fair value on a recurring basis at December 31, 2019 and December
31, 2018.
At December 31, 2019
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Description
Fair Value
Ava i l a bl e-for-s a l e s ecuri ti es :
Col l a tera l i zed mortga ge obl i ga ti ons
Mortga ge-ba cked s ecuri ti es
Muni ci pa l s ecuri ti es
Corpora te debt s ecuri ti es
Tota l a s s ets mea s ured a t fa i r va l ue
(i n thous a nds )
45,141 $
- $
45,141 $
19,130
35,884
2,004
102,159 $
-
-
-
- $
19,130
35,164
2,004
101,439 $
$
$
-
-
720
-
720
At December 31, 2018
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Description
Fair Value
Ava i l a bl e-for-s a l e s ecuri ti es :
Col l a tera l i zed mortga ge obl i ga ti ons
$
40,424 $
Mortga ge-ba cked s ecuri ti es
U.S. Government a gency s ecuri ti es
Muni ci pa l s ecuri ti es
Corpora te debt s ecuri ti es
23,005
3,549
53,446
959
(i n thous a nds )
- $
-
3,549
-
959
40,424 $
23,005
-
52,706
-
Tota l a s s ets mea s ured a t fa i r va l ue
$
121,383 $
4,508 $
116,135 $
-
-
-
740
-
740
As of December 31, 2019 and December 31, 2018, 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.
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, 2019 and December 31, 2018.
40
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, 2019 and 2018, respectively.
Twelve Months Ended
December 31,
2019
2018
(i n thous a nds )
Ba l a nce begi nni ng of peri od
Tra ns fers i n to l evel 3
Cha nge i n FV (i ncl uded i n other comprehens ive income)
Ba l a nce end of peri od
$
$
740 $
-
(20)
720 $
1,741
-
(1,001)
740
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, loans held for sale 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. 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,
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.
41
The following tables present the Company’s assets that were held at the end of December 31, 2019 and December 31, 2018 that were
measured at fair value on a nonrecurring basis:
Description
Fair Value
At December 31, 2019
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(i n thous a nds )
Loa ns mea s ured for i mpa i rment, net of s peci fi c res erves
Tota l a s s ets mea s ured on a nonrecurri ng ba s i s
$
$
191 $
191 $
-
$
- $
-
$
- $
191
191
Description
Fair Value
Loa ns mea s ured for i mpa i rment, net of s peci fi c res erves
Tota l a s s ets mea s ured on a nonrecurri ng ba s i s
$
211 $
211 $
At December 31, 2018
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(i n thous a nds )
- $
- $
- $
- $
211
211
The following table presents quantitative information about Level 3 inputs for financial instruments measured at fair value on a
nonrecurring basis at December 31, 2019 and December 31, 2018 (dollars in thousands):
Description
Fair
Value
Valuation Technique
Significant Unobservable Inputs
Range
(Weighted
Average)
At December 31, 2019
Loa ns mea s ured for i mpa i rment, net of s peci fi c res erves $
191
Income a pproa ch
Proba bil i ty of defa ult, dis count ra te
4.0%, 4.75%
Description
Fair
Value
Valuation Technique
Significant Unobservable Inputs
Range
(Weighted
Average)
At December 31, 2018
Loa ns mea s ured for i mpa i rment, net of s peci fi c res erves $
211
Income a pproa ch
Proba bil i ty of defa ult, dis count ra te
4.0%, 4.75%
42
The estimated fair value of the Company’s financial instruments at December 31, 2019 and December 31, 2018 was as follows:
Fi na nci a l a s s ets :
As of December 31, 2019
Fair Value Hierarchy
Level
Carrying
Value
(i n thous a nds )
Estimated
Fair Value
Ca s h a nd ca s h equi va l ents
Other i nteres t ea rni ng depos i ts
Inves tment s ecuri ti es a va i l a bl e-for-s a l e
Inves tment s ecuri ti es hel d-to-ma turi ty
Loa ns hel d-for-s a l e
Loa ns recei va bl e, net
Accrued i nteres t recei va bl e
Level 1
Level 1
See previ ous ta bl e
See previ ous ta bl e
Level 2
Level 3
Level 1
Fi na nci a l l i a bi l i ti es :
Depos i ts
Long-term borrowi ngs
Juni or s ubordi na ted debentures
Accrued i nteres t pa ya bl e
Level 2
Level 2
Level 3
Level 1
$
$
77,932 $
3,250
102,159
1,056
10,108
675,446
3,074
798,638 $
3,203
13,403
171
77,932
3,250
102,159
1,056
10,108
679,025
3,074
798,561
3,206
9,929
171
Fair Value
Hierarchy Level
As of December 31, 2018
Carrying
Value
(i n thous a nds )
Estimated
Fair Value
Fi na nci a l a s s ets :
Ca s h a nd ca s h equi va l ents
Other i nteres t ea rni ng depos i ts
Inves tment s ecuri ti es a va i l a bl e-for-s a l e
Inves tment s ecuri ti es hel d-to-ma turi ty
Loa ns hel d-for-s a l e
Loa ns recei va bl e, net
Accrued i nteres t recei va bl e
Level 1
Level 1
See previ ous ta bl e
See previ ous ta bl e
Level 2
Level 3
Level 1
Fi na nci a l l i a bi l i ti es :
Depos i ts
Long-term borrowi ngs
Juni or s ubordi na ted debentures
Accrued i nteres t pa ya bl e
Level 2
Level 2
Level 3
Level 1
$
$
22,188 $
3,250
121,383
1,227
6,204
694,054
3,321
783,549 $
8,353
13,403
162
22,188
3,250
121,383
1,227
6,204
694,335
3,321
787,111
8,304
8,825
162
43
NOTE 19 – 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 and restricted stock awards computed under the treasury stock method as if converted to common stock.
The following table illustrates the computation of basic and diluted earnings per share:
For the Year Ended
December 31,
2019
2018
Ba s i c:
Net i ncome (numera tor)
Wei ghted a vera ge s ha res outs ta ndi ng (denomi na tor)
Ba s i c ea rni ngs per s ha re
Di l uted:
Net i ncome (numera tor)
Wei ghted a vera ge s ha res outs ta ndi ng
Effect of di l uti ve s tock opti ons
Wei ghted a vera ge s ha res outs ta ndi ng a s s umi ng di l uti on (denomi na tor)
Di l uted ea rni ngs per s ha re
$
$
$
$
Sha res s ubject to outs ta ndi ng opti ons
(dol l a rs i n thous a nds ,
except per s ha re a mounts )
11,330
10,551,174
1.07
10,596,776
1.30
13,758 $
$
13,758 $
10,596,776
55,021
10,651,797
1.29
$
11,330
10,551,174
122,219
10,673,393
1.06
For the Year Ended
December 31,
2019
-
2018
10,000
As of December 31, 2019 and 2018, 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.
44
NOTE 20 – CONDENSED FINANCIAL INFORMATION – PARENT COMPANY ONLY
Pacific Financial Corporation – Parent Company Only
Consolidated Statements of Financial Condition
(in thousands)
ASSETS
Ca s h a nd ca s h equi va l ents :
Inves tment i n ba nk
Other a s s ets
Tota l a s s ets
LIABILITIES AND SHAREHOLDERS' EQUITY
Juni or s ubordi na ted debentures
Divi dends pa ya bl e
Other l i a bi l i ti es
Tota l l i a bi l i ti es
$
$
$
Tota l s ha rehol ders ' equi ty
Tota l l i a bi l i ti es a nd s ha rehol ders ' equi ty
$
December 31,
2019
December 31,
2018
737
117,278
758
118,773
13,403
-
77
13,480
105,293
118,773
$
$
$
$
3,562
104,739
842
109,143
13,403
3,171
86
16,660
92,483
109,143
Pacific Financial Corporation – Parent Company Only
Consolidated Statements of Income
(in thousands)
INTEREST EXPENSE
Juni or s ubordina ted debentures
Tota l interes t expens e
NONINTEREST INCOME
Di vi dends from s ubs i di a ry ba nk
Equi ty i n undi s tributed income from s ubs i di a ry ba nk
Other i ncome
Tota l noni nteres t income
NONINTEREST EXPENSE
Other expens e
Tota l noni nteres t income
Income before i ncome ta xes
Income ta x benefi t
Net i ncome
Comprehens i ve i ncome
Twelve Months Ended
December 31,
2019
2018
$
$
$
540 $
540
4,000
10,362
16
14,378
379
379
13,459
299
13,758 $
15,935 $
505
505
4,050
7,878
14
11,942
403
403
11,034
296
11,330
10,701
45
Pacific Financial Corporation – Parent Company Only
Consolidated Statements of Cash Flows
(Dollars in thousands)
Twelve Months Ended
December 31,
2019
2018
$
13,758
$
11,330
(10,362)
(24)
108
90
3,570
194
(131)
(6,458)
(6,395)
(2,825)
3,562
737
$
(7,878)
(227)
23
119
3,367
13
64
(2,622)
(2,545)
822
2,740
3,562
Cash flows from operating activities:
Net Income
Adjus tments to reconci l e net i ncome to cas h a nd ca s h
equi va l ents from opera ti ng a cti vi ti es
Equi ty i n undi s tri buted i ncome of s ubs i di a ry
Net cha nge i n other a s s ets
Net cha nge i n other l i a bi l i ti es
Stock compens a ti on expens e
Net ca s h provi ded by operati ng acti vi ti es
Cash flows from financing activities:
Net ca s h from s tock opti on exerci s es
Ta xes pa i d rel a ted to net s ha re s ettl ement for equi ty a wa rds
Ca s h di vi dends pai d
Net ca s h us ed i n fi na nci ng a cti vi ti es
Net i ncrea s e i n ca s h a nd ca s h equi val ents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
46
NOTE 21 – SELECTED DATA
Results of operations on a quarterly basis were as follows (unaudited):
Year Ended December 31, 2019
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Interes t a nd di vi dend i ncome
Interes t expens e
Net interest income
Provi s i on for l oa n l os s es
Noni nteres t i ncome
Noni nteres t expens e
Income before income taxes
Income tax expens e
Net income
Earnings per common share
Bas i c
Di l uted
Interes t a nd di vi dend i ncome
Interes t expens e
Net interest income
Provi s i on for l oa n l os s es
Noni nteres t i ncome
Noni nteres t expens e
Income before income taxes
Income tax expens e
Net income
Earnings per common share
Bas i c
Di l uted
$
$
$
$
$
$
$
$
(dol l a rs i n thous a nds , except per s ha re amounts )
10,360 $
742
9,618
-
2,398
8,412
3,604
658
2,946 $
10,460 $
735
9,725
-
3,443
8,692
4,476
870
3,606 $
10,563 $
721
9,842
-
4,167
9,390
4,619
859
3,760 $
10,187
730
9,457
-
3,887
9,062
4,282
836
3,446
0.28 $
0.28 $
0.35 $
0.34 $
0.35 $
0.35 $
0.32
0.32
Year Ended December 31, 2018
First
Quarter
Third
Quarter
Second
Quarter
Fourth
Quarter
(dol l a rs i n thous a nds , except per s ha re amounts )
9,463 $
580
8,883
-
2,325
8,557
2,651
365
2,286 $
10,337 $
686
9,651
-
2,648
8,392
3,907
724
3,183 $
9,741 $
624
9,117
-
2,649
8,580
3,186
570
2,616 $
10,519
700
9,819
-
2,409
8,264
3,964
719
3,245
0.21
0.21
$
$
0.25
0.25
$
$
0.30
0.30
$
$
0.31
0.30
47
GENERAL CORPORATE AND SHAREHOLDER INFORMATION
Administrative Headquarters
1216 Skyview Drive
Aberdeen, WA 98520
(360) 533-8870
Independent Accountants
CliftonLarsonAllen LLP
Minneapolis, Minnesota
Transfer Agent and Registrar
Computershare
P.O. BOX 30170
College Station, TX 77842-3170.
Telephone: (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
Consolidation of accounts
Duplicate mailings
Lost stock certificates
Transfer of stock to another person
Additional administrative services
As a Pacific Financial Corporation shareholder, you are invited to take advantage of our convenient shareholder services or request
more
Investor Center at
www.computershare.com/investor.
information about Pacific Financial Corporation.
Access your account directly through
Annual Meeting
The Annual Meeting of Stockholders (the “Meeting”) will be a virtual meeting, conducted via live webcast only, to allow all of our
Stockholders the opportunity to participate. The live webcast will be on April 29th, 2020, at 4:00 p.m. (PST). No physical meeting will
be held. Stockholders of record of Common Stock at the close of business on March 10, 2020 will be able to attend the Meeting,
vote and submit questions during the Meeting by logging on to www.meetingcenter.io/229365441 at the Meeting date and time
using their 15-digit Control Number provided with the Notice of the Meeting. The password for this meeting is PFLC2020.
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 Lisa Dutton, 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.
48
Board of Directors
Randy W. Rognlin, Chairman
Co-Owner
Rognlins, Inc
Doug Biddle
Retired CFO
Pacific Financial Corporation and Bank of the Pacific
Douglas M. Schermer, Vice Chairman
Owner and President
Schermer Construction Inc. & Wishkah Rock Products
Dwayne Carter
Retired President & General Manager
Brooks Manufacturing Co.
Denise Portmann
President & CEO
Pacific Financial Corporation and Bank of the Pacific
Edwin W. Ketel
Retired Owner
Oceanside Animal Clinic
Randy J. Rust
Private Investor
Daniel Tupper
Vice President & General Manager
Crown Distributing Co. of Aberdeen, Inc.
Susan C. Freese
Pharmacist
Kristi Gundersen
Partner & Chief Financial Officer
Knutzen Farms, LP
John Van Dijk
Retired President & COO
Pacific Financial Corporation and Bank of the Pacific
Officers
Denise J. Portmann
President and Chief Executive Officer of the Company and the Bank
Carla Tucker
Executive Vice President and Chief Financial Officer of the Company and the Bank
Daniel E. Kuenzi
Vice President of the Company and Executive Vice President and Chief Credit Officer of the Bank
Thomas Baker
Vice President of the Company and Executive Vice President and Chief Operating Officer of the Bank
Walker Evans
Vice President of the Company and Executive Vice President and Chief Lending Officer of the Bank
Lisa Dutton
Corporate Secretary
Subsidiaries
Bank of the Pacific
1216 Skyview Drive
Aberdeen, WA 98520
(360) 533-8870
www.bankofthepacific.com
49
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