Dear Fellow Shareholders:
We began 2022 in a historically low interest rate environment. As inflation
continued to heat up, the Federal Reserve begin increasing interest rates in
March 2022 and then in an effort to restore price stability, continued to raise
rates at the fastest pace in over 40 years. With these increases in the federal funds rate, the Company’s net interest
income improved substantially in the second half of the year, benefiting from an asset-sensitive balance sheet, an
exceptional core deposit franchise and a strong liquidity position. Net income for 2022 was $10.9 million, or
$1.04 per diluted share, resulting in a return on average assets (ROAA) of 0.82% and return on average equity
(ROAE) of 10.24%.
Commercial loan production in the third and fourth quarter ramped up with total originations of over $150 million
in new loan commitments, the highest since 2016 and loan payoffs slowed to a more normalized pace, both
contributing to a strong finish for the year. As a result of the increase in loan production and an improved net
interest margin, the Company recognized record quarterly profits in the fourth quarter with net income of $4.7
million, ROAA of 1.41%, ROAE of 18.70%, and an Efficiency Ratio of 59.67%, all of which exceeded our
strategic goals. This strong performance allowed us to return $5.4 million in capital to our shareholders in 2022
through a quarterly cash dividend. This represented a dividend yield of 4.34% for our shareholders.
During 2022, we also celebrated 50 years of serving our customers and shareholders. Thank you to our customers
for continuing to do business with us and valuing our relationship. Thank you to our prospects for meeting with
us and considering our solutions. Thank you to our shareholders for your support and loyalty. Thank you to our
Board of Directors for your direction and oversight, Ed Ketel in particular as he retires after 20 years of service.
And thank you to our dedicated and amazing employees for living out our mission and holding steadfast to our
values, enabling us to grow our Company and reinvest in our local communities.
Looking ahead, we are well positioned for the current rate environment and expect to continue the momentum of
strong financial performance into 2023. Although we do anticipate some headwinds as deposit costs increase,
mortgage banking activity slows, and inflation pressures persist, we have prudently managed our balance sheet,
asset quality, and capital levels to help withstand these challenges. We are proud of our proven track record and,
as a vibrant Pacific Northwest Bank, we plan to continue to build an outstanding franchise.
Please join us for our annual Shareholders’ meeting on Wednesday, April 26, 2023, at 4:00 pm. You may access
the meeting virtually via the internet at www.virtualshareholdermeeting.com/PFLC2023. As a shareholder, you
will be required to enter your control number found on your proxy card.
The Board and management team are excited about the opportunities we see in our markets and aim to generate
fiscally responsible growth capable of delivering long-term value for our shareholders.
Sincerely,
Denise Portmann
President and Chief Executive Officer
Pacific Financial Corporation
$
$
$
$
$
$
$
$
$
Operations Data
Interest and dividend income
Interest expense
Net interest income
Provision (benefit) for loan losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Net income per share:
Basic
Diluted
Dividends declared per share(1)
Dividends declared
Dividend payout ratio
Performance Ratios
Return on average equity
Return on average assets
Net interest margin
Efficiency ratio
Balance Sheet Data
Total assets
Loans, net
Total deposits
Total borrowings
Shareholders' equity
Equity to assets ratio
Book value per share
Tangible book value per share
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
$
$
$
$
$
$
2022
42,152
1,206
40,946
-
7,227
34,974
13,199
2,311
10,888
1.05
1.04
0.52
5,407
50%
10.24%
0.82%
3.29%
72.60%
$
$
2019
For the Year Ended December 31,
2021
2020
(dollars in thousands, except per share data)
(unaudited)
39,574
2,380
37,194
3,500
20,146
39,594
14,246
2,862
11,384
37,159
1,254
35,905
(3,650)
16,729
40,702
15,582
2,885
12,697
41,570
2,928
38,642
-
13,895
35,556
16,981
3,223
13,758
$
$
$
$
$
$
1.22
1.22
0.52
5,418
43%
$
$
$
$
1.08
1.07
0.38
4,023
35%
10.85%
1.00%
3.00%
77.33%
10.33%
1.07%
3.73%
69.05%
1.30
1.29
0.31
3,288
24%
13.70%
1.50%
4.58%
67.68%
$
$
$
$
$
$
2018
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%
12.63%
1.26%
4.52%
71.14%
$
1,306,203
631,722
1,180,362
13,403
103,162
$
$
1,319,966
620,036
1,178,940
13,806
117,642
1,167,293
717,330
1,028,424
13,956
114,186
$
929,415
675,445
798,638
16,606
105,293
907,929
694,054
783,549
21,756
92,483
7.90%
9.91
8.62
$
$
8.91%
11.32
10.03
$
$
9.78%
10.94
9.65
$
$
11.33%
9.90
8.64
$
$
10.19%
8.75
7.47
1.29%
1.32%
1.65%
1.31%
1.29%
947.76%
0.14%
0.07%
679.52%
0.19%
0.11%
504.52%
0.33%
0.20%
873.96%
0.15%
0.11%
838.65%
0.15%
0.12%
(1) 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.
CliftonLarsonAllen LLP
CLAconnect.com
INDEPENDENT AUDITORS' REPORT
Board of Directors
Pacific Financial Corporation
Aberdeen, Washington
Report on the Audit of the Consolidated Financial Statements
Opinion
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 statements of
financial condition as of December 31, 2022 and 2021, and the related consolidated statements of
income, comprehensive income, shareholders’ equity, and cash flows for the years then ended, and the
related notes to the consolidated financial statements.
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,
2022 and 2021, and the results of their operations and their cash flows for the years then ended in
accordance with accounting principles generally accepted in the United States of America.
We have also audited in accordance with auditing standards generally accepted in the United States of
America, Pacific Financial Corporation and its subsidiary’s internal control over financial reporting,
including controls over the preparation of regulatory financial statements in accordance with the Federal
Financial Institutions Examination Council Instructions for Consolidated Reports of Condition and
Income (call report instructions), as of December 31, 2022, based on criteria established in Internal
Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 16, 2023, expressed an unqualified
opinion.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States
of America (GAAS). Our responsibilities under those standards are further described in the Auditors’
Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are
required to be independent of Pacific Financial Corporation and its subsidiary and to meet our other
ethical responsibilities in accordance with the relevant ethical requirements relating to our audits. We
believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Responsibilities of Management for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial
statements in accordance with accounting principles generally accepted in the United States of
America, and for 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.
CLA (CliftonLarsonAllen LLP) is an independent network member of CLA Global. See CLAglobal.com/disclaimer.
Board of Directors
Pacific Financial Corporation and its ubsidiary
Page 2
In preparing the consolidated financial statements, management is required to evaluate whether there
are conditions or events, considered in the aggregate, that raise substantial doubt about Pacific
Financial Corporation and its subsidiary's ability to continue as a going concern for one year after the
date the consolidated financial statements are available to be issued.
Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements
as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’
report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute
assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will
always detect a material misstatement when it exists. The risk of not detecting a material misstatement
resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal control. Misstatements are
considered material if there is a substantial likelihood that, individually or in the aggregate, they would
influence the judgment made by a reasonable user based on the consolidated financial statements.
In performing an audit in accordance with GAAS, we:
Exercise professional judgment and maintain professional skepticism throughout the audit.
Identify and assess the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error, and design and perform audit procedures responsive to those
risks. Such procedures include examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements.
Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances.
Evaluate the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluate the overall presentation of the
consolidated financial statements.
Conclude whether, in our judgment, there are conditions or events, considered in the aggregate,
that raise substantial doubt about Pacific Financial Corporation and its subsidiary’s ability to
continue as a going concern for a reasonable period of time.
We are required to communicate with those charged with governance regarding, among other matters,
the planned scope and timing of the audit, significant audit findings, and certain internal control related
matters that we identified during the audit.
Other Information Included in the Annual Report
Management is responsible for the other information included in the annual report. The other
information comprises the letter to the shareholders, financial information, and nonfinancial information
but does not include the consolidated financial statements and our auditors’ report thereon. Our opinion
on the consolidated financial statements does not cover the other information, and we do not express
an opinion or any form of assurance thereon.
Board of Directors
Pacific Financial Corporation and its ubsidiary
Page 3
In connection with our audit of the consolidated financial statements, our responsibility is to read the
other information and consider whether a material inconsistency exists between the other information
and the consolidated financial statements, or the other information otherwise appears to be materially
misstated. If, based on the work performed, we conclude that an uncorrected material misstatement of
the other information exists, we are required to describe it in our report.
CliftonLarsonAllen LLP
Bellevue, Washington
March 16, 2023
Pacific Financial Corporation
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
ASSETS
Ca sh on ha nd a nd i n ba nks
Interest bea ri ng depos i ts
Federa l Funds Sol d
Ca s h and ca sh equi va l ents
Other i nteres t ea rni ng depos i ts
Inves tment securi ti es a va i l a bl e for sa l e, a t fai r va l ue
Inves tment securi ti es hel d to maturi ty (fa i r val ue of $56,513 a nd $788, respecti vel y)
Loans hel d for sa l e
Loans , net of deferred fees
Al lowa nce for l oa n l oss es
Total l oa ns , net
Nonmarketa bl e equi ty securi ti es
Premi s es a nd equi pment, net
Opera ti ng l eas e ri ght-of-use a s s ets
Ca sh s urrender va l ue of l i fe i ns ura nce
Goodwi l l
Other i nta ngi bl e a ss ets , net
Accrued i nteres t recei va bl e
Prepai d expens es and other a s sets
Total a s s ets
LIABILITIES AND SHAREHOLDERS' EQUITY
Depos i ts
Federa l Home Loan Ba nk a dva nces
Juni or subordi na ted debentures
Opera ti ng l eas e l i a bi l i ti es
Accrued expens es and other l i a bi l i ti es
Total l i a bi l i ti es
Shareholders' Equity:
Preferred Stock, no pa r va l ue; 5,000,000 s ha res a uthori zed; no s ha res i s s ued
or outs tandi ng a t December 31, 2022 a nd December 31, 2021
Common Stock, $1 pa r va l ue; 25,000,000 s ha res a uthori zed, 10,414,276 a nd 10,388,267
s ha res i s sued a nd outs ta ndi ng a t December 31, 2022 a nd 2021, res pecti vel y
Addi ti ona l pa i d-i n-capi ta l
Reta i ned ea rni ngs
Accumul ated other comprehensi ve i ncome (l os s), net
Tota l sha rehol ders ' equi ty
Tota l l i a bi l i ti es a nd s ha rehol ders' equi ty
$
$
$
December 31,
2022
December 31,
2021
$
18,673 $
295,563
-
314,236
4,250
226,784
59,513
-
639,958
(8,236)
631,722
2,583
12,871
1,077
26,776
12,168
1,268
4,044
8,911
1,306,203 $
1,180,362 $
-
13,403
1,149
8,127
1,203,041
15,859
319,626
50,881
386,366
3,250
232,947
788
6,104
628,333
(8,297)
620,036
2,416
13,004
1,462
26,072
12,168
1,276
3,357
10,720
1,319,966
1,178,940
403
13,403
1,482
8,096
1,202,324
-
-
10,414
42,065
69,844
(19,161)
103,162
1,306,203 $
10,388
41,884
64,363
1,007
117,642
1,319,966
See accompanying Notes to Consolidated Financial Statements.
1
Pacific Financial Corporation
Consolidated Statements of Income
(Dollars in thousands, except per share data)
INTEREST AND DIVIDEND INCOME
Interes t and fees on l oa ns
Ta xa bl e i nterest 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 and di vi dends on other i nteres t ea rni ng a s sets
Tota l i nteres t a nd di vi dend i ncome
INTEREST EXPENSE
Deposi ts
Juni or s ubordi na ted debentures
Federa l Home Loa n Ba nk a dvances
Tota l i nteres t expens e
Net i nterest i ncome
Benefi t for l oa n l os ses
Net i nterest i ncome a fter l oan l os s benefi t
NONINTEREST INCOME
Servi ce cha rges on depos i ts
Ga i n on sa l e of l oa ns , net
Ea rni ngs on ba nk owned l i fe i nsura nce
Other i ncome
Tota l noni nteres t i ncome
NONINTEREST EXPENSE
Compens a ti on and empl oyee benefi ts
Occupa ncy
Equi pment
Da ta process i ng
Profes si onal s ervi ces
Ma rketi ng
Sta te a nd l oca l ta xes
Federa l depos i t i ns ura nce premi um
Other expense
Tota l noni nteres t expens e
Income before i ncome ta xes
Income ta x expense
Net i ncome
Bas i c ea rni ngs per common sha re
Di l uted ea rni ngs per common sha re
Twelve Months Ended
December 31,
2022
2021
$
$
$
$
30,079 $
4,418
1,048
6,607
42,152
742
460
4
1,206
40,946
-
40,946
1,621
1,406
682
3,518
7,227
22,401
2,023
1,184
3,506
709
400
693
357
3,701
34,974
13,199
2,311
10,888 $
1.05
1.04
$
$
33,563
2,061
1,002
533
37,159
1,011
232
11
1,254
35,905
(3,650)
39,555
1,446
9,448
1,384
4,451
16,729
27,114
1,978
1,244
3,288
943
300
858
422
4,555
40,702
15,582
2,885
12,697
1.22
1.22
See accompanying Notes to Consolidated Financial Statements.
2
Pacific Financial Corporation
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Twelve Months Ended
December 31,
2022
2021
$
10,888
$
12,697
(20,707)
539
(20,168)
(3,430)
195
(3,235)
9,462
Net Income
Other comprehensi ve i ncome (l oss ), net of ta x:
Securi ti es a va i l a bl e for s a l e, net of tax
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
Comprehens i ve i ncome (l os s )
$
(9,280) $
See accompanying Notes to Consolidated Financial Statements.
3
Pacific Financial Corporation
Consolidated Statements of Shareholders’ Equity
(Dollars in thousands, except share amounts)
Balance at December 31, 2020
Net i ncome
Other compre hens i ve l os s, ne t of ta x
Stock option exerci s es /s tock uni t ves ted
Stock ba se d compens a ti on expense
Stock repurcha s e a nd ca ncel a ti on of s ha res
Ca s h divi dends decl a red ($0.52 per s ha re )
Balance at December 31, 2021
Net i ncome
Other compre hens i ve l os s, ne t of ta x
Stock option exerci s es /s tock uni t ves ted
Stock ba se d compens a ti on expense
Ca s h divi dends decl a red ($0.52 per s ha re )
Balance at December 31, 2022
Number of
Common
Shares
10,434,533 $
-
-
11,326
-
(57,592)
-
10,388,267 $
-
-
26,009
-
-
10,414,276 $
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
10,435 $
42,425 $
-
-
11
-
(58)
-
-
-
(8)
126
(659)
-
10,388 $
41,884 $
-
-
26
-
-
-
-
31
150
-
10,414 $
42,065 $
57,084 $
12,697
-
-
-
-
(5,418)
64,363 $
10,888
-
-
-
(5,407)
69,844 $
Accumulated
Other
Comprehensive
Income (Loss) ,
net
Total
Shareholders'
Equity
4,242 $
-
(3,235)
-
-
-
-
1,007 $
-
(20,168)
-
-
-
(19,161) $
114,186
12,697
(3,235)
3
126
(717)
(5,418)
117,642
10,888
(20,168)
57
150
(5,407)
103,162
See accompanying Notes to Consolidated Financial Statements.
4
Pacific Financial Corporation
Consolidated Statements of Cash Flows
(Dollars in thousands)
Cash flows from operating activities:
Net Income
Adjus tments to reconci l e ne t i ncome to net ca s h on ha nd a nd i n ba nks
from opera ti ng a cti vi ti e s
Benefi t for l oa n l os s e s
Depreci a ti on a nd a morti za ti on
Deferred i ncome ta xes
Ori gi na ti ons of l oa ns he l d for s a l e
Proceeds from s a l e s of l oa ns
Ga i n on s a l e of l oa ns , net
(Ga i n) l os s on s a l e of premi s es a nd e qui pment
Ea rni ngs on ba nk owned l i fe i ns ura nce
Net cha nge i n a ccrue d i nte re s t re ce i va bl e
Net cha nge i n a ccrue d i nte re s t pa ya bl e
Net cha nge i n prepa i d e xpens e s
Other ope ra ti ng a cti vi ti e s
Net ca s h provi ded by ope ra ti ng a cti vi ti e s
Cash flows from investing activities:
Net cha nge i n l oa ns
Ma turi ti es of i nves tme nt s e curi ti es he l d to ma turi ty
Ma turi ti es a nd pa ydowns of i nve s tment s e curi ti es a va i l a bl e for s a l e
Purcha s e of i nve s tme nt s ecuri ti es a va i l a bl e for s a l e
Purcha s e of i nve s tme nt s ecuri ti es hel d to ma turi ty
Purcha s es of nonma rke ta bl e equi ty s e curi ti es
Increa s e i n othe r i nteres t ea rni ng depos i ts
Purcha s e of ba nk owne d l i fe i ns ura nce
Purcha s es of pre mi s es a nd equi pment
Proce eds from s a l es of nonma rketa bl e e qui ty s e curi ti es
Proce eds from ba nk owne d l i fe i ns ura nce dea th be nefi t
Proce eds from s a l es of premi s e s a nd equi pme nt
Net ca s h us ed i n i nves ti ng a cti vi ti e s
Cash flows from financing activities:
Net i ncrea s e i n depos i ts
Re pa yments of FHLB Adva nce s
Net ca s h from s tock opti on exe rci s e s
Re purcha s e of common s tock
Ta xe s re l a te d to net s ha re s e ttl eme nt for equi ty a wa rds
Ca s h di vi dends pa i d
Net ca s h provi ded by (us ed i n) fi na nci ng a cti vi ti es
Net i ncrea s e (de cre a s e ) i n ca s h a nd ca s h equi va l e nts
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 xe s
Supplemental non-cash disclosures of cash flow information:
Tra ns fe r of l oa ns he l d for s a l e to l oa ns he l d for i nve s tment
Twelve Months Ended
December 31,
2022
2021
$
10,888
$
12,697
-
3,357
59
(65,030)
71,690
(1,406)
13
(682)
(687)
73
(184)
7,283
25,374
(10,150)
3,470
18,047
(40,309)
(61,839)
(184)
(1,000)
(36)
(1,174)
17
14
-
(93,144)
1,422
(403)
52
-
(24)
(5,407)
(4,360)
(72,130)
386,366
314,236
1,133
115
$
$
$
(3,650)
3,055
1,443
(425,575)
470,461
(9,448)
(12)
(1,384)
1,324
(30)
(332)
(9,897)
38,652
96,451
135
19,000
(133,538)
-
(286)
-
(6,036)
(597)
7
2,689
24
(22,151)
150,516
(150)
64
(717)
(53)
(5,418)
144,242
160,743
225,623
386,366
1,284
2,275
850
$
6,636
$
$
$
$
See accompanying Notes to Consolidated Financial Statements.
5
Pacific Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2022 and December 31, 2021
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 two loan production offices in Burlington, Washington; and Salem, Oregon; and a residential
real estate mortgage department.
Basis of presentation – The consolidated financial statements include the accounts of Pacific Financial Corporation and its wholly-
owned subsidiaries. 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 2022 presentation. These reclassifications did not change
previously reported net income or shareholders’ 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 – The Company performed an evaluation of subsequent events through March 15, 2023, the date these financial
statements were available to be issued.
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.”
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. For callable securities
amortization of premiums are recognized over the period to first call date.
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. 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. For callable securities amortization of premiums are recognized over the period to first call date.
6
Other than temporary impairment (OTTI) – 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, 2022 and 2021 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.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) – In response to the Coronavirus Disease 2019 (“COVID-19”)
pandemic, the CARES Act was signed into law on March 27, 2020 to provide national emergency economic relief measures. Many of
the CARES Act’s programs are dependent upon the direct involvement of U.S. financial institutions and have been implemented
through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal
Reserve and other federal banking agencies, including those with direct supervisory jurisdiction over the Company and the Bank.
Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) – The CARES Act amended the SBA’s loan
program, in which the Bank participated, to create a guaranteed, unsecured loan program, the PPP, to fund operational costs
of eligible businesses, organizations and self-employed persons during COVID-19.
The Consolidated Appropriations Act of 2021 (“CA Act”) was signed into law on December 27, 2020 and provided COVID-19
emergency response and relief, including renewing and extending the SBA PPP. During 2021, the Company participated in
the CARES Act by offering PPP loans to clients affected by the COVID-19 pandemic.
Troubled Debt Restructuring (“TDR”) and Loan Modifications for Affected Borrowers – The CARES Act permits banks to
suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be
characterized as TDRs and suspend any determination related thereto if loans met certain criteria and was not more than 30
days past due at December 31, 2019. The CA Act also extended relief offered under the CARES Act related to TDRs as a result
of COVID-19 through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever
is earlier. The Company modified loans due to the effects of the COVID-19 pandemic that were not classified as TDRs in 2021.
7
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
Impairment
delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
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.
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.
Right of Use Lease Asset & Lease Liability –The Company leases retail space, office space and equipment under operating leases. For
operating leases greater than 12 months, an operating right of use (ROU) asset and an operating lease liability (lease liability) is
recorded on the consolidated financial statements.
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
Any write-down to fair value at the time of transfer to other real
at the fair value of the properties less estimated costs of disposal.
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.
8
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, 2022 the Company had $13.4 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. An assessment of qualitative factors is completed to determine if it is more likely than not that the
fair value of a reporting unit is less than its carrying amount. If the qualitative analysis concludes that further analysis is required, then
a quantitative impairment test would be completed. The quantitative goodwill impairment test is used to identify the existence of
impairment and the amount of impairment loss and compares the reporting unit’s estimated fair value, including goodwill, to its
carrying amount. If the fair value exceeds the carrying amount then goodwill is not considered impaired. If the carrying amount
exceeds its fair value, an impairment loss would be recognized equal to the amount of excess, limited to the amount of total goodwill
allocated to that reporting unit. The impairment loss would be recognized as a charge to earnings.
For the years ended December 31, 2022 and 2021, 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 was $0 and $8,000 at December 31, 2022 and 2021, respectively. Amortization expense related to core deposit
intangible totaled $8,000 and $11,000 during the years ended December 31, 2022 and 2021, 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
The premium, and the resultant right to
Authority to the Bank authorizing it to conduct a banking business in the State of Oregon.
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.
Advertising – Advertising costs are expensed as incurred.
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, 2022, 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. The amount of interest and penalties
accrued as of December 31, 2022 and December 31, 2021 and recognized during the years ended December 31, 2022, and 2021 were
9
immaterial. The tax years that remain subject to examination by federal and state taxing authorities are the years ended December
31, 2021, 2020 and 2019.
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 16.
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 and are included in the balance sheet caption “Other interest earning deposits”.
Early withdraw penalties apply, however the Company plans to hold these investments to maturity.
Earnings per share – Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average
number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if common shares
were exercised or issued under the Company’s stock compensation plans. Stock options and restricted stock units excluded from the
calculation of diluted earnings per share because they are antidilutive, were 122,000 and 121,000 in 2022 and 2021, 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,
2022 and 2021.
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, which is out of scope of ASC 606 Revenue Recognition. 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 ASC 606. The Company’s revenue from contracts with customers within the scope of ASC
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
10
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, 2022 and 2021. Items outside the scope of ASC 606 are noted as such.
Servi ce charges on deposi ts
Gai n on sa l e of l oans , net (1)
Ea rni ngs on ba nk owned l i fe ins ura nce (1)
Intercha nge a nd other fees
Other (1)
Tota l noni nterest i ncome $
(1) Not wi thi n the s cope of ASC 606
Recent accounting pronouncements – not yet effective
Twelve Months Ended
December 31,
2022
2021
(i n thousa nds )
1,621 $
1,446
$
1,406
682
3,519
(1)
7,227 $
9,448
1,384
4,383
68
16,729
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 finalizing
the allowance for credit losses under CECL and related methodology, and is not expecting the adoption of ASU 2016-13 to have a
material impact on the Consolidated Financial Statements.
FASB ASU 2020-04, Reference Rate Reform (Topic 848), as amended by ASU 2021-01, was issued in March 2020 and provides optional
expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by
the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of
reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by
prospectively adjusting the effective interest rate and the modification will be considered "minor" so that any existing unamortized
origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be
accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or
remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU
2020-04 also provides numerous optional expedients for derivative accounting and is effective March 12, 2020 through December 31,
2022. In December 2022, the FASB issued ASU 2022-06 Reference Rate Reform (Topic 848) Deferral of the Sunset Date of Topic 848.
This amendment provides an update to defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after
which all entities will no longer be permitted to apply the relief in Topic 848. The Company’s LIBOR exposure is with trust preferred
securities, LIBOR indexed CMO’s, and LIBOR indexed loans. The Company is finalizing the modifications for the transfer away from
LIBOR and not expecting the adoption of this ASU to have a material impact on the Company's business operations and the
Consolidated Financial Statements.
11
NOTE 2 – RESTRICTED ASSETS
The Federal Reserve has the authority to establish reserve requirements on transaction accounts or non-personal time deposits. These
reserves may be in the form of cash or deposits with the Federal Reserve Bank. Effective on March 26, 2020, the Federal Reserve
reduced requirements to zero percent. The Federal Reserve may adjust reserve requirement ratios in the future at its discretion.
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.
Investment
government agencies, state and local governments, other corporations, and mortgaged backed securities (“MBS”).
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 tera l i zed mortga ge obl i ga ti ons
Mortga ge ba cked s ecuri ti es
Muni ci pal securi ti es
Corpora te debt s ecuri ti es
U.S. government a nd agency obl i ga ti ons
Tota l avai l a bl e for s a l e
Held to maturity
Col l a tera l i zed mortga ge obl i ga ti ons
Mortga ge ba cked s ecuri ti es
Muni ci pal securi ti es
U.S. government
Tota l hel d to ma turi ty
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
Muni ci pal securi ti es
Corpora te debt s ecuri ti es
U.S. government a nd agency obl i ga ti ons
Tota l avai l a bl e for s a l e
Held to maturity
Mortga ge ba cked s ecuri ti es
Muni ci pal securi ti es
Tota l hel d to ma turi ty
$
$
$
$
$
$
$
$
Fair
Value
101,958
13,110
61,771
1,999
47,946
226,784
16,853
9,299
2,500
27,861
56,513
Fair
Value
92,050
17,435
71,549
2,010
49,903
232,947
2
786
788
Amortized
Cost
December 31, 2022
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(i n thous a nds)
110,573 $
14,023
69,707
2,000
55,407
251,710 $
18,072 $
9,857
2,506
29,078
59,513 $
8 $
9
84
-
-
101 $
- $
-
32
-
32 $
8,623 $
922
8,020
1
7,461
25,027 $
1,219 $
558
38
1,217
3,032 $
Amortized
Cost
December 31, 2021
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(i n thous a nds)
712 $
270
3,099
9
12
4,102 $
- $
-
- $
982 $
180
546
-
738
2,446 $
- $
-
- $
92,320 $
17,345
68,996
2,001
50,629
231,291 $
2 $
786
788 $
12
Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in
continuous unrealized loss position, as of December 31, 2022 and 2021 were as follows:
Available for sale
(i n thousa nds)
Less Than 12 Months
December 31, 2022
12 Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Col l atera l i zed mortga ge obl i ga ti ons
Mortga ge ba cked s ecuri ti es
Muni ci pa l securi ti es
Corpora te debt s ecuri ti es
U.S. government a nd a gency obl i ga ti ons
Tota l
Held to maturity
Col l atera l i zed mortga ge obl i ga ti ons
Mortga ge ba cked s ecuri ti es
Muni ci pa l securi ti es
U.S. government a nd a gency obl i ga ti ons
Tota l
$
$
$
$
44,373 $
7,239
33,564
1,999
-
87,175 $
1,557 $
370
1,884
1
-
3,812 $
56,895 $
5,545
20,497
-
47,946
130,883 $
7,066 $
552
6,136
-
7,461
21,215 $
101,268 $
12,784
54,061
1,999
47,946
218,058 $
8,623
922
8,020
1
7,461
25,027
Less Than 12 Months
December 31, 2022
12 Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(i n thousa nds)
16,853 $
9,299
1,340
27,862
55,354 $
1,219 $
558
38
1,217
3,032 $
- $
-
-
-
- $
- $
-
-
-
- $
16,853 $
9,299
1,340
27,862
55,354 $
1,219
558
38
1,217
3,032
Less Than 12 Months
December 31, 2021
12 Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Available for sale
(i n thousa nds)
Col l atera l i zed mortga ge obl i ga ti ons
Mortga ge ba cked s ecuri ti es
Muni ci pa l securi ti es
U.S. government a nd a gency obl i ga ti ons
$
57,016 $
9,269
17,897
48,002
702 $
154
441
738
Tota l
$
132,184 $
2,035 $
5,299 $
1,634
2,256
-
9,189 $
280 $
26
105
-
62,315 $
10,903
20,153
48,002
982
180
546
738
411 $
141,373 $
2,446
At December 31, 2022, there were 241 available for sale and held to maturity 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, 2022.
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
The expected cash flows of the security are then discounted to arrive
default rates and collateral value by vintage) and prepayments.
at a present value amount. For the years ended December 31, 2022 and 2021, 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,
2022 and 2021.
There were no sales of securities for the years ended December 31, 2022 and 2021.
13
The Company did not engage in originating subprime mortgage loans, and it does not believe that it has material exposure to subprime
mortgage loans or subprime mortgage backed securities.
The amortized cost and estimated fair value of investment securities at December 31, 2022 by maturity is presented in the following
table. The amortized cost and estimated fair value of CMOs and MBS are presented by the contractual maturity date. Expected
maturities may differ from contractual maturities because borrowers may have the right to prepay underlying loans without
prepayment penalties.
December 31, 2022
Held to Maturity
Available for Sale
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
- $
30,793
5,255
23,465
59,513 $
(i n thous a nds)
- $
29,548
5,003
21,962
56,513 $
43 $
26,735
91,312
133,620
251,710 $
42
24,943
81,529
120,270
226,784
Due i n one yea r or l ess
Due a fter one year through fi ve years
Due a fter fi ve yea rs through ten yea rs
Due a fter ten yea rs
Tota l i nves tment s ecuri ti es
$
$
At December 31, 2022 and 2021, investment securities with an estimated fair value of $135.3 million and $126.3 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, 2022 and 2021 the Company held $1.6 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, 2022 and maintains capital ratios that exceed “well capitalized” standards for regulatory purposes.
14
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY
Loans held in the portfolio at December 31, 2022 and 2021 were as follows:
Commerci a l a nd a gri cul tura l
PPP
Rea l esta te:
Constructi 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 esta te -- owner occupi ed
Commerci a l rea l esta te -- non owner occupi ed
Fa rml and
Tota l rea l es ta te
Consumer
Gros s l oa ns
Deferred fees, net
Loans , net of deferred fees
$
December 31,
2022
2021
(i n thousa nds)
75,705 $
515
85,309
25,081
$
37,287
82,653
41,122
154,380
153,707
26,935
496,084
68,412
640,716
(758)
639,958 $
28,318
67,393
39,854
154,901
148,730
23,905
463,101
56,269
629,760
(1,427)
628,333
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.
Paycheck Protection Program (“PPP”). This program was established by the Coronavirus Aid, Relief and Economic Security Act (“CARES
Act”), enacted on March 27, 2020, in response to the Coronavirus Disease 2019 (“COVID-19”) pandemic. The PPP was administered
by the Small Business Administration (SBA). PPP loans may be forgiven by the SBA and are 100 percent guaranteed by the SBA.
These
loans have either a two-year or five-year maturity date and earn interest at 1%. The Bank also earns a fee based on the size of the
loan, which is recognized over the life of the loan. The balance of unamortized net deferred fees on SBA PPP loans was $17,000 and
$944,000 at December 31, 2022 and 2021, respectively.
Real Estate. The Company originates owner occupied and non-owner occupied commercial real estate and multifamily loans within
its primary market areas. 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
The Company seeks to minimize these risks by scrutinizing the financial condition of the borrower, the
estate market or the economy.
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 that are $1 million and larger 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, SOFR, or Federal Home Loan Bank advance rates plus a defined margin. Fixed rates are generally
set for periods of three to ten years with either a rate reset provision or a payment due at maturity. Prepayment penalties are often
sought on term commercial real estate loans.
15
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 to builders for the construction of speculative residential
property. The Company endeavors to limit construction lending risks through adherence to specific underwriting guidelines and
Repayment of construction loans is dependent upon the sale of individual homes to consumers or in some cases to other
procedures.
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 with 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
These loans include primary residences, second homes, rental homes and home equity loans and home
in the markets we serve.
equity lines of credit.
Consumer. The Company originates consumer loans and lines of credit that are both secured and unsecured. Underwriting standards
ensures a qualifying primary and secondary source of repayment. Underwriting standards for home equity loans are significantly
influenced by statutory requirements. To monitor and manage consumer loan risk, policies and procedures are developed and
modified, as needed.
The majority of consumer loans are disbursed among many individual borrowers which reduces the credit risk
for this type of loan. The Company also purchases indirect consumer loans for classic and exotic cars. Deposit account overdrafts
reported as consumer loans totaled $108,000 and $110,000 at December 31, 2022 and 2021, respectively.
At December 31, 2022 and 2021, $289.1 million and $262.5 million, respectively, of loans were pledged as collateral on FHLB advances.
The Company has also pledged $80.8 million and $81.2 million of loans to the FRB for additional borrowing capacity at December 31,
2022 and 2021, respectively.
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:
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.
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 such 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.”
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.
16
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.
Changes in the allowance for loan losses for the twelve months ended December 31, 2022 and 2021 were as follows:
Commerci a l a nd a gri cul tura l
PPP
Rea l es ta te:
Res i denti a l 1-4, Mul ti fami 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
Consumer
Una l l oca ted
Tota l
Commerci a l a nd a gri cul tura l
PPP
Rea l es ta te:
Res i denti a l 1-4, Mul ti fami 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
Consumer
Una l l oca ted
Tota l
Twelve Months Ended December 31, 2022
Balance at
Beginning of
Year
Charge-offs
Recoveries
(i n thous a nds )
Provision
(benefit) for
Loan Losses
Balance at
End of Year
668 $
-
1,071
1,299
2,479
478
5,327
1,464
838
8,297 $
- $
-
-
-
-
-
-
(90)
-
(90) $
- $
-
-
-
-
-
-
29
-
29 $
336 $
-
132
(252)
(673)
(69)
(862)
471
55
- $
1,004
-
1,203
1,047
1,806
409
4,465
1,874
893
8,236
Balance at
Beginning of
Year
1,524 $
-
1,055
2,187
4,037
839
8,118
1,386
1,040
12,068 $
Twelve Months Ended December 31, 2021
Charge-offs
Recoveries
(i n thous a nds )
Provision
(benefit) for
Loan Losses
Balance at
End of Year
(34) $
-
-
-
-
-
-
(196)
-
(230) $
42 $
-
49
-
-
-
49
18
-
109 $
(864) $
-
(33)
(888)
(1,558)
(361)
(2,840)
256
(202)
(3,650) $
668
-
1,071
1,299
2,479
478
5,327
1,464
838
8,297
$
$
$
$
17
The allowance for loan losses disaggregated on the basis of the Company's impairment method as of December 31, 2022 and 2021
were as follows:
Loans
Individually
Evaluated
for
Impairment
December 31, 2022
Loans
Collectively
Evaluated
for
Impairment
(i n thous a nds )
1,004 $
-
- $
-
-
48
-
1
49
-
-
49 $
1,203
999
1,806
408
4,416
1,874
893
8,187 $
Loans
Individually
Evaluated
for
Impairment
December 31, 2021
Loans
Collectively
Evaluated
for
Impairment
(i n thous a nds )
664 $
-
4 $
-
-
86
-
22
108
-
-
112 $
1,071
1,213
2,479
456
5,219
1,464
838
8,185 $
Total
Allowance
for Loan
Losses
1,004
-
1,203
1,047
1,806
409
4,465
1,874
893
8,236
Total
Allowance
for Loan
Losses
668
-
1,071
1,299
2,479
478
5,327
1,464
838
8,297
Commerci a l and a gri cul tura l
PPP
Rea l esta te:
Res i denti a l 1-4, Mul ti fa mi l y, Cons t & Dev
Commerci a l rea l esta te -- owner occupi ed
Commerci a l rea l esta te -- non owner occupi ed
Fa rml and
Tota l rea l es ta te
Consumer
Una l l oca ted
Tota l
Commerci a l and a gri cul tura l
PPP
Rea l esta te:
Res i denti a l 1-4, Mul ti fa mi l y, Cons t & Dev
Commerci a l rea l esta te -- owner occupi ed
Commerci a l rea l esta te -- non owner occupi ed
Fa rml and
Tota l rea l es ta te
Consumer
Una l l oca ted
Tota l
$
$
$
$
18
The recorded investment of loans disaggregated on the basis of the Company’s impairment method as of December 31, 2022 and
2021, were as follows:
Loans
Individually
Evaluated
for
Impairment
December 31, 2022
Loans
Collectively
Evaluated
for
Impairment
(i n thous a nds )
75,251 $
515
454 $
-
313
1,290
-
294
1,897
101
2,452 $
160,749
153,090
153,707
26,641
494,187
68,311
638,264 $
Loans
Individually
Evaluated
for
Impairment
December 31, 2021
Loans
Collectively
Evaluated
for
Impairment
(i n thous a nds )
84,529 $
25,081
780 $
-
343
1,321
-
299
1,963
110
2,853 $
135,222
153,580
148,730
23,606
461,138
56,159
626,907 $
Gross Loans
75,705
515
161,062
154,380
153,707
26,935
496,084
68,412
640,716
Gross Loans
85,309
25,081
135,565
154,901
148,730
23,905
463,101
56,269
629,760
Commerci a l and a gri cul tura l
PPP
Rea l esta te:
Res i denti a l 1-4, Mul ti fa mi l y, Cons t & Dev
Commerci a l rea l esta te -- owner occupi ed
Commerci a l rea l esta te -- non owner occupi ed
Fa rml and
Tota l rea l es ta te
Consumer
Tota l
Commerci a l and a gri cul tura l
PPP
Rea l esta te:
Res i denti a l 1-4, Mul ti fa mi l y, Cons t & Dev
Commerci a l rea l esta te -- owner occupi ed
Commerci a l rea l esta te -- non owner occupi ed
Fa rml and
Tota l rea l es ta te
Consumer
Tota l
$
$
$
$
Credit Quality Indicators
As part of the on-going monitoring of the credit quality of Bank’s loan portfolio, management tracks certain credit quality indicators
including trends related to risk rating classifications of loans, the level of classified loans, net charge-offs, past due and non-performing
loans, as well as general economic conditions of the United States of America and specifically the states of Washington and Oregon.
Numerical risk rating classifications for loans are established at origination. Changes to the risk rating classification are considered as
new information about the performance of the loan becomes available, including but not limited to receipt of updated financial
information from the borrower, results of annual term loan reviews and scheduled loan reviews.
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:
“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.
19
“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."
“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
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, 2022 and 2021 were as follows:
Commerci a l and agri cul tural
PPP
Rea l esta te:
Constructi on and 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 and
Tota l rea l es ta te
Consumer
Gross Loa ns
Commerci a l and agri cul tural
PPP
Rea l esta te:
Constructi on and 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 and
Tota l rea l es ta te
Consumer
Gross Loa ns
$
$
$
$
Pass
69,072 $
515
37,287
82,206
41,122
154,160
152,296
25,027
492,098
68,361
630,046 $
December 31, 2022
Other Loans
Especially
Mentioned
Substandard
(i n thousa nds )
Doubtful
Total
5,453 $
-
-
53
-
-
1,411
-
1,464
-
6,917 $
1,180 $
-
-
394
-
220
-
1,908
2,522
51
3,753 $
December 31, 2021
- $
-
-
-
-
-
-
-
-
-
- $
75,705
515
37,287
82,653
41,122
154,380
153,707
26,935
496,084
68,412
640,716
Other Loans
Especially
Mentioned
Pass
Substandard
(i n thousa nds )
Doubtful
Total
82,390 $
25,081
1,551 $
-
1,368 $
-
334
116
-
2,449
6,764
856
10,519
-
12,070 $
-
1,275
-
495
4,088
2,895
8,753
80
10,201 $
27,984
66,002
39,854
151,957
137,878
20,154
443,829
56,189
607,489 $
20
- $
-
-
-
-
-
-
-
-
-
- $
85,309
25,081
28,318
67,393
39,854
154,901
148,730
23,905
463,101
56,269
629,760
Impaired Loans
Impaired loans by type as of December 31, 2022 and 2021, and interest income recognized for the twelve months ended December
31, 2022 and 2021 were as follows:
December 31, 2022
Recorded
Investment
With No
Specific
Valuation
Allowance
Recorded
Investment
With Specific
Valuation
Allowance
Total
Recorded
Investment
Unpaid
Contractual
Principal
Balance
(i n thousa nds )
Related
Specific
Valuation
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
454 $
-
313
220
-
-
533
101
1,088 $
- $
-
-
1,070
-
294
1,364
-
1,364 $
454 $
-
313
1,290
-
294
1,897
101
2,452 $
494 $
-
352
1,316
-
295
1,963
127
2,584 $
- $
-
-
-
48
-
1
49
-
49 $
506 $
-
357
1,328
-
297
1,982
132
2,620 $
28
-
20
69
-
15
104
9
141
December 31, 2021
Recorded
Investment
With No
Specific
Valuation
Allowance
Recorded
Investment
With Specific
Valuation
Allowance
Total
Recorded
Investment
Unpaid
Contractual
Principal
Balance
(i n thousa nds )
Related
Specific
Valuation
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
636 $
-
343
241
-
-
584
110
1,330 $
144 $
-
-
1,080
-
299
1,379
-
1,523 $
780 $
-
343
1,321
-
299
1,963
110
2,853 $
820 $
-
360
1,335
-
299
1,994
136
2,950 $
4 $
-
-
-
86
-
22
108
-
112 $
881 $
-
376
1,339
-
300
2,015
137
3,033 $
43
-
22
69
-
14
105
10
158
$
$
$
$
Commercia l a nd a gri cul tura l
PPP
Rea l Estate:
Re si denti a l 1-4, Mul ti fa mi l y, Const & Dev
Commerci a l real es ta te -- owne r occupi ed
Commerci a l real es ta te -- non owner occupi ed
Fa rml a nd
Total rea l es ta te
Cons umer
Tota l
Commercia l a nd a gri cul tura l
PPP
Rea l Estate:
Re si denti a l 1-4, Mul ti fa mi l y, Const & Dev
Commerci a l real es ta te -- owne r occupi ed
Commerci a l real es ta te -- non owner occupi ed
Fa rml a nd
Total rea l es ta te
Cons umer
Tota l
Insider Loans
Certain related parties of the Company, principally directors and their affiliates, were loan customers of the Bank in the ordinary course
of business during 2022 and 2021. Total related party loans outstanding at December 31, 2022 and 2021 to executive officers and
directors were $2.6 million and $2.8 million, respectively. During 2022 and 2021, new loans or advances on existing loans of $350,000
and $376,000, respectively, were made, and repayments totaled $490,000 and $310,000, 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, 2022.
21
Aging Analysis
The following tables summarize the Company’s loans past due, both accruing and non-accruing, by type as of December 31, 2022 and
2021. The Company did not recognize any interest income on non-accrual loans during the years ended December 31, 2022 and 2021.
No allowance was established on non-accrual loans as of December 31, 2022 and 2021.
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than
90 Days
Total Past
Due
Non-accrual
Loans
Loans Not
Past Due
Total
(i n thousa nds )
2022
$
$
$
$
199 $
-
-
49
-
-
-
-
49
101
349 $
191 $
-
-
-
-
-
-
-
-
4
195 $
- $
-
-
-
-
-
-
-
-
-
- $
390 $
-
-
49
-
-
-
-
49
105
544 $
2021
336 $
-
-
313
-
220
-
-
533
-
869 $
74,979 $
515
75,705
515
37,287
82,291
41,122
154,160
153,707
26,935
495,502
68,307
639,303 $
37,287
82,653
41,122
154,380
153,707
26,935
496,084
68,412
640,716
30-59 Days
Past Due
60-89 Days
Past Due
Greater
Than
90 Days
Total Past
Due
Non-accrual
Loans
Loans Not
Past Due
Total
(i n thousa nds )
- $
-
-
-
-
-
-
-
-
55
55 $
- $
-
-
-
-
-
-
-
-
-
- $
- $
-
-
-
-
-
-
-
-
-
- $
- $
-
-
-
-
-
-
-
-
55
55 $
636 $
-
84,673 $
25,081
85,309
25,081
-
343
-
242
-
-
585
-
1,221 $
28,318
67,050
39,854
154,659
148,730
23,905
462,516
56,214
628,484 $
28,318
67,393
39,854
154,901
148,730
23,905
463,101
56,269
629,760
Commerci a l a nd a gri cul tura l
PPP
Rea l esta te:
Cons tructi on a nd devel opment
Resi de nti a l 1-4 fa mi l y
Mul ti -fa mi l y
Commerci a l re a l esta te -- owner occupi ed
Commerci a l re a l esta te -- non owner occupi ed
Fa rml a nd
Tota l rea l esta te
Cons umer
Gros s Loa ns
Commerci a l a nd a gri cul tura l
PPP
Rea l esta te:
Cons tructi on a nd devel opment
Resi de nti a l 1-4 fa mi l y
Mul ti -fa mi l y
Commerci a l re a l esta te -- owner occupi ed
Commerci a l re a l esta te -- non owner occupi ed
Fa rml a nd
Tota l rea l esta te
Cons umer
Gros s Loa ns
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.
22
Loans modified in a TDR are considered impaired loans and typically already on non-accrual status. Partial charge-offs have in some
cases already been taken against the outstanding loan balance. Loans modified in a TDR for the Company may have the financial effect
of increasing the specific allowance associated with the loan. An allowance for impaired loans that have been modified in a TDR is
measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, 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 twelve months. During the twelve months ended December 31, 2022, there was $63,000 decrease on
the allowance from TDRs during the period.
The Company had $87,000 in commitments to lend additional funds for loans classified
as TDRs at December 31, 2022.
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 by type as of December 31, 2022 and 2021, all of which were modified due to financial stress of the
borrower. There were not any subsequent defaulted TDRs as of December 31, 2022 and 2021:
Number
of Loans
Commerci a l a nd a gri cul ture
Commerci a l rea l es tate -- owner occupi ed
Fa rml a nd
Consumer
Tota l TDRs (1)
2
1
1
1
5
Number
of Loans
Commerci a l a nd a gri cul ture
Commerci a l rea l es tate -- owner occupi ed
Fa rml a nd
Consumer
Tota l TDRs (1)
2
1
1
1
5
December 31, 2022
Pre-TDR
Outstanding
Recorded
Investment
Post-TDR
Outstanding
Recorded
Investment
(dol l a rs i n thous a nds)
$
554 $
1,080
303
137
2,074 $
$
340
1,070
295
101
1,806
December 31, 2021
Pre-TDR
Outstanding
Recorded
Investment
Post-TDR
Outstanding
Recorded
Investment
(dol l a rs i n thous a nds)
$
554 $
1,080
303
137
$
2,074 $
376
1,080
299
110
1,865
(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 si nce the modi fi ca ti on date.
23
The following table presents TDRs modified or recorded during the years ended December 31, 2022 and 2021.
December 31, 2022
Commerci al a nd a gri cul ture
Tota l
Commerci al a nd a gri cul ture
Fa rml a nd
Consumer
Tota l
Recorded
Number
of Loans
Investment
(doll a rs i n thous a nds)
222
222
1
1
$
$
December 31, 2021
Recorded
Number
of Loans
Investment
(doll a rs i n thous a nds)
1,080
299
110
1,489
1
1
1
3
$
$
The following tables present troubled debt restructurings by accrual or nonaccrual status as of December 31, 2022 and 2021:
Commerci al a nd a gri cul ture
Commerci al rea l esta te -- owner occupi ed
Fa rml a nd
Consumer
Tota l TDRs
Commerci al a nd a gri cul ture
Commerci al rea l esta te -- owner occupi ed
Fa rml a nd
Consumer
Tota l TDRs
Accrual
Status
December 31, 2022
Non-Accrual
Status
(i n thousa nds )
Total TDRs
118 $
1,070
295
101
1,584 $
222 $
-
-
-
222 $
340
1,070
295
101
1,806
Accrual
Status
December 31, 2021
Non-Accrual
Status
(i n thousa nds )
Total TDRs
144 $
1,080
299
110
1,633 $
232 $
-
-
-
232 $
376
1,080
299
110
1,865
$
$
$
$
Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” allows financial institutions the option to
temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time during the COVID-19 pandemic.
In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the FDIC, (the
"agencies") issued an interagency statement on loan modifications and reporting for financial institutions working with customers
affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. The
agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to
borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months)
modifications, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are
insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a
modification program is implemented.
24
The Company had total outstanding principle balance of $0 and $74,000 of COVID-19 related loan modifications under these provisions
as of December 31, 2022 and 2021, respectively. These loans did not have financial difficulty prior to the COVID-19 pandemic and were
generally modified for principal and interest payment deferral or interest only payments for up to six months.
Modified loans continue
to accrue interest and are evaluated for past due status based on the revised payment terms.
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, 2022 and 2021.
Investment
Securities
Defined
Benefit
Plans
(i n thous a nds )
(336) $
-
483
56
539
203 $
1,343 $
(20,707)
-
-
(20,707)
(19,364) $
Investment
Securities
Defined
Benefit
Plans
(i n thous a nds )
(531) $
-
120
75
195
(336) $
4,773 $
(3,430)
-
-
(3,430)
1,343 $
Total
1,007
(20,707)
483
56
(20,168)
(19,161)
Total
4,242
(3,430)
120
75
(3,235)
1,007
Bal a nce, December 31, 2021
Cha nge i n fa i r va l ue of i nvestment s ecuri ti es a va i l a bl e for s al e
Unrecogni zed net a ctua ri a l ga i n duri ng the peri od, net of ta x
Amorti za ti on of net a ctua ri a l l os s i ncl uded i n i ncome
Net current peri od other comprehens i ve i ncome (l oss )
Bal a nce, December 31, 2022
Bal a nce, December 31, 2020
Cha nge i n fa i r va l ue of i nvestment s ecuri ti es a va i l a bl e for s al e
Unrecogni zed net a ctua ri a l l oss duri ng the peri od, net of ta x
Amorti za ti on of net a ctua ri a l l os s i ncl uded i n i ncome
Net current peri od other comprehens i ve i ncome (l oss )
Bal a nce, December 31, 2021
$
$
$
$
25
The following table presents the components of other comprehensive income for the twelve months ended December 31, 2022 and
2021. Reclassification adjustments related to gains on securities available-for-sale are included in gain on sale of investment securities,
net, in the accompanying consolidated statements of income. Reclassification adjustments related to defined benefit plans are
included in compensation and employee benefits in the accompanying consolidated statements of income.
Net unrea l i zed l os ses on i nves tment s ecuri ti es :
Net unrea l i zed l os ses a ri si ng duri ng the peri od
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 ses on i nves tment s ecuri ti es
Defi ned benefi t pl ans :
Net unrecogni zed a ctua ri a l ga i n
Recl a s s i fi ca ti on a djus tment of amorti za ti on of net a ctua ri a l l os s
Net pens i on pl an l i a bi l i ty a djus tment
Other comprehens i ve i ncome (l os s )
Net unrea l i zed ga i ns on i nvestment securi ti es :
Net unrea l i zed l os ses a ri si ng duri ng the peri od
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 ses on i nves tment s ecuri ti es
Defi ned benefi t pl ans :
Net unrecogni zed a ctua ri a l ga i n
Recl a s s i fi ca ti on a djus tment of amorti za ti on of net a ctua ri a l l os s
Net pens i on pl an l i a bi l i ty a djus tment
Other comprehens i ve i ncome (l os s )
$
$
$
$
Before Tax
Twelve Months Ended December 31, 2022
Net of Tax
Tax Effect
(i n thousa nds )
(5,888) $
-
(5,888)
-
(26,595)
(20,707)
-
(20,707)
(26,595) $
611
71
682
(25,913) $
128
15
143
(5,745) $
483
56
539
(20,168)
Before Tax
Twelve Months Ended December 31, 2021
Net of Tax
Tax Effect
(i n thousa nds )
(4,315) $
-
(4,315)
152
95
247
(4,068) $
(885) $
-
(885)
32
20
52
(833) $
(3,430)
-
(3,430)
120
75
195
(3,235)
NOTE 6 – PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, 2022 and 2021 were as follows:
La nd a nd premi s es
Equi pment, furni ture a nd fi xtures
Constructi on i n progress
Less 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,
2022
2021
(i n thous a nds )
20,535 $
10,030
78
30,643
(17,772)
12,871 $
19,786
10,159
177
30,122
(17,118)
13,004
$
$
Depreciation expense was $1.1 million and $1.2 million for years ending December 31, 2022 and 2021, respectively.
26
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, 2022 are as
follows:
2023
2024
2025
2026
Therea fter
$
Tota l future mini mum l ea s e pa yments $
Amounts repres enti ng i nterest
Tota l opera ti ng l ea s e l i a bi l i ti es $
December 31,
2022
(i n thous ands)
561
401
191
23
-
1,176
(27)
1,149
At December 31, 2022 the weighted-average remaining lease term was 2.3 years and the weighted-average discount rate was 1.38%.
Amortization of ROU assets, short term lease cost, interest on lease liabilities and non-lease component expenses was $647,000 and
$654,000 for the years ending December 31, 2022 and 2021, respectively.
NOTE 8 – OTHER REAL ESTATE OWNED
The Company had no activity related to OREO for the years ended December 31, 2022 and 2021 and had no properties classified as
OREO at December 31, 2022 and 2021.
NOTE 9 – DEPOSITS
Time deposits that meet or exceed the FDIC Insurance limit of $250,000 at December 31, 2022 and 2021 were $9.8 million and $12.8
million, respectively.
The composition of deposits at December 31, 2022 and 2021 was as follows:
December 31,
2022
2021
(i n thousa nds )
Interest-bea ri ng dema nd ("NOW") $
Money ma rket depos i ts
Sa vi ngs depos i ts
Ti me deposi ts ("CDs ")
Tota l i nterest-beari ng deposi ts
Non-i nteres t bea ri ng dema nd
Tota l depos i ts
$
253,272 $
195,814
174,887
48,754
672,727
507,635
1,180,362 $
242,789
210,344
174,929
58,724
686,786
492,154
1,178,940
27
Scheduled maturities of CDs were as follows for future years ending December 31 (in thousands):
2023
2024
2025
2026
2027
Therea fter
Tota l
Maturities
32,690
8,494
3,507
1,776
2,129
158
48,754
$
$
NOTE 10 – BORROWINGS
Advances from the Federal Home Loan Bank
Utilizing a pledge agreement, qualifying loans receivable at December 31, 2022 and 2021, were pledged as security for Federal Home
Loan Bank (FHLB) borrowings. At December 31, 2022, the Bank had no outstanding borrowings against its $195.8 million in established
borrowing capacity with the FHLB, as compared to $403,000 outstanding against a borrowing capacity of $169.1 million at December
31, 2021. The Bank’s borrowing facility with the FHLB is subject to collateral and stock ownership requirements.
A summary of FHLC advances as of December 31, 2022 and 2021 is as follows:
Amount outs ta ndi ng a t end of peri od
Average ba l a nce duri ng the yea r
Average i nterest ra te duri ng the yea r(1)
$
$
(1) Fi xed ra te
December 31,
2022
2021
(dol l a rs i n thousa nds )
- $
190 $
2.23%
403
472
2.23%
Federal Reserve Bank of San Francisco and Other Borrowings
The Bank may borrow funds on an overnight basis from the Federal Reserve Bank through the Borrower-In-Custody program. Such
borrowings are secured by a pledge of eligible loans. At December 31, 2022, the Bank had an available discount window primary credit
line with the Federal Reserve Bank of San Francisco of approximately $57.6 million with no balance outstanding.
At December 31, 2022, the Bank had unsecured federal funds lines of credit agreements with other financial institutions totaling $60.0
million. No balances were outstanding under these agreements as of December 31, 2022. Availability of lines is subject to continued
borrower eligibility.
NOTE 11 – JUNIOR SUBORDINATED DEBENTURES
At December 31, 2022, 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, 2022 and 2021 for the common capital securities issued by the issuer trusts.
As of December 31, 2022 and 2021, regular accrued interest on junior subordinated debentures totaled $126,000 and $38,000,
respectively, and is included in accrued expenses and other liabilities on the consolidated balance sheet.
28
The terms of the junior subordinated debentures as of December 31, 2022 and 2021 are:
Trust Name
Issue Date
Issued
Amount
(dol l a rs i n thousa nds )
Rate
Pa ci fi c Fi na nci a l Corpora ti on
December
Sta tutory Trust I
Pa ci fi c Fi na nci a l Corpora ti on
Sta tutory Trust II
2005
June
2006
$
5,000
LIBOR + 1.45% (1)
8,000
13,000
$
LIBOR + 1.60% (2)
(1) Va ri a bl e ra te of 3-month l i bor, adjusted qua terl y
3-month LIBOR 4.77% a t December 13, 2022 and 0.20% a t December 13, 2022
(2) Va ri a bl e ra te of 3-month l i bor, adjusted qua terl y
3-month LIBOR 4.08% a t October 13, 2022 a nd 0.12% a t October 13, 2022
Maturity
Date
Ma rch
2036
Jul y
2036
NOTE 12 – INCOME TAXES
The Company recorded an income tax provision for the twelve months ended December 31, 2022 and 2021. 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, 2022, 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, tax-exempt loans 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.
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, 2022.
Income taxes for the years ended December 31, 2022 and 2021 was as follows:
Current
Deferred
Tota l i ncome ta x expens e
December 31,
2022
2021
(i n thous a nds )
2,252 $
59
2,311 $
1,442
1,443
2,885
$
$
29
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities and net deferred tax
assets (liabilities) are recorded in prepaid expenses and other assets in the consolidated financial statements at December 31, 2022
and 2021 are:
Deferred Tax Assets
Al l owa nce for l oa n l os ses
Deferred compens a ti on
Suppl ementa l executi ve reti rement pl a n
Compens a ti on expens e
Unrea l i zed l oss on s ecuri ti es a vai l a bl e for s a l e
Other
Tota l deferred ta x a s s ets
Deferred Tax Liabilities
Depreci a ti on
Loan fees /cos ts
Unrea l i zed ga i n on s ecuri ti es a vai l a bl e for sa l e
Prepa i d expenses
Other
Tota l deferred ta x l i a bi l i ti es
Net deferred tax assets (liabilities)
$
$
$
$
December 31,
2022
2021
(i n thous a nds )
1,868 $
7
689
64
5,506
335
8,469 $
1,882
11
878
87
-
242
3,100
189 $
2,534
-
245
273
3,241
5,228 $
292
2,606
382
237
258
3,775
(675)
The following is a reconciliation between the statutory and effective federal income tax rate for the years ended December 31, 2022
and 2021:
December 31,
2022
2021
Amount
2,772
95
(291)
(143)
(122)
2,311
$
$
Percent
of Pre-tax
Income
Amount
(dol l a rs i n thousa nds )
21.0% $
3,272
0.7%
-2.2%
-1.1%
-0.9%
17.5% $
158
(287)
(285)
27
2,885
Percent
of Pre-tax
Income
21.0%
0.9%
-1.8%
-1.8%
0.2%
18.5%
Income tax a t s ta tutory rate
Adjustments 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 $1.0 million and $1.1 million in 2022 and 2021,
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 $743,000 and $806,000
for 2022 and 2021, 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 is currently one participant receiving payments in the director and employee deferred
compensation plan. There were no deferrals or ongoing expense to the Company for these plans in 2022 and 2021.
30
The directors of a bank acquired by the Company in 1999 adopted two deferred compensation plans for directors. One plan provides
retirement income benefits for all directors and the other, a deferred compensation plan, covers only those directors who have chosen
to participate in the plan.
At the time of adopting these plans, the Bank purchased life insurance policies on directors participating in
both plans which may be used to fund payments to them under these plans. Cash surrender values on these policies were $3.1 million
and $3.0 million at December 31, 2022 and 2021, respectively. In 2022 and 2021, the net benefit recorded from these plans, including
the cost of the related life insurance, was $183,000 and $195,000, 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 $34,000 and $48,000 at December 31, 2022 and 2021, respectively.
Long-Term Compensation Agreements – The Company has 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.
A benefit of $42,000 and
a cost of $73,000 was recorded for these agreements for the years ended December 31, 2022 and 2021, 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 $7.3 million and $7.1 million at December 31,
2022 and 2021, respectively.
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, 2022 and 2021:
Net peri odi c pens i on cost:
Servi ce cost
Interest cos t
Amorti za ti on of net l os s
Net peri odi c pens i on cost
Wei ghted avera ge a s s umpti ons :
Di scount ra te
Sa l a ry sca l e
Expected return on pl a n a s s ets
December 31,
2022
2021
(dol l a rs i n thous a nds )
60
59
75
194
58 $
69
56
183 $
$
$
2.38%
n/a
n/a
1.87%
n/a
n/a
The following table sets forth the change in benefit obligation at December 31, 2022 and 2021:
Cha nge i n benefi t obl i ga ti on:
Benefi t obl i ga ti on a t the beginni ng of yea r $
Servi ce cost
Interest cost
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 year
$
December 31,
2022
2021
(i n thous a nds )
3,018 $
58
69
(234)
(483)
2,428 $
3,253
60
59
(234)
(120)
3,018
31
Amounts recognized in accumulated other comprehensive income at December 31, 2022 and 2021 was as follows:
(Gai n) Los s
Pri or servi ce cos t
Tota l recogni zed i n AOCI
December 31,
2022
2021
(i n thous a nds )
(203) $
-
(203) $
336
-
336
$
$
The following table summarizes the projected and accumulated benefit obligations at December 31, 2022 and 2021:
Projected benefi t obl i ga ti on
Accumul a ted benefi t obl i ga ti on
$
$
December 31,
2022
2021
(i n thous a nds )
2,429 $
2,429 $
3,018
3,018
Estimated future benefit payments as of December 31, 2022 were as follows (in thousands):
$
2023
2024
2025
2026
2027
2028-2032
Tota l $
234
234
234
234
234
1,329
2,499
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, 2022 and 2021 is as follows:
December 31,
2022
2021
Commi tments to extend credi t $
$
Sta ndby l etters of credi t
(i n thous a nds )
$
$
202,331
4,420
172,216
600
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.
32
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.
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.
Loans to any single borrower or group of borrowers are generally limited by state banking regulations to 20% of the Bank’s capital and
Standby letters of credit were granted primarily to commercial
surplus, excluding accumulated other comprehensive income (loss).
borrowers. The Bank, as a matter of practice, generally does not extend credit to any single borrower or group of borrowers in excess
of $13.0 million.
NOTE 16 – STOCK BASED COMPENSATION
The Company’s 2021 Equity Incentive Plan, (the “2021 Equity Plan”), provides for the issuance of up to 750,000 shares in connection
with incentive and nonqualified stock options, restricted stock, restricted stock units and other equity-based awards. Prior to adoption
of the 2021 Equity Plan, the Company made equity-based awards under the Company’s 2011 Equity Incentive Plan, which expired
April 1, 2021.
Stock Options
The 2021 Plan authorizes the issuance of incentive and non-qualified stock options, as defined under current tax laws, to key
personnel. Options granted under the 2021 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, 2022
December 31, 2021
Expected
Life
6.5 yea rs
7.5 yea rs
Risk Free
Interest
Rate
4.18%
1.51%
Expected
Stock
Price
Volatility
27.42%
29.23%
Dividend
Yield
4.98%
4.48%
Weighted
Average
Fair Value
of Options
Granted
$
1.93
$
1.98
33
The following tables summarize the stock option activity for the years ended December 31, 2022 and 2021:
Weighted
Average
Remaining
Contractual
Term
(in Years)
Weighted
Average
Exercise
Price
Outsta ndi ng a t December 31, 2020
Gra nted
Exerci s ed
Forfei ted or cancel ed
Expi red
Outsta ndi ng a t December 31, 2021
Gra nted
Exerci s ed
Forfei ted or cancel ed
Expi red
Outsta ndi ng a t December 31, 2022
Shares
210,450 $
2,500
(9,500)
(24,100)
(5,200)
174,150 $
5,000
(25,500)
(3,900)
(2,400)
147,350 $
10.46
11.60
6.72
12.36
10.91
10.42
10.45
5.11
12.47
12.69
11.25
Ves ted a nd exerci s a bl e a t December 31, 2022
92,850 $
11.03
6.36
5.80
The following table summarizes nonvested stock option activity for the years ended December 31, 2022 and 2021:
Nonves ted Outsta ndi ng at December 31, 2020
Gra nted
Ves ted
Forfei ted
Nonves ted Outsta ndi ng at December 31, 2021
Gra nted
Ves ted
Forfei ted
Nonves ted Outsta ndi ng at December 31, 2022
Weighted
Average
Grant Date
Fair Value
1.10
1.98
1.00
1.11
1.18
1.93
1.15
1.03
1.28
Shares
127,600 $
2,500
(27,200)
(24,100)
78,800 $
5,000
(25,400)
(3,900)
54,500 $
Information related to the stock option plan during each year follows:
Intri ns i c val ue of opti ons exerci s ed
Ca sh recei ved from opti on exerci ses
$
$
142 $
130 $
48
64
2022
2021
(i n thousa 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.
34
The following information summarizes information about stock option compensation expense for the years ended December 31, 2022
and 2021:
Compens ati on Expens e
Ta x Effect
Compens ati on Expens e, net
Twelve Months Ended
December 31,
2022
2021
(i n thous a nds )
$
$
31 $
7
24 $
29
6
23
As of December 31, 2022, there was $63,000 of total unrecognized compensation cost related to stock options. The cost is expected
to be recognized over a weighted-average period of 1.84 years.
Restricted Stock Units
The Company grants restricted stock units (“RSUs”) to employees qualifying for awards under the Company’s Annual Incentive
Compensation Plan. Recipients of RSUs will be issued a specified number of shares of common stock under the 2021 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, 2022 and 2021:
Weighted
Average
Grant
Date Fair
Value
10.71
11.85
Outsta ndi ng at December 31, 2020
Gra nted
Ves ted
Forfei ted
Outsta ndi ng at December 31, 2021
Gra nted
Ves ted
Forfei ted
Outsta ndi ng at December 31, 2022
Shares
21,850
11,000 $
(7,000)
-
25,850
11,000 $
(7,100)
-
29,750
The following table summarizes RSU compensation expense during the twelve months ended December 31, 2022 and 2021:
Twelve Months Ended
2022
2021
(i n thousa nds )
Compens a ti on Expens e
Ta x Effect
Compens a ti on Expens e, net
$
$
119 $
25
94 $
97
20
77
As of December 31, 2022, there was $142,000 of total unrecognized compensation cost related to nonvested RSUs. The cost is
expected to be recognized over a weighted-average period of 1.4 years.
NOTE 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
35
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.
The Company is subject to the Basel III regulatory capital framework ("Basel III Capital Rules"), which includes a 2.5% capital
conservation buffer. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires
increased capital levels for the purpose of capital distributions and other payments. Failure to meet the full amount of the buffer will
result in restrictions on the Company's ability to make capital distributions, which includes dividend payments, and stock repurchases
and certain discretionary bonus payments based on percentages of eligible retained income that could be utilized for such actions.
As of December 31, 2022 and 2021, 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
There are no conditions or events since that notification that management believes have changed the
set forth in the table.
institution’s category.
Actual capital amounts and ratios for December 31, 2022 and 2021 are presented in the table below.
Actual
Minimum
Requirements
Well-Capitalized
Requirements
Amount
Ratio
Amount
Ratio
Amount
Ratio
(dol l ars i n thous a nds )
As of December 31, 2022
Compa ny
Common equi ty Ti er 1 ca pi ta l to
ri s k-wei ghted a s sets
$
Ti er 1 l everage ca pi ta l to avera ge a s s ets
Ti er 1 ca pi tal to ri sk-wei ghted a s s ets
Tota l ca pi ta l to ri s k-wei ghted a ss ets
Ba nk
Common equi ty Ti er 1 ca pi ta l to
ri s k-wei ghted a s sets
Ti er 1 l everage ca pi ta l to avera ge a s s ets
Ti er 1 ca pi tal to ri sk-wei ghted a s s ets
Tota l ca pi ta l to ri s k-wei ghted a ss ets
As of December 31, 2021
Compa ny
Common equi ty Ti er 1 ca pi ta l to
ri s k-wei ghted a s sets
$
Ti er 1 l everage ca pi ta l to avera ge a s s ets
Ti er 1 ca pi tal to ri sk-wei ghted a s s ets
Tota l ca pi ta l to ri s k-wei ghted a ss ets
Ba nk
Common equi ty Ti er 1 ca pi ta l to
ri s k-wei ghted a s sets
Ti er 1 l everage ca pi ta l to avera ge a s s ets
Ti er 1 ca pi tal to ri sk-wei ghted a s s ets
Tota l ca pi ta l to ri s k-wei ghted a ss ets
108,888
121,888
121,888
130,327
121,112
121,112
121,112
129,551
103,191
116,191
116,191
124,692
115,733
115,733
115,733
124,234
36
14.3% $
9.4%
16.0%
17.1%
15.9%
9.1%
15.9%
17.0%
14.6% $
8.8%
16.4%
17.6%
16.4%
8.8%
16.4%
17.6%
34,265
51,867
45,708
60,972
34,277
53,236
45,703
60,965
31,805
52,814
42,509
56,678
31,756
52,606
42,341
56,470
4.5%
4.0%
6.0%
8.0%
N/A
N/A
N/A
N/A
4.5% $
4.0%
6.0%
8.0%
49,511
66,545
60,937
76,206
4.5%
4.0%
6.0%
8.0%
N/A
N/A
N/A
N/A
4.5% $
4.0%
6.0%
8.0%
45,870
65,757
56,455
70,588
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%
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
Valuations and broker quotes are non-binding and do not represent quotes on
information is not available to produce a valuation.
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.
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.
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, 2022 or 2021.
37
The following table presents the balances of assets measured at fair value on a recurring basis at December 31, 2022 and 2021.
At December 31, 2022
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Description
Fair Value
Avai l a bl e-for-s a l e securi ti es:
(i n thous a nds )
Col l a tera l i zed mortga ge obl i ga ti ons
$
101,958 $
- $
101,958 $
Mortga ge-ba cked s ecuri ti es
Muni ci pal s ecuri ti es
Corpora te debt s ecuri ti es
U.S. government
Tota l a s sets mea s ured a t fa i r val ue
13,110
61,771
1,999
-
-
-
47,946
226,784 $
$
47,946
47,946 $
13,110
61,131
1,999
-
178,198 $
-
-
640
-
-
640
At December 31, 2021
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Description
Fair Value
Avai l a bl e-for-s a l e securi ti es:
(i n thous a nds )
Col l a tera l i zed mortga ge obl i ga ti ons
$
92,050 $
- $
92,050 $
Mortga ge-ba cked s ecuri ti es
Muni ci pal s ecuri ti es
Corpora te debt s ecuri ti es
U.S. government
17,435
71,549
2,010
49,903
-
-
-
49,903
17,435
70,869
2,010
-
Tota l a s sets mea s ured a t fa i r val ue
$
232,947 $
49,903 $
182,364 $
-
-
680
-
-
680
As of December 31, 2022, the Company had one available-for-sale security classified as Level 3 investment which consist of a non-
rated municipal bond. The valuation of this security 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. The security is
not rated by the rating agencies and there is no trading volume, management determined that this security 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, 2022 and 2021.
38
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, 2022 and 2021, respectively.
Twelve Months Ended
December 31,
2022
2021
(i n thous a nds)
Bal a nce begi nni ng of peri od
Tra nsfers i n to l evel 3
Cha nge i n FV (i ncl uded i n other comprehensi ve i ncome)
Bal a nce end of peri od
$
$
680 $
-
(40)
640 $
700
-
(20)
680
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
Impaired
be unable to collect all amounts due (both interest and principal) according to the contractual terms of the loan agreement.
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.
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.
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 sensitive to changes in market
conditions.
39
The following tables present the Company’s assets that were held at the end of December 31, 2022 and 2021 that were measured at
fair value on a nonrecurring basis:
Description
Fair Value
At December 31, 2022
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(i n thousa nds )
Loa ns mea sured for i mpa i rment, net of speci fi c reserves
Tota l as sets mea s ured on a nonrecurri ng ba s i s
$
$
1,316 $
1,316 $
-
$
- $
-
$
- $
1,316
1,316
Description
Fair Value
Loa ns mea sured for i mpa i rment, net of speci fi c reserves
Tota l as sets mea s ured on a nonrecurri ng ba s i s
$
$
1,411 $
1,411 $
At December 31, 2021
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(i n thousa nds )
- $
- $
- $
- $
1,411
1,411
The following table presents quantitative information about Level 3 inputs for financial instruments measured at fair value on a
nonrecurring basis at December 31, 2022 and 2021 (dollars in thousands):
Description
Fair
Value
Valuation Technique
Significant Unobservable Inputs
Range
(Weighted
Average)
At December 31, 2022
Loans mea sured for i mpa i rme nt, net of s peci fi c res erves $
1,316
Income a pproa ch
Proba bi l ity of defa ul t, di s count rate
3.95%, 5.12%
Description
Fair
Value
Valuation Technique
Significant Unobservable Inputs
Range
(Weighted
Average)
At December 31, 2021
Loans mea sured for i mpa i rme nt, net of s peci fi c res erves $
1,411
Income a pproa ch
Proba bi l ity of defa ul t, di s count rate
7.50%, 5.08%
40
The estimated fair value of the Company’s financial instruments at December 31, 2022 and 2021 was as follows:
Fi na nci a l a s sets:
As of December 31, 2022
Fair Value Hierarchy
Level
Carrying
Value
(i n thous a nds)
Estimated
Fair Value
Cas h a nd cas h equi va l ents
Other i nterest ea rni ng depos i ts
Investment s ecuri ti es a va i l a bl e-for-s al e
Investment s ecuri ti es hel d-to-ma turi ty
Investment s ecuri ti es hel d-to-ma turi ty
Investment s ecuri ti es hel d-to-ma turi ty
Loa ns recei va bl e, net
Accrued i nterest recei va bl e
Level 1
Level 1
See previ ous ta bl e
Level 1
Level 2
Level 3
Level 3
Level 1
$
314,236 $
4,250
226,784
24,517
34,345
651
631,722
4,044
314,236
4,250
226,784
23,544
32,318
651
617,533
4,044
Fi na nci a l l i a bi l i ti es:
Depos i ts
Juni or s ubordi na ted debentures
Accrued i nterest pa ya bl e
Level 2
Level 3
Level 1
$ 1,180,362 $
13,403
155
1,178,435
13,785
155
As of December 31, 2021
Fair Value
Hierarchy Level
Carrying
Value
(i n thous a nds)
Fi na nci a l a s sets:
Cas h a nd cas h equi va l ents
Other i nterest ea rni ng depos i ts
Investment s ecuri ti es a va i l a bl e-for-s al e
Investment s ecuri ti es hel d-to-ma turi ty
Loa ns hel d-for-sa l e
Loa ns recei va bl e, net
Accrued i nterest recei va bl e
Level 1
Level 1
See previ ous ta bl e
Level 3
Level 2
Level 3
Level 1
$
386,366 $
3,250
232,947
788
6,104
620,036
3,357
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 nterest pa ya bl e
Level 2
Level 2
Level 3
Level 1
$ 1,178,940 $
403
13,403
82
Estimated
Fair Value
386,366
3,250
232,947
788
6,104
619,091
3,357
1,178,962
407
13,775
82
NOTE 19 – SHAREHOLDERS’ EQUITY
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.
41
The following table illustrates the computation of basic and diluted earnings per share:
For the Year Ended
December 31,
2022
2021
Ba s i c:
Net i ncome (numera tor)
Wei ghted avera ge sha res outs ta ndi ng (denomi na tor)
Ba s i c ea rni ngs per s hare
Di l uted:
Net i ncome (numera tor)
Wei ghted avera ge sha res outs ta ndi ng
Effect of di l uti ve stock opti ons
Wei ghted avera ge sha res outs ta ndi ng a ss umi ng di l uti on (denomi na tor)
Di l uted ea rni ngs per s hare
$
$
$
$
Sha res s ubject to outsta ndi ng opti ons
(dol l a rs i n thous a nds,
except per s ha re a mounts )
12,697
10,412,845
1.22
10,396,268
1.05
10,888 $
$
10,888 $
10,396,268
27,033
10,423,301
1.04
$
12,697
10,412,845
28,570
10,441,415
1.22
For the Year Ended
December 31,
2022
82,600
2021
109,400
Shares subject to outstanding options had exercise prices in excess of the current market value. Those specific shares are not included
in the computation of earnings per share above, as exercise of these options would not be dilutive to shareholders.
Stock Repurchase Program
On February 17, 2021 the Board of Directors for the Company authorized the repurchase of up to $2.61 million, or approximately 2%,
of the outstanding common stock of the Company. Stock repurchases may be made from time to time on the open market or through
privately negotiated transactions. The timing of purchases and the exact number of shares to be purchased are subject to market
conditions and may be suspended as deemed appropriate.
The Company repurchased no shares during the year ended December 31, 2022, and repurchased 57,592 shares, at a weighted
average share price of $12.44, during the year ended December 31, 2021.
42
NOTE 20 – CONDENSED FINANCIAL INFORMATION – PARENT COMPANY ONLY
Pacific Financial Corporation – Parent Company Only
Consolidated Statements of Financial Condition
(in thousands)
ASSETS
Ca sh a nd ca sh equi va l ents :
Inves tment i n ba nk
Other a s s ets
Total a s s ets
LIABILITIES AND SHAREHOLDERS' EQUITY
Juni or s ubordi na ted debentures
Other l i a bi l i ti es
Total l i a bi l i ti es
$
$
$
Tota l s harehol ders ' equi ty
Total l i a bi l i ti es a nd s harehol ders' equi ty
$
December 31,
2022
December 31,
2021
593
115,386
711
116,690
13,403
125
13,528
103,162
116,690
$
$
$
$
263
130,185
634
131,082
13,403
37
13,440
117,642
131,082
Pacific Financial Corporation – Parent Company Only
Consolidated Statements of Income
(in thousands)
INTEREST EXPENSE
Juni or subordi na ted debentures
Total i nteres t expens e
NONINTEREST INCOME
Di vi dends from s ubs i di a ry ba nk
Equi ty i n undi s tri buted i ncome from s ubs i di a ry ba nk
Other i ncome
Total noni nterest i ncome
NONINTEREST EXPENSE
Other expens e
Total noni nterest i ncome
Income before i ncome ta xes
Income ta x benefi t
Net i ncome
Comprehens i ve i ncome (l os s)
Twelve Months Ended
December 31,
2022
2021
$
$
$
460 $
460
6,207
5,370
11
11,588
454
454
10,674
214
10,888 $
(9,280) $
232
232
6,310
6,915
7
13,232
439
439
12,561
136
12,697
9,462
43
Pacific Financial Corporation – Parent Company Only
Consolidated Statements of Cash Flows
(Dollars in thousands)
Twelve Months Ended
December 31,
2022
2021
$
10,888
$
12,697
(5,370)
(77)
88
149
5,678
83
(24)
-
-
(5,407)
(5,348)
330
263
593
$
(6,915)
23
(120)
125
5,810
64
(61)
(717)
-
(5,418)
(6,132)
(322)
585
263
Cash flows from operating activities:
Net Income
Adjus tments to reconci l e net i ncome to ca s h a nd ca sh
equi val ents from opera ti ng a cti viti es
Equi ty i n undi stri buted i ncome of subs 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 compensa ti on expense
Net ca s h provi ded by opera ti ng a cti vi ti es
Cash flows from financing activities:
Net cas h from s tock opti on exerci s es
Taxes pa i d rel a ted to net s hare settl ement for equi ty awa rds
Repurcha se of common stock
Stock awa rds i s sued
Cas h di vi dends pa i d
Net ca s h us ed i n fi na nci ng a ctivi ti es
Net i ncrea s e (decrea se) i n cas h a nd ca sh equi va l ents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
44
NOTE 21 – SELECTED DATA
Results of operations on a quarterly basis were as follows (unaudited):
Year Ended December 31, 2022
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Interest a nd di vi dend i ncome
Interest expens e
Net interest income
Benefi t for l oa n l oss es
Noni nteres t i ncome
Noni nteres t expense
Income before income taxes
Income ta x expens e
Net income
Earnings per common share
Bas i c
Di l uted
Interest a nd di vi dend i ncome
Interest expens e
Net interest income
Benefi t for l oa n l oss es
Noni nteres t i ncome
Noni nteres t expense
Income before income taxes
Income ta x 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 sha re a mounts )
8,526 $
238
8,288
-
2,112
8,576
1,824
167
1,657
11,177 $
298
10,879
-
1,692
8,950
3,621
705
2,916
9,097 $
253
8,844
-
1,864
8,800
1,908
310
1,598 $
13,352
417
12,935
-
1,559
8,648
5,846
1,129
4,717
$
$
0.17 $
0.16 $
0.15 $
0.15 $
0.28 $
0.28 $
0.45
0.45
Year Ended December 31, 2021
First
Quarter
Third
Quarter
Second
Quarter
Fourth
Quarter
(dol l a rs i n thous a nds, except per sha re a mounts )
9,612 $
387
9,225
(1,400)
5,164
10,504
5,285
1,057
4,228 $
9,188 $
284
8,904
(500)
3,951
10,375
2,980
368
2,612 $
9,318 $
324
8,994
(1,600)
4,616
10,497
4,713
977
3,736 $
9,040
259
8,781
(150)
2,998
9,325
2,604
483
2,121
0.41
0.41
$
$
0.36
0.36
$
$
0.25
0.25
$
$
0.20
0.20
45
GENERAL CORPORATE AND SHAREHOLDER INFORMATION (unaudited)
Administrative Headquarters
1216 Skyview Drive
Aberdeen, WA 98520
(360) 533-8870
Independent Auditors
CliftonLarsonAllen LLP
Transfer Agent and Registrar
Broadridge Financial Solutions, Inc.
51 Mercedes Way
Edgewood, NY 11717
www.broadridge.com/
Shareholder Services
Broadridge, 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 information about Pacific Financial Corporation. Access your account directly through Client Support at www.broadridge.com/.
Annual Meeting
The annual meeting of shareholders will be held via webcast on April 26th, 2023, at 4:00 p.m., local time.
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.
Subsidiaries
Bank of the Pacific
1216 Skyview Drive
Aberdeen, WA 98520
(360) 533-8870
www.bankofthepacific.com
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
46
Board of Directors
Randy W. Rognlin, Chairman
Co-Owner
Rognlins, Inc
Susan C. Freese
Pharmacist
Douglas M. Schermer, Vice Chairman
Owner and President
Schermer Construction Inc. & Wishkah Rock Products
Doug Biddle
Retired CFO
Pacific Financial Corporation and Bank of the Pacific
Denise Portmann
President & CEO
Pacific Financial Corporation and Bank of the Pacific
Dwayne Carter
Retired President & General Manager
Brooks Manufacturing Co.
Randy J. Rust
Private Investor
Daniel Tupper
Vice President & General Manager
Crown Distributing Co. of Aberdeen, Inc.
Kristi Gundersen
Partner & Chief Financial Officer
Knutzen Farms, LP
47